But, what, you mean macroeconomics is not accurate?
A useful little example here:
OBR error leaves Reeves £18bn short of room to borrow
Mistake in official borrowing forecasts risks spooking traders
Our word. You mean that macroeconomic numbers are not very accurate?
A mistake in the UK’s official financial forecasts has left Rachel Reeves £18bn short of headroom to borrow in her ambitious tax and spending plan.
The Office for Budget Responsibility (OBR) was this week forced to “restate” its March estimates for public sector net financial liabilities (PSNFL), the UK’s new measure of public debt.
The figure shows Reeves has £44bn of room to borrow – around £18bn less, Bloomberg reported, than its initial estimate of £62bn in March.
Well, yes, that is what this means - macroeconomic estimates are not very accurate. Now in one sense this isn’t all that important. The credits and debits on the PSNFL are both vast numbers, trillions each. The balance between them being out by £18 billion, well, under 1%. Pretty good for government work actually.
But in another sense really very important indeed. Because this under 1% is the sort of number that people are trying to use to manage that macroeconomy. And if your numbers are inaccurate by 1% then you cannot manage to that under 1% level. For the information you’re using to manage is erroneous by greater than the margin you’re trying to manage.
This is why that detailed demand management of the Haute Keynesianism years didn’t work. The information flowing into the decision making system just wasn’t accurate enough for the decisions people were trying to make.
Of course this point has been made more generally, about all economic numbers and management. They gave Freddie Hayek the Nobel for pointing it out after all. The centre simply never will have the knowledge to be able to do things in detail. Therefore don’t try to do things in detail. Get the basics - incentives, legal rights, civil liberties - right and leave be to allow society to grow.
Yes, yes, this is just the one example of error, already cleared up. But our opposition to detailed macroeconomic management - to detailed economic management - is at least in part driven by our insistence that all economic numbers are like this. Therefore there’s no system of processing that information centrally, through politics or Rolls Royce minds, that can possibly do that management job. So, don;t do it because it’s not possible to do.
Tim Worstall
When did we allow the pecksniffs into our lives?
Possibly why did we allow the pecksniffs into our lives? Even, did we?
Supermarkets are using multibuy promotional deals to encourage shoppers to buy meat and processed meat, despite the products being linked to a heightened risk of cancer, research reveals.
Almost one in five (18%) of multibuy offers in major British supermarkets involve meat and dairy products, and one in ten (11%) processed meat such as ham, bacon and sausages.
Customers are being encouraged to buy such products even though the World Health Organization says that red meat probably causes cancer and that processed meat definitely does.
The Food Foundation said its findings, especially about processed meat, were alarming for environmental as well as health reasons. It accused food retailers of “actively incentivising citizens to buy more of those foods that are known to be bad for the health of people and the planet”.
One possible explanation here is a link to the declining fertility rate. There are always those in any society best suited to telling the ickle ones to eat up their broccoli, to take charge of toilet training. The absence of enough children doesn’t stop that urge nor the presence of those with it. It simply gets displaced into this urge to do that same command of both ends of the diet to the entire population. Therefore one useful solution is to command the ladies and gentlemen of Britain to get on with it - our freedom lies in your, erm, hands. Or, perhaps, we could abolish the Town and Country Planning Act 1947 and successors - proper blow up, kablooie - so that Britons can afford to have children in Britain. Might work, who knows?
Or, of course, we could just be serious and be adults. The Grim Reaper will come for us all in his own good time. The gap between now and then is to be enjoyed and if that, by your tastes, includes steaks, ham, sausages and bacon - mmm, bacon - then so be it.
This is, we insist, being serious about it. The pecksniffs are insisting upon their right to potty train society. Nope, we’re adults, gerroffwi’it.
And now really think about it. If those who rule us think we’re not even capable of deciding upon our own diet then how long before we’re considered incapable of deciding who is to rule us?
Tim Worstall
Britain’s first fibreoptic telecoms network was built by ferrets
You know, ferrets, the vicious little beasts related to stoats, weasels and wolverines. It really is true that when Cable and Wireless built that first - private sector! - fibre telephone system in The City then did so by strapping cable to a ferret which was then sent through the pipes. We think this is one of those stories that should be regularly repeated so that it doesn’t drop out of the national consciousness.
It also aids in explaining this:
Northern Rail is still relying on fax machines to communicate with staff as the state-owned operator grapples with some of the worst delays and cancellations in the industry.
Faxes are still being used to run the UK’s electricity grids, the Government’s energy systems operator has admitted.
And it’s the basis of the disagreement between Bill Nordhaus and Nick Stern over how to deal with climate change.
Back when there was the London Hydraulic Power Company. Pressurised tubes snaking across London to deliver power to people. It was, if we’re honest about it, a technology out of date very soon after it was first adopted - electricity and wires were “better” by perhaps 1904 which is a bit of a blow to a company started in 1893. However, the system still ran factories up into the 1960s and really closed only in 1977. The ferrets bit is that it had the right to dig the roads to maintain those pipes - and it had that network of pipes down which it was possible to stick ferrets - which was very useful when laying a telephone network. Thus the shell - empty pipes and the right to dig the roads - was bought up by the nascent phone company and ferrets stuck down pipes trailing a cable attached to a little leg.. All very fun.
But, note, that power system still lasted 70 years after it was, if we were building anew or even linking up a new customer, technologically redundant and past it.
Which is the point that Nordhaus makes. Sure, deal with climate change. But don’t junk what currently works. Only, when that needs to be replaced, replace it with the new and more climate friendly. For, that way, the cost of dealing with the problem is minimised. The cost of the new and climate friendly is no longer the total cost of the new system. Rather, it’s the cost of the climate friendly minus the cost of building another of the old as a replacement for what doesn’t work any more anyway.
Or, in more formal terms, work with the capital cycle. Run that old power plant for the 70 years it’s worth running it for. Only then replace it with that new fangled electricity.
If faxes still work then why not faxes? Until the faxes themselves need to be replaced that is?
Tim Worstall
We predict a - significant - rise in youth unemployment. What joy
As a tendency - not an asserted truth - we tend not to believe in macroeconomics very much. Too much maths and wand waving by those who really never can gain the information necessary to feed into the equations even if they did work. Microeconomics though we believe in very strongly. Get the details of legal structure, incentives and the freedom to respond to them correct and she, that whole economy, will largely come out right. Where we would assert a truth is that even if you do have a macroeconomic policy - even one that’s vaguely correct - you do still have to get those details of the markets themselves correct. Macro is a nice addition to micro that is, not a substitute for it.
At which point our prediction from this most recent UK budget. We’re going to see a significant and sustained rise in the youth unemployment rate. Which is not, we’d suggest, something that policy should be trying to encourage.
A basic point: whatever rules we make about the price fixing of wages - minimum wages that is - they’re obviously going to bite hardest upon the young and untrained. For they’re the people who have to leap that hurdle from not working to having convinced someone to give them a try. This will also be true of “workers’ rights” like protections against unfair dismissal, whatever rights folk might have to maternity leave and any other non-cash expense of employment.
The effect of such things will bite hardest upon those attempting to enter the labour market. Obviously they will. How would anyone think otherwise?
The minimum wage rise for 18 to 20 year olds will add £2,500 a year to the cost of employing one such. The drop in the National Insurance payment level will add £600 (15% of the £4,000 increase in the taxable amount). So, roughly, a £3,000 addition to the cost of employing some fresh faced shaver straight out of education. Or, given that starting wages are fairly obviously going to be at or close to that minimum wage level, a 15% or so increase in the cost of giving the young that first step on the path to a career.
This is a hard bite. Somewhere between fewer and many fewer are going to be given that opportunity. The gap between taking on an untrained and untried youth and instead hiring a known quantity, someone who’s already been working a few years, has, after all, now shrunk. Therefore the incentives have changed and so will behaviour.
We’ve also that issue of workers’ rights now kicking in immediately and not after some probationary period. Trying the fresh-faced now comes with a substantial - well, substantially higher - risk as well as cost.
So, what do we all think will happen as a result of this change in incentives? Fewer fresh-faced will get hired. Obviously.
Contrary to popular belief we’re all in favour of Europe. Just perhaps not the political confection that is the European Union. Parts of Europe are lovely places, many Europeans are equally lovely, the food’s often good, the wine better and so on. Britain has done well over the decades by importing much of that food culture, the wine’s very definitely got better and climate change seems to be making the weather more European too. So, good.
But one aspect of the European experience we’d suggest we should not import is the Latin-style youth labour markets. Here in the UK the “youth” (as in, 18 to 24) unemployment rate is 12.8%. In Portugal - as an example - more like 20%*. And that’s after 350,000 of the young have left the country in search of a job - 3.5% of the entire population. In Spain it’s 29%.
The reason the Latin countries have such high youth unemployment rates? Because worker protections - and they’re strong - kick in from day one of a job. Further, the minimum wage is high as a percentage of the median wage and yes, social security taxes upon employment are high. All of these bite upon the young and untrained more than upon the rest of the workforce.
As we say, importing some European things is wonderful. Others perhaps not so much. And importing the youth labour markets, thus the youth unemployment rates, of Southern Europe strikes us as not just a bad idea but a positively insane one.
Yes, obviously there were other things in the Budget. But there’s a strong argument to be made that this is the one single issue that’ll have the most pernicious long term effects.
Finance bills don’t get voted down especially with today’s sort of majority. But here’s hoping…..for the children, you see, for the children……
Tim Worstall
*Yes, that’s the 16 to 24 rate but sadly different countries compose stats slightly differently. By that same W Bank measure the UK is at 12.5% for 2023.
How glorious is the Washington Post cancellation saga
This is just wondrous:
Deterioration of the Washington Post’s subscriber base continued on Tuesday, hours after its proprietor, Jeff Bezos, defended the decision to forgo formally endorsing a presidential candidate as part of an effort to restore trust in the media.
The publication has now shed 250,000 subscribers, or 10% of the 2.5 million customers it had before the decision was made public on Friday, according to the NPR reporter David Folkenflik.
A day earlier, 200,000 had left according to the same outlet.
We’d be willing to mutter that we don’t quite believe those numbers. But say that they’re true. That really is the loss from that decision by Bezos. And no, think not of whether it’s righteous that a man can do what he likes with his own property and all that. Just luxuriate in the event itself.
Capitalist billionairism means that you’ve got a choice. You don’t like the output from one capitalist billionaire’s newspaper? Great, so don’t buy it then. Gain your news from some other outlet. There are, after all, well over 1,000 newspapers in the United States, some of which are even written by adults. There are, other than newspapers, a plethora of other media forms which deliver news to you.
You don’t like Mr. Bezos and his actions? You’re going to cancel and not pay for that rubbish? Good on you. No, really, if you object then you should not spend your money that way. For this is indeed how we bend suppliers - given that precondition of there being a market, with choices - to our will. We like it, we buy it, we don’t like it we don’t. Thus do we increase the production of what we like and reduce that we don’t. There’s even space for some of us to like some forms of supply and not like other - to make choices, that is.
Compare this to other possible arrangements. Say, where there’s only the one truth that can be propagated. There have been systems that did that and we ended up not thinking all that much of them. And for all the jokes that the WaPo has long been Pravda on the Potomac just revel in the freedoms of that capitalist billionairism.
You don’t like it? Then you’ve not got to have it, do you? A freedom apparently a quarter million people have just taken advantage of. Press freedom, nothing quite like it, eh?
Tim Worstall
That proof that the NHS needs reform, not money
As we can see, at no time at all has the NHS ever even had a flat real terms budget, let alone a cut in it. Over a 70 year-ish period it has only, ever, swallowed yet more money.
This is not a stirring tale of increased productivity now, is it? Which is that very argument that it requires reform. Because productivity should increase over time. Technology does march on and things do, thereby, become cheaper to do. If, of course, those new technologies are actually used efficiently to do those old things better and more cheaply. Which the NHS might well not be doing.
We also know how to increase productivity - markets. The Stalinist system of the Soviet Union managed not to increase total factor productivity by one iota in its whole 7 decades and a bit existence. The market economies over the same time period gained 80% of their growth from increasing that tfp.
We need markets in the NHS. QED.
Yes, yes, we know, that insistence that the NHS has its own inflation rate, that it requires a 4% real budget increase each year just to be able to stand still. But that’s just proof of the contention that we require market reform. It’s because the NHS has its own inflation rate that it requires reform.
Tim Worstall
Changing CGT rates will change investment behaviour
This really shouldn’t come as a surprise - changing taxes leads to changes in behaviour. It is, after all, the reason we tax cigarettes so highly, to dissuade people from smokin’ ‘em. The public health lobby is absolutely insistent that raising the price of booze will lead to newspapers being - unusually - written by the sober. Taxes change behaviour.
There is though this current delusion that changing taxes upon investment won’t change investment behaviour. This is not going to be true - taxes change behaviour after all.
Retail investors are piling into the government bond market amid fears that the Labour government will increase the capital gains tax rate on shares in the budget this week.
Why? Because capital gains on gilts are not subject to capital gains tax. A low coupon gilt - of which we’ve got lots and lots as a result of the interest rates of the past decade and a half - currently trades well below par and the return to it is largely the rise in capital value as it approaches maturity. The - low - interest paid is subject to income tax, the capital gain is untaxed. So, rational investors are moving into gilts given the likely coming change in capital gains taxation.
That is, yea even when it’s the rich b’stards deploying their ill-earned loot, taxes change behaviour.
How could it be otherwise?
Thus any change in the taxation of capital gains - or pensions, or inheritance tax, or the like - is going to change investing behaviour.
At which point, well, the government’s declared aim is to increase investment in the British economy. They tell us that we, and they, desire a high investment, high wage, high growth economy. Which indeed we do. Whether they do in fact desire such will become evident when they tell us what those tax changes on investment are going to be.
We’ve already shown that ttax changes behaviour here. So, logically, if they - as opposed to just we - desire that high investment economy they will lower the taxation of the returns to capital. Obviously. There’s not one single person in the country who thinks they will do that of course. But by their actions we shall know them. They’re going to increase the taxation of those returns to capital, from which we can deduce that they wish to reduce investment in the British economy.
Isn’t economic analysis of politics fun?
Of course, there is a really useful solution here. If it’s right that gilts carry no CGT penalty in order to increase investment in gilts then why not simply abolish CGT in the British economy in order to increase investment in the British economy?
Tim Worstall
Measuring Wealth
Amid all the talk of ‘no tax increases for working people,’ it is pertinent to look at the different types of wealth that people have.
The one most people know about is earnings, the salary or wages they are paid for doing a job. This is what they spend to live on and, if they are fortunate enough, to save from, often in housing via mortgages.
The second most obvious one is income earned not from wages but from assets. If people have managed to save enough, they can invest in housing and draw rental income from that. Or they might invest in stocks and shares and draw on the income they yield. In both housing and shares they have the possibility of gains if the value of their assets rises.
A third form of wealth is in the form of entitlements. People in the UK are entitled to a free education for their children, to free healthcare for themselves and their families, and to a free pension from the state when they reach retirement age. These constitute wealth, and it is wealth that can be measured by calculating what it would cost to provide it if the state did not do so.
Surprisingly, many commentators on inequality fail to include this third form of wealth, and therefore come up with a much greater figure for inequality than there actually is when it is taken into account. This form of wealth is particularly valuable for those at the lower end of income distribution because it gives them access to essential services. When benefits are added in, the entitlements raise the standard of living much higher than it would otherwise be, and help redress some of the inequalities.
Much of the current government’s talk centres around imposing a heavier tax burden on those who draw income from assets, and not doing so for those who draw it from wages. The thought seems to be that asset income is less meritorious than wage income. This is simply not true. Those who buy houses to let are increasing the stock of rental properties at a time of a widely acknowledged housing shortage
Those who buy shares are investing in business and in the growth that makes the population richer. Furthermore, they are taking risks that the wage earner does not take. Their gains are not assured, which makes a case for taxing them at a lower rate rather than a higher one.
Capital Gains Tax is particularly iniquitous when it fails to take inflation into account. Inflationary gains do not make people richer, they simply put a higher monetary figure on asset values without any real gains.
Tax policy should be to encourage what is good for everyone, not to penalize it. We want people becoming wealthier, to invest and to save into pension funds. Taxing them more is not the way to achieve this.
You’re gonna have to face it, you’re addicted to tax
With apologies to the late, great, Robert Palmer:
The lights are on, but you're not home
Your mind is not your own
Your heart sweats, your body shakes
Another tax is what it takes
You can't sleep, you can't eat
There's no doubt, you're in deep
Your throat is tight, you can't breathe
Another tax is all you need
Whoa, you like to think that you're immune to the stuff, oh yeah
It's closer to the truth to say you can't get enough
You know you're gonna have to face it, you're addicted to tax
Of course, after that butchering of the lyrics an apology is needed. And yet it is also a very decent explanation of what’s going on here:
It attracts not only locals but also a steady stream of visitors, says Woolston, who claims that free parking is a large part of the town’s appeal.
“People come here knowing they park for a couple of hours free of charge,” says Woolston. “They can go into the local store, pop into the coffee shop, get a bunch of flowers for their wife, or whatever it may be.”
However, Woolston fears this local perk may soon become a thing of the past, as council proposals threaten to drive away shoppers and leave the town centre all but deserted.
His concerns stem from new plans put forward by St Albans council, which involves charging visitors £2.50 an hour to park in bays around Harpenden.
The plans are yet to be finalised but local authority chiefs have warned that “something has to give if a council is to stay afloat”.
The whole idea of having parking charges on a High Street - no, really, back when meters were first used - was not to raise income at all. It was to ensure turnover of parking spaces. If someone comes into town and parks for the whole day then that’s one parking space that produces one car load (which could, of course, be just the one person) of footfall in the shopping area. Free parking for an hour followed by charges makes turnover of that space much more likely. We might, in fact, gain 8 car loads of footfall over the course of the day.
Parking charges were not, not, a revenue raiser. They were a Pigou Tax upon all day parking. As such the correct rates are some free period - say an hour, say - followed by swingeing charges thereafter. £50 for the second hour. You know, maybe.
As we can see the local council is now trying to use this incentive tax as a money raiser - and thereby destroying the incentive the tax was set up to provide in the first place. We want, positively lust after, people coming to do their shopping. This is what maintains a High Street, that community and all that blather. We also want that parking to turn over. Thus free short term plus charges for long term.
This is the political problem with good taxation in the first place. We might - we often do - set up a Pigou Tax to provide the correct incentive, possibly to push people away from behaviours with negative externalities. But the revenue collectors get addicted to that tax and thereby destroy the very thing we’re trying to do in the first place.
Which brings us to fuel duty. Yes, entirely true that the expansion of electric vehicles is going to be a problem for the current system of taxing motoring through fuel duty. Thus all the talk of per mile (which is an excellent economic solution) charges and so on. But there’s a significant point being missed here.
The demand is that the tax revenue from the new system should be equal to the revenue gained from the current system. For they’re addicted to that tax revenue. Throats are tight, they can’t breathe, at the thought of not having that lovely loot to spend. But, and this is important, we are taxing petrol and diesel to cover the externalities of carbon emissions from them. In fact, we’re over-taxing those emissions. The Stern Review states that 11p a litre covers those. The fuel duty escalator has added 25p so far and the talk is of another 7p this week. No, really, the IMF says so here (page 13).
EVs should produce less revenue than the current ICEs. Because there is not that emissions externality that needs to be priced in. But who even notes this (other than us)? And, having noted it who thinks there is that celluloid rat in Hell’s chance of it actually working out that way?
Quite, they’re addicted to tax, they just can’t get enough, can they? Which is the political problem with the good economics of Pigou Taxes. Once politics gets addicted to the loot they’ll not give up the revenue stream even when the externality that justified the tax is gone.
Tim Worstall
Teaching economics to Richard Murphy
We’re not averse to a little bit of teaching economics to people. Obviously. Equally, we’re just fine with musing about a subject, or returning to first principles in order to think through it all again. But we do think it’s a little off that it’s necessary to teach basic economics to Richard Murphy. Who, you know, is a Professor at a British university teaching economic matters to students.
The trigger for this ire is this:
Now, that was what my father employed those staff who were excess to apparent requirements to do when they weren't dealing with an emergency. Those people weren't sitting around on their backsides doing nothing. They maintained the power lines. They kept the system in good order. Those spare people weren't spare. They were the pool of labour that was necessary to keep the system in good order so that breakdowns did not take place. And as a result, by and large, those breakdowns did not take place.
But now a power company will do something quite different. It will outsource the maintenance to a contractor.
That contractor will then subcontract the contract they've got.
In other words, they will let out a contract for a particular power line from A to B, and another one from B to C, and a further one from C to D, and on.
In other words, there will be hordes of contracting going on to get what they think is the best price for the maintenance of each element of the lines for which they have accepted responsibility under the main contract they've been given.
The conclusion then reached being that accountants and lawyers make too much out of this and therefore this must all stop.
And, well, maybe it should? At which point we require a logical structure to enable us to think through that very point. When should a company be vertically integrated, when should there be a company at all? When should there instead be a network of contractual relationships? Fortunately, this has been done for us. Ronald Coase. In fact, he gained his Nobel in (large) part for exactly this work:
Coase showed that traditional basic microeconomic theory was incomplete because it only included production and transport costs, whereas it neglected the costs of entering into and executing contracts and managing organizations. Such costs are commonly known as transaction costs and they account for a considerable share of the total use of resources in the economy. Thus, traditional theory had not embodied all of the restrictions which bind the allocations of economic agents. When transaction costs are taken into account, it turns out that the existence of firms, different corporate forms, variations in contract arrangements, the structure of the financial system and even fundamental features of the legal system can be given relatively simple explanations. By incorporating different types of transaction costs, Coase paved the way for a systematic analysis of institutions in the economic system and their significance.
Note that Coase didn’t give an answer nor series of them. Rather, here’s the logical structure to use to think through and thereby be able to decide on a specific example. When transaction costs are low use the network of contracts, when high the centralised company - to reduce to the acorn of the idea.
As we say we’ve no problem with musing from first principles. But we do think that knowedlge of the standout examples of musing from first principles over the past couple of centuries is perhaps a good idea. In fact, we’d suggest that it’s a pre-requisite for an academic position. That knowledge of the subject under discussion thing. That very thing not in evidence here.
Seriously? Contracting versus central control and ownership without Coase? When this is the very work that led (largely) to a Nobel?
We’d suggest that British academia has a significant problem. For, somehow, people who know no economics have ended up teaching economics. This does not bode well for the future economic understanding of the population, does it?
Tim Worstall