An excellent natural economic experiment

We welcome this:

South Carolina and Montana residents will be cut off from federal pandemic unemployment benefits next month, with Republican governors in each state claiming the payments have led to a workforce shortage. Economists say that's not the case.

"Employers are just angry that they are unable to find workers at relatively low wages," Heidi Shierholz, a senior economist and director of policy at the Economic Policy Institute, said in an interview. "The jobs being posted are more stressful, more risky, harder jobs than they were pre-COVID. ... When the job is more stressful, then it should command a higher wage."

These two states will be the first to end participation in the unemployment enhancement programs, as both states are attempting to transition back to pre-pandemic unemployment insurance eligibility and benefits by the end of June.

We disagree with Heidi. The current system whereby normal state unemployment benefits are paid, with few questions, plus the $300 a week Federal upgrade means that somewhere between 25% and 50% of the American labour force earns more by not going to work than by labouring. This clearly and obviously raises the reservation wage - the amount that must be paid in order to get a worker to come to work.

We’re entirely agreed that supporting people during a pandemic inspired lockdown of the economy is a good idea. But we’re also convinced that the political incentive is to continue handing out the cash long after it’s sensible to continue doing so.

However, it’s not so much the ending that we think is such a good thing. It’s that it will end in some places and not in others. The national economy will be subject to much the same influences in every part of it. We’ll have this one policy difference in just these two areas. We’ll thus have the natural experiment to be able to see what the effect of the extended and expanded unemployment benefits actually is.

Which is great, isn’t it? Next time around we’re not going to have to try and pick and choose between two sets of - possibly - ideologically motivated think tankers, we’ll have real world evidence and proof. We’ll be using the evidence to illuminate the issue the next time around but the other lot…..

Some advice for Sir Iain Duncan Smith

We think it would be helpful if, when talking about the details of policy about metals, the details about metals were known.

Sir Iain Duncan Smith, the former Conservative party leader said: “The Government should now call this in and block it.

“China already has three-quarters of the world’s rare earth minerals and an even larger share of their processing.

“Rare earth minerals like lithium are to the 21st century what oil was to the 20th century and deals like this are all about taking control of strategic materials to make the West go to China for them.”

Lithium is not a rare earth mineral. They are the 15 lanthanides plus yttrium and scandium. This might sound like some terrible pedantry but we’re afraid it isn’t. China does indeed mine some three quarters of the world’s rare earths, process even more of them. It does not have anything like the same stranglehold over lithium which is, in most classifications, a minor metal and in all is definitely not a rare earth.

Even then the Chinese position in lithium is for a particular method of extraction. When mining spodumene it is necessary to have a processor of the concentrate produced at the mine. China does dominate that process. Other extraction routes - from brines, clay deposits as this one under discussion, from micas - do not require that processor for the material is processed up to industrial quality at the mine itself.

This is not, therefore, pedantry for the misidentification as a rare earth leads to this belief of Chinese dominance as with the rare earths. Australia is the dominant producer of lithium - that spodumene that is then often processed in China - followed by Chile which processes directly.

We also think there is a distinct whiff of overreach here.

Ministers have been urged to block a planned Chinese takeover of a British lithium miner as fears mount over Beijing’s grip on materials critical for electric cars.

Bacanora Lithium, which is listed in London, said it has received a £190m bid from its largest shareholder, China’s Ganfeng Lithium, which is already one of the world’s largest producers of the material.

Bacanora is listed in London. But the deposit anywhere near to actual exploitation is in Sonora in Mexico. It sounds a little colonial almost for the British government to be determining who might own minerals in Mexico. The next idea in the company pipeline is at Zinnwald in Germany. Again - and this is a deposit that one of us actually knows rather well having done work in the area on associated minerals - the British government insisting upon who may own minerals in Germany seems to us a bit of a reach.

This is, of course, Hayek all over again. Gaining the actual knowledge to run the world in any detail is somewhere between extremely difficult and impossible for any government to achieve.

More than that we do rather worry about that property rights thing. Bacanora Lithium is currently the property of the shareholders of Bacanora Lithium. Property rights, if they are to have any meaning at all, meaning that one can dispose of one’s own property as one wishes. Rather than, say, being limited by the technical misunderstandings of a politician.

(Just for the avoidance of doubt none of us here have any relationship with any of the companies. We do know Sir Iain and like him, this is a critique more in sorrow than anger)

The old idiocies do keep coming back, don't they?

Bad economic ideas do seem to repeat just like that dodgy kebab persuaded into late one night.

Still, for all the sabre-rattling, some good can come from the dispute if it serves as a firm wake-up call for our over-reliance on foreign partners.

The solution to this skirmish isn’t to simply reroute giant subsea power cable projects away from France towards the Netherlands or another country deemed to be a more reliable ally. That misses the point and simply shifts the problem elsewhere. The answer should be a comprehensive rethink of the energy system so that we can become self-sufficient.

But don’t let it stop there. Post-Brexit, post-Covid Britain has a massive opportunity to reinvent itself. The pandemic has exposed the downsides of globalisation and the danger of being overly reliant on the impulses of suppliers thousands of miles away.

Self-sufficiency is also known as making ourselves grossly poorer. The entire point of trade is to gain access to those things that Johnny Foreigner does better, cheaper, faster, than we do. To become self-sufficient is to miss out on better, cheaper, faster.

Think, just for a moment, about those vaccines that we’ve just done so well at. We in Britain did the bit that we’re good at. Design and testing, financing, the high value parts of the process. We’ve even done some of the manufacturing. And yet the supply chain can be seen here, or here. One vital ingredient is, apparently, Chilean tree bark. Whether that’s bark from a tree from Chile or bark from a tree called Chilean we don’t know but we’re pretty sure we’re not about to plant a forest of them in Britain.

That is, even if we did say that we were going to have our own, local for locals, vaccine supply chain we still aren’t going to have one. Because at some point down the line, at some iteration of suppliers to suppliers, the supply chain for any product at all is the entire global economy.

Another way to make much the same point we can think of two countries that are, largely enough, self-sufficient in the sense that they import very little. The result being a distinct lack of sufficiency of anything at all in both DR Congo and North Korea.

No, there is no clever way of identifying what government should insist we are self-sufficient in and what we might allow to be traded. That calculation is already being done by all the millions upon millions of people engaging in making economic decisions - some few hundred in Westminster don’t have the knowledge to second guess all of that. The chutzpah to think they do but not the competence.

Seriously, we’ve spent tens of millennia expanding the geographic coverage of our trading networks. For good reason, the larger the network the richer we are. There is no good reason to slam that process into reverse whatever current political fashion may be.

Happy Birthday Friedrich Hayek!

On 8 May 1899, in Vienna, Friedrich Hayek was born. He would become, in Robert Skidelsky’s words, “the dominant intellectual influence of the last quarter of the twentieth century” and he remains influential among liberals and libertarians today.

From the 1940s to the 1970s, Hayek had — almost alone — kept alive the spirit of personal and economic freedom that had been crushed by the chaos of the Second World War and the Keynesian government interventionism that followed it. Such interventionism, he argued, was based on a fatal conceit, the conceit that we knew far more than we in fact did. Governments and their planners simply could not collect and process all the information needed to run an efficient economy, because that information is dispersed, diffuse, incomplete and essentially personal. The socialist dream, therefore, would always be frustrated by reality; and as socialists struggled to control that reality, individuals would increasingly find their freedoms being stripped away. It was a road to serfdom.

More than anyone, Hayek showed how unplanned societies could be highly rational and collaborative, their conventional practices containing a ‘wisdom’ that we may not even understand, never mind be able to manipulate.  The price system, for example, allocated resources to their most urgent uses, with a speed and efficiency that conscious government planning could never achieve.

Hayek explained how such spontaneous orders (which include not just markets but language, justice and much else) were the product of social evolution rather than of rational thought. Indeed, trying to replace them with some planned ‘rational’ alternative was likely to end in disaster. His thought influenced a whole generation of economists, including many who, like he, would win the Nobel Prize, such as Milton Friedman, George Stigler, Maurice Allais, James Buchanan, Vernon Smith, Gary Becker and Ronald Coase. A 2009 study by David Skarbek showed that only Kenneth Arrow was cited more often in the work of other Nobel economists – an indicator of his influence on the profession.

Hayek’s ideas also enthused a whole generation of intellectuals, writers and think-tankers who in turn disseminated his ideas even more widely. Among them were Henry Hazlitt, journalist and co-founder of the Foundation for Economic Education; Ralph (later Lord) Harris and Arthur Seldon who ran the Institute of Economic Affairs; F A (“Baldy”) Harper who founded the Institute for Humane Studies, Eamonn Butler and Madsen Pirie who set up the Adam Smith Institute; and many others.

Through this process, Hayek’s ideas came to have a real political effect too – something unimaginable for much of the half-century following the Second World War. Politicians such as Margaret Thatcher and Ronald Reagan owed much to his thinking. So did those, like Mart Laar and Vaclav Klaus, who became the political leaders of Eastern Europe after the fall of the Soviet system — which Hayek’s thought did much to undermine. “No person,” concluded Milton Friedman, “had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek.”

Hayek’s ideas remain a guide and inspiration to lovers of individual freedom all over the world. Think tanks promote his view; student groups name themselves after him; college programmes spring up in his name; journalists cite him; academics admit their intellectual debt to him; his views are analysed in books, papers and blogs. Millions of ordinary people owe to Hayek their enjoyment of the fruits of economic and personal freedom, even though they may not realise it; but then as Hayek pointed out, knowledge is not always obvious.

Eamonn Butler is author of Friedrich Hayek: The Ideas and Influence of the Libertarian Economist (Harriman Economics Essentials).

It would appear that Larry Summers was right

We tend not to talk or worry too much about macroeconomics around here, thinking as we do that getting the microeconomics of market structure, incentives and voluntary cooperation right is more important. Hugely more important, meaning that getting that important part right obviates the need for much concern about the other.

Others disagree with us, as with Larry Summers. Who recently pointed out that the American economy is indeed a little inside its potential production capacity envelope. There are economic resources lying unused. He goes on to recommend some Keynesian pump priming to bring them back into use. Not our favoured policy but it is, within the models being employed, sensible enough.

Summers goes on to point out that there’s only so many of those unused resources. So, if they’re brought back into use by simply spraying money over the economy - sorry, stimulus checks to American voters - then the available room for spending on the infrastructure he thinks it necessary to revitalise is constricted. In fact, trying to do both will mean all those unused resources get used, and more, meaning that interest rates will have to rise to choke off excessive demand for them.

This has, of course, been entirely laughed at by the political class. They’ve got the societal chequebook and they’re going to enjoy their control of it. Even the sometimes sensible - Paul Krugman for example - have been insisting better to do too much rather than too little.

American interest rates might need to rise to ensure that the world’s largest economy does not overheat, the head of the US Treasury has said.

Ah, there appears to be more than just a modicum of truth to the Summers view.

We would take a larger lesson from this. That Modern Monetary Theory for example. It states that politics can spend as much newly created money as it likes the limitation being good sense and taste. The good sense to not spend too much and the taste for restricting the spending when it is too much.

We do think that fails, not on economic grounds but upon human ones. Taste and sense, let alone good versions of either, seem not to be all that evident in politics.

We agree with the sentiment but not the specifics

The contention is that the UK’s common law approach - it is really the law of England and Wales here - is better than the Roman approach of the continent when building financial markets. We agree with that sentiment but the specifics seem a little garbled to us.

In all the maelstrom of debate about the future of global financial services in light of Brexit, one key point is often forgotten. That is, that the UK’s common law, pragmatic approach to law and regulation is intrinsically the safest for financial services, and conducting financial business under other available regimes introduces dangerous risk into the system which cannot be quantified or managed.

A rousing chorus of Flanders and Swann seems appropriate here, tuppence not being given etc.

However, much too much emphasis is being placed upon the institutions of the law. We agree that London being filled with people who know what they’re doing in this area is useful. As with Delaware’s Chancery Court competence and speed - if that can ever be applied to the law - is an aid to a business environment. But that doesn’t explain why the advantage arose in the first place, nor why it is likely to remain.

For that we need to look at the underlying concept of English law in commercial matters. Which is, broadly enough, that it does not follow the precautionary principle. As long as an arrangement is not obviously illegal already then it may be done. There is freedom of contract that is. It is not necessary to go around the corner to some bureaucrat or, worse, politician, to ask whether this may be done. Or even done in this manner. Some such arrangements that are tried out later prove to be illegal in new and interesting ways, true, but this is a cleaning up exercise that happens afterward.

The effect of this is as in any other area of innovation. Financial markets are webs of contracts. As contracts can be varied, tried out, experimented with, without the requirement of an imprimatur or political acquiescence then that innovation can and does proceed more speedily. London’s financial markets work, dominate even, simply because they are closer to free markets than those in many to most other places. Free in this sense of allowing innovation.

Once this is understood we can see the dangers of certain proposals floating around. There’s a suggestion that takeovers should be subject to a public interest test for example. You may only buy this if you can show how it benefits the wider economy. But this is to stick that crowbar of the precautionary principle back into markets which work precisely because they don’t already incorporate it. That you may not do this because it will be obviously harmful is one thing, it’s the reversal of the proof which is the damaging thing.

It’s all an example writ small of the larger point about economies in general. Those where the base presumption is that anything not obviously illegal may be tried have lots of innovation. Those where permission must be obtained have less, the amount less of innovation being directly proportional to the difficulty of gaining the permission. As innovation is what makes us all richer over time - it is how productivity and technology advance - then we desire, positively lust after in fact, a permit and permission free society.

It’s possible to confuse this, as we think has been done here, with the joys of our bewigged and peruked lawyers. The importance however is in the base assumption about liberty underpinning the system. Which is that we have freedom of contract, not just with whom but also in form.

BBC Brexit Editorializing

On Monday at 6.45 on the BBC News Channel, Ros Atkins asked “whether the pledges made by the Leave campaign have been borne out by reality across fishing, trade, Northern Ireland and divergence - and whether some of the warnings made by Remain about Brexit have come to pass” (quote from BBC Website).

I recall four segments of more or less equal length: fishing, Northern Ireland, trade and warnings. To quote the BBC website, Mr Atkins failed in his pledge to discuss divergence, neglecting the vaccine/nimble/speed-boat story, which most would see as divergence’s headline fruit, indeed the headline post-Brexit story so far.

He admitted that fishing was trivial but proceeded to devote one quarter of his time to it. He could have disposed of the matter summarily by saying that fishing is unique: for a few years, we must balance EU access to our waters with access to the EU markets which take almost all of our catch. He failed to ventilate the medium-term solution: investing in supply chains (and negotiating access) to other markets. Instead, three months in, he chose to editorialise it as a failed promise.

He dealt with the facts of Northern Ireland accurately enough. Even so, he failed (a) to identify as an underlying cause the EU’s insistence that its single market obliged the countries of the British Isles to accept either a border across the Irish Sea or a border within the island of Ireland; and (b) to identify as an error the negotiators’ sole focus on the risk of Nationalist disaffection. Instead, once again, he editorialised a failed promise

His treatment of trade agreements was accurate in saying that the UK’s 60-odd novated agreements follow the EU’s paperwork. He failed to note that pre-Brexit, the EU was only able to make agreements with marginal economies and that none of them matter. If he mentioned Australia, India or Japan, I missed it. Once again, an editorialised failed promise.

He treated the mistaken warnings fairly but gave them only equal time with any one of the other three points. Most would see them as a bigger story. He was silent on our biggest industry, financial services, where jobs have conspicuously failed to move to Europe.

What we got felt like sectarianism from Mr Atkins. Has the BBC no time to broadcast other views?

We'd suggest that Dame Margaret, Lady Hodge, turn the autoquote machine off

Apparently the Amazon subsidiary in Luxembourg has raised the ire of Dame Margaret, Lady Hodge:

Margaret Hodge, a Labour MP who has long campaigned against tax avoidance, said: “It seems that Amazon’s relentless campaign of appalling tax avoidance continues.

“Amazon’s revenues have soared under the pandemic while our high streets struggle, yet it continues to shift its profits to tax havens like Luxembourg to avoid paying its fair share of tax. These big digital companies all rely on our public services, our infrastructure, and our educated and healthy workforce. But unlike smaller businesses and hard-working taxpayers, the tech giants fail to pay fairly into the common pot for the common good.

There’s something almost Alf Garnett about that, dirty capitalists comin’ over ‘ere and exploitin’ our taxes.

Except that’s not what is happening at all:

Fresh questions have been raised over Amazon’s tax planning after its latest corporate filings in Luxembourg revealed that the company collected record sales income of €44bn (£38bn) in Europe last year but did not have to pay any corporation tax to the Grand Duchy.

Accounts for Amazon EU Sarl, through which it sells products to hundreds of millions of households in the UK and across Europe, show that despite collecting record income, the Luxembourg unit made a €1.2bn loss and therefore paid no tax.

If you were to be avoiding tax by squirrelling profits away in Luxembourg then there would be, well, there’d be profits squirrelled away in Luxembourg, wouldn’t there? When in fact Amazon makes a loss there and, as we’ve seen from the accounts of the UK companies, profits here which do pay tax.

Reality being that Amazon continues to invest in expanding its business and so makes a loss. Which does seem to be what we’d like Amazon to be doing too. We consumers out here like what Amazon provides so their spending more on us being able to have more of it is producing what we want more of. The problem with this is?

Our advice to Dame Margaret, Lady Hodge, is to turn that autoquote machine off, it has become out of synchronisation with reality.

Tax competition — or tax tyranny?

Tax Tyranny – I wish I had thought of that as a book title.  Fortunately Pascal Salin did, and has done the title justice; this is a broad-ranging book about the many problems of tax, and one that manages the difficult task of being very knowledgeable about taxation, both the theory and practicalities, whilst also being very readable.

Written for the general reader, it avoids the technical language of tax economics, instead illustrating the principles with plenty of interesting examples.  Most of these are French, but it is always beneficial to realise that other countries have their problems too; indeed one of the disconcerting things for a British reader is to see our tax rates regarded as comparatively low!

Rather than a textbook for tax wonks, this is political philosophy informed by tax economics.  Professor Salin gets into the real basics of what tax policy should be about – the reality of human nature; voluntary co-operation; human rights and ethics; liberty vs slavery.  Reducing taxes is, he shows, not just an economic imperative, but essential to give us humans the space “to act in accordance with our very nature”.

But the philosophical theory is combined with robust practicality; for example, after showing why a poll tax is better than an income tax, he then goes on to explain why it would still be worth working for a flat income tax of 20%

The book aims “to put taxation back in the context of the actual working of human societies” rather than leaving it in the hands of those who see their role as directing the wise allocation of resources, and as such it neatly skewers many of the arguments used by proponents of higher taxes.  For example the principle of progressive tax, higher rates on higher incomes, is shown to conflict with human nature, since in voluntary contracts overtime is frequently paid at a higher rate than base salary – we naturally need more incentive to work harder or longer, but a higher rate tax removes that incentive and leaves us with less benefit from extra work.  

That illustrates the trade-off between work and leisure that is a frequent theme of the book; tax is a disincentive to our natural tendency to work for each other, so it reduces the trade (domestic and international) that is “a key driver of progress”.  He contrasts the entrepreneur, doing productive good for society, with another individual of the same ability who “prefers to walk in the countryside humming music”.  How should the two be taxed, and what incentives – or disincentives – would those taxes have?

Like myself, Professor Salin sees tax competition as beneficial – the risk of productive individuals moving to lower taxed countries acts as a restraint on politicians’ desire to increase taxes too much.  At a time when the US and EU politicians are calling for worldwide minimum levels of taxation, it is good that someone points out that the emperor has no clothes - “if a tax is stupid, it is no less stupid because it is harmonised” – and useful to be reminded that taxes should really be set “at the level of the smallest possible community”, encouraging tax competition and giving a genuine diversity and choice between different levels of taxation and government spending, so that people can vote with their feet.  And he really does mean “the smallest possible community”, suggesting that tax policy could be set by each town or even village.

I was almost disappointed when the book actually suggested a tax system – it seemed something of a surrender after the splendid opposition to the whole principle of tax.  However it is prefaced by the comment that “there is no good tax” and that his recommendation is merely the least bad.  And this is a comprehensive reform proposal, rather than his opposition to the illogicality of much tax policy, where governments solve the problems of the bad design of one tax by introducing another tax in addition to it.

For those who collect tax proposals, his is an individually assessed consumption tax, with consumption calculated as receipts minus investments (Professor Salin, like myself, prefers VAT to income tax, whilst opposing having both).

But far more interesting than his proposed tax are his proposals for tax constitutional provisions, particularly the “tax house” of parliament, separately elected, which would have to approve all tax and borrowing but which would have no responsibility (and therefore could not seek electoral credit) for expenditure.

There is a recurrent theme of “the destructive nature of taxes”, particularly their destruction of human capital and interactions.  Rather than the usual claim that tax is “the price we pay for a civilised society”, Professor Salin warns that “civilisations die … when individuals have lost the desire to create and the enthusiasm to innovate”, and that tax stifles that creativity.

At the root of taxation and public spending is the bizarre idea that it is better for decisions to be imposed by politicians rather than by the free interaction of people.  This book is a splendid call for human relations based, not on coercive taxes and top-down government-directed spending, but on free will and the voluntary interaction of people living in liberty.

Buy the book here.

Karl Marx was right on one thing

Most of the bits that Karl Marx got right were cribbed from Adam Smith which is a good source to use of course. There is one part of his analysis that is useful to us today though.

Marx insisted that it was competition among the capitalists for the labour they desired to profit from which raised wages. If there was that reserve army of the unemployed, meaning there was no need to compete for labour, then rises in productivity would feed through into profits and nothing else. If, however, there was full employment then some would have to raise wages in order to gain access to that desired workforce. This then pulled up wages across the economy.

This is correct.

The hospitality industry is facing a staffing crisis as restaurants and pubs say that up to a quarter of those employed before the Covid-19 pandemic will not return.

The UK’s largest listed pub group, Mitchells & Butlers (M&B), has lost 9,000 of its 39,000 staff since last year; D&D, the owner of more than 40 upmarket restaurants including Le Pont de la Tour and Coq d’Argent, is looking for up to 400 recruits out of a total 1,300 UK workforce; and Pizza Express is looking for 1,000 staff, having laid off thousands less than a year ago.

Pubs and restaurateurs agree that there is a particular challenge in the south-east of England and London as a lack of supply of skilled people from the EU, post-Brexit, is causing issues with hiring staff, especially in the kitchen. More than 30% of hospitality workers across the UK are thought to have come from Europe pre-Brexit but that rises to more than half of those employed in London.

We have had, by and large, full employment at times these past couple of decades. Domestically, inside the UK that is. But wages haven’t been rising as we might think they should. The reason being that the reserve army has still been there, just not wholly visible. It’s been in Brno, Budapest and Bialystock, a £50 flight away. Thus any increase in demand for labour has been met without wages needing to rise.

Of course, this is one of those economic things, as so many are, which is largely true instead of being wholly and exactly so. A tendency not a defining truth in our economy. But true as far as it goes for all that.

We’re entirely happy with that mobility of labour and moves for a better life. But it is worth noting the effects of the new legal restrictions upon it. Low end wages and working conditions are likely to improve in the UK as a result of Brexit. On the basis that on this one thing Karl Marx was in fact correct.