Geography and economic policy

The Economist has an interesting look at the problems of countries without a coastline. Given the greater expense this loads onto international trade this makes those countries poorer. From which we can derive two interesting points:

With a few exceptions the world’s 45 landlocked countries are poor. Of the 15 lowest-ranking countries in the Human Development Index, eight have no coastline. All of these are in Africa, which is a poor region. But even compared with similar sea-front countries those without coastlines have lagged behind. Their GDP per person is 40% lower than that of their maritime neighbours.

The first and most obvious of these being that this is proof that international trade enriches a place not, as the autarkists would have it, impoverishes. Pleases that find it more difficult to trade are poorer than thoise who find it easier: pretty good evidence that all that import substitution malarkey is indeed that, malarkey.

The second is a policy point. The total trade barrier in and out of any economy is not just the tariff barrier. Nor is it the regulatory plus the tariff one. It's the costs of transport plus the tariff plus the regulatory. Thus, if you find yourself with high transport costs as a result of he above geography you should therefore be trying to be even more free trade in your regulatory and tariff attitudes. Because, as above, more trade makes you richer.

And interesting example of this is the US economy after the Civil War. Tariffs were raised considerably. This is often used as an example of a country developing successfully behind such trade barriers. But this coincided with the development of cheap ocean going steam ship transport. The total trade barriers into the American economy actually declined in this period. Late 19th century US development is an example of more trade leading to more development. We can check this too: trade did indeed rise considerably, despite those raised tariffs. And traded items converged in price across the Atlantic in this period: price convergence being a signal of freer trade.

The import substitution argument insists that some level of autarky makes places richer. The real world says that people with higher trade costs become poorer. We prefer to take our evidence from the real world, amazingly enough.

There's a difference between the intent of regulation and the effects in the real world

We have another of these lovely examples of how the intent of a regulation can be very different indeed from the effect of said regulation out there in the real world. We'll assume that most people are pretty cool with there being regulations against murder and punishments for breaching them. We're also pretty sure that such regulations and punishments reduce the number of murders that occur. So, sure, some regulations can indeed be beneficial, achieve their stated goal. We can also look around the world and see those gurning idiots in South America who think that if you peg the price of toilet paper nice and low then the poor will be able to afford toilet paper. Of course, what happens is that no one can afford toilet paper as no one is willing to make it for this new and lower price. Regulations can have the opposite effect to that intended.

And then there's, well, then there's this:

Fair or not, this latest evidence of the risks of informal surrogacy arrangements, in the context of Britain’s strict regulatory code, can only encourage more parents to bypass local options and head straight for a poorer or developing country. In India, for example, surrogates are plentiful, screened and by all accounts more dependable than British volunteers.

Leave aside, for a moment, any judgement on either the morality or desirability of such surrogacy. And consider the statement there. That strict regulation of who may do what and when drives the very activity itself out of the regulatory net. Does this regulation therefore achieve its aim? We would say probably not. The take away from this specific example being that, if one wanted to keep the activity inside the regulatory net then one would probably argue for a lighter touch with the regulation.

This observation is of a great deal mpore use than just talking about reproductive technology of course. It's from the one side, the argument used in favour of legal abortion: without the legality it would still take place on those fabled backstreets and this would be worse. And it, from the other side, informs our attitude towards recreational drugs. As is obvious it's going to happen anyway. So, loosen the regulations on whether people can or not so as to bring the activity into the regulations on purity and safety. Which is, as should be obvious, exactly the same as that abortion argument. Both are arguing that regulation should be pitched at the level to minimise harm, that only being possible when regulation is sufficiently light for the activity to remain regulated at all.

Thus it is essential that all regulation be "light touch" regulation. Within a wide and highly variable definition of "light" to be sure, dependent upon the specific activity. But it must always be light enough not to drive the activity underground and thus out of the reach of any regulation at all.

It was the Yanks wot won it

This isn't the result we usually think of. It's more likely that we'll think that the terrible loss of life by the Soviets, or perhaps plucky little Britain, fighting on alone, is really what won the battle against the Nazis. but the wisdom of the crowds has it right again:

As the world celebrates the 70th anniversary of Allied victory in Europe, millions in the UK will honour the role played by British forces in the defeating Nazi Germany.

According to a new poll, however, most other countries look to the United States as the country that did the most to vanquish Adolf Hitler.

A YouGov survey asked respondents from the US, Britain, and several European countries who they thought was most essential to defeating Germany in the Second World War and the US was the top choice in all but the UK and Norway.

Modern war isn't won by battles. It's won by winning the war. And that's more a matter of logistics than anything else. And it's at that point that America becomes so important. The vast productive capacity of the American economy meant that Germany was going to be defeated, whatever else happened, in the end. Once, that is, that the United States had come into the war on the side against Germany.

We can talk a lot about tactics, battles, who suffered most (that has an easy answer, those inbetween Germany and Russia, those in the Bloodlands) but the eventual outcome was never really in doubt. Not once the American economy entered on the one side.

An interesting supposition

And one that may well have a measure of truth to it. That supposition being that there's only so much tax that you can pull out of an economy:

While raising taxes was “easier” for a future chancellor to do than shrink expenditure, Dame DeAnne added: “My personal view is that this country is hitting rates of marginal taxation that are pretty close to the ceiling of what you can expect to actually get to work for you by getting increasing revenues by increasing rates.” Dame DeAnne suggested that spending cuts were the only solution,

She used the example of Labour’s pledge to restore the 50p top rate of tax to illustrate her point. The Institute for Fiscal Studies believes the policy is unlikely to raise more than £100m, after the Coalition’s decision to cut it to 45p cost the government around the same amount, according to official studies.

“It’s difficult to see where you can get substansial additional revenue from the tax side unless it’s through broadening the VAT base, which both parties have said they are not going to do,” said Dame DeAnne. “Anyway, that’s a politically difficult thing to do.”

Mr Plenderleith agreed. “There are a range of views as to what the optimal tipping point is and it seems to me that we’re quite close to that,” he said.

We do not say that this is absolutely true. But that it is generally true seems to us to be an intriguing thought. That there's a rough amount of the economy that you can tax out of it. That rough amount changing over very long periods of time perhaps, and over different countries, but each place having its own natural rate. Outside true emergencies like all out war no one's really managed to get much more than 35% of the British economy in tax. The American Federal system never seems to manage more than 19 to 20% for anything other than a couple of years. Yet the tax burdens in other countries can and have been for decades rather higher.

This is also true whatever the tax system actually is. Whether it's all largely consumption based, or income, or they try to nickel and dime us to death with imposts on this or that, some cultures will accept higher tax burdens than others. For we've tried different variations of the tax system over time and those amounts that we can collect don't seem to budge all that much.

all of which will be something of a disappointment to Polly Toynbee of course. For as she's fond of pointing out we Brits seem to want Scandinavian style services with American style tax rates. The analysis here leading us to the conclusion that it's the taxes that are the immovable object: meaning that it's the services that have to be cut to fit that, not just the tax rates raised to provide that chicken in every pot and a pony.

Why we vote the way we vote

In my last post I tried to understand why people vote, suggesting that even if a sense of civic duty or a desire to express oneself can explain why we turn out to vote, these can’t really tell us much about why we vote the way we vote. In this post I'll try to explain why I'm convinced that, for voters, ideas matter. There are two basic views among political scientists about this: people vote to maximise their own wellbeing (“pocketbook” voters) or people vote to maximise the wellbeing of their society (“sociotropic” voters). The literature here is enormous so this post will try to sketch out the argument broadly – it is not intended to be anywhere near comprehensive.

There is a clear correlation between declines in GDP per capita and declines in support for the political party in power ('economic voting'). But this could be because people who are worse off are changing their votes to improve their own welfare, or because people in general are trying to improve their society in general.

In ‘Sociotropic voting: The American case’, Donald Kinder and D. Roderick Kiewiet look at how voters behave when their personal circumstances differ from those of society in general – if you are unemployed, but total unemployment is low, are you more likely to want a change of government?

Looking at Congressional elections during the 1970s, they find strong evidence that people are more concerned with society and the economy as a whole than for their own circumstances.

‘A person’s private economic experience had very little impact on his choice of candidate in the congressional elections whereas his sociotropic judgements were of the utmost importance … American voters resemble the sociotropic ideal, responding to changes in general economic conditions.’

Kiewiet’s conclusion in a later book is that people blame factors other than the government for their own circumstances, but blame the government for the overall state of the economy. Is this a uniquely American phenomenon, though?

Leif Lewin’s review of the evidence in his excellent Self-interest and public interest in Western politics suggests that it is not – Western European voters, including British voters, also seem to be much more inclined to vote sociotropically than with regard to their own circumstances.

We know that voters are mostly very ignorant of the facts of politics, which may make it very hard for them to form accurate judgements about the best policies to achieve the end-goals they have in mind. But it also means that the media that they do pay attention to has an enormous influence over their perceptions, and that people’s political awareness may affect how ‘benevolent’ they really are.

In light of this, Gomez and Wilson (2001) adapt the pocketbook thesis to argue that more sophisticated, politically aware voters are more likely to be affected by pocketbook factors than others.

They are the ones who can think in terms of specific policies, make connections between particular policies and their own incomes, and do not blame incumbents for everything that goes wrong with the economy.

Other, less sophisticated voters simply assume that the President is responsible for what goes wrong with the economy. That might explain why electoral ‘giveaways’ (pensioner bonds, opposition to new home builds) seem to be concentrated on quite small groups of well-heeled voters – nobody else would notice.

The last word on voter behaviour must go to Philip Converse, whose 1956 survey data showed that most voters make their decisions based on extremely broad judgements of the ‘sign of the times’ (22%), or based on which group – posh people? workers? – a party or politician seems to speak for (45%), or even evaluations that had no shred of policy significance whatever, like which candidate was the funniest (17.5%).

Only around 15% of voters used ideology or ideology-like rules-of-thumb to decide who to vote for, and those were the most rigid in their decisions about how to vote.

To sum up, people seem to mostly vote for the candidates that they think will be best for society as a whole, though they may make very poorly considered judgements of that. If there is a ‘pocketbook’ effect, it is probably limited to the most well-informed voters.

All this suggests that the public choice view of democracy as just a way to divide the spoils of government between interest groups may well be wrong. Yes, voters are amazingly ignorant of basic facts, let alone economic theory, but we do have a chance of persuading them and changing the world for the better. To those of us who would like to believe in the power of ideas, that’s something to celebrate.

The perils of fake Fairtrade products

It's just so difficult to be a properly concerned middle class social justice warrior these days, isn't it?

Well-meaning shoppers may be wasting money on groceries bearing fake Fairtrade or organic logos, after police in Europe identified counterfeit food labels as one of the fastest growing frauds.

Fairtrade or organic bananas, vegetables, tea and other items are bought by millions of people concerned about the provenance of the food on their plates.

But the certification logos on packaging can be “easily replicated and affixed” by experienced counterfeiters, the Europol law enforcement agency said.

Its experts warn that organised crime groups have “joined forces” to run counterfeiting operations inside the EU.

They are forging quality labels on “everyday products” that can then be sold at a premium, as opposed to the traditional fake handbags and medicines.

As it happens we don't think this is a particular problem. Fairtrade makes virtually no difference at all to those poor, third world, producers. It has a marginal value as a form of indoor relief for the dimmer scions of the upper middle class. But the real value gained from it is the near holy righteousness that a certain type of shopper feels as they proudly display their status by showing off the correct, socially approved, labels of "organic", "Fairtrade" and so on. Given that this, the main effect of the system, still applies to fake labels it seems to be a most efficient way of achieving that main effect.

Greenpeace should be allowed to say it even if they're wrong

We find ourselves a little bit conflicted here. That Greenpeace has been spouting lies making incorrect statements does not surprise. But we are rather absolutist on this free speech thing. Absent incitement to violence and libel we're pretty sure that anyone should be allowed to say whatever they wish. And we're most certainly not happy with some organ of the State deciding what it is that people may or may not say. Thus the conflict:

A Greenpeace advert opposing fracking has been banned for claiming experts agreed that the process would not cut energy bills.

The national press ad said: "Fracking threatens our climate, our countryside and our water. Yet experts agree - it won't cut our energy bills."

The Labour peer Lord Lipsey, who said he understood there was a range of views on the subject, complained that the ad was misleading for claiming experts were in agreement.

Greenpeace said the claim was made in the context of a public debate on Government policy, and cited quotes from David Cameron, who has repeatedly backed fracking and claimed that it could bring down energy bills.

The organisation provided quotes from 22 people, groups or organisations supporting the view that fracking would not reduce energy prices.

That Greenpeace are wrong is something we've proven here and elsewhere before. However, there is that free speech issue. And as we say, we don't think that such speech should be banned.

Quite apart from anything else if people are banned from spouting obvious lies then how can we spot them when they're being a bit more disingenuous and spouting non-obvious lies?

Whoda thunk it? A free market in banking means more competition!

Some economists, especially economic historians, have really consistently interesting CVs. You'll look at their publication list because you're interested in their work on the US experience of free banking, and you'll end up finding interesting papers on genetic and cultural diversity on economic growth. Prof. Philipp Ager at the University of Southern Denmark turns out to be one of these types. I came across Prof. Ager November 2013 working paper with Fabrizio Spargoli: "Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience" (pdf) which has a very interesting finding that although US free banking led to more bank failures it also led to more competition and probably higher growth.

We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees.

We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies.

We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.

This is particularly interesting, because it suggests that even in a free banking system with fairly important regulations, free banking may outperform the alternative.

As Larry White details on the new blog alt-m most histories of US free banking miss out that many of the major distortions and problems in the US experience stemmed from regulatory interventions—especially restrictions on what kinds of collateral banks could accept and tight restrictions on branching, making banks much more vulnerable to idiosyncratic local risks.

My real issue here is not deciding what side is correct. Basically all of the thoughtful work concludes that free banking is better than the tightly restricted banking we have had outside of a few historical experiences. The 'evidence' I see against consists of stuff like this Philly Fed paper, i.e. nonsense.

My real issue is why this evidence isn't breaking through? Why are so many smart, knowledgeable people opposed to free banking? Why is the ruling tendency now towards practically outlawing bank/debt finance altogether in favour of steps toward equity financing everything? I don't have a good answer.

What just about everyone is getting wrong about climate change

The Telegraph has an interesting report today on the costs of decarbonising Britain's electricity generation system over the next 15 years. It's vast and it's not a sensible thing to do. But in their discussion there's this, which shows just how badly everyone is approaching this question:

All political parties (apart from Ukip) support the 2008 Climate Change Act which commits Britain to reduce emissions by at least 80pc from 1990 levels by 2050. Analysis by the Department of Energy and Climate Change has shown that, to hit those targets, there must be significant decarbonisation of the power sector by 2030. The Committee on Climate Change has set a target of reducing carbon intensity from 450g of carbon dioxide per kilowatt hour to 50g by 2030.

This is entirely the wrong way around.

Let's not get into the science of this, that's always a boring and unproductive shouting match. Instead, let's just say the IPCC is correct and then look at the economics of it. And there we find that this approach is *still* wrong. Because it is not correct to announce a target for emissions: it is correct to announce a cost that we're willing to pay to reduce them.

This is the Stern Review argument. There's some future damage to come from emissions. How much should we be willing to spend now to reduce such damages? We reach our answer (which translates into that $80 per tonne carbon tax) and that's it. We should not spend more than that to reduce emissions. We should not have a target for emissions: we should be targeting only those emissions that we can reduce below that cost.

And yet every political party except Ukip is targeting the emissions number. This is simply wrong, it's an entire misreading of what the settled science on this issue is. The settled economic science as laid out in that Stern Review and backed up by every other economist who looks at it (Nordhaus, Tol and so on). We set the price of the actions we're prepared to undertake and go and do those things that cost less than that to do.

The reason for this is that the actual logic that says we should be doing anything rests upon that estimation of the cost of future damages. Spending more than that cost makes the future poorer than it could or should be. It is quite literally impoverishing our grandchildren.

It's not the first time this has happened of course. When the political classes have entirely misunderstood the entirely reasonable (please note, economists might differ on what the price of emissions should be but not on the logical approach itself) result of economic research and so garbled the implementation as to end up doing the opposite of what they should be doing. But it's impressive to see them doing so all the same.

Charter schools and the aspiring classes

There is significant research concluding that the ever-spreading charter schools in the U.S. are markedly improving pupils’ performance. Charter schools are free to attend, open to all children and publicly funded but independently run – the most similar comparison close to home being the Free Schools Programme in England. Since the first charter school law passed in Minnesota in 1991, almost seven thousand have opened with two and a half million children now being educated in a charter school. Previous studies have looked at lottery estimates. These compare how charter applicants perform when admitted to a charter school with how they would have performed had they attended a state school as the randomness ensures there are no systematic differences between those selected and not selected. But these studies do not account for pupils who never applied to a charter school and ended up attending one. Or for pupils attending charter schools for which demand is weak.

A new discussion paper (pdf) by Atila Abdulkadiroglu, Joshua D. Angrist, Peter D. Hull, and Parag A. Pathak does just this by testing the treatment effects of charter school attendance on middle-schoolers that are part of the new takeovers in New Orleans and Boston.

Takeovers see traditional state schools closed and then re-opened as charter schools. Students enrolled in schools designated for closure are eligible to be ‘grandfathered’ into the newly-opened charter schools. This means that they are guaranteed a place.

What this new paper finds is that highly disadvantaged students have experienced substantial gains in their achievement after enrolling in takeovers passively. It was previously believed that urban charter lottery applicants enjoy an unrepresentatively large benefit from charter attendance because they are either highly motivated or uniquely primed to benefit from the education these schools offer. Now we have both estimates from grandfathering and lottery-based research that weigh against this view.

These successes have also prompted similar approaches to be explored in Michigan, Pennsylvania, and Tennessee despite the controversy caused by the proliferation of charter takeovers in New Orleans, Boston and elsewhere.

Charters Without Lotteries: Testing Takeovers in New Orleans and Boston is one report of what is becoming a substantial compilation of literature on why charter schools are working. They are some of the top-performing schools in the country with a higher percentage of charter school students accepted into a college or university. They are raising the bar of what is possible and should be expected in public education.

Teachers in charter schools are given the freedom to innovate and have more powers to explore the best practices. The schools can adopt themes and focus on specific fields like STEM subjects, performing arts or meeting the special needs, for example, of autistic children.

How charter schools are quickly extending choice to the poorest is exciting. And crucial. It is not widely recognised that choice already exists – but for the wealthiest. The most privileged can not only afford private schools but through the state school catchment system the housing market is the market for schools. An accepted way of boosting real estate is by improving schools as families want to buy houses in areas with good schools. School choice gives the poor a way to access the already existing market.

The disadvantaged are on the rise and benefiting more than ever from state education as a result of what is the best prominent educational movement in the U.S right now.