Doesn't Brexit keep producing those little bundles of joy?

We're well aware that opinion is divided upon the merits of Brexit. It is at our gaff too. But we would still insist that the process is producing certain little bundles of joy:

Ministerial panic at the prospect of defeat over Brexit and key domestic policies has created the most inactive parliament for at least two decades.

Analysis by The Times shows that the number of votes held in the nine months since the general election, when Theresa May lost her majority, is lower than after every election won by David Cameron and Tony Blair.

Despite the task of rewriting British law for life outside the EU, since June MPs have voted 127 times on 40 separate days, equivalent to a third of the days on which the Commons has sat.

Legislation on post-Brexit customs rules as well as the multibillion-pound restoration of parliament has been repeatedly delayed as whips try to head off defeats on dozens of amendments. Pressing issues such as housing and social care are also being neglected.

There are indeed problems which need solving in this modern world. There are also problems which must be solved and which can only be solved by government. It is our insistence that the overlap between the problems needing solving and those which can or will be solved by more government is small. Small to the point of non-existence in fact. Our diagnosis of most of what ails this modern world - with respect to governance that is - is that we've too much government. The task is to get them to stop doing things, not to give them room to attempt more.

Brexit is preventing them from passing new laws. Good. Yes, of course we'd prefer that we were all in a better place, with better governance. Brexit is causing that log jam - how excellent, given that a decent enough prevention for modern government is that constipation.

The maternity discrimination problem

We agree that there is discrimination going on in the British workplace concerning women, children, maternity and pregnancy. The important question though is not whether but who? Who is doing the discriminating?

A study by the Equality and Human Rights Commission (EHRC) earlier this year, reported a bias against working parents. Its survey of 1,106 employers in the UK, revealed that a third believe new and expectant mothers are “generally less interested in career progression” than their childless counterparts. Of those polled, 40 per cent claimed they had seen at least one woman in their company “take advantage” of their pregnancy. 

Nearly 60 per cent of employers surveyed said women should have to disclose a pregnancy during the recruitment process. Meanwhile, 36 per cent said it is reasonable to ask about their plans to start a family.

Previous research has shown that 40 per cent of employers avoid hiring a woman of childbearing age.

We could read all of that as saying that employers do discriminate against pregnant women and new and would be mothers. That they'd like to be able to discriminate more.

But we do have something of a problem here. What if the basic claim, that mothers put children - all of such things are on average across the population of course, not relevant to the decisions of any one woman - before career are true? What then?

The thing being that as far as we know this is true. Women do indeed tend (again, tend) to become primary child carer, it is more likely that female career ambitions are put on hold than male. That then leads us to, well, who is making that decision? 

We might claim that it's the patriarchy, capitalism, The Man, insisting that women throw away their dreams. Or it could be that this accords with the desires of the women doing the deciding. What we might do about it all, even whether we do anything at all, rather depends upon that very question - who is it doing the discriminating?

Given that we see exactly the same pattern in every human society we can observe, yea even unto the Scandinavian social democracies, we do rather conclude that it's the individual choices of the women concerned which lead to the larger pattern we can see.

At which point what do we do about it? And why would we do anything about the freely expressed choices of consenting adults?  

Another way to put this is that the recognition of an unequal outcome is not sufficient as a justification for action. If the inequality is the result of the exercise of freedom and liberty well, that's just that, isn't it? We insisting that the freedom and liberty being exercised are more important than the inequality.

Exactly why we shouldn't believe Wilbur Ross on trade and tariffs

Don Boudreaux has a correspondent insisting that because Wilbur Ross is a successful businessman, the Good Professor is only a pointy head in an ivory tower, therefore we should believe Ross against Boudreaux on the subject of trade tariffs. This is the wrong way around.

Precisely because of the successful businessman and pointy head bit we should believe the view from the ivory tower.

 Of all the countless fallacious arguments for protectionism, none is more illogical than the one that you offer in your e-mail today – namely, that because “Secretary Wilbur Ross is a successful businessman his understanding of trade [is] rich and reliable” while my and other “ivory tower professors’” understanding of trade “is shallow, not very trustworthy.”

A useful real world test - even if edging up to the lip of a logical fallacy - is to ask cui bono? As one of us put it elsewhere recently:

A protectionist is someone who argues that you should be poorer so they can be richer.

The people who become richer through protectionism are the people who own the businesses being protected. We're going to take the opinion of a man made rich in the steel industry about the desirability of steel import tariffs? 

Professor Boudreaux is of course far too polite to get to the lip of that ad hominem logical fallacy but we're not.

KFC's DHL Debacle shows why markets work

We've all had a good chortle about Kentucky Fried Chicken's problems over their new distribution contract with DHL. Stores closing because of a lack of fresh chicken, musings over who knew they used that ingredient, those sorts of things.

What is going to get missed here is how this shows the superiority of a market economy:

KFC has gone back to its original recipe for chicken deliveries by rehiring Bidvest Logistics in the wake of last month’s supply fiasco.

The American fast food chain was forced to temporarily close hundreds of storesafter it ran out of chicken following the botched handover of its logistics contract to DHL and QSL. “To put it simply,” KFC tweeted at the time, “we’ve got the chicken, we’ve got the restaurants, but we’ve just had issues getting them together.”

We can just hear the Teenage Trots giggling in their bedrooms, can't we? The State, planning, that would have done something as simple as getting chicken to the restaurants, wouldn't it? This will be used as an example of the inefficiencies of private economic action, undirected by said state.

In response we might point out that several of us have lived and worked in places with state distribution of food and believe us, it isn't better than this at all.

However, the real point here is not that a mistake was made. We're humans, any economic system is going to contain humans and therefore we're going to have errors. Given, you know, that erring and humanity bit. What matters is how we clean up errors.

That contract changed on Feb 14, here we are on 10 March, the contract was reassigned on 8 March. That is, 3 weeks after the error started it has been solved.

Now think of any government error which has even been admitted in such a time period let alone solved.

Sure, any system of economic organisation will contain errors. The difference between government planning and market chaos is who cleans up the mistakes, solves the problems, faster? That would be the markets, precisely why they are so desirable - over and on top of all that freedom and liberty stuff.

Measuring quality by outcomes

I think when I do a third edition of my"How to Win Every Argument" I will add a new fallacy to the 94 fallacies I identified and described there. This could be called "Measuring quality by inputs."

I wrote here earlier about "Regulation by result" making the case that if we state what result is to be achieved and leave it to creative brains to find ways of achieving it, we do better than if we stipulate the processes which people are required to follow.

This is different, but related. It seems extraordinary that people should measure quality by the effort put in rather than by the result achieved, but many people do precisely that. Gordon Brown's government measured the quality of education by the amount spent on it, by the pay of teachers, by the size of classes, and so on. Most thinking people would measure the quality of education by the ability of the children to read, write and do arithmetic, and to pass exams. It may be that the inputs listed contribute to an improved output, but that is not intuitively obvious. Measurement of the inputs is not a substitute for measurement of achievement.

It is very common for measurement of the quality of the NHS to be discussed in terms of how much is spent on it, or how many people work in its different departments, whereas many might suppose its quality would be better measured by the death rates for various diseases, or the brevity of recovery times.

We live in the real world, and want to know if it is improving in various respects. To do that we have to look at what happens in practice, rather than congratulating or criticizing the effort or the expenditure applied. Quality is what a thing is like – an outcome not an input.

The white-elephant airport with real elephants

Yesterday I wrote about Sri Lanka’s Norochcholai power plant—the coal-fired power plant that you can’t actually get coal to for half the year—as a classic example of state-led infrastructure projects. But many other such projects in Sri Lanka were far worse.

The contenders for the crown of 'worst possible waste' range from the Weerawila cricket stadium, an engineering marvel in the middle of nowhere, to a television and radio broadcast tower that when completed is expected to be the tallest structure in South Asia—one might ask why.

But surely the prize should go to the international airport outside the former President’s home town. Boasting a runway longer than Changi Airport in Singapore, it faces the wrong direction; instead of aircraft landing into a headwind, they approach in a crosswind—a dangerous condition for landing.

The white-elephant airport (which serves no airlines) has, however, succeeded in attracting real elephants (which are large and potentially dangerous and destructive animals), since it sits by a wildlife sanctuary. Herds of buffaloes and deer also invade the premises. So firecrackers, soldiers, policemen and wildlife wardens have been employed to drive them out. Desperate officials have reportedly even turned to the local cattle rustlers to deal with them.

In addition, the airport lies right in the path of migrating birds—another hazard to aircraft. The authorities proposed a mass shooting of peacocks, but the plan was hurriedly shelved-because of religious sentiments (the birds are regarded as sacred). 

SriLankan Airlines, the country’s national carrier, was about the only airline to fly there—mostly carrying Sri Lankans who flew to the airport to take advantage of the generous duty-free allowances designed to attract tourists. After cutbacks in its operations even SriLankan stopped flights and the authorities turned some of the air cargo terminals into rice storage to accommodate the bumper harvest in the region. A rather expensive way of storing grain!

Ravi Ratnasabapathy is a Fellow of the Advocata Institute, a free-market think tank in Colombo.

So we didn't need the EU regulation at all then?

A slightly puzzling Guardian column talking about car insurance. The EU insisted that prices could not vary solely on the basis of gender, ending the manner in which women were generally charged less than men. The result of which has been:

My conclusion is that the EU ruling has done women a favour. Before, insurers bluntly charged you a bit more if you were male, a bit less if you were female. Now they have to price it according to rather more concise data reflecting your individual driving behaviour.

My guess is that women were actually paying too much before the ruling and are now paying premiums that more accurately reflect their risk.

Car insurance may have become less equal. But it is more fair.

The argument here is that the insurers have delved more deeply into the data and now discriminate upon things like miles driven, occupation, size and expense of car and so on. The justification being that the EU rules forced this.

Hmm, yes, we've seen no other sector of the economy start to use Big Data at all have we? No one, not subject to EU regulation, has started to slice and dice their customer base. Nope, nada.

There's a very strong temptation to insist that the change would have happened among profit hungry companies anyway as the technology emerged to enable this. But how to decide? Regulation caused it, regulation is irrelevant to it?

As an aid to decision making, consider roaming. The EU is very proud of the fact that is has reduced the costs of using a mobile phone from one country to make calls inside another. We've even Remoaners insisting that the loss of this will be a significant cost of Brexit. We ourselves would note that such freedom from roaming charges is available on any number of plans out there in the marketplace. Including to and from and within many countries which aren't in the EU and thus not subject to the regulations.

This is more about the EU claiming credit for something that would and did happen without them than anything else. Being able to point to the regulations is that credit claiming. 

A howler from the IPPR

The IPPR have a report out today calling for corporation tax to be hiked and employers’ national insurance contributions to be cut. You don’t have to read far in the report to spot an absolute howler.

From the report’s Executive Summary (emphasis my own):

“The corporation tax rate should be increased, and the proceeds used to fund a reduction in employers’ national insurance contributions (ENICs). We model a rise in corporation tax from 19 to 24 per cent, which would allow a reduction in ENICS from 13.8 to 11.8 per cent. This change will ensure that shareholders bear a greater portion of the burden of corporate taxation, allowing the proceeds to be passed on to workers through wage increases or additional employment. A higher rate of corporation tax would also raise the value of investment allowances, creating a larger incentive for investment. The changes would shift the burden of taxation away from less profitable businesses with high input costs onto more profitable ones”

Let’s put it to one side whether shifting taxation from businesses with high input costs to businesses with low input costs is a good idea. The idea that a higher rate of corporation tax increases the incentive to invest is categorically wrong.

Guys. It’s time for some optimal tax theory.

In the 1960s Dale Jorgenson and Robert Hall put together a framework for evaluating the effect taxes have on investment. It’s pretty straightforward. It sums up all the associated costs of capital such as taxes, depreciation and borrowing costs. If an investment can generate a return net of those costs then it’ll take place, if it doesn’t then it won’t be made.

The amazing thing about Hall and Jorgenson’s User Cost of Capital equation is that it lets you mathematically prove that the IPPR’s claim that higher rates of corporation tax will increase the incentive to invest is wrong.

Alan Cole (formerly of the Tax Foundation) in his paper Fixing the Corporate Income Tax, shows that raising the corporate tax rate increases the cost of capital.

“Hall and Jorgenson derive an expression for the price of capital, as follows:[10]

“where c is the cost of capital services, q is the price of capital goods, r is the discount rate, delta is the rate of physical depreciation on the asset, k is an investment tax credit, z is the present value of the depreciation deduction on one dollar’s investment, and u is the tax rate. For the purposes of this analysis, we will concern ourselves with the relationship between z and u.

“The value of z under current law is greater than zero, but less than one. A value of zero would correspond to no deductions at all, whereas a value of one would correspond to a system where deductions for capital equipment were taken immediately. (This is also often known as “expensing.”)

“Recent Tax Foundation research found z to be 0.8714 in the U.S. in 2012, meaning that the present value of the depreciation deduction schedule for the average investment made in 2012 was only about 87 percent of the value of the actual investment.

“With a value of 0.8714 for z, we find that the cost of capital increases as u increases. That is to say, a higher corporate rate (under current depreciation schedules) increases the cost of capital."

It’s true that as the net present value of capital allowances increases the effect that a higher rate has on the cost of capital falls (capital allowances also become increasingly expensive). If we allowed firms to immediately write-off capital investments (known amongst wonks as full expensing), then the corporate tax rate would have no effect whatsoever on investment, but at no point does a higher corporate tax rate increase the incentive to invest. The IPPR’s claim is simply false.

George Osborne’s 9 percentage point cut in corporation tax was funded in part by making depreciation schedules less generous (and in the case of industrial buildings scrapped them altogether).

As a result, the UK’s Effective Marginal Tax Rate in 2016 was only 3% lower than in 2007. Osborne’s rate cuts were effective at attracting international capital, but failed to move the needle on domestic investment. Hiking corporation tax without expanding capital allowances (which is what the IPPR propose) would hit investment hard.

The coal-fired power plant you can’t get coal to

For over a decade, my country—Sri Lanka—followed a state-directed, debt-fueled model of infrastructure development. The results were mixed: just how mixed is illustrated by is the 900Mw coal-fired power plant in Norochcholai. It is regarded as a success: but read on.

The largest power plant in the country, Norochcholai was expected to transform the energy supply, producing reliable cheap power and freeing the country from the vagaries of the weather. Up to that point, the bulk of the country’s power was being provided by hydropower. 

The plant was designed and built by the China National Machinery and Equipment Import and Export Corporation (CMEC) and partly financed by a loan from the EXIM bank. Controversy dogged the project from inception: the idea was first floated in the 1980s but environmental and other concerns stopped it from being built. In 2005 a positive environmental impact assessment from 1998 was dusted off and the agreement with CMEC signed.

However, Sri Lanka does not produce coal. So the plant was sited by the seashore to facilitate the unloading of coal. Naturally, a pier should have been built for ships to dock and unload. But this was never done. Under pressure from environmentalists, the site was shifted from the eastern deep water port of Trincomalee, to Hambantota in the south, before finally settling on the West coast—where the water is too shallow to accommodate a pier.  

This means that the ships that bring coal for the plant must now discharge their cargo mid-sea onto small barges that transport it to shore. Inefficient enough: but unfortunately, Sri Lanka is also a tropical country, subject to the monsoon. So for six months of the year, the waters are too choppy for the barges to operate. So the plant has to stockpile half a year’s supply of coal in the open, where of course it gets wet.

Since a change of Government in 2015 the two sides have traded allegations of corruption, poor design and the use of substandard materials in the project. CMEC have retorted by blaming breakdowns on the transmission lines and a lack of technical skills in Sri Lanka. The fact that all the instruction manuals for the power plant were written in Chinese may have contributed to some of the confusion evident among local engineers.

Remarkably, despite all these mistakes, plus teething troubles that led to many unexpected shutdowns, and more recent problems of pollution from coal dust and fly ash, the coal power plant remains one of the best Chinese projects. It does at least generate power at relatively low cost: when it was completed in September 2014, the President announced a 25% cut in the electricity tariff (with cuts in kerosene, petrol and diesel prices thrown in for good measure). As an example of a state-led infrastructure project, however—it is a classic.

Ravi Ratnasabapathy is a Fellow of the Advocata Institute, a free-market think tank in Colombo.

Taking back control of our waters

In this week's Madsen Moment, Dr Pirie tackles how the UK should reform the fisheries once control is returned from Brussels after Brexit.