Reasons for optimism - regulation

Given the tendency for regulation to increase remorselessly, especially in protectionist blocs, there seems at first glance to be little cause for optimism concerning its future. Regulation is used by some countries and trading blocs to raise non-tariff barriers to foreign imports. Where tariff barriers are not allowed under international agreements such as the WTO, use is sometimes made of regulation as the alternative. Goods are kept out because it is alleged they do not met the ‘safety’ standards required, or are produced with insufficient ‘consideration’ of the workers, the environment, or any animals engaged in their production.

One ground for optimism is that there is a distinct trend for protectionist blocs to be superseded by genuine free trade areas, in which countries agree to accept each other’s regulatory regimes, instead of trying to impose their own on everyone else. The largest one, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), formerly the Trans-Pacific Partnership (TPP), was already the world’s largest free trade area, even before the UK applied to join it, and with the US looking increasingly likely to join.

Two more grounds for optimism stem from the UK’s departure from the EU and its reacquired ability to make regulations via a different approach. The first is that EU practices the so-called “precautionary principle” of not allowing anything until it has been shown to be safe.

A more sensible approach is that of cost-benefit, which balances the possible risks of something against the gains it might bring. The problem with the precautionary approach is that nothing can be shown to be completely safe, even taking a bath or climbing upstairs. It represents a cost-cost approach by not taking into account the potential benefits. The results of these two approaches were illustrated by the development of vaccines against Covid-19. The UK took the risk of ordering vaccines that showed promise but had not completed testing, and it ordered many million doses in advance. The EU accused the UK of risk-taking, and opted for a more cautious safety-first approach. The outcome was that the UK was able to vaccinate more people more rapidly once the tests were completed than the EU could manage.

A second advantage now available to the UK is that it can opt for result-driven, rather than process-driven regulation. The latter gives instructions in detail on what must be done and how it must be done, and it is very much the EU approach, whereas the former sets out the results that must be achieved, and leaves it to ingenuity to come up with different and efficient ways of achieving those results.

We can increasingly expect the UK to join expanding free trade areas rather than protectionist blocs that try to favour their own producers at the expense of outside producers and their own consumers. We can expect, too, that the UK will give attention to cost-benefit analysis when it regulates, rather than following the precautionary principle. It is also likely that the UK will take advantage of its new-found freedom to practice result-driven, rather than process-driven regulation, enabling it to achieve the desired outcomes in ways that are sympathetic to business and industry, and therefore to economic growth.

It's difficult to understand this complaint

We can’t help but think this is rather misunderstanding how business works:

The music industry continues to marginalise women, according to the latest instalment of a landmark US survey on representation in pop.

In 2020, women were outnumbered on the US Billboard charts by men at a ratio of 3.9 to 1, according to the USC Annenberg Inclusion Initiative’s annual study of the Billboard Hot 100 year-end chart.

Women including Dua Lipa, Maren Morris, Doja Cat and Megan Thee Stallion made up 20.2% of the 173 artists that appeared on the chart in 2020, dropping from 22.5% in 2019 – and a high of 28.1% in 2016.

“It is International Women’s Day everywhere, except for women in music, where women’s voices remain muted,” said Dr Stacy L Smith, who led the survey.

Yes, and?

The more open and competitive a market the more it will not just reflect but be the straight outcome of consumer choices. What gets into the Billboard 100 is, by definition, what consumers decide to consume. There is indeed a vast industry involved in trying to persuade said consumers but even a random reading of the charts shows that PR comes a very distant second to those fickle choices of the people actually paying for the goods. The music business, that is, is one of the most open and competitive markets in the world- viciously open and competitive even.

That consumer choice seems to be a little biased by gender is not something that needs to be cured, it’s something that is perhaps but then the economic outcome is supposed to be emergent from individual choices.

It’s also terribly difficult to work out what should or even might be done about this if something were to be done. Are we supposed to dissolve the audience and elect another?

In Support of Adam Smith's Legacy Against Slavery

“ Fortune never exerted more cruelly her empire over mankind, than when she subjected those nations of heroes [on the coast of Africa] to the refuse of the jails of Europe, to wretches who possess the virtues neither of the countries which they come from, nor of those which they go to, and whose levity, brutality, and baseness, so justly expose them to the contempt of the vanquished.”

  Does this sound like a man who “perpetuated racism and oppression”? 

We generally frown upon the act of patricide, killing one’s father is just not the done thing in polite society. And yet recent calls by members of Edinburgh City Council are targeting one of Scotland’s own fathers: the Father of Modern Economics, Adam Smith. The addition of Smith’s grave and statue to a leaked list of sites that had links to “historic racial injustice”,  may vilify his name, suffocate his voice, and if taken to an extreme could destroy his legacy.   

Whilst Smith may have taken his last breath over 200 years ago, his words still echo throughout society. Indeed, 245 years to the day since the publishing of Smith’s magnum opus “The Wealth of Nations”, and his work is full of lessons that continue to define our modern economy. 

The group justified his name on the list by stating that Smith “argued that slavery was ubiquitous and inevitable”. Would it be reasonable to make the case, from this comment, that Smith was a pessimist? Probably. A cynic? Perhaps. But a racist? No. Is his statement even highly controversial? It is an awful truth, but over 2 centuries later, at least 46 million men, woman and children across the world are still trapped by the horrific bonds of slavery. 

Lest we forget, Smith openly condemned slavery on both moral and economic grounds. As an economist, he argued that slavery was inefficient and ineffective for society. He believed that when people are forced to work, and therefore cannot act upon their “own interest”, they have no incentive to innovate, improve or invest their skills and labour. As a man, he was repulsed by slavery. He strongly believed that it was an inhumane and abhorrent institution:

“[W]e may see what a miserable life the slaves must have led; their life and their property entirely at the mercy of another, and their liberty, if they could be said to have any, at his disposal also.” 

By appealing to both the self-interested minds and morally conscience hearts of the time, Smith composed a damning attack on slavery. His two-fold argument was used as fuel to stoke the blazing fire of the abolitionist movement. Whilst he may have been resigned to slavery’s presence in society, this defeatism did not deter him from writing vehemently against it. 

It is important to note that Sir Geoff Palmer, the lead of the Edinburgh Slavery and Colonialism Legacy Review Group, has stated that he does not plan on removing Smith’s statue or grave, instead his aim is to educate and “provide people with information about their city”. 

Whilst the move to teach people about the oft brutal and tragic nature of our shared history is highly commendable, it does still beg the question why Smith’s resting place and statue were ever on this leaked list of sites in the first place. This is a unique opportunity for the council to educate people on the truths that defined our history. Let’s get it right! I do so hope that when this final list is published on March 15th that Adam Smith, the fierce critic and opponent of slavery, makes no appearance.

Getting on Top of the Obesity Problem

Victoria Street 

SW1 

“Humphrey.” 

“Yes, Minister.” 

“I gather all these people have died of Covid not because Public Health England cocked up but because they were overweight.” 

“That is correct, Minister.” 

“Bur haven’t Public Health England known about this obesity crisis for decades and been taking measures to deal with it?” 

“Also correct, Minister.” 

“According to a letter I read in The Times last Friday from the Chairman of the National Obesity Forum, wittily surnamed Fry, the government’s new policies to tackle obesity are the same old things and will fail just as surely.”

“Not at all, Minister, not at all.  We can now reap the benefit of this lengthy experience and look forward to a panoply of successes.  You will recall the announcement of our public health plans last July with no less than 14 actions we will take.  The 13th was ‘We will take tackling obesity and malnutrition onto the global stage.’  World-beating, no less.” 

“Humphrey, that’s all very well but a simple chap like me would expect to see the measured results of our previous efforts, how they compared with expectations and whether they were value for money.  Back in 2004, The British Medical Journal was scathing about the government’s failure to collect any performance measures. To what extent are our 14 new initiatives based on a scientific evaluation of the old ones especially as, according to Mr Fry, they are much the same as the new ones?” 

“Ah Minister, far be it from me to suggest that in any way you might be taking an overly traditional view.  We are, of course, always led by the data. However we must not look back but bring hope, build confidence that the future will be better and brighter.” 

“You mean Public Health England really has cocked it up and can be expected to go on doing so?” 

“You may have forgotten, Minister, we have re-named it the National Institute for Health Protection.  It is now led by Baroness Harding so it cannot fail.” 

“No, I hadn’t forgotten but none of the 11 responsibilities we announced it was to have include obesity. Furthermore as valuable as Dido’s experience is, I’m not sure the Jockey Club is a fount of wisdom on obesity.” 

“One can be cynical, Minister, but we have made progress, school meals for example.  We have replaced junk foods with healthy foods. We have persuaded the marketers of fizzy drinks to reduce their sugar content.” 

“I’ve never really understood what junk foods are. A burger sold by McDonalds is junk food – right?  But exactly the same ingredients prepared by Mom in her own kitchen is healthy food?  And a bowl of cereal sugared by the manufacturer is junk whereas a bowl of cornflakes covered by a couple of spoonfuls of sugar is healthy?” 

“Well that’s roughly right.  If the food is advertised to children on television by profit-seeking corporations, probably not paying all their taxes in the UK, we have to hit back.  Labelling their products ‘junk’ is one way of doing it.” 

“So we are protecting the national interest, Humphrey.  Jolly sensible that. I have the same kind of concern with inequality.  It is clearly unfair that the deprived members of society are more likely to be victims of obesity than the more affluent.  We must do something about that.” 

“Yes, indeed, Minister.  It is truly shocking.” 

“Yet my Shadow colleagues tell me that our mishandling of the pandemic and the economy is causing starvation in deprived areas.  Queues at food banks have never been longer, Moms can only afford one meal a day for their families and we have failed to provide adequate compensation for missing school meals.” 

“All true, Minister.” 

“So why is it that obesity is most prevalent and growing fastest amongst the deprived who are also starving?” 

“Junk food perhaps?” 

“But thanks to the evil profit mongers, junk food is more expensive and the deprived don’t have any money.” 

“Our educational system is probably to blame, Minister.  We don’t explain calories very well and, as there are seven kinds, that’s not surprising.  The basic idea is that one calorie raises the temperature of one gram of water by one degree Celsius.” 

“Well that’s odd.  When I put a lump of sugar in my tea, the tea gets cooler. I suppose teaching evolution doesn’t help: the survival of the fattest and all that.” 

“Very droll, Minister. The truth is that we do not really know the answers to any of these questions.  For a start most of our scientists and civil servants, not being noticeably deprived themselves, do not empathise with those suffering from obesity which is, of course, a disease that should no more be blamed on its victims than we should tell those with mental health problems to get a grip.  In fact, obesity is a mental health problem.” 

“Which causes which?” 

“I’m talking correlation, Minister, not causality.  To quote from a 2006 academic paper, I happen to have about me, ‘Obesity is associated with an approximately 25% increase in odds of mood and anxiety disorders and an approximately 25% decrease in odds of substance use disorders.’” 

“So telling the obese to stop putting jam on their bread is about as useful and telling anorexics to buck up and start eating?” 

“Pretty much but the Skinifers who make the rules are offended by overweight folks filling up our hospitals and thereby costing the NHS millions of pounds. They insist we do something, or appear to do something, about it. The public is quite good at holding two opposing beliefs at the same time, e.g. ‘belief that [being] overweight is caused by the food environment or genes – both seen as outside individual control – was associated with greater support for government policies to prevent and treat obesity.’” 

“I can see why something must be done but surely if the obese are dying early that is saving the NHS money, not the reverse?” 

“The cost of the obesity crisis is indeed far from clear, Minister. It is all to do with comorbidities.  Would you like a briefing paper on that?” 

“Perhaps not, let’s get on with what I can tell the media we are doing.” 

“You can announce two crucial initiatives. The first arises from our recognition that this is a marketing problem.  The junk food industry uses marketing to harm the victims of obesity by spending money they cannot afford on food and drink they do not need.  Our answer, following Sun Tzu’s advice, is to take the enemy’s weapons and use them against him. We have engaged Sir Keith Mills to lead our £30M marketing campaign.  He is a top marketer, including the London Olympics so successfully – no obesity there.” 

“The other part?” 

“Ah yes, Minister.  We will be spending £70M on scales so that the obese can monitor their weight levels and get advice.  Obese people know they have a problem and want to do something about it. Watching their weight will provide the nudge.” 

“At least we can say they are on top of their problem...” 

So, let's not do that then

Ikea is entirely correct here:

The boss of Ikea has told the BBC he fears that global trade tensions will lead to higher prices for customers.

Jesper Brodin, chief executive of Ingka Group, which is the furniture giant's holding company, said imposing restrictions such as tariffs "normally doesn't benefit the ordinary people".

Perhaps we should revise that headline slightly. The “normally” is incorrect, tariffs never benefit the ordinary people.

Taxing people just because they desire to buy something made or built by foreigners never does benefit those people. That being exactly what a tariff is, a tax upon buying something made or built by foreigners.

As tariffs don’t benefit us out here, us ordinary people, therefore we should not have them.

As is easily derived from both Adam Smith and David Ricardo the only logical or even sensible trade stance is unilateral free trade. So, that’s what we should do then, clearly. Further, this is the first time in 40 years that we can do this so this is the right time to do so as well.

Yes, we know we keep banging on about this but the wisdom is over 200 years old now. We’ve even done it before, in 1846, and it worked. It’s just that so few of those in power wish to believe it that it needs to be banged on about.

Reasons for optimism - invention and innovation

Ten years ago, Tyler Cowan published “The Great Stagnation: How America Ate All the Low-hanging Fruit,” arguing that the US economy since the seventeenth century enjoyed free land, immigrant labor, and powerful new technologies, the “low-hanging fruit.” He argued that since 1970 the fruit tree became bare, and the easy access to growth gradually disappeared.

His book became a best-seller and stimulated much debate, but events since its publication have combined to cast doubt on its central thesis. Uber and Airbnb had started before he wrote it, but had not by then revealed the massive economic effect they were to have by lowering the cost of travel and accommodation and bypassing the entrenched dominant city transport and accommodation systems.

Similarly, the CRISPR gene-editing technology had been developed, but few, if any, appreciated what a powerful tool it would become for its potential improvement of the human condition. Autonomous (self-driving) vehicles were the stuff of science fiction when he wrote, as were people-carrying and delivery drones and cultured (lab-grown) meats. All of these innovations and new technologies have shown that the economic tree has a great deal more fruit on it than the low-hanging ones that had been picked.

Each of these innovations is a potential game-changer, displacing an established way of doing things with a novel and disruptive alternative. Each has the potential to stimulate new and unpredictable economic developments that might result from it.

Those who oppose invention and innovation because of the economic growth they bring, and who say that the planet cannot sustain what they call “the drain on its resources,” are misguided. It is invention and innovation that enable us to produce greater value with fewer inputs.

Some oppose technological developments because of the disruption they bring, and it is true that they can displace established players. This is, however, the way the world became richer, and able to support new types of employment more rewarding than the ones they displaced. There are no longer spinning wheels in every peasant hut, but there is a giant textile industry that provides most of the world with affordable clothing of far better quality than it had before.

Established players have often opposed new products and processes that threatened their comfortable places in the economic order. They threw wooden shoes into the textile machines. They lobbied Parliament to require a walking man with a red flag to precede each of the new motorcars. They usually fail because the benefits of the new technology spread more widely to people beyond the narrow group that opposes them out of self-interest.

There is cause for optimism because human ingenuity shows no sign of faltering or failing, and continues to produce and develop innovations that can add value to our lives. It is also highly unlikely that human aspiration will falter or fail, and highly likely that people will continue instead to welcome and accept the new developments that present hem with new opportunities. We can be optimistic that progress will not stop.

But why does the NHS obviously need more money?

A common enough assertion, here being made in The Observer:

One of the lessons of the impact of Covid-19 and the manifest long-term pressures on the health service is this: once the economy is on an even keel again, there will need to be an increase in taxation – probably, and appropriately, via national insurance – to finance the NHS properly.

Leave aside the current issues which we think very much overblown indeed. We have a health service to take care of our health. When we needed our health taken care of we had a health service to do so. Well, that’s good but why does that mean everything must change? Isn’t that why we went to the bother of having a health service in the first place?

Think instead of that longer term issue. Clearly, obviously, spending on the NHS must rise. But why?

The argument in favour of the state-led model - an argument routinely deployed by the likes of Polly Toynbee et al - is that it removes all that waste caused by competition and markets. That this misses the point entirely isn’t our point here. Let’s accept it for the moment. So, we have, in the NHS, a more efficient health care system than others who use those pesky markets models.

This means we should gain more health care for any specific amount of money, or the same amount for less money. That very argument in favour of the NHS proves that it should have a smaller budget than other systems precisely because it is more efficient.

Yet UK health care spending is near bang on EU average as a percentage of GDP. It’s above EU average in per capita terms and right about where it should be given relative GDP per capita.

We’re spending, that is, about what everyone else does in relative terms. If the NHS is more efficient then we should be gaining more and better health care than they do as a result of that spending. If we’re not - which is the common complaint, isn’t it? - then it must be that the NHS model isn’t more efficient and therefore that’s the thing, not the spending levels, that must change.

Either the NHS is better in which case it doesn’t need more money or if it needs more money then the NHS isn’t better.

A fairly naked beg for our money

Of course, it’s all our money whichever route it takes to get there but still:

The sector needs big pockets to fund the electric revolution, but analysts fear that without state aid, it will run out of road...(...)...combined with supportive governments...(...)...Burn agrees: “Manufacturing in the UK is down to government’s appetite for it. Does it support it or not?”...(...)...Vauxhall boss Michael Lohscheller said he expected the Government to “behave in the interest of the UK economy… we need UK Government support to make it happen”....(...)...Investors might need to see concrete government support to be willing to back these factories....

“Support” obviously meaning our money as filtered through the tax and political system.

The problem with this claim upon our wallets is that the stock markets are willing to fund just about anything in this space these days. Add the words “battery” or “lithium” or even “EV” to a company name and the money pours in. One innovative company even freewheeled a truck downhill and raised money for its as yet non-existent fuel cell that wasn’t, in fact, powering said lorry.

For this particular sector markets haven’t been so monumentally febrile since perhaps the South Sea Bubble. Capital is, to a useful level of approximation, free simply by asking investors for it. This is not the time to be forcing, through government, the subsidy by us all of such plans when there are some who will do it voluntarily - even if not perhaps wholly wisely.

After all, the point of government is to do those things that markets don’t - given that the markets will fund alternative vehicle technologies currently government shouldn’t.

Polly Toynbee really doesn't understand how markets work

We’re told that the only solution to Britain’s housing woes is more social housing. Because, as Polly Toynbee tells us:

The market will never build enough homes, and certainly not enough “affordable” homes, as scarcity drives up prices. Rather than treating housing as something for the market to rectify, the state should start building more social housing. It already owns land aplenty, and doing this would be a double win: it would both help to solve the housing crisis and deflate house prices by introducing more social rent properties on to the market.

It’s entirely true that scarcity drives up prices. But that’s the very thing, higher prices gained for producing a greater supply, which calls forth the new supply which then lowers prices again. The only time this doesn’t happen is when there’s a monopoly supplier. Only a monopolist can, that is, prevent the new supply which brings prices back down again.

We do not have a monopoly housebuilder. Therefore the market, unadorned, would be entirely capable of producing more houses to take advantage of these higher prices. As it did in the 1930s, back the last time we actually had something approaching a free market in house building.

For the problem is that we do have a monopolist in the marketplace, the state. Which decides, and decides alone, who may build what where. If we see results that are akin to those of a monopoly - supply not rising as price does - then we should really be ascribing that result to the monopoly we see within the system.

Free the market from those planning restrictions and watch housing become more affordable. As Polly does manage to grasp with social housing - more housing would reduce the price of housing. So, all we need to do is remove the monopolistic restrictions upon the housing market and we’re done.

That is, as we’ve pointed out before, abolish the Town and Country Planning Act 1947 and successors. We didn’t have this problem before that Act, we have done since, it is the Act itself causing the problem. The solution to housing is actually to have a free market in its provision.

Mired in archaic thinking

A useful point to grasp is that physical investment - investment in physical things - isn’t the way that a modern economy adds value. Or not the bulk of the value being added. It is, rather, investment in knowledge and intangibles that does add value.

For example, the value of Amazon doesn’t depend upon warehouses and the silicon in servers, although those obviously contribute, but in the software and brand that makes the whole thing work.

Companies paying corporation tax will be eligible for a new “super deduction” equal to 130pc of the value of qualifying plant and machinery investments.

Why, therefore, would we institute a subsidy for the unimportant part of investment and not one for the important part in this modern world? And yes, 130% allowances are, in part, a subsidy in a manner that 100% allowances are not.

Consider the one single product class of the past year with the greatest value to us all - vaccines. The reactor tanks to make it in are plant and machinery and so would gain this new allowance. The far larger and vastly more important research work, clinical testing and intellectual property would not. But we all know that the second group is the vast majority of both the costs and the value added - the reactor tanks really are just the reactor tanks and are of insignificant comparative value.

The modern economy adds value through knowledge, not physical plant. To subsidise the second and not the first is to be trapped in very archaic thinking.

Sure, tax cuts are nice, all tax cuts are good. But we do also need to be up to date with our analysis of how an economy works.

Do note that full expensing is still a great idea. It’s the restriction of it to just the one type of investment that is the error here.