Economics

The lie of the ground post 23rd June.

Well, 52% of the electorate voted the way that I did. I previously argued that I was a reluctant Brexiter, and I think so far I am right in thinking that the major danger of leaving is increased State control and direction in a “independent” Britain. Mrs May isn’t exactly a free-marketer, nor can it really be argued that she is much of a liberal, what with that awful snoopers charter.

It remains to be seen as to what will happen with that, but of course the major politicking will be over Brexit for the next few years. We now have a Secretary of State for Exiting the European Union, and a Secretary of State for International Trade. Machiavellian arguments have been made that the new PM is setting them up for a fall, particularly with Boris at the FCO, but setting up in essence two new departments isn’t something that is done lightly. For the moment, Brexit means Brexit.

Away from the “politics” the UK faces fairly significant challenges. The Government will have to rebuild areas of competency (stop laughing) in areas taken over by the EU, not just in trade negotiating but in fishing, environmental regulation and lobbying for international rather than just single market standards, which is what some would say is the point of leaving the EU is all about.

There may well be little scope for shrinking the size or role of the state (why do planning reform when you can cut the amount of immigrants –  its all them immigrants taking the houses, right) but actually we don’t know how the dice might fall. The Workers Councils that have been suggested by the PM don’t work particularly  well, but cutting corporation tax has been broadly welcomed – if the right arguments are deployed we might be see a Government that respects market processes.

A definite success that can be pointed to is the fishing regime in New Zealand, a discussion of which can be seen here. Also, the success of NZ in eliminating  agricultural subsides is an out of the box success story – here guys, do it! (But do it gradually, like NZ did, otherwise we might have plenty of very angry and suicidal farmers, and end up with a worse agricultural policy than we have currently).

But, here we don’t need to despair about possible wrongs that are going to be committed. The EU has the potential to mess things up to a much greater extent if we were inside of it, and with little to no recourse since the council and commission are the power bases.

And although there is an argument that Brexit will accelerate an integration process I don’t think this is a very good argument – we may never know the counterfactual, but if the UK had voted to remain it would have lost its main bargaining chip, that it would one day vote (or otherwise) to leave.

Much more to go into here, but there are plenty of reasons to be optimistic.

 

Lidl is doing sweatshop workers a favour

By employing them of course. Look, sweatshops are not places that we would like to work. The dimly lit, poorly maintained rooms where workers produce the clothes of the west are places which we would probably baulk at before stepping in, never mind working in, but these are the conditions of what many of the (mostly female) poor workers face up to and around 12 hours a day.

Therefore is is an outrage that the German owned supermarket, Lidl, is selling jeans at £5.99 for a pair, highlighted here by the Guardian. They could have only been produced by ruthless capitalist exploitation, and the pittance that the workers receive in return (“as little as 2p”) is of course an offence to all right minded people, i.e. Guardian readers.

Now, despite the fact that Guardian readers wouldn’t be seen dead in Lidl, and that they have forgotten about the UK’s poor who probably wouldn’t be all too squiffy about being offered lower priced goods, is this claim of exploitation true?

The notorious right wing, free market absolutist Paul Krugman once wrote an article “In praise of Cheap Labour” with the subtitle “Bad jobs at bad wages are better than no jobs at all.” Now, Krugman may have since called for better working conditions (globally, so unrealistically) after a garment factory in Bangladesh collapsed and killed around 1200 people, but the economic evidence is on Krugman’s original position.

There is plenty of evidence that ‘sweatshops’ benefit workers and local industries. To quote John Miller “Not to believe that demand curves are negatively sloped would be tantamount to declaring yourself an economic illiterate.” The demand here, being that of labour. If as many calls to raise wages are heeded, then workers loose their jobs. This is really bad when we consider “We find that workers perceive factory employment to provide more desirable compensation along several margins.” If sweatshops are so bad, then why are people so willing to work in them?

One reason might be that the wages are much better than they would be getting elsewhere. Foreign owned firms in particular pay higher wages (here and here) than the domestic competition, and the wages are higher than the national average in the majority of countries. Even the protested wages, which are deemed the worst of the worst by anti-sweatshop campaigners are generally above the national average, and in some countries are multiples of the averages. The wages then, are pretty good.

In the case of Bangladesh, which the article is attacking, protested wages at a 40 hour week are near 100% of the average earnings. In the UK, this is around £28,000; these people are doing well by comparison.

There is also the compensation packages that many firms offer their workers. They might seem like small things to us, but providing shoes for children, or a lift to work is a big thing. Since the workers tend to be women, getting them out of the house and gaining skills is crucial for them and the longer term health of the economy.

So, the Guardian may well be outraged that Lidl is offering poor people a good product made by poorer people who are earning good wages by comparison, but I’m afraid that for me it is pretty hard to be offended. We might not like sweatshops, but they are much better than the alternatives, and are making those who make our clothes better off too.

 

Well it’s probably got nothing to do with gender then, does it?

“Women working for the Conservative minister responsible for closing the pay gap are paid an average of almost £2 per hour less than men, it has been revealed.”

So, the Indy has it that Nicky Morgan’s Department of Education (who has a dual brief as an education and equalities minister) is paying women £3000 a year less than men. Except, as usual, this is is wrong. Grouping the pay of all women vs the pay of all men doesn’t tell you anything in particular, but it does bore most people because they know that it will lead to a pointless discussion about sexism that doesn’t exist. (I am also not so sure why they are attacking Morgan when it is the responsibility of the Treasury to administer pay.)

As with all of these things, it is illegal to pay men and women differently because of their sex. It is entirely legal to pay people differently based on experience, years worked, etc. This is what we find whenever we look behind the headlines on this issue.

What we really see is that there is a motherhood pay gap, because of the enormous amount of time and effort it takes to raise a child, particularly in the early years (there is also the interesting fact that fathers earn more than non fathers). This is also compounded by having multiple children (obviously). Not to say that having children isn’t a joyous experience for many, but it is a simple fact that women will have to take time off to have children.

Shouting sexism or racism all the time doesn’t help anyone at all (tagged by the Indy under sexism), so get onto the point and for crying out loud, have a debate about compensating mothers for having children, because that is what is really about.

Remittances in China aren’t all they are cracked up to be

 

There are huge amount’s of people moving around in China, and moving around for work; up to 274 million people. Like most migrants, they tend to go to earn higher wages, and this add’s up to a lot of money, with estimates of to 300 billion yuan being sent back by economic migrants to their families. A presumption that can and is made is these higher wages are beneficial for the children left behind because they are being sent back, and then have more money spent on their education. This however, might not be the case..

“When it comes to budget components, we find that remittance-recipient households allocate a smaller share of their budget to education than non-recipients do, and we thus add evidence to the possible negative effect of migration on education outcomes of children who stay behind.”

The households with migrants leaving spent on average 325 yuan per child, whereas households where the parents stayed spent nearly 500 yuan per child. Although households which are receiving remittences are spending more, this is going on consumption and not being invested in human capital. Now while we may well enjoy the increased consumption, we would probably enjoy the benefits of more education and therefore more wealth in the future a great deal more.

“The ones left behind are less likely to value education, and therefore less likely to spend on this particular expenditure component. This could be the case when migrants are parents who leave their children behind, under the care of (less educated) grand-parents.”

It is also strange that result isn’t repeated in other countries which have large recipient communities, such as Ghana, Guatemala, Ecuador, Colombia, Mexico, the Philippines, Nigeria and Eritrea. This may well be that the benefits of education are touted more often in these countries, it might be because of the effect that motivated and skilled parents can have on their children (influencing them to do better but having lower wages themselves as a result) or might be because the returns to higher levels of education are not so easily recognised by the carers for the children. This is an important point to think about as we usually tout the benefits of remittences, and see them as generally quite effective in promoting growth.

 

What is driving the African growth miracle? Capitalism

I love it when you read an abstract that reaffirms everything you know, because I quite like an easy life. “What is driving the African Growth Miracle?” is a paper I have come across again recently, and generally confirms what we know about developing economies, or rather, the process by which they develop.

We show that much of Africa’s recent growth and poverty reduction can be traced to a substantive decline in the share of the labor force engaged in agriculture.”

The agricultural labourers losing their jobs is of course a good thing; it tells us that we don’t need to put as much labour into feeding ourselves, and therefore we can go off and be much more productive elsewhere.

Agriculture doesn’t need that much labour to feed us all, what with mechanisation and more efficient farming methods we can enjoy much more food with half the workforce. This is of course what the definition of increases in productivity means; more for less (and usually a better more).

As many other have argued, one of the great strengths of Capitalism is that it continually improves productivity and thus makes us all richer. Smith said it, Schumpeter said it and no one now disputes it because it is true. More from the paper;

This decline has been accompanied by a systematic increase in the productivity of the labor force, as it has moved from low productivity agriculture to higher productivity manufacturing and services.

Good. Agriculture is a low productivity sector, and industrialised jobs produce more. This not only makes people who live on the African continent richer, but us richer too, as we can trade higher value items, and enjoy the benefits of those trades too. Here is to more exploitation of Africa!

 

If McDonnell is discussing UBI, we really should be too

John Mcdonnell, the Shadow Chancellor, is giving a series of talks with high profile left wing economists and thinkers. At his talk on Tuesday, where among other things, he completely misunderstood Googles tax arrangements and mentioned Hayek of all people, he spoke of a universal basic income, the idea all citizens should get an amount to live off and that be that.

I know it is fashionable to have a go at the loss making Indy, but God Almighty this article was thrown together 5 minutes before closing time. There is no actual link to his exact quote, there is nothing of what a Labour policy would look like, and although it is believable because of what they were discussing, you could put “considering” after pretty much anything anyone has said. For instance, Jonathon is “considering” suicide after reading the Independent.

Anyway, since the McDonnell quote offers a way into discussing basic incomes, lets do that. The amount referenced by the Independent comes from the Royal Society for the encouragement of Arts, Manufactures and Commerce, which floated a figure of £3, 692 a year or £71 a week for people aged 25-65. This is also what an ASI report found, the difference being that they called their proposal a Negative Income Tax , while the RSAMC confusingly but for understandable reasons (Negative.. bit negative sounding) referred to their proposal as a UBI.

The actual difference between a NIT and UBI is that the former is based on the tax system in the form as a top up to income, or a minimum income if you earn nothing at all. As you earn more it is taxed back off you, like child benefit is, while a UBI is cash given, with then some ambiguity on where the money comes from to pay it. The work disincentives for a UBI are quite bad, because if you have just enough to live, then why not sit around all day. A NIT is a system in which you keep more money for each pound that you earn, with say a tapered withdrawal rate of 40p, so there is at some incentive to go out into the wider world, work and seek higher wages.

I like people working because you know, I am an evil capitalist who wants to crush the human soul it is how a modern economy works, and makes me and you richer. But also, unemployment has been very strongly associated with depression, lower levels of happiness, mental health issues, and poor self esteem, which we don’t like at all.

Since we probably should be thinking about the future of work, where low productivity labour will either be priced out by minimum wage increases or simply unable to provide enough to have an acceptable living standard, this is probably something we should think about.

Is this because the elderly aren’t all that thick?

Under certain assumptions, the estimates suggest that ageing societies will tend to become less averse to open immigration regimes over time.” This doesn’t surprise me at all. On the first point (paper here), as the authors Simone Schotte and Hernan Winkler point out “The old not only differ from the young in terms of age, but they were also born and raised in a different time, in a different economic and institutional context.” It is quite obvious to anyone who has parents, that back in their day it weren’t as easy as it is today son.

When we (young uns) get old, it is quite clear that our attitudes to immigration are going to be quite different to those who went before us. My generation for the most part has grown up in a much more diverse set of surroundings, and the young are the most supportive of immigration anyway. Unless  we currently think that immigrants come and take all the jobs, depress wages or sit around all day claiming benefits, we are unlikely to think that in the future, especially since it doesn’t seem to be true.

Taking a deeper look into the paper, we can read lovely sentences such as this one, which reinforce the previous point “Theories and research in the fields of sociology and psychology show that political attitudes and opinions are shaped during youth and tend to remain stable over the life‐cycle (Alwin and Krosnick, 1991)” I reserve judgement on whether this is a good thing or bad thing when it comes to political attitudes.

But, on a second point, I don’t think the next crop of old timers (50’s) in the Uki s all too out of touch, so you can call me on it in 2025 when the current (70’s) have started to die off. Anecdotal again – the elderly people I know, 70’s plus, are in my grandfathers words “too old to give a shit anymore”.

For one thing, the people who are going to be caring for them in 25-30 years time are very likely to be from abroad, and there is also the pressing question of who is going to pay for it. Well, according to the ONS, the immigrants are, because without them it looks very bleak indeed. I may well be proved wrong, but as Keynes said, in the long run the old attitudes will die out. Or something like that.