Let them in
In City AM today I have a piece on the refugee crisis, arguing that the costs that many are (understandably) worried about may not actually be a problem:
A recent study looked at the impact of Yugoslav refugees on Danish workers in the 1990s and 2000s. Because Denmark’s resettlement policy distributed these refugees across the country without respect to local labour market conditions, this is a case study in how “exogenous” immigration affects natives. . .Instead of starting a race to the bottom, as some feared, this influx of workers allowed the Danish economy to become more complex. Adam Smith’s “division of labour” increased, as jobs became more specialised and hence more productive. . .
Crime is on people’s minds too. And it’s true that asylum seekers do seem to increase property crime rates in the places in Britain they go to, though interestingly they seem to reduce violent crime rates.
But this seems to be a consequence of the tight restrictions that effectively prohibit asylum seekers from working for at least the first 12 months that they spend in Britain. If we liberalised those rules, we could solve that problem.
It's important to get the numbers right. The UK has accepted around 5,000 asylum applications from Syrians, not 216 as many people are claiming – that 216 is the number of Syrians we've actually evacuated from Syria directly. But I think there's a strong case for letting in many more than that.
A brief endorsement of 'Markets for Managers'
I'm often asked by people who are just getting interested in economics what they should read. There is no shortage of good 'pop economics' books to recommend to them: Freakonomics is the most famous and The Armchair Economist is enjoyably contrarian, but for my money The Undercover Economist is the most interesting. But none of these teach you the sort of economics you'd learn if you studied economics at a university. And that's where Anthony J Evans's Markets for Managers comes in. It's aimed at 'managers', by which Evans means people who make strategic decisions for their firm, and makes the case that managers who understand the principles of economics will have an advantage over their rivals. But in explaining those principles Evans inadvertently gives an introduction to anyone who wants to learn about them.
The 'applied economics' method that Evans uses is extremely readable. If, like me, you prefer to learn by applying abstract ideas to reality, Evans's approach is ideal. And for British audiences there is something quite nice about reading examples applied to Fernando Torres rather than basketball players I've never heard of. What's most impressive about the book is that Evans even covers the drier parts of economics, like international trade and macroeconomic policy, that the 'pop economics' books don't bother with.
Evans is a Senior Fellow of the ASI and can claim to be one of the UK's only "Austrian school" economists, and these perspectives do shine through, though not to the detriment of the economics being discussed. What he's done with Markets for Managers is to give a clear, interesting and comprehensive primer in economics as it's taught in the classroom. No doubt many managers would benefit from reading it but even more so I find myself recommending it to university students who are not studying economics. For historians and political science students especially, the boot-camp in economics it gives might well give a surprising new way of understanding their own fields.
So that's the end of minimum pricing on booze then
Ever since the idea was first put forward we, along with others, have been saying that minimum pricing for booze would fall afoul of the law. And we were right:
Nicola Sturgeon’s plans to fix a minimum price for alcohol has suffered a huge blow after the European court’s top lawyer ruled it would infringe EU law on free trade.
In a formal opinion on Sturgeon’s flagship policy, the advocate general to the European court of justice, Yves Bot, has said fixing a legal price for all alcoholic drinks could only be justified to protect public health if no other mechanism, such as tax increases, could be found.
Bot’s opinion is expected to mean a final defeat for the Scottish government’s efforts to be the first in Europe to introduce minimum pricing – supported by leading figures in the medical profession and the police, after several years of legal battles.
Over and above the obvious illegality of the proposal the thing we couldn't get our heads around was the mind gargling stupidity of the idea. We don't accept the idea that boozers don't cover their costs currently but imagine, for a moment, that we do. Why, as a solution, would you boost the profit margins of producers with a minimum price rather than raise the prices with more taxation? We have not been able to find anyone who can explain this to us.
All we're left with is the rather uncharitable opinion that some people wanted nice jobs as campaigners but wanted to make sure that they campaigned for something silly that quite obviously would never happen. Nothing, other than sheer raging stupidity, makes sense as an explanation to us.
Economic development can have some old, old, roots
An interesting little piece of research showing just quite how old some of the roots of economic prosperity can be. And shown using the most modern technology as well. For some years now economists have been measuring economic development by the amount of light that can be seen in satellite photographs of an area. For one of the very first things people seem to do, as soon as they can, is to light up that bulb rather than curse against the darkness. The technique has been used to estimate African GDP growth for example, coming to much more cheering results than the official figures would have us believe. And here it's used to measure quite how old some of the roots of successful development might be:
In ancient times, the area of contemporary Germany was divided into a Roman and non-Roman part. The study uses this division to test whether the formerly Roman part of Germany show a higher nightlight luminosity than the non-Roman part. This is done by using the Limes wall as geographical discontinuity in a regression discontinuity design framework. The results indicate that economic development—as measured by luminosity—is indeed significantly and robustly larger in the formerly Roman parts of Germany. The study identifies the persistence of the Roman road network until the present as an important factor causing this development advantage of the formerly Roman part of Germany both by fostering city growth and by allowing for a denser road network.
It's a very interesting little piece of work.
Why are corporations 'socially responsible'
In a 1970 piece in the New York Times magazine Milton Friedman argued that 'the social responsibility of business is to increase its profits'. They should make as much cash as possible for their shareholders, and shareholders should give directly to charity. It is hard enough to be an efficient firm, without needing to be an effective charity at the same time. But it is popularly believed that corporations' role in society does include various other responsibilities rather than simply maximising long term shareholder value. And in real life we note that firms often run charity events, match their employees' charitable donations and so on. Why would firms spend money on charity when they don't have to?
At first you might expect that managers are exploiting the firm to selfishly gain themselves prestige. There is some evidence, for example, that more narcissistic chief executives do more corporate social responsibility.
But the bulk of evidence suggests that firms do better financially when their 'corporate social performance' is higher. A 2003 meta-analysis of 52 papers and 33,878 firms found a positive association—though this was stronger when you measured financial performance by accounting measures rather than investor measures. A 2007 meta-analysis looked at 167 studies and found a similar result: corporate social responsibility is associated with higher financial performance, though quite weakly.
Various different types of study confirm this point from different angles. For example, a 1997 paper looked only at 27 event studies of share prices when firms revealed socially irresponsible behaviour and found the converse of the other results: bad behaviour cut firm value. Event studies on financial markets are quite a good way of isolating causality; with a short enough timescale the change in question is very likely to be the one driving price changes.
But why exactly does CSR help firm performance? Recent work provides some clues. For one, it seems to cut a firm's financial risk. It seems to raise a firm's access to capital. This might be why market analysts tend to recommend firms more in their notes after they engage in CSR. And it explains why firms with more shareholder-driven corporate governance give more incentives to CEOs to engage in CSR—not what you'd predict if it was an agency cost.
This probably comes from reputational improvements, and reputational insurance. Customers prefer to buy from firms who do more and better social programmes, and engaging in CSR seems to cushion stock declines after ethics in business become popularly salient (e.g. after the 1999 Seattle protests against the WTO).
Intriguingly, the reputational advantages may also extend to the government. Davis et al. (2015) discovers that firms who do more nice stuff also lobby more and pay less tax; i.e. that corporate social responsibility and tax are substitutes. This suggests that CSR overall is not driven simply by some measure of manager altruism or empathy or quality—the sort of thing we might usually wonder about. (Though some evidence disagrees.)
None of this really answers whether CSR is good for society at large. If it does enhance reputation, leading consumers to like it more, then this is basically a transfer from consumers to charities. Either way we probably shouldn't lionise firms when they do it—they're just trying to maximise profits, as usual.
There's silly housing policies and then there's stupid ones
We'll leave it to you to work out which one this is, silly or stupid:
Londoners should be given the chance to buy a new type of state-built, price-capped home that could only ever be sold to a first-time buyer, according to David Lammy, a Labour mayoral candidate.
Announcing new details of his plans to address the housing crisis in the capital on Monday, Lammy said his plan would create a new type of tenure in the UK housing market and see the state showing “hands-on leadership” in housing.
Lammy, one of the six contenders hoping to be named as Labour’s candidate for mayor in the 2016 election, said he wanted to build 30,000 of what he described as new “first-time homes” with the intention they would provide affordable housing for Londoners for generations to come.
The homes, which he said could be available for as little as £150,000, would be built on public land and sold with conditions on the leasehold intended to stop the price rising in line with normal London house price inflation.
The buyers would be able to sell for up to 10% above cost price, but only if they had lived in the home for a long time. For those trying to sell after a shorter period, the cap on the amount by which the price could rise above cost would be “significantly lower than 10%”.
Well, no, we won't leave it to you: this is a stupid policy, not merely a silly one.
There's two ways you can ration things: by price or by queues. And if you fix the price then you will be rationing by queue. Thus the inevitable outcome of this plan will be a vast waiting list of people wanting to buy this price controlled housing. The difference between this and standard housing association or council housing is only that people will be paying a mortgage to live in it rather than rent. Which isn't in fact all that much of a difference.
If there is in fact public land upon which housing can be usefully built then sure, housing should usefully be built upon that public land. But it should of course then be sold at the market price for to do otherwise means a subsidy from all other taxpayers to those who gain that below market price. That is, the politicians would just be buying votes with our money again.
Turning points
There have been turning points in the development of humankind. Some would point to the ability to make fire and the effect it had on people's diet and survival chances. Undoubtedly the development of agriculture about 12,000 years ago and the domestication of grains and livestock enabled humans to become a settled species and to store value against adversity.
For most of the time men and women have been on this planet they have lived a meagre existence at subsistence level, vulnerable to storms, drought and crop failure. Something happened about three centuries ago that changed that for an increasing proportion of Earth's population. It was undoubtedly a turning point when people began to use some of their resources as capital to generate wealth.
Social and intellectual changes played their part in fostering a culture of experiment, innovation and investment. Led by Britain, the Industrial Revolution set humankind on an upward course of wealth creation that has lifted large and increasing portions of humankind out of starvation and misery. The wealth generated by the use of capital has made possible a secure and adequate diet as well as modern medicine and sanitation. It has enabled widespread access to education and healthcare. It has profoundly altered the conditions of life along with the other major turning points.
Capitalism has spread and is spreading its benefits across the world. It is not to Socialism that we owe lifestyles replete with opportunities as well as comforts. By concentrating on the creation of new wealth instead of the mere redistribution of existing wealth, capitalism has set humankind on an upward path of limitless development. In place of envy of those who have more, it provides space or what Adam Smith called "the uniform, constant and uninterrupted effort of every man to better his condition," and of course it applies equally to women.
It seeks not a fairer world but a better one, not equality but opportunity. It works with the grain of the real world rather than attempting to impose a preconceived mental pattern upon it. It works by improvement and evolution, not by revolution. Even though this seems obvious, it is worth repeating from time to time to people for whom this is not so. When people are tempted by the fantasy world of Socialism, it is worth reminding them of the real-world achievements that Capitalism has brought about and Socialism never has and never can.
No, prefabs are not the housing crisis solution
There's a short answer to this question posed in the Telegraph:
Are prefab boxes the answer to Britain's severe housing shortage?
That answer being "No".
There's a longer possible answer as well: "No way".
Because, as the article itself goes on to point out, the problem is not in fact the cost of housing:
“The nature of London property prices in particular makes moving house impossible. We want to prove prefabs can be cool - if you have spare land, why not have an extra bedroom. And you can take it with you if you do move, “ said Lee Thornley, co-founder of Bert & May. He adds that prefabs are a cheaper alternative to costly extensions, as planning permission isn’t required for structures that are counted as mobile homes.
That "cheaper" part isn't quite right:
Bert & May Spaces, which launches its units next month at design show Decorex, will sell three types of units. The smallest will be a one-roomed box retailing for £25,000, a one-bedroom unit will be available from £75,000, while the most expensive will be the two-bedroom option at £150,000.
Because any form of volume building operation will have a build cost of better than £150k for a two bedder. However, accepted, the total cost, when including that planning cost, might well be lower. But at this point we need to note that it isn't the cost of building houses that is the problem. It's the cost of negotiating the planning system.
That is, prefabs, classed as mobile buildings, are an arbitrage around the planning system. Meaning that our problem is in that planning system, not in building nor the cost of it. Our solution must therefore be to do with the planning system as that is the root cause of our problems.
It's possible to be reformist here and suggest minor changes and tweaks to the system. But we are increasingly of the opinion that that's just not going to work. We're not entirely convinced that incremental reform is impossible but very nearly so. Thus the solution is simply the wholesale shredding of the Town and Country Planning Act of 1947 and all the subsequent updates to it.
The real importance of this solution is that we know that it would actually work. It's said that we need 250,000 new homes a year: the last time the private sector managed this was in the 1930s, before planning became so constipated restricted. And what was constructed was exactly what gains a significant premium in today's market: the 1930s suburban house, the very thing which people fight over to buy in the Home Counties.
That is, the last time the market was left free to build houses for the people the industry built the houses that the people wanted, where they wanted them. Our current system does not manage that so why not blow up that current, nonfunctional, system and retreat back to the last one we had which actually worked?
Out today: The Oxford Handbook of Austrian Economics
Released today, The Oxford Handbook of Austrian Economics (edited by Peter J. Boettke and Christopher J. Coyne) contains contributions from two of our Senior Fellows: Kevin Dowd and Anthony J. Evans. In his chapter, Evans takes an Austrian look back at the causes of – and the lessons we can draw from – the UK's 2007 Financial Crisis. Focusing on regime uncertainty, he rejects both the idea that the crisis was "caused by greedy bankers, complicit politicians, or capitalism itself" and the prominence of analysis that overstates the role of incentives in the run-up to the crisis. Instead, he takes the view (with reference to the work of Jeffrey Friedman, among others) that
There is far more evidence to suggest that it was ignorance and error that caused the crisis and that theoretical issues such as regime uncertainty, big players, recalculation, price naiveté, trading strategies, and corporate governance deserve closer attention.
And that
Allowing insider trading (to improve market efficiency) and reducing barriers to entry and exit (so that foreign banks can provide additional competition) help to thaw the economy and to solve the knowledge problem.
That "ignorance, not omniscience, is the norm" (and a well-functioning price mechanism is the only feasible method by which to ameliorate that problem) is a point too rarely made in reference to the crisis, which is most often blamed on the greed of bankers or the laxity of financial regulations.
As well as being a Senior Fellow of the ASI, Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School in London and a member of the IEA's Shadow Monetary Policy Committee.
You can buy The Oxford Handbook of Austrian Economics here, visit Anthony J. Evans website here, and download Dr. Eamonn Butler's (excellent) ASI primer on Austrian Economics here.
Andy Burnham's very strange £11 minimum wage
Gosh, isn't Andy Burnham showing himself to be a strong leader?
Firms have been warned by Andy Burnham that they could face penalties including higher national insurance payments if they failed to pay a proposed new higher living wage of around £11 an hour. In a fresh push to make up ground on surprise left-wing Labour leadership frontrunner Jeremy Corbyn, the shadow health secretary said he would seek to use a "carrot and stick" approach to force up wages if he led the party to power in 2020. At the start of the final 10 days of campaigning, Mr Burnham will set out his proposals at a campaign event in Pudsey, a Yorkshire constituency that Labour failed to win at May's general election. The national rate - which would rise to over £12 in London - would apply to all age groups and be adjusted for the loss of tax credits and linked to the cost of housing, food and household items.
Such a strong leader that he can simply divine the price of something and 65 million people and the markets that are their interaction will simply buckle under and obey. Sadly for such price fixing games that's not in fact how things work.
More specifically, the level of the minimum wage has an impact upon how many people actually have jobs to earn a wage from. It's entirely true that low minimum wages have little effect on employment: simply because very few people earn very low wages. The higher that minimum is compared to the general wage level the greater the unemployment effect. There's no cut and dried limit here, but the rule of thumb is that a minimum wage higher than 50% of the median will have substantial such unemployment effects.
Currently the median wage is around £13 an hour meaning that the proposed £11 is around 85% of that median.
This isn't going to work out well, is it?
"It will be based on the simple principle that the same hour's work deserves the same hour's pay, regardless of your age. So I will abolish the youth rate minimum wage, apply the higher rate to everyone and give incentives for companies to go even further."
And there is where the real effects will be felt. For those the minimum wage is most binding upon are those who are young and untrained. And if someone fresh off the educational production line must be paid that same £11 an hour as someone with a decade of experience of turning up to work on time and sober then that teenager just isn't going to get employed is she?
We thus return to our long stated position. Which is that if we are going to have a minimum wage, something we don't think should exist at all, then whatever that minimum wage is must be the same as the tax free allowance for both income tax and national insurance. For if there is, as is claimed, some moral amount that an hour's work is worth then there can be no justification for the state taking some of that amount to pay Andy Burnham's salary.
Or, if you prefer, if you'd like the working poor to have more money then stop taxing them so damn much.