Well, yes, this is what happens in recessions

Interesting new figures out from the TUC:

The coalition government has presided over the worst five-year period for living standards since modern records began more than half a century ago, according to the Trades Union Congress.

In an analysis based on data from the Office for National Statistics, the TUC said the 2010-2014 period was unique in seeing a drop in real household disposable incomes.

RHDI – a yardstick of living standards that takes account of incomes, benefits, taxes and inflation – was 0.6% lower in the half-decade ending in 2014 than in the five years ending in 2009, when it rose by 6.9%.

We have two responses to this. The first being that it was probably Done It Duncan who pieced this together:

Living standards are a key battleground in the general election campaign and in last month’s budget, George Osborne said on this same measure they would be on course to be higher in 2015 than when the coalition came to power five years earlier. The two measures differ because the chancellor was comparing a forecast with RHDI for the end of this year with RHDI in 2010, while the TUC is comparing an average of RHDI per head between 2010 and 2014 with an average of the previous five years.

We do rather wonder how many tweaks and variations Duncan had to make to his spreadsheet to get a version which showed a fall. However, there's another point to this, which is that yes, this is what happens in recessions. The economy becomes smaller. As a result the incomes of the people of the country fall. That's what all of these words actually mean.

"Living standards fall in recession" is about as startling as the claim "water is wet". So, err, quite what everyone is chuntering on about we're not quite sure. Unless it's an insistence that there shouldn't have been a recession in the first place and we're OK with that idea. Only that we can't bring ourselves to blame the people clearing up after a recession had already happened for the existence of a recession. That blame rather belongs to those who didn't prevent the recession itself we feel.

Myth busting: NHS not so efficient after all

The NHS has long coasted on the widely held belief that it is one of the best healthcare systems in the world because it is so efficient. While European systems boast better patient outcomes, and the United States points to its excellent pre-emptive care measures, NHS loyalists cast that all aside, because unlike any of those other countries, the UK is able to keep its healthcare spending below 10% of GDP, free at the point of use, with relatively good outcomes. No other country can beat that efficiency. Well, it turns out most of them do.

In 2010, the OECD published multiple papers that specifically looked at the efficiencies of different health care systems. In its report “Health care systems: getting more value for money”, the OECD found that there was “room in all countries surveyed to improve the effectiveness of their health care spending.” Some countries, however, could see significant efficiencies gained. And the top three countries that could benefit the most: Greece, Ireland, and the United Kingdom.

By improving the efficiency of the health system, public spending savings would be large as compared to a no-policy-change scenario, amounting to almost 2% of 2017 GDP on average in the OECD. It would be over 3% for Greece, Ireland and the United Kingdom.

Breaking with myth, the UK is one of the countries that could do the most to improve its efficiency in public healthcare spending. Even more than the United States.

What the loyalists don’t seem to realise is that efficiency can’t simply be determined by how much money a country puts towards healthcare. The real question is how efficiently those monetary resources are being used to obtain better health outcomes.

And according to the OECD, both the UK and the US still have a long way to go:

Australia, Iceland, Japan, Korea and Switzerland perform best in transforming spending into health outcomes

In more than one third of OECD countries, exploiting efficiency gains in the health care sector would allow improving health outcomes as much as over the previous decade while keeping spending constant (Figure 2, Panel B). Germany, the United Kingdom and the United States fall into this group.

I’m not predicting the end of this health care tale. Perhaps, if the right reforms were made to the NHS to drastically improve efficiencies, the UK would have a system that not only demands less public spending, but also creates better health outcomes too. To compare apples with apples, Norwegian healthcare is " is mainly provided by a heavily regulated public system, with strict gate-keeping" and grouped together with the UK in the OECD's categorisations for healthcare systems; yet Norway's system is ranked much better for efficiency (more details to come in next blog...).

I just thought I'd flag up that, as things stand, the NHS under-performs on just about everything that matters.

The Ayn Rand Institute Europe

Today in Copenhagen is launched the Ayn Rand Institute Europe. Its mission is to promote awareness and understanding of Ayn Rand's philosophy of objectivism, and to spread awareness of her life and work, including her highly influential novels The Fountainhead and Atlas Shrugged. Heading up the programmes is Annie Vinther Sanz, originally Danish but now living in France, who has spent two decades in international business and now heads up her own consulting firm. And she is fluent in six languages (don't you hate people like that?).

Lars Seier Christensen, CEO of Saxo Bank, is chairing the new Institute's advisory board, and the event takes place at Saxo Bank's impressive headquarters. Some 300 people are expected at the launch, which includes short talks by Christensen, the head of the Ayn Rand Institute in the US Yaron Brook, and our own Eamonn Butler.

Eamonn admits that he is not an earnest devotee of Ayn Rand, though he shares some of her conclusions – like the importance of free-market capitalism, the rule of law, property rights and a robust system of justice. But that, says Yaron Brook, is exactly why he has been invited to give the main talk. Eamonn is strongly aware of Rand's importance to the intellectual right and her ability, through her novels in particular, to win people over too it.

Many young people, in fact, have been won over to the ideas of capitalism, and a belief in individuals as ends in themselves rather than mere cogs in some collective, by reading Rand. In the words of Jerome Tuccille, 'It usually begins with Ayn Rand.

Rand, Eamonn will say, has many supporters in the United States, where she lived for most of her life. The former Federal Reserve Chairman, Alan Greenspan, was a member of Rand’s inner circle. And her work influenced many other notable people, such as the former head of BB&T bank and of Cato, John Allison; Supreme Court Justice Clarence Thomas; Star Trek creator Gene Roddenberry, and PayPal creator Peter Thiel. Entrepreneurs, indeed, still name their children after her or her fictional characters.

She has, perhaps, less traction in Europe. That may be because the American right is more concerned with the protection of individual liberty, while the European right is more about conserving existing institutions. But as a result of today's launch, there is no doubt that Rand is about to become even better known, and much more influential, in Europe too.

Woe and thrice woe as the decline of Britain is upon us

So we're told by an academic, must be true 'coz it's science, right? Britain is doomed to decline and fall because, well, actually, because us moderns just aren't up to much:

Britain is experiencing the same decline as Rome in 100BC, with the collapse of civilisation inevitable, a scientist has warned.

Dr Jim Penman, of the RMIT University in Melbourne, believes Britons no longer have the genetic temperament to advance because of decades of peace and a high standard of living.

He claims that the huge success of the Victorian era will not be repeated because people in the UK have lost the biological drive for innovation.

Instead, Britain is existing in a period similar to the decades before the fall of the Roman Republic where social tensions were rife, the gap between the rich and poor was increasing and extremism was growing.

Hmm, well.

We do think that in order to be able to do history well you need to actually know history. At which point a little putting of that huge success of the Victorian order in context is possibly needed. Per capita GDP, from 1700 to 1870, is usually estimated as having at 0.5% or so a year. Our experience of the 20th century was very much better than that. And here we are now, with GDP per capita over the past four years growing by 1.1%, 0.9%, 0.0% and 1.1%. This in the middle of what we all agree is the worst recession of modern times. We generally think that trend growth is 1.5 to 2% for this number.

Or about 3x that 19th century number, just if we keep generally rolling along without too much strain or effort. If this is failure compared to the Victorian success then bring it on we say.

The modest case for nominal income targeting

I think monetary regime options are basically a two-axis question: they go from maximally politically likely and least desirable to maximally desirable and least politically likely. The most politically likely monetary regime is the one we actually have: flexibly targeting CPI inflation at 2% per year. It's not the worst target in the world—it will prevent a great depression—but it allows deep recessions and slow recoveries like those we've been experiencing recently.

The most desirable monetary regime is free banking and private supply of money. But it's the least politically likely despite the evidence it lends itself to both monetary and financial stability. The monetary side of things—typically you see nominal income (total spending) grow stably or stay flat predictably under free banking, and a concomitant lack of harsh demand-side recessions and mass unemployment—suggests that we can find mid-points.

Thus, I spend my time advocating that we target nominal GDP—the total amount of spending/income/output in the economy measured without correcting for inflation—which I view as a spot in the middle. Less desirable than free banking but orders of magnitude more politically feasible and achievable.

There's one very Hayekian reason for this. The basic Taylor Rule framework that New Keynesian-dominated central banks use performs well only if those central banks can make good guesses of the output gap—the difference between actual output and potential. If they have imperfect information, then targeting nominal income works better.

Or so says a new paper, "Nominal GDP Targeting and the Taylor Rule on an Even Playing Field" (pdf) by two of my favourite economists, David Beckworth & Josh Hendrickson:

Standard monetary policy analysis built upon the New Keynesian model suggests that an optimal monetary policy rule is one which minimizes a weighted sum of the variance of inflation and the variance of the output gap. As one might expect, the Taylor rule evaluates well under this criteria. Recent calls for nominal GDP targeting therefore must contend with Taylor rule as an alternative approach to monetary policy.

In this paper, we argue that the information requirements placed on a central bank by requiring policymakers to have real-time knowledge of the output gap need to be taken into account when evaluating alternative monetary policy rules. To evaluate the relevance of these informational restrictions, we estimate the parameters of an otherwise standard New Keynesian model with the exception that we assume the central bank has to forecast the output gap using lagged information. We then use the model to simulate data under different monetary policy rules. The monetary policy rule that performs best is the nominal GDP targeting rule.

Previously I've argued that we might call nominal GDP targeting 'Hayek's Rule' because it would achieve his preferred view of macroeconomic stability—a stable flow of payments. But I think we have another reason to call it Hayekian—it emphasises the importance of information-constrained central planners, in this case of money.

The progressive's immigration dilemma

The freedom and wellbeing of all human beings should be important to us, regardless of their race or nationality. Because migration allows very poor people to dramatically improve their lives, often increasing their income by an order of magnitude, we should have a strong preference for more liberal migration laws in the developed world, particularly laws that favour low-skilled workers from the poorest countries.

The progressive’s dilemma is usually seen as being the fact that higher levels of immigration seem to make voters support redistributive domestic policies less. People are less happy to share with people who aren’t much like them. David Goodhart discusses this here. But this is a two-way street: the more redistributive your state, the more sceptical voters are of (at least low-skilled) immigration – this polling seems to reinforce that.

This might be aggravated in cases where immigrants don’t do much or even have a negative effect on the wages of low-skilled native workers. Not only are these guys competing with you for welfare, they’re driving down your wages too – even if theirs are rising by five hundred percent, yours falling by five percent still hurts.

But that isn’t usually what actually happens: immigrants to the UK generally don’t drive down native wages, even for low-skilled workers in the medium-to-long-run, and in Denmark they actually seem to have had a significant positive effect on low-skilled workers’ long-term earnings. In the US, there is a big positive link between immigration and native productivity (which eventually translates into higher wages). In the UK that link is also positive but is very small, almost zero.

However, in France, immigrants do seem to hurt work outcomes for natives – both in terms of jobs and, for short-term contract workers, wages.

What explains the difference? The authors of the Danish study say Denmark’s flexible labour market is what allowed the market to absorb immigrants to make everyone better off, and the author of the French study says the rigidity of France’s wage structure is what makes immigration harm natives. Incidentally, the UK, where immigrants have a fairly neutral impact on natives, is roughly halfway between those two countries in terms of labour market flexibility (according to the Heritage Foundation’s Index of Economic Freedom).

This trend seems to hold across Europe: the more rigid a labour market, the worse immigration is for native workers. That must be a factor in considering the costs and benefits of any given labour market regulation.

Poor people's lives are made enormously better off by moving from poor countries to rich countries. Thanks to remittances, migrants also may have a significant positive impact on their home countries. For any progressive who wants to improve human welfare, facilitating more immigration from poor to rich countries should be an overriding priority.

Not only does a big welfare state reduce the number of immigrants that are politically accepted, a heavily regulated labour market seems to be associated with immigrants having a worse impact on natives. Even policies that seem like they would be good for Britons might still do much more harm than good if they make Britons less willing to accept higher levels of immigration.

This is a serious dilemma for any progressive who wants all humans to live good lives, not just ones of the same race or nationality. It means that these political concerns alone may demand a low regulation, low redistribution state.

Willy Hutton is starting to parody himself

Will Hutton's managed to argue himself into a most interesting little corner. He's been shouting for years that we need companies to be managed for the long term, not just for the short term interests of share traders. OK, not an argument we share (for the price of a share is the net present value of all future income, therefore it is a long term matter) but interesting in a manner. Hutton's also one who shouts about how appalling all this inequality is. And the rich shouldn't be allowed to own everything and other such generally lefty ideas. And then we get to this:

In fairness, part of Tesco’s problem is that Britain’s retailing landscape is being transformed by two different challenges – online shopping and discount retailers Aldi and Lidl, whose market share has doubled in the past five years to more than 10%. Tesco’s grandiose out-of-town hypermarkets are now stranded behemoths no longer attracting, as they once did, shoppers who now prefer to go online. Tesco has recognised the reality, stopped building new stores, closed others and written down the value of its fixed assets by £4.7bn.

But Aldi’s and Lidl’s success is rooted in something more profound than just capitalising on newly cost-conscious, financially pressed consumers. They are privately owned businesses that think long term and whose business purpose, enshrined by the owners, is to focus on a very narrow range of goods they can sell at high volumes and thus price incredibly keenly. British supermarkets, having to please shareholders with no such commitment, can never price so keenly even if they could match Aldi’s and Lidl’s logistical capacity and focus.

He's seriously arguing that it's better for everything to be owned by a few billionaires than it is for all of us, in a rather more minor manner, to be capitalists and owning the businesses of the country through our own savings and or pensions.

How on Earth did anyone nominally on the left end up advocating such oligarchic policies?

It really is planning that is the problem with housing and house prices

We know, we go on about this almost ad nauseam. But it really is true that the basic problem with housing and house prices is the planning system. An interesting paper from the CEPR allows us, once again and via a different route, to prove this:

How have house prices evolved over the long‐run? This paper presents annual house prices for 14 advanced economies since 1870. Based on extensive data collection, we show that real house prices stayed constant from the 19th to the mid‐20th century, but rose strongly during the second half of the 20th century. Land prices, not replacement costs, are the key to understanding the trajectory of house prices. Rising land prices explain about 80 percent of the global house price boom that has taken place since World War II. Higher land values have pushed up wealth‐to‐income ratios in recent decades.

It is not that houses have become more expensive to build. The standard 3 bedder suburban semi can be put up, from scratch, for £120k and a little less than that in volume. What has become more expensive is that land. And, no, it's not that we're running out of land nor even that land itself has become more expensive. Even prime agricultural land in he SE tops out at £10k a hectare.

It is that land upon which you are allowed to build a house has become more expensive. And that of course is an entirely artificial shortage caused by the planning system itself.

So, if we want to deal with the "housing crisis" what we need to do is reform the planning system. Probably to the one we had before it caused this particular problem which was, essentially, to have no planning system at all.

An interesting idea to change copyright

We wouldn't like to give anyone the idea that we think that the Green Party are anything other than somewhere between wildly misguided and entirely deluded on all matters. However, they have made one suggestion which is most certainly worthy of greater consideration. That's to restrict the terms of copyright:

The Green party may be forced to backtrack on its proposals to limit UK copyright terms to 14 years after a howl of protest from prominent writers and artists including Linda Grant, Al Murray and Philip Pullman.

The Greens’ manifesto said the party aims to “make copyright shorter in length, fair and flexible” with the party’s policy website saying it would “introduce generally shorter copyright terms, with a usual maximum of 14 years”. Representatives of the party said on Thursday that length could be revised after a consultation.

There have indeed been howls of protest from just about everyone who has ever made a penny or two from stringing words together. As most of us here have made a penny or two from stringing words together as well perhaps we might add a little bit of grown up talk to the discussion?

The entire point of copyright (and also of patents) is to acknowledge that free markets, pure free markets entirely unadorned, are not the optimal solution to every problem. We'll argue with anyone about the idea that they are the optimal solution to more problems than anyone currently allows them to be but we're still insistent that this does not mean that they are perfect. And the issue of creation, whether of new ideas, new works of art or simply entertaining schlock is one of these areas. It's difficult and time consuming, expensive in other words, to produce new material in any of these fields. It's extraordinarily easy to copy it once that has been done.

This means that in a purely free market system it will be very difficult to profit from creation thus we think there will be less creation than we might want. So, we add protections for the creators. We have, simply, entirely invented this concept of "intellectual property". That provides the incentive to create.

However, there's also the point that we like derivative creation as well: someone creating atop the bones of what has gone before. And too long a, or too restrictive terms of, protection will limit and hinder this. So, some protection of creation is desirable and too much is not.

But note where this leads us. It is that original creation that we wish to encourage. And, if we're honest about it, writing a book now is not influenced in any manner at all by the thought that a literary estate might still be earning from it 70 years after the authors' death. The Sherlock Holmes stories only recently went out of copyright: does anyone think Conan Doyle was in the slightest influenced to write by what the stories might earn in the 1980s? Or take the lengthening of sound recording copyrights from 50 to 70 years just recently. Does anyone really think that Cliff Richard was incentivised to record "Living Doll" by how much it might make him in 2010? Sure, in 2010 he was very interested in the subject as he campaigned on the issue but what we want to know is what pushed him in the first place, not what he thinks post facto. Given that he did the recording under a 50 year protection does rather show that the 70 year protection was not necessary to encourage that original creation.

So, therefore, we probably shouldn't have the longer protection.

14 years might be too short a period of time. From memory that was actually the time period in the early 18th century, and it could be renewed at least once. Full marks to the Greens for actually recognising this as an interesting area for discussion. But we would have thought that reverting to that 18th century was a bit odd for them. For they normally want us to fast forward to the Middle Ages don't they?

The Collected Economic Nonsense

In his latest series of blogs, the Adam Smith Institute's President, Dr Madsen Pirie took aim at 50 of the most prevalent and pernicious falsehoods about economics. Read them all here in this collection of all 50 pieces. [gview file="http://www.old.adamsmith.org/wp-content/uploads/2015/04/Economic-Nonsense.pdf"]