67992 (Author at Cato Institute) https://www.cato.org/ en Antitrust Chapter in the Economic Report of the President https://www.cato.org/blog/antitrust-chapter-economic-report-president Ryan Bourne <p>This year’s Council of Economic Advisers (CEA)&nbsp;<a href="https://www.whitehouse.gov/wp-content/uploads/2020/02/2020-Economic-Report-of-the-President-WHCEA.pdf">Economic Report of the President</a> (EROP) contains a&nbsp;very heartening chapter on antitrust policy and competition issues. It’s clear the CEA doesn’t buy into the idea that the U.S. has a&nbsp;pervasive “monopoly problem” and is very aware of the danger of simplistic thinking around large digital platforms.</p> <p>The President’s economic advisers echo much of <a href="https://www.cato.org/publications/economic-policy-brief/does-rising-industry-concentration-signify-monopoly-power">my recent critique</a> on the use of crude national industry concentration measures as proxies for the health of competition. They bring lots of theoretical arguments and empirical evidence to bear that these are not reflective of relevant product markets pertaining to antitrust enforcement, not least because markets are often incredibly local.</p> <p>For example, six‐​digit NAICS codes are often used to assess sector‐​level concentration in many studies – and these go as granular as industries such as “book publishers,” “beauty salons,” and “car washes.” But, as a&nbsp;moment’s reflection of these examples suggests, these are clearly not relevant markets for antitrust. A&nbsp;beauty salon in Kenosha, Wisconsin doesn’t compete with one in Dupont Circle, Washington DC. In fact, the EROP highlights&nbsp;evidence I&nbsp;hadn’t seen before:</p> <blockquote><p>Werden and Froeb (2018) calculate the volume of commerce of the relevant markets alleged in DOJ merger complaints between 2013 and 2015 as a&nbsp;share of industry shipments in the six‐​digit NAICS sector. They find that in most cases, the antitrust markets accounted for less than 0.5 percent of the six‐​digit NAICS sector. In many cases, this is because the antitrust markets where the DOJ identified a&nbsp;competition problem involved single localities such as a&nbsp;city, State, or region, whereas the NAICS sectors are national.</p> </blockquote> <p>Still though, many seem to be conducting the public debate over whether the U.S. has a&nbsp;monopoly problem knowingly using data that is easy to collect but which doesn’t represent actual markets. It’s very pleasing the CEA demurs from this growing trend.</p> <p>Even better, the CEA report is clearly extremely skeptical of “Hipster Antitrust” calls to broaden the scope of antitrust law and the most interventionist policy proposals on “Big Tech,” including proposals for sector‐​specific remedies such as enforced data portability and interoperability, tougher restrictions on acquisitions, and&nbsp;bringing in a&nbsp;specific digital sector regulator.</p> <p>Perhaps most pleasing of all though is that the EROP doesn’t fall for the “this time is different” narratives we hear about digital platforms. It’s common to read that because of economies of scale, network effects, data, or firms competing on platforms they operate, that there’s something just unique about today’s tech companies that requires a&nbsp;more “forward‐​looking” antitrust. The CEA cites lots of evidence showing that none of these economic features of these markets ensure sustained dominance, in line <a href="https://www.cato.org/publications/policy-analysis/time-different-schumpeter-tech-giants-monopoly-fatalism">with my own work</a> showing how Schumpeterian competition from new products put pay to historical examples of firms said to have just these types of advantages.</p> <p>The overall chapter concludes:</p> <blockquote><p>confusion surrounding the effects of rising concentration appears to be driven by questionable evidence and an overly simple narrative that “Big Is Bad.” When companies achieve scale and large market share by innovating and providing their customers with value, this is a&nbsp;welcome result of healthy competition.</p> </blockquote> <p>Do <a href="https://www.whitehouse.gov/wp-content/uploads/2020/02/2020-Economic-Report-of-the-President-WHCEA.pdf">read the whole thing</a>. More from me on this issue can be found <a href="https://www.cato.org/publications/commentary/wheres-real-harm-google-amazon-facebook-apple">here</a>, <a href="https://www.cato.org/publications/commentary/facebook-deserves-more-credit-our-data-not-product">here</a>, and <a href="https://www.cato.org/blog/professor-tim-wu-makes-case-against-antitrust-policy">here</a></p> Thu, 20 Feb 2020 15:38:56 -0500 Ryan Bourne https://www.cato.org/blog/antitrust-chapter-economic-report-president Bernie Sanders Is Far More Radical Than Corbyn’s Labour https://www.cato.org/publications/commentary/bernie-sanders-far-more-radical-corbyns-labour Ryan Bourne <div class="lead text-default"> <p>It may be early days in the Democratic primary race, but Bernie Sanders is&nbsp;<a href="https://www.realclearpolitics.com/elections/betting_odds/democratic_2020_nomination/" target="_blank">now the favourite</a>&nbsp;to&nbsp;<a href="https://twitter.com/thehill/status/1228021563695521797" target="_blank">win the party’s</a>&nbsp;nomination and set up a&nbsp;Trump‐​Sanders presidential election.</p> </div> , <div class="text-default"> <p>As the prospect of Sanders winning becomes ever more real, some commentators are downplaying his socialist credentials, painting the veteran Senator as no more than a&nbsp;moderate social democrat.</p> <p>“Memo to left‐​wing Americans who adore Sanders’s radical ‘socialism’…”&nbsp;<a href="https://twitter.com/mehdirhasan/status/1227662837306339328?s=20" target="_blank">says Al Jazeera’s Mehdi Hasan</a>, “in most other Western/​European countries, Sanders would be considered a&nbsp;pretty mainstream, centre‐​left social democrat.”</p> <p>His view is shared by the economist&nbsp;<a href="https://www.nytimes.com/2020/02/13/opinion/bernie-sanders-socialism.html" target="_blank">Paul Krugman</a>. Dastardly Republicans might have the audacity to use Sanders’ own preferred label to describe him, but since he doesn’t want to “nationalise our major industries” or “replace markets with central planning”, Sanders “isn’t actually a&nbsp;socialist.” Ignore scare stories about Venezuelan economics then, Krugman advises. Sanders just wants the US to look more like Denmark.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Sanders’ platform goes far beyond any modern social democracy in terms of government size and scope.</p> </div> </div> </aside> , <div class="text-default"> <p>Krugman is right to say that Sanders shuns nationalisation. To simply label him a&nbsp;socialist, without any caveats, is misleading. But it’s even more grossly misleading to suggest his “democratic socialist” ambitions stop at&nbsp;<a href="https://www.cato.org/publications/commentary/democratic-socialism-scenic-route-serfdom">a&nbsp;Scandinavian‐​style welfare state</a>. More redistribution is central to his agenda, sure, but he also proposes massive new market interventions, including the Green New Deal, a&nbsp;federal jobs guarantee, expansive price and wage controls, overhauling labour and corporate governance laws, and enforced mutualisation of companies.</p> <p>Any given European country might engage in one or some of these interventionist policies. Combined though, whatever label you give it, Sanders’ platform goes far beyond&nbsp;<a href="https://www.cato.org/publications/policy-report/swedens-lessons-america">any modern social democracy</a>&nbsp;in terms of government size and scope.&nbsp;Indeed, his policies can only be considered moderate if some three‐​way lovechild of the economics of 1970s Sweden,&nbsp;<a href="https://www.cato.org/blog/dont-cry-me-democratic-socialists">Argentina</a>, and Yugoslavia’s market socialism is the baseline.</p> <p>Rather than countries, perhaps we might use another politician as a&nbsp;barometer here.&nbsp;<a href="https://twitter.com/mehdirhasan/status/1227663496755716098?s=20" target="_blank">Hasan suggests Sanders is less “left”</a>&nbsp;than Labour’s Jeremy Corbyn and John McDonnell, which is quite a&nbsp;low bar to crawl under. Corbyn and McDonnell are certainly widely regarded as contemporary socialists and not social democrats.</p> <p>So, is Hasan right? Our best tool is to compare Labour’s 2019 manifesto against the Sanders’ economic platform. Doing so makes clear that Bernie is more radical than Corbyn on economics, both in absolute terms and relative to their countries’ respective politics.</p> <p>Take the size of government. The Manhattan Institute’s Brian Riedl calculates that Sanders’ promises would add&nbsp;<a href="https://www.city-journal.org/bernie-sanders-expensive-spending-proposals" target="_blank">$97.5 trillion to spending</a>&nbsp;over a&nbsp;decade, taking total annual US government spending to around 70% of GDP and more than doubling the size of the federal government. Even if climate investments prove a&nbsp;one‐​off, spending would settle at a&nbsp;massive 64% of GDP. That’s far higher than&nbsp;<a href="https://www.ifs.org.uk/election/2019/article/labour-manifesto-an-initial-reaction-from-ifs-researchers" target="_blank">Labour’s planned 44%</a>&nbsp;and even France’s current 57% (itself the highest in the OECD).</p> <p>A look at certain individual spending areas also underlines just how radical the Sanders agenda is. Like Labour, he wants government‐​funded free public higher education. Unlike Labour, he’d also forgive all existing student debts. On climate change and infrastructure, Labour planned for £400 billion investment over 10&nbsp;years (about 20% of current annual UK GDP). Sanders wants to invest $16.3 trillion over 15&nbsp;years (about 75% of current annual US GDP.) On healthcare, both want government spending to expand to cover all medical treatment, prescription charges, long‐​term care for the elderly, and dentistry. But only Sanders would explicitly ban private health insurance (Labour did consider that proposal but held off in the end).</p> <p>True, Corbyn and McDonnell favoured nationalising buses, railways, the energy sector, water, and parts of the broadband network. Corbyn even wanted free government‐​funded broadband for all. But even here the results of Sanders’ pledges would bring similar results. He would set up&nbsp;<a href="https://berniesanders.com/issues/high-speed-internet-all/" target="_blank">“publicly owned” and “democratically controlled”</a>&nbsp;broadband networks. And his Green New Deal would bring most public transport under government control and deliver effective&nbsp;<a href="https://www.nakedcapitalism.com/2019/08/bernie-sanders-gnd-plan-will-nationalize-power-generation-in-the-u-s.html" target="_blank">public ownership of energy production</a>.&nbsp;And Sanders historically&nbsp;<a href="https://edition.cnn.com/2019/03/14/politics/kfile-bernie-nationalization/index.html" target="_blank">has supported exactly the types of nationalisations</a>&nbsp;Corbyn favours.</p> <p>When it comes to financing their promises, Sanders is arguably more radical again. Labour planned to only borrow to invest, raising the deficit by about 2% of GDP per year. But Bernie’s tax plans get nowhere near fully funding his agenda. Absent further broad‐​based tax rises, Riedl calculates annual borrowing would soar to around 30% of US GDP if his spending plans were implemented.</p> <p>That doesn’t mean he hasn’t got radical plans for higher tax rates as well. As with Labour, Bernie would tax capital gains and dividends as ordinary income and introduce a&nbsp;new financial transactions tax. But he’d also go much further in terms of higher rates on the rich and corporations.</p> <p>Combined with national insurance, Labour’s top marginal income tax rate would have been 52%. Sanders’ top&nbsp;<em>federal&nbsp;</em>income taxrate alone would be 52%, bringing a&nbsp;top combined top rate of around 80% once state and payroll taxes are considered. Sanders wants a&nbsp;new wealth tax too, another option Labour shirked. And while Labour wanted to raise the UK’s main corporation tax rate to 26%, Bernie&nbsp;<a href="https://berniesanders.com/issues/corporate-accountability-and-democracy/" target="_blank">would opt for 35%</a>&nbsp;with a&nbsp;broad base.</p> <p>Again and again on economics, where there are differences, it’s because Sanders is offering the more radical leftwing policies. He and Labour both proposed big minimum wage rises, national rent control, mandated employee ownership, and workers on boards, for example. But where Labour proposed 10% worker ownership stakes in large companies, Sanders would mandate 20%; while Labour want 33% of boards to be made up of worker representatives, Sanders wants 45%.</p> <p>Then there’s Sanders’&nbsp;<a href="https://www.cato.org/blog/jobs-guaranteed-economic-disaster" target="_blank">federal jobs guarantee</a> — the mammoth plan to offer any American who wants one a $15‐​per‐​hour job with full benefits. If implemented, the federal government would become the&nbsp;<a href="https://www.cato.org/blog/federal-jobs-guarantee-would-be-largest-single-global-employer-far" target="_blank">largest global employer by far</a>. No European country engages with such a&nbsp;large labour market intervention. Nor did Labour propose one.</p> <p>Now, there are no doubt some areas where Labour or even the current Tory government are more interventionist than Sanders envisages. It may well be true too that, in their hearts, Corbyn and McDonnell are more hardcore ideologically socialist than Sanders, and that their 2019 manifesto merely reflected having to gain acceptability from the broader party and country, whereas Sanders (for now) is just trying to win a&nbsp;primary.</p> <p>Certainly, there are more constraints on elected leaders in the US, meaning Sanders’ full agenda has less chance of being implemented than Labour’s would have done. And economics isn’t everything. Sanders seems more deferential to American institutions than Corbyn was to British ones, and though Sanders has himself had staffing and historical problems of unpleasant racial or foreign policy views, he doesn’t suck up to terrorists and authoritarian regimes in the way Corbyn has for his entire political career.</p> <p>Nevertheless, on the role of government, the declared economic platforms are instructive. Call it “democratic socialism,” or just plain old “interventionism,” Bernie Sanders is, in many respects, putting a&nbsp;more radical interventionist offer to the electorate than Jeremy Corbyn did.</p> <p>Given how Corbyn crashed and burned in a&nbsp;country much less hostile to “socialism” and “big government”, I&nbsp;can understand why commentators such as Hasan or Krugman might want to downplay the revolutionary nature of the platform. But that doesn’t make them correct.</p> </div> Mon, 17 Feb 2020 08:57:58 -0500 Ryan Bourne https://www.cato.org/publications/commentary/bernie-sanders-far-more-radical-corbyns-labour Ryan Bourne’s article, “History Shows Forcing Companies to Put Workers on Boards is a Bad Idea,” is cited on the Ben Shapiro Show https://www.cato.org/multimedia/media-highlights-radio/ryan-bournes-article-history-shows-forcing-companies-put-workers Thu, 13 Feb 2020 11:08:49 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bournes-article-history-shows-forcing-companies-put-workers Does Rising Industry Concentration Signify Monopoly Power? https://www.cato.org/publications/economic-policy-brief/does-rising-industry-concentration-signify-monopoly-power Ryan Bourne <div class="lead text-default"> <p>Certain ideas dominate debate about the state of competition in the United States: that market shares for top firms are rising, that consumers and competitors are suffering, and that a&nbsp;lack of enforcement of antitrust laws is a&nbsp;key cause of these difficulties.</p> </div> , <div class="text-default"> <p>Such sentiments echo through the 2020&nbsp;Democratic&nbsp;presidential primary. In one recent TV debate,&nbsp;Sen. Elizabeth&nbsp;Warren (D‑MA) vowed not to “let a&nbsp;handful of monopolists dominate our economy,” while Sen. Amy Klobuchar (D‑MN) claimed we are living through “another gilded age.”&nbsp;Sen. Bernie Sanders&nbsp;(I‑VT) expressed the predictable policy conclusion: “We need a&nbsp;president who has the guts to appoint an attorney general who will take on these huge monopolies.”<sup><a href="#_ednref1" id="_edn1">1</a></sup></p> <p>The impression given is that America’s economy is besieged by a&nbsp;generalized monopoly problem.<sup><a href="#_ednref2" id="_edn2">2</a></sup>&nbsp;Fewer firms are said to be dominating industries, enjoying rising markups of price over cost. Consumers are supposedly suffering higher prices and less innovation as a&nbsp;result of these companies’ growing market power. Competitors, meanwhile, allegedly struggle to stay afloat because of unfair behavior by these behe­moths. And all this, scholars and politicians tell us, is due to a&nbsp;failure to enforce or strengthen antitrust laws to prevent anti‐​competitive behavior.<sup><a href="#_ednref3" id="_edn3">3</a></sup></p> <p>Such a&nbsp;narrative, though, is highly challengeable. The measures of concentration taken as proxies for the health of competition often do not reflect the dominance of top national firms in actual relevant product markets. Local measures of industry concentration, contrary to national trends, appear to have fallen. What’s more, recent evidence suggests that jumps in national concentration have been driven by the strength of highly productive market‐​leading firms, which are expanding, not constraining, output—not what one would expect from firms with monopoly market power.</p> <p>Economists have long known that increasing concentration need not signify rising market power in an industry. In fact, it can be driven precisely by the competitive&nbsp;process—for example, by consumers opting to buy from more‐​productive&nbsp;and more‐​innovative market leaders that have found cost‐​effective ways to serve more markets. That rising market concentration has also occurred in Europe, which applies competition law very differently than the United States does, suggests that weak enforcement of U.S. antitrust laws is not the likely cause of any rising concentration we have seen.</p> </div> , <h2 class="heading"> Rising National Concentration? </h2> , <div class="text-default"> <p>In 2016, President Barack Obama’s Council of Economic Advisers (CEA) kicked off the narrative about rising market concentration across the U.S. economy.<sup><a href="#_ednref4" id="_edn4">4</a></sup>&nbsp;Examining changes in the revenue share of the largest 50 firms in very broad sectors between 1997 and 2012, the CEA’s analysis found that concentration had increased in 10 of 13 of those industries.</p> <p>The analysis was careful to point out that rising concentration need not be evidence of weakened competition or harm to consumers. But the findings were not treated with such caution in subsequent reporting. The presentation of the analysis didn’t help—the table presenting the results appeared in a&nbsp;section titled “Indicators of Declining Competition.”</p> <p>The industrial groupings presented, though, were clearly absurd for thinking about meaningful product‐​market competition.<sup><a href="#_ednref5" id="_edn5">5</a></sup>&nbsp;Industrial classifications as broad as retail meant, in principle, assessing firms such as Walmart, IKEA,&nbsp;McDonald’s, Foot Locker, and car dealers as if they were meaningfully competing. Other sectors were also as extensive in scope as transportation and warehousing, finance and insurance, and utilities.</p> <p>Former deputy assistant attorney general for economics Carl Shapiro identified other problems with the analysis.<sup><a href="#_ednref6" id="_edn6">6</a></sup>&nbsp;Even if it had used more‐​targeted industrial classifications, a&nbsp;50‐​firm concentration ratio would not be particularly infor­mative about the health of competition, given that (for genuinely national markets) that’s already a&nbsp;lot of firms.</p> <p>Economic Census data, as used by the CEA, also only include production that takes place domestically. Given that imports of manufactured products have grown massively in the time frame examined, the CEA methodology risks making U.S. product markets seem much less competitive than they are. Google chief economist Hal Varian gives the example of the assembled‐​smartphones sector.<sup><a href="#_ednref7" id="_edn7">7</a></sup>&nbsp;The only U.S. company that assembles them in the United States is Motorola. Under the CEA methodology, the assembled‐​smartphones industry would appear to have a&nbsp;100 percent concentration ratio despite the obvious import competition.</p> <p>Despite these problems, though, another more granular analysis has indeed found upward trends in&nbsp;<em>national</em>&nbsp;concentration measures across industries. In a&nbsp;2017 paper, economist David Autor and others assessed changes in concentration for 676 four‐​digit industries between 1982 and 2012 using data from the Economic Census.<sup><a href="#_ednref8" id="_edn8">8</a></sup>&nbsp;These industries were drawn from six broad sectors (manufacturing, retail trade, wholesale trade, services, utilities and transportation, and finance) and were assessed using three concentration measures (the top 4&nbsp;firm sales share, the top 20 firm sales share, and the Herfindahl‐​Hirschman Index).</p> <p>Autor and others concluded that “there has been a&nbsp;rise in sales concentration within four‐​digit industries across the vast bulk of the U.S. private sector.” This confirms findings of other studies: economists Gustavo Grullon, Yelena Larkin, and Roni Michaely, for example, found that concentration levels had increased in more than 75 percent of industries in the past 20&nbsp;years.<sup><a href="#_ednref9" id="_edn9">9</a></sup></p> <p>Though industries have become more concentrated on average, the work done by Autor and others shows that concentration measures examining the top 20 or fewer firms in any industry tend to show bigger jumps in concentration than broader measures. This shows that findings of higher concentration are being driven by the very largest firms becoming relatively larger than before. Interestingly, Autor and others also found that the leading firm in any given industry tends to operate in fewer other discrete four‐​digit industries today than it did in the 1980s. In other words, top firms tend to be increasingly specializing to core product markets (Amazon&nbsp;is the exception rather than the rule).</p> <p>In sum, problematic as they are as proxies for product‐​market competition, measures of&nbsp;<em>national concentration</em>&nbsp;seem to have risen modestly to significantly among most industries over the past two to three decades, driven by the very biggest firms, which tend to be more focused on narrower industries than they were before.</p> </div> , <h2 class="heading"> Falling Local Concentration </h2> , <div class="text-default"> <p>Unfortunately, even these narrower industrial classifications at a&nbsp;national level may not be particularly helpful as proxies for the health of real‐​world competition. In order to get a&nbsp;grip on that, one must first define the relevant product market and its geographical contours. In doing so, it becomes obvious that many real markets are incredibly local, not national. This is particularly true in retail, which, according to much analysis, has seen the largest rise in concentration of any major sector.</p> <p>Consider the market for health and personal care products, such as over‐​the‐​counter drugs or shampoos. A&nbsp;consumer looking to purchase them might go to a&nbsp;local CVS, Walmart, another supermarket, or an independent pharmacy or order online from Amazon or an independent seller. A&nbsp;high measure of&nbsp;<em>national</em>&nbsp;concentration of the top four firms in the health and personal care products sector says nothing about the meaningful competition between companies in any individual locale.</p> <p>Suppose Starbucks opened a&nbsp;new outlet in a&nbsp;small rural town, entering a&nbsp;geographical market that had contained only a&nbsp;local café and a&nbsp;bagel store that also sold coffee. Meaningful competition would rise in this market, with the choice for consumers of where to purchase coffee increasing. But the&nbsp;<em>national</em>&nbsp;concentration measure of limited‐​service restaurants would probably go up, reflecting the addition to Starbucks’s already large national footprint. In other words, rising national concentration might be driven by the same trends driving falling local concentration—an increase in the number of competitors in new localities.</p> <p>Good evidence suggests that this type of story has actually been observed across the U.S. economy. A&nbsp;2019 report by Princeton University’s Esteban Rossi‐​Hansberg and the&nbsp;Federal&nbsp;Reserve Bank of Richmond’s Pierre‐​Daniel Sarte and Nicholas Trachter confirmed that national product‐​market concentration had increased between 1990 and 2014. But it found that in sectors accounting for 72 percent of employment and 66 percent of sales, concentration fell in narrower geographic‐​market territories, such as urban areas, counties, or ZIP codes (see Figure 1).<sup><a href="#_ednref10" id="_edn10">10</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="563" alt="epb-figure1.jpg" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2020-02/epb-figure1.jpg?itok=oDWlEyl3 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-02/epb-figure1.jpg?itok=n7C2gu01 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2020-02/epb-figure1.jpg?itok=oDWlEyl3" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>For example, Rossi‐​Hansberg, Sarte, and Trachter found that when Walmart opens a&nbsp;new store, local concentration tends to fall at a&nbsp;ZIP‐​code level, indicative of more competition. A&nbsp;new Walmart store, on average, increases the total number of local establishments by 0.75 (showing that in some areas Walmart replaces existing firms, but on average tends to add to the number of firms).<sup><a href="#_ednref11" id="_edn11">11</a></sup></p> <p>All this suggests that the observed increases in national concentration in the past two to three decades have been driven in part by large enterprises expanding into new local markets. The rising national concentration that we hear so much about might therefore be indicative of more, rather than less, firm competition at the local level. The concern about weak antitrust policy driving higher concentration may be completely invalid.</p> </div> , <h2 class="heading"> The Rise of Superstar Firms </h2> , <div class="text-default"> <p>Economists have long known that concentration measures are hugely problematic as guides to competition. In fact, the higher national concentration measures we have seen in many industries may themselves be the result of healthy market competition.</p> <p>In the past two years, a&nbsp;number of papers have pointed in that direction. Economist Sharat Ganapati’s work, for example, found that rising industry concentration was associated with higher productivity and real output growth but not with rising prices.<sup><a href="#_ednref12" id="_edn12">12</a></sup>&nbsp;This is not what one would expect if we were facing a&nbsp;situation of anti‐​competitive monopoly power—where firms would be expected to cut output and raise prices.</p> <p>Increasingly, economists are developing models of “superstar firms” in the modern economy that might help explain the trends of rising national concentration, falling local concentration, rising markups, and falling labor income share. The basic idea is that more strenuous global competition and changing technologies are enabling highly productive firms to dominate more than before, not least by expanding into new markets.</p> <p>Economists Rossi‐​Hansberg and Chang‐​Tai Hsieh’s version of this thesis has been called “The Industrial&nbsp;Revolution&nbsp;in Services.”<sup><a href="#_ednref13" id="_edn13">13</a></sup>&nbsp;They examine how in services, retail, and wholesale trades, top firms are increasingly those that have invested in new information technology—this comes with high fixed costs but with the benefit of reducing the marginal costs of standardization.</p> <p>These productive investments allow superstar firms to capture more market share by serving more locations cost‐​effectively. The economists highlight the Cheesecake&nbsp;Factory&nbsp;as an example. The company has invested in technologies that help with staff management, food purchasing, and menu adaptation, allowing them to roll out menu items nationwide in just seven weeks.</p> <p>Hospital chains and other service, retail, and wholesale industries are seeing market leaders proliferate geographically too. Employment is rising in industries that are becoming more highly concentrated nationally, suggesting that this isn’t a&nbsp;situation of monopoly power constraining output and raising prices. Instead, what we’re seeing is productive firms serving more places—hence the associated fall in local industry concentration. Rossi‐​Hansberg and Hsieh estimate that a&nbsp;full 93 percent of the growth in concentration across national industries comes from large firms serving more localities.</p> <p>If this were true, we would expect to see rising national concentration of industries being driven by a&nbsp;relative reallocation of output toward highly productive, innovative firms. This is exactly what the work done by Autor and others appears to show. They present evidence that there is a&nbsp;significant and positive relationship between the growth of concentration and total‐​factor productivity in manufacturing industries. In fact, for all six of the broad sectors they examine, they likewise find that “the industries exhibiting rising concentration are more dynamic as measured by innovative output and productivity growth.”<sup><a href="#_ednref14" id="_edn14">14</a></sup></p> <p>As economist Timothy Taylor has noted, firms engaging in big investments that lower their marginal costs may enjoy rising markups of price over marginal cost while also seeing a&nbsp;decline in their labor intensity.<sup><a href="#_ednref15" id="_edn15">15</a></sup>&nbsp;As these firms capture greater market share, industries as a&nbsp;whole will therefore see greater national concentration, rising markups, and falling labor shares—all trends that pundits, economists, and politicians have been worried about. But this will have been driven by positive trends: new technology facilitating more‐​aggressive competition, with markets facilitating leading innovators to obtain greater market share.</p> </div> , <h2 class="heading"> An Antitrust Explanation </h2> , <div class="text-default"> <p>In theory, then, the higher national concentration we see alongside rising markups in many U.S. industries over the past two to three decades could be evidence of worrying anti‐​competitive consolidation, or it could be a&nbsp;<em>consequence</em>&nbsp;of competition in a&nbsp;world of globalization and technological change. But the evidence—particularly that industries with higher concentration tend to see robust productivity growth—increasingly points to the latter.</p> <p>There are other reasons to doubt the commonly held view that weak U.S. antitrust legislation or enforcement is to blame for rising concentration. Autor and others show that the broad patterns of rising national industry concentration and the phenomenon of superstar firms are common among members of the Organisation for Economic Co‐​operation and Development, including those in the European Union, despite big differences in the application of antitrust and competition law.</p> <p>A skeptic of this positive explanation of rising national concentration might say, “OK, that may explain the trends of rising concentration in some markets. But, surely, in competitive markets, firms wouldn’t enjoy sustained higher markups of price over cost.” In other words, shouldn’t a&nbsp;competitive market see markups from leading firms driven down quickly as other competitors or new entrants adopt any new cost‐​effective&nbsp;technologies? Economists might worry that firms that were initially innovative, having obtained a&nbsp;market‐​leading position, are now “rigging” the market to their own ends—and so are still benefiting from lax antitrust enforcement after initial consumer welfare‐​enhancing behavior.<sup><a href="#_ednref16" id="_edn16">16</a></sup></p> <p>But Varian posits a&nbsp;simpler explanation: diffusion of the best technological and organizational practices in an industry takes time, particularly in industries where demand is constrained. Consumers are currently enjoying more choices as a&nbsp;result of superstar firms’ innovations. But they will not experience the full benefits of lower prices enabled by these productive improvements until the best technologies and practices are more broadly adopted.</p> </div> , <h2 class="heading"> Conclusion </h2> , <div class="text-default"> <p>Democratic presidential candidates have jumped on the ideas that American industries are becoming less competitive, that consumers and competitors to dominant firms are suffering, and that anti‐​competitive behavior facilitated by weak antitrust enforcement is to blame.</p> <p>Yet increasing evidence suggests that rising national concentration among industries may not be reflective of reduced competition in relevant markets or reflect harm to consumers’ welfare. Instead, economists more frequently see rising national concentration as a&nbsp;consequence of globalized competition in which lumpy investments can allow leading firms to productively serve more local markets.</p> </div> Thu, 13 Feb 2020 00:00:00 -0500 Ryan Bourne https://www.cato.org/publications/economic-policy-brief/does-rising-industry-concentration-signify-monopoly-power Bernie Sanders and the Disastrous Rent Control Plan https://www.cato.org/multimedia/cato-daily-podcast/bernie-sanders-disastrous-rent-control-plan Ryan Bourne, Caleb O. Brown <p>There isn’t much disagreement among economists about what a&nbsp;national rent control policy would do to harm renters, housing prices, housing stock, and the incentive to build new housing. Nonetheless, Bernie Sanders persists. Ryan Bourne comments.</p> Tue, 04 Feb 2020 09:26:41 -0500 Ryan Bourne, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/bernie-sanders-disastrous-rent-control-plan Ryan Bourne discusses Brexit on KURV’s The Drive Home https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-brexit-kurvs-drive-home Mon, 03 Feb 2020 10:45:21 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-brexit-kurvs-drive-home With Brexit, Britain Is Finally at the Wheel of Its Own Destiny https://www.cato.org/publications/commentary/brexit-britain-finally-wheel-its-own-destiny Ryan Bourne <div class="lead text-default"> <p>Britain has become the first major country to formally exit the European Union. After 47&nbsp;years as a&nbsp;member, and with the British people having voted to leave more than three years ago in a&nbsp;referendum, Boris Johnson’s Conservative government has finally made good on the public’s mandate: The United Kingdom’s participation in this pan‐​European political project is over.</p> </div> , <div class="text-default"> <p>It is an utterly historic moment. Britain’s elected representatives of the European Parliament have been retired. In fact, the U.K. has departed all the E.U.’s political and administrative bodies. Now, the so‐​called&nbsp;<a href="https://www.bbc.com/news/uk-politics-50125338" target="_blank">Withdrawal Agreement</a>&nbsp;between Prime Minister Johnson’s government and the E.U. comes into effect, under which a “transition phase” has begun. This sees the U.K. continuing to pay into the E.U. budget and adhering to E.U. single market and customs unions rules until at least the end of December, when, hopefully, a&nbsp;new E.U.-U.K. free‐​trade agreement will be finalized.</p> <p>As a&nbsp;result, not much will “feel different” when British citizens wake up on Saturday. Business trading arrangements will remain unchanged. Regulations won’t be altered. Free movement of people will, by and large, continue. But in another sense, everything has changed: The U.K. and E.U. will now negotiate their future free‐​trade and security partnerships as governmental entities with no overt power‐​sharing ties. The Britain for the first time in almost five decades, has ceased to be a&nbsp;whining backseat driver in a&nbsp;bigger political club, and instead is at the wheel of its own destiny.</p> <p>In the immediate term, much focus will be on how the U.K. uses its newly repatriated trade powers in decisions over the shape of the E.U. free‐​trade agreement. Hand‐​wringing about the specific loss of access or new regulatory or tariff barriers to certain markets will result. It may even be that the time frame through December is too short to negotiate the sort of deal both sides want, in which case a&nbsp;transition extension (which must be&nbsp;<a href="https://davidallengreen.com/2019/11/the-government-ruling-out-extending-the-transition-period/" target="_blank">pre‐​agreed by</a>&nbsp;July 1) will kick in. Expect, if this occurs, “remainers” to ape Brexiteer language and talk of loss of sovereignty — being bound by rules over which Britain has no say.</p> <p>But Jan. 31 is not about the immediate consequences, or policy decisions made, but where ultimate political authority resides.</p> <p>Formal exit overcomes a&nbsp;necessary hurdle in moving toward a&nbsp;new U.K.-E.U. economic settlement, yes. And the shape of that relationship has become clearer given Johnson’s thumping electoral victory, and his desire for Britain to exit the E.U.‘s single market and customs union. But it’s about much more than that. The key implication of leaving the E.U. is confirmation that a&nbsp;range of policy powers, for good or ill, will ultimately be returned to Britain, including on trade, immigration, economic regulation, state aid and competition, agriculture and fishing.</p> <p>After being entangled with the E.U. for so long, and with the U.K. government occupied by the process of leaving, Britain’s near‐​term future will unlikely be characterized by radical policy change, even after the transition ends. But the Britain’s political system will obtain more degrees of freedom — greater domestic powers to independently navigate the shocks that afflict economies and to pursue regulatory objectives regarding new technologies, and devise new laws in an environment more directly answerable to the public.</p> <p>Brexit was a&nbsp;bet that the U.K.‘s institutions — not least its accountable, flexible parliamentary democracy — would, on net, deliver better outcomes in a&nbsp;changing world than the ever‐​growing centralization of powers in Brussels’s technocracy. Whether that’s true will take years to assess and depend on whether the U.K. embraces openness or accedes to growing global protectionism and state planning.</p> <p>But right now, we shouldn’t conflate policy choices with the constitutional framework underpinning them. Jan. 31 marked a&nbsp;momentous repatriation of political power, delivered on instruction of the British people.</p> </div> Fri, 31 Jan 2020 11:04:52 -0500 Ryan Bourne https://www.cato.org/publications/commentary/brexit-britain-finally-wheel-its-own-destiny Brexit Day! https://www.cato.org/multimedia/cato-daily-podcast/brexit-day Ryan Bourne, Caleb O. Brown <p>It may still be too early to say how Brexit will impact trade and other international relations, but the ever‐​changing details of the Brexit plan took an unlikely path to deliver a&nbsp;big win for Prime Minister Boris Johnson. Ryan Bourne comments.</p> Thu, 30 Jan 2020 16:58:50 -0500 Ryan Bourne, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/brexit-day The Folly Of Bernie Sanders’ National Rent Control Proposal https://www.cato.org/blog/folly-bernie-sanders-national-rent-control-proposal Ryan Bourne <p>“Landlords cannot be allowed to raise rents to whatever they want, whenever they want,” <a href="https://twitter.com/BernieSanders/status/1196452143005392902?s=20">Senator Bernie Sanders boomed on Twitter</a> in November. “We need…a national rent control standard.” Now, <a href="https://berniesanders.com/issues/housing-all/">his presidential campaign advocates one</a>: under Sanders’ housing proposals, all landlords nationwide would only be able to increase rents annually by one and a half times the rate of inflation or 3 percent, whichever is higher. Assuming the current CPI for Urban Consumers is the inflation measure used, that would mean a rent increase cap today of just 3.4 percent.</p> <p>Given the likely unconstitutionality of a truly national rent control law, one suspects Sanders should be taken seriously but not literally. What he is really doing here is endorsing a spate of new rent control laws across states, encouraging left‐​wing activists to push for more stringent restrictions elsewhere. California has already instituted <a href="https://www.cato.org/blog/statewide-california-rent-control-shooting-price-messenger">a 5 percent plus inflation cap</a> for older buildings. Oregon has passed a rent increase cap of <a href="https://www.cato.org/publications/commentary/statewide-rent-control-will-ultimately-please-nobody">seven percent per year above CPI</a>. New York just expanded protections for existing rent stabilized tenants and is expected to follow the others with a proposal for a general rent cap.</p> <p>But that Sanders’ national proposal probably won’t or can’t be implemented doesn’t mean his reasoning won’t damage housing policy across the country. His claim that landlords can charge “whatever they want” entrenches the idea that rents are set through greed or market power, not supply and demand. And if crude, low level rent increase caps are implemented even in individual cities, it could have disastrous consequences in “hot” markets – particularly given proposals like his are shorn of the exemptions one usually sees for small‐​time landlords, new properties or vacant units, that can provide a safety valve for the rental market.</p> <p>To see the folly of a national rent policy, consider the differential state of major U.S. housing markets. According to a <a href="http://www.demographia.com/dhi.pdf">Demographia report last week</a>, Rochester, New York has a median house price just two‐​and‐​a‐​half times the median income for the city. Similarly affordable housing can be found in Cleveland, Ohio and Oklahoma City (both 2.7 median multiples). On the other end of the spectrum, major Californian housing markets such as Los Angeles, San Jose, and San Francisco all have mean multiples above 8, while Seattle (5.5), Miami (5.4), and New York (5.4) are still deemed “severely unaffordable.”</p> <p>Given housing affordability varies so much, we shouldn’t be surprised that rents similarly differ by locality. And if we accept that rents differ across the country for similar housing because of different household sizes, incomes, land use and zoning laws, and more, it stands to reason that average rents will <em>change </em>at different rates year‐​to‐​year as these supply and demand factors vary.</p> <p>Looking across the last 20 years shows this clearly (see Table 1). In the broad housing markets around San Francisco, Seattle, Miami and Denver, average rent increases have exceeded what Bernie Sanders’ proposal would allow in over one of every two years. In contrast, cities such as Milwaukee, Cleveland, and St Louis have rarely seen rent increases exceed Sanders’ arbitrary cap. Within cities, we’d expect differences by neighborhood too (though perhaps with lower variance).</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="43abce15-0cbb-4901-bd39-f053bef6bf85" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/2020-01/Sanders%20Rent%20Control%20Table%201.png?itok=n0L6sJ71 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-01/Sanders%20Rent%20Control%20Table%201.png?itok=sTCXuJ91 1.5x" width="582" height="651" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/2020-01/Sanders%20Rent%20Control%20Table%201.png?itok=n0L6sJ71" alt="Years in Which Bernie Sanders' Rent Control Law Would Have Bound, On Average, By Metropolitan Area (2000-2019)" typeof="Image" class="component-image" /></p></div> <p>Is there any reason to suspect that landlords have been greedier in Miami than Milwaukee, or Seattle than St Louis? Or is it more likely that supply and demand trends have been different across cities over that 20 years? This evidence, plus the fact that rents within individual cities’ neighborhoods tend to quickly converge for certain property types and size, suggests that landlords cannot raise rents to “whatever they, whenever they want.” In reality, they are constrained both by tenants’ ability to pay and the availability of substitute properties. Or, to put it another way, by supply and demand.</p> <p>Once one accepts that rental prices are overwhelmingly the product of market forces, not landlord greed, you see why rent control, especially as Sanders’ envisages, is such a misguided idea. It effectively seeks to drown out the message that rising rents is submitting – of an increased relative scarcity of rentable accommodation that has led rents to rise to clear the market. Instead, capping rents forces on the market the comforting lie that property is abundant. That produces a whole range of well‐​documented consequences.</p> <p>Consider neighborhoods where market rents are expected to rise in the coming year beyond Sanders’ current 3.4 percent cap. The rent control will therefore bind, and if market rents continue increasing rapidly (perhaps because of an unresponsive supply of new housing to demand) then rents paid will become lower and lower relative to the underlying market rent. For hot rental markets:</p> <ol><li>Once it becomes clear rent controls are likely to be implemented, some landlords may seek to raise rents today before the cap becomes law, second‐​guessing how market rents will evolve in the very near future.</li> <li>Once the rent control binds, there will be a shortage of property relative to the quantity demanded. Existing landlords will, on the margin, seek to find ways to convert rental accommodation into <a href="https://www.sciencedirect.com/science/article/abs/pii/S0094119006000635?via%3Dihub">non‐​controlled forms of accommodation</a>, such as condos, offices, use through AirBnB, owner‐​occupancy, and more.</li> <li>Since rents cannot adjust to the new market reality over time, and there are no exemptions for new properties, <a href="https://www.nationalaffairs.com/storage/app/uploads/public/58e/1a4/9dd/58e1a49dd2c19946100154.pdf">capital investment in new rentable accommodation</a> will fall in neighborhoods affected. Existing buildings will likewise be knocked down and replaced with buildings for other uses. These effects will be exacerbated if landlords perceive rent control to be the precursor for other restrictions on how they use their buildings or choose their tenants. The overall <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20181289">supply of rentable accommodation in the market will therefore fall</a> relative to where it would have been.</li> <li>Existing tenants who do not want to move will <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20181289">benefit significantly from the controls</a>, with big rent savings. But over time that will mean many people being in accommodation that is the <a href="https://www.nber.org/papers/w6220">wrong size or location for them</a>. <a href="https://www.bbc.com/worklife/article/20160517-this-is-one-city-where-youll-never-find-a-home">Extensive wait lists</a> for properties and <a href="http://treromogkjokken.no/">black‐​market bribes</a> will likely proliferate.</li> <li>Ordinarily, crude rent controls can lead to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0094119006000635?via%3Dihub">a deterioration of property quality</a>. Landlords have incentives to either allow the property quality to deteriorate so that the market rent falls to the controlled rent or else to change the tenure type to non‐​controlled forms. In the case of Sanders’ proposal, however, landlords can apply for waivers from the controls if significant capital improvements are made. In very hot markets there are therefore big incentives for rapid gentrification – converting to very expensive, high‐​end properties and then fixing rents very high initially to reflect binding rent controls into the future.</li> </ol><p>In short, a Sanders national rent control proposal would bring a lot of economic damage. But even if implemented more locally, such a crude rent cap would bring significant downsides to local housing markets, and the economy more broadly. And all based on the misguided idea that landlords have vast market power to set rents.</p> Mon, 27 Jan 2020 14:12:48 -0500 Ryan Bourne https://www.cato.org/blog/folly-bernie-sanders-national-rent-control-proposal Boris Johnson Should Heed Trump’s Approach to Regulation https://www.cato.org/publications/commentary/boris-johnson-should-heed-trumps-approach-regulation Ryan Bourne <div class="lead text-default"> <p>Donald Trump is, to put it mildly, prone to exaggeration. His Davos speech this week talked of overseeing a&nbsp;US “economic boom the likes of which the world has never seen before”. To listen to him, everything in America now sounds “fantastic”, “the best” or “unprecedented”.</p> </div> , <div class="text-default"> <p>But while critics pour scorn on his poetic licence, Trump is right that his economy has defied expectations and outperformed other developed nations. And no policy area shows the structural break he has overseen better than the approach on economic regulation.</p> <p>Even here, Trump lays it on thick. Upon entering the White House, he promised to scrap 75pc of all federal economic regulations. Unsurprisingly, that hasn’t happened, despite claims of “massive deregulation”.</p> <p>Yet an oil tanker takes some time to turn around. What Trump’s team has achieved is incredible: slamming on the brakes of the regulatory state after years of runaway growth.</p> <p>Capital Economics has assessed some of the numbers. The pages of the Federal Register of regulations has simply stopped growing after ballooning from the mid‐​Nineties. US spending and employment in regulatory agencies has fallen meaningfully.</p> <p>Only 98 economically significant new regulations have been introduced in Trump’s term to date, compared with an average of 175 at this stage in Barack Obama’s first two terms. Little wonder the number of small businesses citing regulation as their biggest problem has nearly halved.</p> <p>There has been meaningful, actual deregulation in certain areas too. Trump’s Council of Economic Advisors has shown how the administration oversaw new rules on generic drugs that led to a&nbsp;rise in approvals of 17.5pc, which (they estimate) will cut prescription drug prices by around 10pc.</p> <p>Obama’s “net neutrality” laws, that would have given government extensive powers to regulate internet pricing, were repealed and government has rolled back rules on employment practices for many small businesses, streamlined environmental reviews for infrastructure projects and improved targeting of federal spending.</p> <p>After years of public debate in the UK whereby bans or new business regulations are proposed to cure every perceived societal ill, “deregulation” or “reform” seem almost alien concepts to many Conservatives. But Britain’s departure from the EU and our promised regulatory divergence grants an opportunity to reassess many laws, some of which may be economically defunct or needlessly restraining economic activity.</p> <p>More importantly, it might provide a&nbsp;catalyst to follow Trump’s reset: moving away from a&nbsp;continuous tsunami of new prescriptive regulations that pretend Whitehall or Brussels knows best.</p> <p>In an age with extensive within‐​market regulation arising from consumers’ demand for safety, rating and review websites, accreditation agencies and more, it’s not clear why one‐​size‐​fits‐​all rules are necessary for many industries.</p> <p>Yes, broad environmental frameworks and certain major health and safety laws should be maintained. A “bonfire” of existing red tape is fantasy, not least because of political sensibilities and resistance from incumbent firms that have ploughed in funds to comply.</p> <p>But what Trump’s hands‐​off approach has allowed is businesses to get on with devising new products, innovations, or workplace organisation practices, without constantly looking over their shoulder in expectation of politicians or regulatory agencies.</p> <p>The scale of the impact of this easing of the boot on businesses’ throats in macroeconomic terms is debatable. Economists disagree as to the costs and benefits of individual regulation and it’s difficult to ascertain their economy‐​wide effects.</p> <p>Trump’s team believes his agenda has provided savings amounting to $2,500 (£1,900) per household per year, even after accounting for regulation’s benefits. This figure tots up 20 of the biggest regulatory changes and the impact of a&nbsp;counterfactual world under which Democrats continued to grow the regulatory state. One can criticise this methodology.</p> <p>Some changes, such as on generic drugs, were in the works pre‐​Trump. Other attempted deregulations are now being held up in the courts, while new trade policies amount to effective regulation not included in the calculations.</p> <p>More worryingly, there often seems little overall theory behind some areas where genuine deregulation is being pursued. If deregulation is a&nbsp;mere tool to support specific industries rather than a&nbsp;principled commitment to market‐​led activity, then a&nbsp;failure to achieve Trump’s objectives may be a&nbsp;precursor for other bad, interventionist policy.</p> <p>Nevertheless, for now, it appears to be working: the US average annual productivity growth rate under Trump is just under 1.5pc, compared with less than 1pc for the previous five years. Birth and death rates of American companies are picking up, indicative of the economy becoming more dynamic. These achievements are more remarkable given the headwinds of the trade war.</p> <p>By reducing the costs of regulatory compliance and entry barriers for new players, and providing an environment for more permissionless innovation, Trump’s administration has given businesses licence to focus on consumers’ demands, rather than regulators’. We would expect the benefits of this on dynamic competition to be greater over time, as Trump himself suggested this week.</p> <p>As Britain leaves the EU, a&nbsp;lot of focus is going to be on trade policy. Such issues are important. But we shouldn’t forget Britain’s internal trade is far more economically significant. With Boris Johnson’s desire to provide vast new infrastructure projects, Sajid Javid’s call for Britain to be as business‐​friendly as possible, and a&nbsp;whole range of new industries — from artificial intelligence to fintech — with much to gain outside the EU, the Government needs to take regulation seriously.</p> <p>They should follow Trump in turning off the taps to assess the stock.</p> </div> Thu, 23 Jan 2020 11:40:32 -0500 Ryan Bourne https://www.cato.org/publications/commentary/boris-johnson-should-heed-trumps-approach-regulation The Perils Awaiting Conservatives Who Seek to Reduce Inequality https://www.cato.org/publications/commentary/perils-awaiting-conservatives-who-seek-reduce-inequality Ryan Bourne <div class="lead text-default"> <p>Inequalities of wealth and income in the U.K. are bad and the Conservatives should embrace left‐​wing policies to reduce them. So concludes Tim Pitt, a&nbsp;former adviser to Savid Javid and Philip Hammond,&nbsp;<a href="http://www.smf.co.uk/publications/beyond-levelling-conservative-case-tackling-inequality-income-wealth/" target="_blank">writing for the Social Market Foundation</a>.</p> </div> , <div class="text-default"> <p>As with most Tory egalitarian calls, Thatcherites are his boogeymen. One Nation Conservatives have always cared about inequalities threatening our political and social fabric, he says, but were “drowned out” by economic liberals from the 1980s onwards. Now, Pitt considers the authoritative evidence in: inequality hinders social mobility, impairs long‐​term economic growth, and undermines political stability. The growth‐​chasing, equal opportunity‐​declaring Thatcherites were thus wrong on their own terms. It is time to Make Economic Conservatism One Nation Again.</p> <p>Much (besides this potted history) perturbed me in Pitt’s essay: the constant conflation of income and wealth inequality, the very partial reading of empirical literatures, and the shifting yardsticks to judge whether inequality is “too high”. On income, for example, OECD comparisons are used, showing the UK at the high end; for wealth inequality, no cross‐​country comparisons are forthcoming (hint: the UK has unspectacular levels of wealth inequality internationally, with a&nbsp;Gini coefficient lower than in Germany, Sweden or Denmark).</p> <p>But Pitt ignores the fundamental disagreement most economic liberals have with him about how to think about an income or wealth distribution. He talks about these as if they are themselves independent variables, that can both be easily manipulated and which then determine other economic outcomes. Like&nbsp;<a href="https://www.cato.org/publications/commentary/angus-deaton-inadvertently-shows-why-we-shouldnt-care-about-economic">Angus Deaton</a>, the&nbsp;<a href="https://www.cato.org/publications/commentary/angus-deaton-inadvertently-shows-why-we-shouldnt-care-about-economic">Nobel prize winning economist</a>, I&nbsp;think this gets the story about inequality, and what it means, back‐​to‐​front.</p> <p>When we talk of “inequality,” what we are really describing is a&nbsp;snapshot, summary statistic of the distribution of wealth or income across the economy. This is itself shaped by millions of past and present trades, investment, business, and education decisions, inheritances, policies, demographic trends and more. “Inequality,” then, “is not so much a&nbsp;cause of economic, political, and social processes, as a&nbsp;consequence,” as Deaton explains.</p> <p>Three implications follow from this pretty uncontroversial observation. First, that inequality cannot be denounced “good” or “bad” per se, without assessing what has caused it. Second, that “solutions” to inequality are not created equal. Some might unpick bad causes, such as ill‐​gotten gains from cronyism; others might deter activity enriching us all. Third, saying “reducing inequality” is central to your economic platform, causes be damned, shows a&nbsp;willingness to trade‐​off other economic goals, whether reducing poverty, raising growth, or more.</p> <p>Take a&nbsp;cross‐​country example. According to&nbsp;<a href="https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-databook-2019.pdf" target="_blank">Credit Suisse</a>, Sweden, the U.S. and Russia all have near‐​identical levels of wealth inequality (Gini coefficients of 86.5, 85.2, and 87.5, respectively). This shows that wealth inequality is a&nbsp;useless metric for any reasonable conception of economic health. But thinking through the causes is illuminating.</p> <p>In Sweden, high wealth inequality is driven in part by&nbsp;<a href="http://www.iariw.org/dresden/fessler.pdf" target="_blank">a&nbsp;hugely expansive welfare state</a>. Generous government entitlements mean the middle‐​classes have much less relative need and means (due to high taxes) to save and build up private assets. That government entitlements are non‐​heritable (relatively more of the poor’s wealth being tied up in them) also tends to widen measured private wealth inequality further. So though a&nbsp;big welfare state might reduce&nbsp;<em>income</em>&nbsp;inequality, it tends to increase private wealth inequality.</p> <p>In the U.S., high levels of wealth inequality are instead driven significantly by income inequality, in turn arising from a&nbsp;globalised economy. Top entrepreneurs, sports stars, and CEOs often lead “winners take all” markets, earning high incomes and building up assets.&nbsp;Yes, this is not the whole story. There’s cronyism and lack of competition in some markets too. But it should go without saying that this is a&nbsp;far less significant driver than in Russia, where wealth inequality often reflects corruption (indeed, very high wealth inequality is common in crony‐​capitalist economies).</p> <p>By not analysing what drives inequality (in the UK or elsewhere), you therefore risk making big policy mistakes in reducing it. Does Pitt really think wealth inequality in Sweden is as worrisome as Russia, and necessitates similar responses? Surely not. Blanket denouncements (inequality bad, equality good) make one susceptible both to ignoring obvious follow‐​up questions and to wishful thinking about solutions.</p> <p>If income and wealth inequality are “too high,” as Pitt claims, then what are the right levels? If reducing inequality would, in his utopia, be a&nbsp;central aim of government, then how would he weigh its pursuit against other goals? He calls for more redistribution, for example. But what if this widened wealth inequality while lowering income inequality?</p> <p>Consider another pertinent example. A&nbsp;government social insurance system for social care&nbsp;<a href="https://www.cps.org.uk/research/care-for-the-elderly/" target="_blank">would widen wealth inequality</a>, by protecting the assets of wealthier social care users with much higher life expectancies. Would Pitt reject this policy given this consequence? Or would other considerations dominate?</p> <p>To avoid such tough questions, egalitarians tend to reach for bad cross‐​country studies suggesting that reducing inequality is “win‐​win.” One OECD paper claiming that lower inequality is “good for growth” is central to Pitt’s particular case.</p> <p>Now, there are big problems with this degree of aggregation and ignoring within‐​country stories. China has become much more unequal as it has liberalised, but this has clearly been good, on net. In other countries, rising cronyism has seen both growth‐​sapping while widening inequality. Generalising across countries in terms of implications for policy is therefore very dangerous.</p> <p>Delve deep into the&nbsp;<a href="https://www.oecd-ilibrary.org/social-issues-migration-health/trends-in-income-inequality-and-its-impact-on-economic-growth_5jxrjncwxv6j-en" target="_blank">underlying OECD paper</a>&nbsp;and you see already how confusion can reign. Yes, this paper finds inequality and growth negatively statistically associated. But the results make clear this is about inequality between the poorest and the middle‐​classes. The paper explicitly says: “no evidence is found that those with high incomes pulling away from the rest of the population harms growth.” Yet Pitt’s policy prescriptions are highly focused on taxing the rich more.</p> <p>One Nation Tory‐​types likewise reach for economic explanations for Brexit and Donald Trump, buying into the idea this “rise of populism” is caused by inequality breeding political instability. But is Britain really less stable today than during the 1970s industrial strife, when inequality was lower? That’s subjective. But&nbsp;<a href="https://www.conservativehome.com/thecolumnists/2019/10/ryan-bourne-thatcher-and-cameron-made-us-happier.html" target="_blank">we are certainly happier today</a>. Again, such sweeping statements about equality’s benefits are pretty dangerous as a&nbsp;guide. Historically, mass mobilisation war, communism, state failure and plague have been necessary to cause&nbsp;<a href="https://www.cato.org/publications/commentary/want-more-equal-society-be-careful-what-you-wish">big reductions in economic inequality</a>. This hardly seems likely to improve political stability.</p> <p>In all then, Pitt’s arguments for a&nbsp;new Tory egalitarianism are unconvincing. Evidence that inequality is a&nbsp;key&nbsp;<em>driver</em>&nbsp;of slow growth or political dysfunction here is weak. And in failing to analyse inequality as the end result of complex economic forces, his proposed policy agenda seems muddled, at best, and highly risky at worst.</p> </div> Wed, 22 Jan 2020 11:27:52 -0500 Ryan Bourne https://www.cato.org/publications/commentary/perils-awaiting-conservatives-who-seek-reduce-inequality Raising Wages via Policy Is Hard or Destructive. It’s Time to Focus on Living Costs https://www.cato.org/blog/raising-wages-policy-hard-or-destructive-its-time-focus-living-costs Ryan Bourne <p>A Presidential election year will bring with it plenty of good, bad, and ugly policy ideas to help struggling families. With the <a href="https://fred.stlouisfed.org/series/UNRATE">unemployment rate extremely low</a>, much focus will be on real wage growth for workers. This is not currently disastrous – real wages are growing at around 1.4 percent per year (see Chart below). But after 15 years of relatively sluggish performance in GDP per capita growth, politicians will be trying to think of ways to broadly raise living standards further.</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="298d90d1-f495-4d9e-b08f-b9e64adc109a" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/2020-01/Real%20earnings.png?itok=oj9nJ7CS 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-01/Real%20earnings.png?itok=UlIUpDqU 1.5x" width="700" height="270" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/2020-01/Real%20earnings.png?itok=oj9nJ7CS" alt="Average hourly earnings and personal consumption expenditure inflation" typeof="Image" class="component-image" /></p></div> <p>Over time, living standards are driven in large‐​part by rising wages, in turn driven by the rising productivity of workers. But in <a href="https://www.bloomberg.com/opinion/articles/2020-01-14/u-s-job-growth-is-great-but-boosting-wages-will-be-much-harder">an excellent Bloomberg article</a> this week, Tyler Cowen points out that many of the forces that determine workers’ wages are structural, global, and difficult for policymakers to affect. (And, I’d add, government attempts to affect wages – through, say a $15 minimum wage, or greater union bargaining –come with large trade‐​offs for jobs for certain groups).</p> <p>Yes, we know that a robustly growing economy driven by broad‐​based productivity growth is the best way to get rising living standards. Unfortunately raising the productivity growth rate of the economy is difficult. Governments don’t really know what drives much of the innovation that really propels growth. And to the extent that we think growth can be enhanced through better policies (certain tax cuts, deregulation etc), Tyler shows that the effects might be offset in the coming years by other global headwinds.</p> <p>If policymakers really want to improve living standards in the near term then, Tyler concludes that they should focus on living costs. In particular: housing, healthcare, and higher education costs. To which I say: Amen, brother.</p> <p>A couple of years ago, I wrote <a href="https://www.cato.org/publications/policy-analysis/government-cost-living-income-based-vs-cost-based-approaches">“Government and the Cost of Living: Income‐​Based vs. Cost‐​Based Approaches to Alleviating Poverty,”</a> making the case that with the budget deficit already large and productivity growth in a rut, policymakers should focus on undoing bad things that currently raise both raise prices for poorer consumers while also worsening the efficiency of the economy. In other words, they should focus on how far workers’ wages go in being able to afford important goods and services, rather than always thinking about nominal incomes.</p> <p>Instead of just picking three sectors, as Tyler has done, I looked at what poorer families tend to spend their money on, honing in on specific current policies affecting housing, childcare, food, transport, clothing and footwear, and services governed by occupational licensing.</p> <p>What I found was that bad laws and regulations at the local, state and federal levels of government in all these areas actually raised prices for the average lower‐​income family by anywhere between $830 and $3,500 directly per year (never mind the damage to economic efficiency). What’s more, my examination of policy areas wasn’t comprehensive. High healthcare costs are an obvious area to tackle, as Tyler says, and there are other transport and house building costs affected by policy (not least trade policy) that could be examined too.</p> <p>A supply‐​side agenda for lowering basic living costs is an underrated tool to tackle genuine poverty and ease the pressure on all families. Though reform of these areas is difficult to achieve, and we must be cautious to politicians’ using concern about living costs as a precursor to price controls, too much focus on people’s living standards remains on income through wages or transfers, leaving a lot of regulatory low‐​hanging fruit ignored.</p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="53550f54-a9a2-42e0-be05-b32a02ec8311" data-langcode="en" class="embedded-entity"> <div class="embed embed--youtube js-embed js-embed--youtube"> <div class="responsive-embed"> </div> </div> </div> Thu, 16 Jan 2020 11:10:06 -0500 Ryan Bourne https://www.cato.org/blog/raising-wages-policy-hard-or-destructive-its-time-focus-living-costs Want to Create an Immigration System That Works? Look to Airbnb https://www.cato.org/publications/commentary/want-create-immigration-system-works-look-airbnb Ryan Bourne <div class="lead text-default"> <p>Plenty of foreigners would value the opportunity to work in the UK for a&nbsp;short period. Lots of UK citizens, meanwhile, would prefer some time out of the labour market to upskill, care for a&nbsp;loved one, or even travel. Yet today these two groups have no means of trading their desires. We have what economists call “a missing market”.</p> </div> , <div class="text-default"> <p>Economists view movements of people for work as synonymous with international trade.&nbsp;<a href="https://www.telegraph.co.uk/business/2019/06/27/need-immigration-system-can-wean-economy-addiction-cheap-labour/" target="_blank">Barriers to immigration prevent workers moving to where they are most productive</a>, making the global economy poorer. But as Brexit showed, completely “open borders” appears a&nbsp;politically unsustainable proposition.</p> <p>Voters want migration controlled. They see their country more as a&nbsp;club than part of a&nbsp;global labour market. So although most evidence suggests immigration enriches the economy, voters place heavier weight on the welfare of adversely affected domestic citizens, the localised impact on public services, or perceptions of cultural damage, than on aggregate benefits including to migrants themselves.</p> <p>Hence the Conservatives have pledged to end free movement for EU citizens after Brexit. They’ve promised instead an “Australian‐​style, points‐​based system”, applied equally to all countries. Our Government would rank potential migrants according to certain characteristics for determining visa eligibility, including educational achievement, language skills, work experience, or having a&nbsp;job offer.</p> <p>Such a&nbsp;bureaucratic approach — setting conditions and allowing all who fulfil them to enter — is one of three broad ways to “control” immigration. The others are quotas (imposing a&nbsp;crude cap on immigrant numbers) or prices (some financial barrier to entry). Most real‐​life systems are hybrids of these approaches.</p> <p>Economically, though, not all immigration controls are created equal. Capping numbers creates obvious absurdities. Suppose a&nbsp;limit is set at 99,999 people per year. Would the UK benefit if an international footballer was denied a&nbsp;Premier League job as number 100,000? The answer is, clearly, no.</p> <p>Nor is the Government likely to do well at centrally planning the labour market&nbsp;<a href="https://www.telegraph.co.uk/business/2019/12/09/switching-points-based-immigration-system-would-mean-uk-economy/" target="_blank">through a&nbsp;points‐​based system</a>. Already ministers are talking up a&nbsp;separate visa route for NHS nurses. Agriculture will surely follow. Whitehall has no knowledge of migrant’s potential for entrepreneurship, nor can it second‐​guess businesses’ needs in an environment in an ever‐​changing economy.</p> <p>Is there a&nbsp;market‐​based immigration policy that could harness most of the benefits of immigration, address some stated public concerns, while avoiding these destructive economic impacts? There is. And it comes back to our “missing market” above.</p> <p>One of the most valuable assets we UK citizens have is our permanent “right to work” in a&nbsp;high‐​wage economy. Yet this is an effective property right we own but can’t currently trade.</p> <p>Suppose instead we had the option to “rent out” this right, leasing it to a&nbsp;foreigner for a&nbsp;contractually agreed period. Technology now exists such that the Government could do for work permits what Airbnb has done for our homes — making ownership of our “right to work” a&nbsp;marketable asset.&nbsp;Just as&nbsp;<a href="https://www.telegraph.co.uk/technology/2019/04/30/airbnbs-rapid-growth-has-changed-face-europe-cities-fighting/" target="_blank">leasing your home on Airbnb temporarily disables you from living in it</a>, leasing out your work right&nbsp;would temporarily prevent you from working.</p> <p>If such trade were allowed, the foreigner would get the time‐​limited right to work in the UK in return for the UK citizen (likely to be in temporary need) getting a&nbsp;cash sum they’d prefer. As a&nbsp;voluntary trade, both sides would be better off. Most gains from immigration would still be realised, but with more of the surplus accruing to participating UK citizens.</p> <p>Economists Martin Ravallion and Michael Lokshin have developed such a&nbsp;proposal. Under their scheme, a&nbsp;government auction website would announce start dates and work permit durations for bidding. Eligible UK citizens could register, setting their minimum asking price for giving up their right to work, with foreign buyers registering maximum bids.</p> <p>Software would then “clear” the market, setting the final price such that demand and supply intersect. Those who bid at least the discovered market price would be matched anonymously with UK citizens willing to sell at or below it. Transactions would be complete when payments were transferred through a&nbsp;clearing system to the seller.</p> <p>After the work permit expires, British participants would regain the right to work. Such a&nbsp;rental scheme brings obvious benefits. An unchanged potential number of workers would somewhat alleviate fears about migrants taking jobs. Much of the black market in foreign labour would be eliminated too — now UK citizens, rather than human traffickers, would be capturing the financial gain.</p> <p>What’s more, UK citizens, would, in effect, now benefit from the option of a&nbsp;time‐​limited, out‐​of‐​work “basic income”. This additional social protection, fully funded by market activity, could be used to retrain, move, cope with unemployment, raise children, or remunerate people for caring for the ill, disabled, or elderly.</p> <p>Other details would need to be thrashed out. UK eligibility might be restricted to those with strong employment histories, to stop it compounding social problems associated with long‐​term unemployment. Some secondary market for people whose situations change will be necessary. Other considerations include whether family members of foreign work permit holders would be able to live in the UK, the lengths of permits, and whether rental payments constitute taxable income.</p> <p>But these are details for a&nbsp;market that’s clearly viable. According to Oxford University’s Migration Observatory, an average of 150,000 immigrants per year (between 2012 and 2016) had stays of just three to 12&nbsp;months for work or study. Between 1990 and 2017, a&nbsp;large majority of non‐​UK nationals who left the country had lived here for five years or fewer.</p> <p>A work permit rental scheme wouldn’t be the complete answer. People migrate for non‐​work reasons too. But if we want to maintain the economic gains of market‐​based immigration for work, while flipping the economic interests of poorer groups affected by or opposed to it, then Boris should harness technology to create a&nbsp;market in work permits. Airbnb points the way.</p> </div> Thu, 09 Jan 2020 18:27:25 -0500 Ryan Bourne https://www.cato.org/publications/commentary/want-create-immigration-system-works-look-airbnb The Limits of Weirdos and Misfits https://www.cato.org/publications/commentary/limits-weirdos-misfits Ryan Bourne <div class="lead text-default"> <p>It is fast becoming one of the most discussed employment advertisements ever.&nbsp;<a href="https://dominiccummings.com/2020/01/02/two-hands-are-a-lot-were-hiring-data-scientists-project-managers-policy-experts-assorted-weirdos/" target="_blank">Dominic Cummings’ call</a>&nbsp;for No. 10 job applications from data scientists and software developers, quirky economists and policy experts, and other assorted “weirdos and misfits” has drawn reaction from&nbsp;<a href="https://marginalrevolution.com/marginalrevolution/2020/01/what-are-the-most-important-lessons-for-dominic-cummings-and-british-civil-service-reformers.html#comments" target="_blank">global public intellectuals</a>,&nbsp;<a href="https://www.theguardian.com/commentisfree/2020/jan/03/dominic-cummings-whitehall-civil-service-no-10" target="_blank">former civil servants</a>, and&nbsp;<a href="https://www.theguardian.com/commentisfree/2020/jan/03/dominic-cummings-whitehall-civil-service-no-10" target="_blank">experience‐​weary ex‐​government digital experts</a>.</p> </div> , <div class="text-default"> <p>Now, civil service employment practices, SpAds’ competences, and government project management, are outside my “circle of competence,” as Cummings might say. Without in‐​house experience, I’ll avoid passing judgment on whether better physics and maths skills or expertise in the economics of auctions might improve Downing Street’s performance. Others who I&nbsp;respect&nbsp;<a href="https://unherd.com/2020/01/why-we-need-weirdos-like-dominic-cummings/" target="_blank">seem positive</a>&nbsp;about his proposals, particularly as it pertains to quantitative skills and institutionalising analysis of uncertainty.</p> <p>Likewise, some of Cummings’ broad proposals for&nbsp;<a href="https://www.ft.com/content/9ff61dee-2d67-11ea-bc77-65e4aa615551" target="_blank">Civil Service reform</a>&nbsp;seem sensible as an outsider: “red teams” to push back on conventional wisdom; rewards for officials actually seeing through on delivering government projects; redundancy for poorly performing officials; more specialism, less generalism. All have clear rationales, though are easier said than delivered. And some tensions clearly exist between them. Greater longevity for brilliantly specialist civil servants, for example, surely creates an institutional impediment to radically adaptive change.</p> <p>Given all the ink spilt debating these ideas, however, an obvious point has been missed. Cummings’ ideas here are for personnel and structural changes to a&nbsp;technocracy. For “better” management and people to deliver systems for a&nbsp;large enterprise (the state). They do not tell us anything, per se, about what he perceives to be the correct&nbsp;<em>role</em>&nbsp;of government — of&nbsp;<em>when</em>&nbsp;it should act,&nbsp;<em>what</em>&nbsp;it should do, and&nbsp;<em>why</em>. Yet without knowing what recruits and the civil service will be working on, it’s impossible to assess claims of the supposed “trillions of dollars lying on the sidewalk” from the “low‐​hanging fruit” of improved government performance.</p> <p>Yes, yes, we have breadcrumbs signalling towards certain “ends.”&nbsp;<a href="https://www.conservativehome.com/thetorydiary/2020/01/white-hot-heat-of-the-technological-cummings.html" target="_blank">This site’s editor</a>&nbsp;thinks Cummings seeks a&nbsp;world of politics as “enterprise association,” harnessing AI, science, big data, cutting‐​edge communications in pursuit of regional rebalancing, science‐​led industrial strategies, and value‐​for‐​money procurement. Brexit, as Cummings acknowledges, brings necessary major policy change in other areas too, not least the promised immigration system.</p> <p>But reading Cummings’ blog suggests a&nbsp;more romantic and expansive view of what an effective technocracy can achieve. He places central importance on “people,” reading as if tons of government failures would dissipate, and other projects become viable, if only more brilliant physicists, data scientists, or mathematicians, armed with cutting‐​edges models of uncertainty and understanding of non‐​linearities, were in government. Policy failure and other challenges, in other words, are downstream. “Bad management” or “the wrong skills” or “incompetent people” are held up as the root cause of bad government; better rational planners could be transformative.</p> <p>My central gripe is that I&nbsp;doubt this is true. Government action ultimately reflects a&nbsp;decision to deliver collective action through the political process. And politics causes a&nbsp;range of structural problems that explain government failure, particularly on economics, irrespective of the brilliance of officials and project managers:</p> <ul> <li>Political incentives and short‐​termism: civil servants ultimately work for politicians, and politicians can be myopic and ignorant, while wanting results conducive to re‐​election or pleasing interest groups. How else to explain prestige projects such as HS2 when other transport projects clearly could deliver better bang for the buck? Or moving from hugging huskies to denouncing “green crap” to meeting Greta within a&nbsp;decade? Or police spending levels with inflexion points at elections? If civil servants come and go, so do Ministers. There have been five transport secretaries alone since 2010. It’s all very well lamenting a&nbsp;lack of error correction in the civil service, but what about politicians continually demanding things with little record of success in their role as local champions (see current debates about high streets and activist government regeneration).</li> <li>Knowledge problem: Data can help inform better policy, of course. But some significant economic problems are complex and intractable, even to the smartest brains or the newest methods. Politicians and planners seek “a solution,” often creating huge unintended consequences. Markets, by being open forums to fulfil individual wants and needs, instead find tailored solutions for different people. Economies are not predictable systems — if they were, then machine learning could make socialism a&nbsp;reality. Even “the best people” or “the best models” can’t forecast the macroeconomy with decent accuracy because “the British economy” is really 66.4 million people and 6&nbsp;million businesses, each acting relatively freely.</li> <li>Centralisation: Cummings might want to replicate successful private sector innovation. But market‐​based activity tends to start small and expand when signals like profits or consumer surveys suggest success. The public sector usually doesn’t have these signals. They could be mimicked by experimentation at local level, or hospital level, or school, with best practice spreading organically. That though, means decentralising power and accepting “post‐​code lotteries,” which governments are reluctant to do. Instead,&nbsp;<a href="https://twitter.com/mayerandrew/status/1213578787352383488?s=20" target="_blank">project failure is met with new money</a>&nbsp;and large‐​scale solutions. Without profit and loss, and the threat of financial failure, finding the correct “efficient scale” for much government activity is difficult, no matter what modeling or expertise you have.</li> <li>Scope: Government engages in an extraordinarily diverse range of activities. Yes, individual‐​focused projects, such as the Apollo programme Cummings highlights, can be successful; but healthcare is more complex. Different policy areas often have conflicting objectives too (see the lower VAT rate on domestic fuel vs. policies to make fossil fuels less attractive). Reformers constantly run into&nbsp;<a href="https://en.wikipedia.org/wiki/Wikipedia:Chesterton%27s_fence" target="_blank">Chesterton Fences</a>&nbsp;– not least because no man can account for all of what the state does. Having a&nbsp;framework of what constitutes core activities and why (whether it’s delivering public goods, solving other market failures, redistributing or more) is, therefore, an important prerequisite for the type of management, resources and approach required.</li> <li>Crowd out: government projects or the hiring of more “brilliant people” would suck individuals and resources out of the private sector, where they could benefit society more. It also disincentives individuals and businesses from finding their own solutions to problems, often creating de‐​facto monopolies less responsive to users/​consumers and technological change.</li> </ul> <p>Now, if Cummings is just laser‐​focused on improving delivery of core functions or projects, necessary Brexit‐​related change, or solving market failures, then this critique is neutered somewhat. His ideas could well generate improvements to delivery of activities government would be undertaking anyway. But my fear, reading between the lines, is that these hires reflect an ambition for projects encompassing greater government economic activism. In that case, it’s worth revisiting why governments fail where markets succeed. There are limits to what talented weirdos and misfits can achieve.</p> </div> Wed, 08 Jan 2020 18:09:35 -0500 Ryan Bourne https://www.cato.org/publications/commentary/limits-weirdos-misfits After a Decade of Macroeconomics, It’s the Small Things That Need Fixing https://www.cato.org/publications/commentary/after-decade-macroeconomics-its-small-things-need-fixing Ryan Bourne <div class="lead text-default"> <p>It could have been worse. That’s hardly a&nbsp;stellar verdict on the 2010s as a&nbsp;decade of UK economic policy. Yet in a&nbsp;10‐​year period that saw the mopping up of the financial crisis, a&nbsp;controversial deficit reduction programme, and then the political convulsions of Brexit, it doesn’t take much imagination to envisage economic outcomes much weaker than we’ve seen.</p> </div> , <div class="text-default"> <p>After the financial crisis, a&nbsp;mistaken lurch Left in policymaking seemed feasible. Economic commentator Will Hutton talked confidently of how “an old order is once again giving way to another” and of a “once‐​in‐​a‐​lifetime chance to change British capitalism”. The Left had a&nbsp;clear narrative, portraying the financial crisis as the ultimate manifestation of “deregulation” and supposed “neoliberal” excess.</p> <p>Mercifully, they fluffed their lines. Sure. Old, failed ideas resurfaced and became renormalised in public debate — from Keynesianism to strong unions, “New Deals” (this time Green) to price controls. Britain briefly flirted with Jeremy Corbyn, and the Conservatives became more attracted to nannying and susceptible to the allure of central planning themselves. But a&nbsp;sea‐​change in policy away from markets hasn’t materialised, yet. Britain has, so far, avoided throwing out the baby with capitalism’s bath water.</p> <p>After‐​the‐​horse‐​had‐​bolted regulatory reform of the banking system instead quickly gave way to a&nbsp;decade dominated by macroeconomic debates — of monetary versus fiscal policy as the best stabilisation tool, stimulus versus austerity for the public finances, and then, most recently, on the short and long‐​term consequences of Brexit. Plenty of mistakes were made, but Britain’s aggregate outcomes, viewed coolly and objectively, have not been disastrous.</p> <p>Monetary policy after the crash helped avert a&nbsp;deep depression. Fiscal repair in terms of reducing the day‐​to‐​day structural deficit afterwards is now largely complete, with headline borrowing having fallen from above 10pc of GDP to around 2pc once new spending promises kick in.</p> <p>What’s more, this has been achieved alongside a&nbsp;<a href="https://www.telegraph.co.uk/business/2019/04/16/employment-hits-another-record-high-despite-brexit-turmoil/" target="_blank">remarkable employment performance</a>, no doubt aided by Britain’s flexible labour market. Unemployment, at 3.8pc, is now at its lowest since 1973; the employment rate for 16 to 64‐​year‐​olds, at over 76pc, is at its recorded peak. Austerity didn’t deliver a&nbsp;lost generation of workers as some claimed it would. Nor did it result in the skyrocketing inequality and material deprivation some thought an inevitable consequence.</p> <p>In fact, though there are no doubt families struggling in insecure work, or others having seen working‐​age benefit cuts, the proportion of children in households facing both low income and material deprivation has fallen since 2010. Income inequality, as measured by the Gini coefficient, is lower now than a&nbsp;decade ago.</p> <p>Britain’s economy has proven more a&nbsp;hardy weed than the delicate flower of politicians’ minds. George Osborne&nbsp;<a href="https://www.telegraph.co.uk/news/2016/05/22/britain-faces-a-recession-of-its-own-making-if-we-vote-for-brexi/" target="_blank">predicted an immediate recession if we dared to vote to leave the EU</a>&nbsp;in 2016. Uncertainty since that referendum has indeed proven a&nbsp;drag on growth, but as with the major fiscal consolidation we saw through to 2016, the British economy has proven a&nbsp;lot more robust and adaptive than many expected.</p> <p>We shouldn’t be Panglossian about the 2010s, of course. With alternative policy, better outcomes could have been delivered. Monetary policy “forward guidance” from the Bank of England proved a&nbsp;huge misreading of the potential of the labour market.</p> <p>The coalition government front‐​loaded tax rises and cuts to investment spending, proving more of a&nbsp;drag on economic activity than if they’d prioritised reform towards a&nbsp;smaller day‐​to‐​day state that did fewer things better. Huge public finance headwinds from an ageing population remain in the future.</p> <p>But Britain’s policymakers’ main mistake was putting too little focus on what became our biggest self‐​evident structural problem: stubbornly weak productivity growth. Output per worker growth has averaged just 0.3pc a&nbsp;year since 2008, a&nbsp;figure earning the dubious honour of the Royal Statistical Society’s “stat of the decade”. As a&nbsp;result, we are 20pc poorer than we would have been if the pre‐​crash trends of 2pc productivity growth per year had continued.</p> <p>Now, that counterfactual is no doubt over‐​optimistic given trends in other developed countries. But as time has gone on, attributing this malaise to a&nbsp;hangover from the financial crash or a&nbsp;consequence of deficit reduction has become ever more difficult to justify.</p> <p>Whatever its causes, the consequences of&nbsp;<a href="https://www.telegraph.co.uk/business/2019/05/14/productivity-slides-workers-put-longer-hours-little-show/" target="_blank">weak productivity growth</a>&nbsp;– not least weak wage growth and lower tax revenues — deserved a&nbsp;policy reassessment. But so much of the past decade has been spent fighting crises, unexpected political events, or near‐​term fiscal shocks, we’ve neglected discussion of the microeconomic building blocks of longer‐​term prosperity.</p> <p>As we enter the 2020s, this focus must change. Brexit is forcing a&nbsp;debate about the nuts and bolts of good trade policy. Boris’s victory is seeing a&nbsp;repoliticisation of infrastructure spending and a&nbsp;battle of ideas on regional regeneration and land‐​use planning laws. How we regulate machines, driverless cars and digital platforms will become more important as innovation continues apace.</p> <p>The economic consequences of efforts to lower carbon emissions and immigration will be heavily dependent on the nuts and bolts of the frameworks government introduces.&nbsp;<a href="https://www.telegraph.co.uk/business/2019/12/20/andrew-bailey-bank-of-england-governor-profile-grizzly-bear/" target="_blank">Britain’s new Bank of England Governor</a>, Andrew Bailey, will presumably play a&nbsp;key role in preparing the financial sector for Brexit and any regulatory deviations Britain makes after leaving the EU too.</p> <p>Of course, we can never discount the risk of a&nbsp;fresh recession and so the revival of the macro debates. But it’s the quality of microeconomic policy in all these areas that will determine Britain’s long‐​term economic success.</p> <p>With the public finances now healthier and Brexit delivered, Boris Johnson and his big majority in Parliament have a&nbsp;real opportunity in the early 2020s to tackle the smaller, micro‐​level roadblocks to broad‐​based macroeconomic success.</p> </div> Thu, 02 Jan 2020 18:25:01 -0500 Ryan Bourne https://www.cato.org/publications/commentary/after-decade-macroeconomics-its-small-things-need-fixing How Economic Liberals Can Win the Tory Battle on Economics https://www.cato.org/publications/commentary/how-economic-liberals-can-win-tory-battle-economics Ryan Bourne <div class="lead text-default"> <p>Twelve months is a&nbsp;long time in politics. This time a&nbsp;year ago, journalist Anatole Kaletsky asked: “Is cancelling Brexit now inevitable?” Theresa May had junked a&nbsp;meaningful vote on her backstop‐​laden withdrawal agreement, certain of defeat, but survived a&nbsp;Tory leadership challenge.</p> </div> , <div class="text-default"> <p>Labour was neck‐​and‐​neck with the Conservatives in the polls. Remainers in Parliament saw a&nbsp;path to delaying Brexit for long enough to facilitate a&nbsp;kangaroo‐​court second referendum, preventing the supposed Brexiteer agenda of Britain becoming Singapore‐​on‐​Thames.</p> <p>Now, Brexit by Jan 31&nbsp;looks inevitable. Boris Johnson — a&nbsp;pro‐​Brexit prime minister — is entrenched with a&nbsp;stonking parliamentary majority of&nbsp;80. While the Conservatives are united on Europe, Labour tears itself apart over whether Brexit caused its devastating election defeat.</p> <p>Far from Thatcherism 2.0, Conservative success in working‐​class towns has seen the party embrace higher public service spending, regional regeneration&nbsp;and public infrastructure investment as a&nbsp;platform for government. Singapore‐​on‐​Thames has given way to Taiwan‐​on‐​Trent, in rhetoric if not fully‐​fledged policy.</p> <p>To say the past 12 months have been a&nbsp;whirlwind would be severe understatement. But those interested in a&nbsp;healthy, dynamic, market economy&nbsp;risk letting the relief of avoiding a&nbsp;Christmas socialist revolution mask a&nbsp;warts‐​and‐​all assessment of our current plight.</p> <p>British politics appears locked now in an equilibrium pitching variants of socialism against a&nbsp;new, as yet policy‐​undefined, blue‐​collar Toryism. Electoral dominance for the latter was not and is not inevitable. Only an unusually transformative political figure in Boris Johnson, intent on delivering Brexit, could have increased the Conservative polling numbers by the 20 percentage points seen in recent months.</p> <p>Classical liberal economics — the premise that a&nbsp;free economy, relatively unhindered by government action, tends to deliver high growth and a&nbsp;fairly efficient distribution of resources — is being squeezed out of political life. As politics realigns along cultural divisions, free‐​market capitalists find themselves politically homeless.</p> <p>As Stephen Davies of the Institute of Economic Affairs has outlined, “place” proxies well for their dilemma. Major global cities tend to be cosmopolitan in outlook. But the dominant political manifestations of this outlook are either left‐​wing (globalist, woke left politics and radical green economics) or liberal (in the Scandinavian social democratic sense of taming the free market’s excesses and state‐​delivered economic security).</p> <p>Old towns and rural regions, particularly those “left behind”, find themselves on the other side of the cultural divide — rooted to local communities. But their dominant political manifestations come in desire for active government regeneration and industrial planning, or, even in its most pro‐​market variety, a&nbsp;form of “capitalism in one country”. Those who support free and open markets both at home and abroad might have found aligning with Boris over Corbyn a&nbsp;relatively easy decision, but they worry about the direction the Tories could lean into.</p> <p>On election night, former David Cameron adviser Craig Oliver distilled the shift nicely. Cameron had tried to unite the Tory shires with metropolitan liberals. Now, Boris’s coalition combines the shires with working‐​class towns. A&nbsp;shift from being electorally united on economics and divided on culture to united on culture but divided on economics means the Conservatives’ commitment to existing economic orthodoxies (for good or ill) is no longer assured.</p> <p>A thin manifesto leaves much to play for, hence why groups are limbering to fight for the party’s economic soul. Lest the party fall pray to age‐​old errors — that buying local makes us more prosperous, or subsidising failure generates success, or that industrial planning works — classical liberals in the Tory tribe urgently need to adjust their energies to explain how free‐​market ideas can be pro‐​working class, and how it is central government that often impairs economic opportunity for the regions.</p> <p>They have some policy building blocks already in place. With different electoral economic tensions, the Tory party platform is unsurprisingly a&nbsp;ragtag of economic ideas. But some are pro‐​market. Boris is instinctively anti‐​nanny state, for example. His team has made positive noises towards pro‐​investment tax reform to raise productivity, land‐​use planning reform to improve worker mobility, an expansion of free trade to reduce prices, and freeports to offer a&nbsp;reasonably market‐​friendly way to encourage development in coastal areas.</p> <p>But to prevent other bad interventionist ideas taking hold, pro‐​market types need emphasise a&nbsp;key truth: the higher public service spending Boris desires requires a&nbsp;growing economy. And that can only come sustainably from embracing dynamism and economic change, not insulating industries or regions from it through tariffs, state aid&nbsp;or even preferential taxation.</p> <p>Economic liberty breeds security — at least in the long‐​term — because it facilitates adjustment to new realities. But in the short‐​term, adjustment is painful. What liberal Conservatives need concentrate on is devising policies that work with market signals, using them as a&nbsp;guide for the skills, infrastructure, housing and research policies needed to allow more people to enjoy economic success.</p> <p>That requires economic liberals having a&nbsp;compelling story about how government deters inclusive growth for people in our left‐​behind towns and regions. First, policy constrains the growth of many flourishing cities through bad housing and land use policies, making it more difficult for people in poorer cities and towns to move to new opportunities.</p> <p>It then imposes one‐​size‐​fits‐​all solutions on the country — national minimum wages, national public sector pay bargaining&nbsp;and regional transfers — which, though alleviating hardship in poorer areas, make it more difficult to attract and build new private sector businesses using their competitive cost advantages.</p> <p>Having done that, economic policy power is then centralised further in Westminster, stripping communities of meaningful fiscal tools to encourage private sector development, or incentivise clearing of space for new activity.</p> <p>If free‐​marketeers fail to convince Boris that this should be his focus, and that a&nbsp;pro‐​working class agenda can be centred on growth, devolving power&nbsp;and central government humility, then plenty stand ready to offer up the old, dirigiste ideas of subsidies, protection and throwing money at regeneration. And if a&nbsp;year in politics can be transformative, then five years of such a&nbsp;Labour‐​light agenda could deliver a&nbsp;lot of disappointment.&nbsp;</p> </div> Thu, 26 Dec 2019 18:22:01 -0500 Ryan Bourne https://www.cato.org/publications/commentary/how-economic-liberals-can-win-tory-battle-economics Boris Doesn’t Need an Ideology – Just Remove the Barriers to Growth https://www.cato.org/publications/commentary/boris-doesnt-need-ideology-just-remove-barriers-growth Ryan Bourne <div class="lead text-default"> <p>It’s difficult to pigeonhole Boris Johnson’s economic worldview. He&nbsp;<a href="https://www.telegraph.co.uk/politics/2019/12/13/earthquake-have-created-boris-johnsons-victory-speech-tory-headquarters/" target="_blank">calls his Cabinet a&nbsp;One Nation government</a>, given its ambition for&nbsp;higher public service spending, regional infrastructure investment and minimum wage increases. His musings on regulation, free trade and the nanny state often sound liberal, if not libertarian.</p> </div> , <div class="text-default"> <p>To confuse matters more, his proposed state aid laws suggest he’s partial to some old‐​school national collectivist thinking too. Anyone hoping for a&nbsp;principles‐​based coherent economic agenda during this Parliament will be disappointed.</p> <p>One concept the prime minister does appear to intuitively understand though is the importance of economic growth. His desire to “unleash the potential” of the country might not be based on theoretical models, like Gordon Brown’s penchant for “post‐​neoclassical endogenous growth theory”.</p> <p>But in acknowledging wealth must be produced before being spent, Johnson understands that growth is the essential precondition for the rising wages, regional levelling‐​up and better public services promised in today’s Queen’s Speech.</p> <p>A legacy of the Blair and Brown era is that we spend inordinate time in politics debating distributional issues, analysing “winners and losers”. Rich are pitched against poor, young against old, North against South. Deficit reduction from 2010 necessitated tough spending choices, adding to this zero‐​sum economic framing in respect of government departments or local government – the idea that one person’s gain must be another’s loss. </p> <p>Yet faster economic growth eases these constraints. It allows “having your cake and eating it,” as Boris might say. An economy growing more quickly means stronger public finances, faster wage growth, and people far less occupied with comparing their spoils. Positive sum, not zero sum.&nbsp;</p> <p>The central economic problem the UK has faced over the past decade is simply too little growth. Whether it was the cause or simply reflective of a&nbsp;past unsustainable trend, the crisis’s aftermath heralded&nbsp;<a href="https://www.telegraph.co.uk/business/2018/05/07/uk-productivity-grows-strongly-still-lags-behind-europe/" target="_blank">a&nbsp;period of dire productivity growth performance</a>.</p> <p>GDP per capita is over 20pc below where it would have been had pre‐​crisis productivity trends continued, with annual growth falling from over 2pc to just over 0.4pc.&nbsp;</p> <p>Forecasters initially predicted a&nbsp;productivity bounceback was just around the corner. But tomorrow never came.&nbsp;Conservative chancellors each year therefore stood at the despatch box to announce weak growth forecasts, before proceeding to do little about it.&nbsp;Then came Brexit.</p> <p>Uncertainty about trading relations and a&nbsp;<a href="https://www.telegraph.co.uk/news/2019/12/11/thirteen-ways-jeremy-corbyn-would-ruin-british-economy/" target="_blank">Corbyn premiership has cast a&nbsp;long shadow over investment</a>&nbsp;and location decisions since 2016. Under these and demographic headwinds, we’ve become so depressingly accustomed to weak growth that its absence barely features in public debate. Which is why Boris’s rhetoric is so encouraging.</p> <p>The positive stock market reaction to his victory suggests seeing off Corbyn and the declining probability of a “no‐​deal” Brexit will deliver somewhat of an investment fillip, as Boris claimed. We might also see some near‐​term macroeconomic stimulus, although any investment projects will have muted economic effects given lead times and the likelihood the Bank of England would offset any demand pressure that raised inflation.&nbsp;</p> <p>Given the size of his majority though, the prime minister’s economic ambitions should extend far beyond delivering a&nbsp;short‐​term sugar rush. With unemployment low and migration likely to be curtailed, the scope for GDP boosts from simply adding workers is diminishing anyway. Robust productivity growth is therefore crucial to deliver the tax revenues and wage increases needed to make Boris’s first term a&nbsp;clear economic success.</p> <p>His team know this, and recognise they have a&nbsp;narrow time frame of electoral goodwill to do something about the contentious land‐​use planning regime, for example. Our byzantine mess of a&nbsp;system constrains economically successful areas from growing, especially through green belts.</p> <p>But it also reduces the prospect of certain firms achieving efficient premises scale in industries such as retail, social care and childcare, due to limited space and/​or high rents.</p> <p>There’s obvious pro‐​investment policy the government could opt for, including letting corporations write off spending on buildings and capital equipment immediately against tax.</p> <p>The litmus test of whether Boris is serious about growth will come from how he intends to repay working‐​class towns he won. The political imperative to be seen to “help” may lead to resources thrown at high street, town and hospital regeneration, as tried and failed under New Labour.</p> <p>Hare‐​brained ideas for government schemes to help locals acquire shop space or incentivise them to stay where they were born are already proliferating. This sort of stuff,&nbsp;<a href="https://www.telegraph.co.uk/technology/2019/12/18/googles-advertising-stranglehold-threatened-big-tech-crackdown/" target="_blank">plus attacks on big tech</a>, is just a&nbsp;form of winner to loser distributional politics Boris should avoid.</p> <p>If you tax success to subsidise failure, you’ll end up with more failure.&nbsp;It doesn’t mean nothing can be done. But new interventions or infrastructure should work with market signals, not against them. Removing bottlenecks to growth or joining areas to thriving markets by better transport infrastructure is what works.</p> <p>Given our population density, economic thinkers Stian Westlake and Sam Bowman think the best way to help poor towns’ residents is to remove government barriers to moving while improving connectivity between successful city hubs and close‐​by towns.</p> <p>While Boris does not have an economic ideology then, the sheer size of his majority has given him an opportunity to crack thorny structural economic challenges.</p> <p>There’s a&nbsp;potential future where he is ruthless in eliminating barriers to growth, makes infrastructure decisions to obtain the biggest bang for the buck, broadens our free trading horizons and improves tax incentives to invest.</p> <p>In that world, GDP is somewhat higher, public service pressures are that bit more manageable and economic opportunity has broadened into the regions of his new voters. Now, that’s a&nbsp;potential worth unleashing.</p> </div> Thu, 19 Dec 2019 18:18:04 -0500 Ryan Bourne https://www.cato.org/publications/commentary/boris-doesnt-need-ideology-just-remove-barriers-growth Politicians Are Hopeless at Delivering Big Ideas – We Need Small Solutions Instead https://www.cato.org/publications/commentary/politicians-are-hopeless-delivering-big-ideas-we-need-small-solutions Ryan Bourne <div class="lead text-default"> <p>An election’s end provides merciful relief from politicians’ claims that they will “transform” our lives and our economy.&nbsp;<a href="https://www.telegraph.co.uk/politics/2019/12/12/manifesto-2019-general-election-labour-conservative-party-lib-dem-summary/" target="_blank">Whether it be pledges to</a>&nbsp;turn around failing regions, deliver rapid decarbonisation, or plant hundreds of millions of trees per year, this particular campaign was littered with promises that we know, in our hearts, would not or could not be delivered.</p> </div> , <div class="text-default"> <p>Commentators worry about the breakdown of trust in politics and politicians. Nothing does more to accentuate it than unmeetable political commitments that subsequently have to junked or downgraded when reality hits. Yet many pundits still use “radical” or “bold” as synonyms for “good” when describing election manifestos.</p> <p>The Conservatives’ offering this time around, for example,&nbsp;<a href="https://www.telegraph.co.uk/business/2019/11/28/eight-financial-fantasies-general-election-manifestos/" target="_blank">was criticised for its supposed absence of ambition</a>. The “lack of significant policy action is remarkable,” concluded the Institute for Fiscal Studies’ Paul Johnson. Surely, big challenges — weak productivity growth, an aging population, climate change — require radical rethinks about policy?</p> <p>In the past, I&nbsp;might have echoed such reasoning. Yet recent history surely shows the opposite: British politics suffers from a&nbsp;deficit of interest in modest, marginal improvements in government policy, not “big ideas”. Major overhauls of public services or welfare have proven either a&nbsp;waste of time or a&nbsp;disaster, while many headline‐​catching promises continually fall by the wayside.</p> <p>Think about major policy change over the past decade. Universal Credit, though well intentioned, has seen vast resource and political capital invested in attempting to roll six working‐​age benefits into a&nbsp;single credit.</p> <p>Near constant problems of delivery have beset it, with significant numbers suffering its teething problems. And all for a&nbsp;relatively small economic improvement in some recipients’ work incentives.</p> <p>Andrew Lansley’s major reorganisation of the NHS saw a&nbsp;bitter passage through the House of Commons and cost billions to implement. Yet in the dying days of the last Parliament, a&nbsp;reversal of some of its key features was already underway. The director of the Nuffield Trust, Nigel Edwards, says that in future we will regard the Lansley reforms as “one of the most major public policy failures” of all time.</p> <p>Then there’s the&nbsp;<a href="https://www.telegraph.co.uk/business/2019/11/16/hs2-vanity-project-already-obsolete/" target="_blank">ongoing farce of our main grand transport project today — HS2</a>. Its projected costs have now spiralled from £62bn to between £81bn and £88bn, all to deliver a&nbsp;much smaller projected “bang for the buck” than other minor transport projects elsewhere.</p> <p>Rather than these bungled attempts to completely overhaul our welfare and health systems, imagine what might have been achieved with modest pro‐​work reform of tax credits or small‐​scale NHS experiments with automation. Instead of spending gargantuan sums for a&nbsp;prestige project to get marginally faster travel times between the midlands and London, think how many localised transport bottlenecks could have been relieved, easing commute times for thousand of families.</p> <p>True, much smaller projects would not have generated the sexy headlines, but they would have almost certainly delivered better outcomes.</p> <p>Now consider instead some policy areas that have gone well in recent years.&nbsp;<a href="https://www.telegraph.co.uk/business/2019/11/12/jobs-market-wobbles-number-eu-nationals-work-plunges/" target="_blank">Unemployment has fallen to extremely low levels</a>, after a&nbsp;big post‐​recession spike. Most agree this reflects in part the more flexible labour market delivered by Thatcher’s liberalising agenda. But it also comes from welfare reforms and active labour market policies honed and refined under both political parties over decades.</p> <p>In other words, gradual, incremental change has produced a&nbsp;jobs market that, while vulnerable to sharp shocks in recessions, is structurally strong.</p> <p>Though it benefited both parties to exaggerate the differences, the seemingly successful Conservative school reforms under Michael Gove really built on the academies of New Labour too. Yes, other very targeted changes in how children are taught in certain areas have been rolled out — not least a&nbsp;mandatory focus on phonics in teaching reading. But these were well‐​evidenced, and not just delivered on a&nbsp;whim.</p> <p>In an election campaign, of course, it’s too much to ask for politicians to really get into the weeds discussing small ideas. Big promises help them show they care about a&nbsp;particular issue and are determined to change it. But the arms race we’ve seen on planting trees, decarbonisation targets, or government investment levels are exactly the sorts of promises that ultimately lead voters to lose faith with politicians.</p> <p>Trust requires delivering what you say you will. It’s why Boris Johnson is right that Parliament’s inability to deliver Brexit, more than anything else, has profoundly worsened the disconnect between electors and politicians.</p> <p>Grand projects or major structural policy overhauls invariably disappoint. Not only do they bring large, unforeseen downsides that create political anger; they are high cost to reverse if they prove a&nbsp;dud. With Brexit already enough of a&nbsp;major disruption for the coming years, politicians should heed the lesson.</p> <p>It would be much better to have some relatively stability in other areas, with gradual reforms that can try to improve things where current policies clearly fail.</p> <p>No doubt, Britain does face major economic challenges. But not every big challenge requires a&nbsp;radical new solution. Just a&nbsp;generation ago, we understood that having a&nbsp;robust and growing economy, for example, required getting the conditions right in individual sectors. It meant making the necessary changes to taxes, regulations, or entry barriers to foster a&nbsp;competitive environment conducive to innovation.</p> <p>Nowadays we hear less interest about how changes to incentives or structural conditions could deliver better outcomes in specific markets, instead obsessing over the supposed macroeconomic benefits of more spending.</p> <p>History suggests that in delivery or outcomes, a&nbsp;top‐​down agenda will disappoint. If politicians are really interested in delivering those outcomes, they should focus less on the grandiose projects, and more on small scale reforms that could make markets and public services work better.&nbsp;</p> </div> Fri, 13 Dec 2019 18:14:07 -0500 Ryan Bourne https://www.cato.org/publications/commentary/politicians-are-hopeless-delivering-big-ideas-we-need-small-solutions Ryan Bourne discusses the UK election and what comes next on CGTN’s The World Today https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-uk-election-what-comes-next-cgtns-world-today Fri, 13 Dec 2019 11:27:53 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-uk-election-what-comes-next-cgtns-world-today The Bernie Plan to Regulate Labor Markets https://www.cato.org/multimedia/cato-daily-podcast/bernie-plan-regulate-labor-markets Ryan Bourne, Caleb O. Brown <p>Bernie Sanders has a&nbsp;series of labor market interventions he’d like to see, including ending at‐​will employment. Ryan Bourne says it’s a&nbsp;terrible idea.</p> Thu, 12 Dec 2019 16:45:24 -0500 Ryan Bourne, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/bernie-plan-regulate-labor-markets Johnson’s Policy Prospectus Is Tainted by Interventionism, Statism, Collectivism – and Could Be a Lot Worse. https://www.cato.org/publications/commentary/johnsons-policy-prospectus-tainted-interventionism-statism-collectivism Ryan Bourne <div class="lead text-default"> <p>At first glance, prospects for economic liberalism in the UK appear gloomy, whatever tomorrow’s result.</p> </div> , <div class="text-default"> <p>Corbyn’s socialism speaks for itself. But the Conservatives’ slide away from liberal economics continues. Boris Johnson’s last Cabinet, on paper, arguably had the strongest “dry” economic credentials of any since the 19th century. Yet recent announcements for new protectionist state aid laws, “buy British” plans for public bodies, cancellation of corporation tax cuts, and the embrace of government spending as a&nbsp;proxy for public service quality, appear to provide evidence of an ongoing statist shift in the party’s mindset.</p> <p>Many economic liberals feel despair towards both the Conservatives and Labour as a&nbsp;result.&nbsp;<em>The Economist</em>&nbsp;election leader epitomised that reflex. Yes, it acknowledged, Corbyn’s socialism was beyond the pale. But so was Johnson, who’d “accelerated the shift from an economically and socially liberal party into an economically interventionist and culturally conservative one.” By erecting new trade barriers and ending free movement, Brexit is seen by many liberal commentators as anti‐​liberal by definition. A&nbsp;new more working‐​class Tory‐​voting coalition will inevitably change the Conservatives’ electoral offer away from free markets too, so conventional wisdom goes.</p> <p>Should economic classical liberals despair? We certainly should be worried by today’s political currents. But if the polls are right, I&nbsp;think we should also be cautiously thankful for the stay of execution that Johnson’s leadership and manifesto have given us, using that reprieve for some self‐​reflection of our own strategy.</p> <p>Despite claims to the contrary, leaving the EU is not “anti‐​liberal by definition.” Ask Remainers. One of their well‐​worn worries is that the UK outside the EU might become a&nbsp;Singapore‐​on‐​Thames — a&nbsp;low tax economy with light regulations and privatised healthcare. Brexit broadens the range of political possibilities, for good or ill, to include&nbsp;<em>Liberaltopia</em>. Whether a&nbsp;more economically liberal Britain arises depends on how we use those repatriated powers over decades. Brexit is for life, not just for Christmas.</p> <p>Things could be much worse than Johnson in the near term too. Just six years ago,&nbsp;<em>The Economist</em>&nbsp;heralded him as a&nbsp;great social and economic liberal. He’s been a&nbsp;long‐​time champion of immigration, anti‐​the nanny state, a&nbsp;trailblazer in the party for social liberties, and instinctively a&nbsp;low‐​tax Tory. Of course, he’s always had a&nbsp;penchant for big infrastructure projects and high minimum wages — he’s no libertarian. But it’s uncontroversial to believe he’s more liberal than his party, and more liberal than current public attitudes.</p> <p>True, under his leadership, the party has pledged significant public spending increases. But these have been, by and large, highly targeted on frontline public services. To conflate the Conservative drift for higher spending on core government functions after years of restraint with a&nbsp;Labour party intent on delivering the biggest state in our history, confiscating company shares, and renationalising swathes of the economy, is false equivalence. Defeating Corbynism would be economic liberalism’s biggest defensive victory since 1979.</p> <p>Recent Conservatives announcements on state aid and populist lines on migration are more disturbing. But given the broader climate of opinion, we free‐​marketeers might be grateful for small mercies. Johnson is not imbued with a&nbsp;desire to max out the “the good government can do” a&nbsp;la May. His liberal instincts (and those of many around him) are surely why the May tidal wave of new bans has receded and why the manifesto didn’t contain any misguided agenda to “reform capitalism.” Indeed, what we appear to be seeing from Johnson is not a&nbsp;government‐​loving “Borisism”, but a&nbsp;focus‐​group driven agenda — trying to win an election by addressing voter’s stated concerns. And doing so in a&nbsp;zeitgeist inhospitable to free market ideas.</p> <p>Electoral politics doesn’t occur in a&nbsp;vacuum. Politics is the final act. We must therefore avoid concluding from timelines, instead judging Johnson against real counterfactuals. We are in a&nbsp;period where major reform of capitalism is a&nbsp;drumbeat through the pages of the&nbsp;<em>Financial Times</em>. Where Davos men suggest businesses move away from focus on profits. Where rapid decarbonisation, devoid of costs considerations, is taken seriously. Where business groups are unwilling or unable to defend the market economy, even with socialist barbarians at the gates.</p> <p>Such an environment is the product of years of ceding bad arguments to capitalism’s critics, while failing to revise policies that centralise power and make people’s lives worse. Given prevailing conventional wisdom, the real surprise was that the manifesto was not more anti‐​market. When you see Donald Trump’s protectionist agenda, Corbyn’s manifesto, and the demands of new Tory think‐​tanks, Johnson is arguably offering the least possible change consistent with the feelings of the age.</p> <p>Let’s put it another way: is there any other current Conservative MP who is more instinctively liberal than Boris who could have transformed the party’s electoral prospects over the past three months to be close to winning this election? Whatever tomorrow’s outcome, the answer is a&nbsp;bracing one for those who believe in economic freedom.</p> <p>The hard truth we economic liberals must now face is that Britain is once again dominated by collectivist thinking. The Conservatives have been on a&nbsp;very, very slow drift away from market economics over a&nbsp;25‐​year period. Thatcherism proved an interlude in terms of advancement of market‐​based policies. Subsequent years saw those gains defended, but in recent times a “drip, drip” of anti‐​market interventions and proposals has now become a&nbsp;flood of demands for new misguided interventions. Yes, Johnson has let some through. But there could have been many more with a&nbsp;different leader.</p> <p>Whether or not a&nbsp;Conservative majority is secured tomorrow, the UK’s economic liberals need desperately to rethink strategy. First: time, energy, and resources need to be put into the institutions that seek to change the broader climate of opinion, rather than affect near‐​term politics. A&nbsp;naive view that many instinctively held — that with just the right Conservative leader and personnel, economic liberalism would flourish — is clearly misguided. A&nbsp;free‐​market Conservative party will only re‐​appear when there is electoral demand for one. The past four years are an early warning sign.</p> <p>Second, we should be relieved by Boris’s priorities and his manifesto focusing on principles, which leaves opportunities for influence. Johnson has made clear his desire to raise productivity levels and economic growth. He wants to address living costs for poorer families. And he wants to raise investment — both public and private. Economically liberal policies have much to offer here. So after the election, the purer policy‐​oriented think‐​tanks should grasp the opportunity to devise sound economic policy ideas that fulfil such objectives, and work hard to show why other anti‐​market drifts are misguided.</p> <p>Yuval Levin defines conservatism as “gratefulness.” We free‐​marketeers obviously dislike current anti‐​liberal machinations on all sides. But tomorrow we can hopefully be grateful for what we still have.</p> </div> Wed, 11 Dec 2019 18:06:09 -0500 Ryan Bourne https://www.cato.org/publications/commentary/johnsons-policy-prospectus-tainted-interventionism-statism-collectivism Bernie Sanders Wants to End At‐​Will Employment, and That’s a Truly Bad Idea That Would Increase Unemployment https://www.cato.org/publications/commentary/bernie-sanders-wants-end-will-employment-thats-truly-bad-idea-would Ryan Bourne <div class="lead text-default"> <p>Friday’s jobs report once again highlighted the strength of the US labor market. The unemployment rate hit a&nbsp;nearly 50‐​year low, with the total number of jobs added crushing expectations.</p> </div> , <div class="text-default"> <p>Yet despite another strong indication that the US jobs market is an economic success story, Democratic presidential candidates continue to demand risky and radical plans to overhaul the way Americans work.</p> <p>Chief among them is Sen. Bernie Sanders. The Vermont senator wants to introduce a&nbsp;slew of changes ranging from a ” jobs guarantee” to a&nbsp;hike of the federal minimum wage to $15 an hour.</p> <p>But perhaps Sanders’ most eyebrow‐​raising labor market plan is the call to outlaw the American norm of “at‐​will employment.”</p> <p>Despite US labor‐​market flexibility delivering much lower unemployment than more heavily regulated countries, Sanders thinks it’s time to move toward more onerous employment laws. Getting rid of at‐​will employment would not only make it much more difficult for inexperienced, young, and risky hires to find work, but it would also reduce wages and living standards.</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Democratic presidential candidates continue to demand risky and radical plans to overhaul the way Americans work.</p> </div> </div> </aside> , <div class="text-default"> <p><strong>Sanders’ goal is laudable but the idea is misguided</strong></p> <p>Doing away with at‐​will employment means eliminating the presumption that employers should be able to fire workers at any time or for any reason, just as workers are free to walk away from a&nbsp;job if they choose.</p> <p>Federal protections against termination already exist for discrimination against protected classes. And many states have additional safeguards for workers, such as laws that prevent companies from firing workers if it would breach implied promises to the employee or is a&nbsp;way to punish the employee for complying with public policies.</p> <p>Yet Sanders’ plan goes much further. He wants a&nbsp;national “just cause” law, where the government would dictate what constitutes a&nbsp;fair layoff for personal or economic reasons, with the threat of court action and fines for employers found guilty of “unjust” dismissals.</p> <p>His stated desire is laudable: improving job security for workers. But security isn’t free.</p> <p>Making it costlier or riskier to fire people also makes it riskier to hire them. Abolishing at‐​will employment entirely could make firms less likely to take on workers who are young and inexperienced, particularly when their performance is difficult to observe. The risk of such a&nbsp;law, then, is higher unemployment and weaker labor productivity.</p> <p><strong>The risk of ending at‐​will employment</strong></p> <p>Given that at‐​will employment is largely the default through the US and Sanders hasn’t outlined the precise reasons he’ll allow for layoffs, assessing the magnitude of his proposed just‐​cause law is impossible. But existing evidence from states with even more modest regulations than Sanders’ proposal suggests that restrictions on a&nbsp;company’s ability to lay off employees worsens employment prospects.</p> <p>Many states have an “implied‐​contract exception” — usually meaning firms can’t fire an employee if the company itself failed to deliver on something as set out in a&nbsp;company handbook. A&nbsp;<a href="https://www.nber.org/papers/w9425" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.nber.org/papers/w9425&amp;source=gmail&amp;ust=1575668485086000&amp;usg=AFQjCNHxp66uF8yxQ2hdZm2LNWigIfCurQ">paper analyzing the economic effect</a>&nbsp;of this weaker exception found the regulation lowered a&nbsp;state’s employment rate by anywhere between 0.8 and 1.6 percentage points overall, hurting “female, younger, and less‐​skilled workers,” particularly in the short term.</p> <p><a href="https://www.rand.org/pubs/reports/R3989.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.rand.org/pubs/reports/R3989.html&amp;source=gmail&amp;ust=1575668485086000&amp;usg=AFQjCNGFAeZ77hPHXFRJXkYSCoJmXHSv7g">A Rand Corp. study</a>&nbsp;in the early 1990s found that states adopting the broadest “good faith” or public‐​policy compliance exceptions (again, weaker than what it appears Sanders envisages) saw employment levels fall by between 2% and 5%. Large businesses and those in retail, finance, and real estate were hardest hit.</p> <p>The economist David Autor&nbsp;<a href="https://www.nber.org/papers/w12860" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.nber.org/papers/w12860&amp;source=gmail&amp;ust=1575668485086000&amp;usg=AFQjCNHTLEpao4lgzPCH69QhSJQXhac10w">has likewise concluded</a>&nbsp;that “wrongful‐​discharge protections reduce employment flows and firm entry rates.” Put another way, these laws supposedly protecting workers end up reducing the number of people who get hired and fired and the number of companies that start up.</p> <p><strong>A less flexible labor market could cause long‐​term problems</strong></p> <p>Firms could compensate for the risk burden just‐​cause laws impose by reducing the wages offered to risky hires, negating the unemployment effect. But these results suggest wages aren’t fully flexible.</p> <p>What’s more, Senator Sanders wants a $15 federal minimum wage and the rollout of collective bargaining nationwide, making US wages less flexible still. The combined effect of his plan to reshape the labor market would therefore be doubly damaging for the job prospects of low‐​skilled, inexperienced workers.</p> <p><a href="https://tcdata360.worldbank.org/indicators/lbr.mkt.efcy?country=BRA&amp;indicator=737&amp;viz=line_chart&amp;years=2007,2017" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://tcdata360.worldbank.org/indicators/lbr.mkt.efcy?country%3DBRA%26indicator%3D737%26viz%3Dline_chart%26years%3D2007,2017&amp;source=gmail&amp;ust=1575668485086000&amp;usg=AFQjCNG_25HNUk4OJusjzFL1nQaB85e8dw">Looking across countries</a>, the impact of less labor market flexibility is clear.</p> <p>In part because of the flexibility of the US labor market, the unemployment rate has now fallen to an incredibly low 3.5%. By contrast, Sweden, Finland, and Denmark — which have variants of the just‐​cause laws Bernie Sanders proposes — have higher unemployment rates of 6.8%, 7.3%, and 4.8% respectively. Other European countries with much more broadly inflexible labor markets, such as France, Spain, and Italy, have much higher levels of unemployment still.</p> <p>The experience of the past decade suggests that although flexible labor markets can be volatile in the short term — US unemployment jumped above European levels in 2009 — they near consistently deliver lower structural unemployment over time.</p> <p>Sanders’ agenda doesn’t just risk unemployment, though. A&nbsp;just‐​cause law would likely weaken productivity and hence wages too. Silicon Valley’s success has been credited with an ability to hire and fire workers quickly according to a&nbsp;company’s needs. Making it difficult to hire and fire leads to workers in jobs to which they are not best suited, or else convinces employers to explore needlessly costly mechanization, reducing their efficiency.</p> <p>Our labor‐​market outcomes are not perfect. Many workers want more hours, more security, or higher pay. But Sanders’ idea to abolish at‐​will employment goes too far and will hurt the job prospects of inexperienced workers significantly.</p> </div> Sun, 08 Dec 2019 11:24:07 -0500 Ryan Bourne https://www.cato.org/publications/commentary/bernie-sanders-wants-end-will-employment-thats-truly-bad-idea-would Wake Up, Business! You Could Be a Week Away from Socialist Disaster https://www.cato.org/publications/commentary/wake-business-you-could-be-week-away-socialist-disaster Ryan Bourne <div class="lead text-default"> <p>Wading into election campaigns is fraught with danger for business people. “We are concerned by the direction of things, but won’t raise our head just to get it blown off,” an executive of a&nbsp;popular multinational explained to me this week.</p> </div> , <div class="text-default"> <p>When even Bill Gates, a&nbsp;massive philanthropist, can be media‐​massacred for critiquing a&nbsp;US presidential candidate’s wealth tax plans, no business sees itself safe from the blowback of opposing populist Left‐​wing policies. Customer bases comprising all political persuasions make any electoral statement from individual companies highly risky.</p> <p>No such excuses, however, can be made for organisations purporting to represent business interests, who have actively chosen to remain neutered. These groups have the licence to take the heat in defending members’ long‐​term economic interests. Yet in this campaign, the Institute of Directors (IoD), the Federation of Small Businesses (FSB), and the Confederation of British Industry (CBI) have been utterly supine in the face of Jeremy Corbyn’s socialist threat.</p> <p>Here is a&nbsp;Labour Party wanting to confiscate shares in large companies, overhaul corporate governance, nationalise whole industries at prices set by politicians, impose rapid and destructive decarbonisation, reverse the Eighties’ trade union reforms and jack up all major taxes on capital.</p> <p>Business groups, though, have reacted with unjustified political evenhandedness, passing up on highlighting the destructiveness of socialism to instead hang‐​wring about smaller policy gripes from both parties.</p> <p>Consider the IoD. Last week, the organisation issued a&nbsp;robust defence of EU‐​style state aid laws. Conservative plans to change them to assist certain struggling industries and oblige public bodies to “Buy British” after Brexit were rightly savaged as a “retreat away from free and open markets … unfairly protecting and subsidising large incumbents at the expense of true competition”. Bravo! This was exactly what a&nbsp;defence of a&nbsp;competitive market economy should look like, although their head of trade’s claim that these mercantilist measures put her into “actual convulsions” seemed a&nbsp;tad over the top.</p> <p>So what was their reaction to Labour’s more stringent calls for active industrial and regional planning, nationalisation for the purpose of cutting prices, and taking de facto government ownership stakes in large companies? Presumably, it sent them into apoplexy. Well, you wouldn’t know it from their media release, which read: “Taken as a&nbsp;whole, Labour’s measures on business risk being too much stick and not enough carrot.” Such a&nbsp;line might be appropriate for a&nbsp;minor Tory budget tax threat to push firms towards subsidising creches. But it read pathetically in response to a&nbsp;manifesto proposing a&nbsp;reversal of the Thatcherite revolution and the imposition of Yugoslavian‐​style “market socialism”.</p> <p>The FSB’s behaviour has been similarly bewildering. It had nothing but caveated praise for the measures in Labour’s manifesto. “Firms welcome Labour small business pledges, but more details needed” was their press release headline. Sure, the Labour Party’s shadow chancellor might want to overthrow capitalism.</p> <p>But, no worries, he has made “cast‐​iron commitments to end the late payment crisis”. Surprisingly, the usually corporatist CBI offered the most clear attack on Corbyn’s manifesto, explaining: “Labour’s default instinct for state control will drag our economy down.” All would be well, of course, if only the party would just “work with business”.</p> <p>Look, we all know many companies dislike Brexit and want to remain closely aligned with the single market. Tory state aid plans worry them particularly then, as they signal a&nbsp;desired looser free‐​trade agreement with the EU. Plenty of people in the business community are really playing part‐​time psephologists.</p> <p>Given current polling, they consider Conservative measures they dislike as a&nbsp;more realistic threat to their interests, resting on their laurels that a&nbsp;Labour majority just won’t happen or that, anyway, a&nbsp;Corbyn‐​led government would be short‐​term and constrained by mythical “Labour moderates” or coalition partners. Such faith, though, is fantasy. Electoral history shows the propensity for voting shocks. And, if Labour wins or becomes the largest party, it will be taken as a&nbsp;mandate for their radical manifesto.</p> <p>Business is a&nbsp;mere week away from being governed by leaders who want to “democratise” the whole economy, introducing ownership institutions to facilitate its slow nationalisation. At best, Labour sees private business as its lapdog for socialist goals — granting a&nbsp;place by the fire for doing right by Labour’s agenda, or a&nbsp;smack on the nose for business models or practices “the party” doesn’t approve of.</p> <p>We’ve seen already this week how Labour would use the bully pulpit of government for the sinister targeting of individual businesses. The party’s Twitter feed denounced five major firms directly and shared a&nbsp;deeply sinister spoof video mocking Virgin owner Richard Branson.</p> <p>Business groups remained silent. Companies who fail to decarbonise are already being threatened. No doubt Corbyn and McDonnell’s anti‐​Americanism would infuse their actions too. Under Labour, businesses would have to worry about pleasing their dear leaders, not just their customers.</p> <p>Highlighting this threat is not to dismiss businesses’ frustrations today. No major party has put pro‐​business policies at the forefront of its campaign. Individual companies do worry over trade, migration and tax policies under the Conservatives. I&nbsp;can understand why high street retailers may like Labour’s measures that hit digital competitors. Certain businesses may well consider apprenticeship levy reform the be all and end all.</p> <p>But it is a&nbsp;complete false equivalence to compare such issues to proposals that represent an existential threat to a&nbsp;modern market economy as a&nbsp;whole. In prevaricating or remaining neutral between these risks, the UK’s business community is making a&nbsp;high‐​stakes, short‐​term bet, rather than taking out prudent insurance.</p> <p>At best, it’s been complacent. At worst, suicidal.</p> </div> Thu, 05 Dec 2019 12:02:58 -0500 Ryan Bourne https://www.cato.org/publications/commentary/wake-business-you-could-be-week-away-socialist-disaster The Labour Manifesto Is a Lifetime Tax Bombshell for Ordinary Families https://www.cato.org/publications/commentary/labour-manifesto-lifetime-tax-bombshell-ordinary-families Ryan Bourne <div class="lead text-default"> <p>At times, it was painful to watch. But Andrew Neil’s TV <a href="https://www.telegraph.co.uk/politics/2019/11/27/jeremy-corbyn-dodges-tv-debates-disastrous-bbc-interview/" target="_blank">interrogation of Labour leader Jeremy Corbyn</a>&nbsp;served a&nbsp;useful economic purpose: it put to bed, entirely and convincingly, the Labour lie that only the rich and business would feel the heat of the party’s planned tax hikes.</p> </div> , <div class="text-default"> <p>With characteristic precision, Neil showed how families currently benefiting from the income tax marriage allowance or receiving puny dividend income could pay hundreds of pounds more under Labour each year. Unsurprisingly, if you abolish or make allowances less generous, and raise dividend income tax rates to those of ordinary income, people outside the top 5pc of earners who use such allowances or receive dividends pay more in tax.</p> <p>This fact seems to surprise nobody except for the Labour leaders, who persist in claiming that only those earning over £80k would pay more income tax under them — in other words, those affected by their direct marginal income tax rate hikes (to 45pc over £80k and 50pc over £125k).</p> <p>In truth though, the dishonesty at the heart of Labour claims that “someone else will pay” runs far deeper than Neil had time to dig. Economists distinguish between who pays taxes legally, and where the actual burden really ends up. A&nbsp;huge literature, for example, suggests that between 30pc and 70pc of the real burden of corporation tax ultimately falls on workers in the form of lower wages.</p> <p>Labour, of course, would jack up the main rate from 19pc to 26pc. Their planned broadening of stamp duty — in effect creating a&nbsp;financial transactions tax — will, in part, be borne by pensions funds and workers. In other words, ordinary people will be made worse off by their business or transactions taxes as well, even those notionally paid by companies or the wealthy.</p> <p>Things could be far worse in reality. Clifford Chance tax lawyer Dan Neidle says there could be a £20bn revenue hole in the party’s plans; and some of their economic assumptions for the revenue obtained from other taxes look heroic. Any shortfall, of course, will ultimately need to be made up with tax hikes on ordinary families to meet their £83bn‐​plus of day‐​to‐​day spending pledges. Given the high likelihood of subsidies for the newly&nbsp;<a href="https://www.telegraph.co.uk/investing/shares/labours-plan-nationalise-bt-will-leave-shareholders-pocket/" target="_blank">nationalised rail, energy, postal and water industries</a>, the tax burden on workers could, for many reasons, be much higher than the manifesto suggests.</p> <p>Even all this, though, is static analysis. What nobody has really pointed out yet are the likely impacts of Labour’s manifesto on families’ tax burdens over longer periods.</p> <p>First off, even Labour’s hikes in marginal income tax rates for “the rich” will affect many more people than they suggest. The Institute for Fiscal Studies has been told that Labour would keep <a href="https://www.telegraph.co.uk/money/consumer-affairs/does-earning-80000-year-make-rich/" target="_blank">the £80k starting threshold</a>&nbsp;for their 45pc rate fixed in cash terms (in other words, it will not be indexed to prices). As incomes rise over time, many more individuals will be dragged into this band, with the number likely rising by 24pc in the next parliament alone.</p> <p>Of course, “the rich” aren’t a&nbsp;fixed block of people either. Many people not earning over £80k now will do at some stage in their life. On quite conservative assumptions, anywhere above 15pc or 20pc of people might pass that threshold at some stage in their careers. Labour’s plans then will raise lots of families’ lifetime income tax rates, even if they appear unaffected today.</p> <p>More importantly, a&nbsp;lot of Labour’s spending pledges are what we might call “demographically sensitive”. That is, they will likely become more expensive as the population ages. Despite the fiscal headwinds the country is sailing into, with health, long‐​term care, state pension, and pensioner benefit spending already set to explode from 14pc of GDP to 23pc of GDP over five decades, Labour’s priorities would make this long‐​term ageing time bomb much worse.</p> <p>It’s not just the promise to freeze the state pension age at 66 — though this alone will add £24bn per year to direct public spending by the 2050s, increasing the jump in spending expected by over 40pc. Nor is it only the new commitment to provide free personal social care to those over 65, while capping their lifetime “hotel” costs at £100,000 — promises that will spiral in cost, particularly if the age eligibility threshold is left unchanged.</p> <p>No, Labour’s own manifesto details how the party would also increase the NHS spending baseline, expand free prescriptions, introduce free hospital parking, expand pension credit eligibility, increase state pension generosity for Britons overseas and put taxpayers (rather than the BBC) on the hook for “free” TV licences for over‐​75s. All will likely grow in expense with an ageing population.</p> <p>Inevitably, that means further hikes in taxes on ordinary working age people. Labour’s own fiscal framework commits to not financing day‐​to‐​day government spending via borrowing over time. So as these commitments raise ordinary spending, taxes would have to be jacked up to cover age‐​related health, pension and welfare policies. Such additional revenue, on top of existing plans, could not be feasibly raised from rich taxpayers alone. Ordinary people would face significant hikes in the taxes they pay.</p> <p>Again, this is just pure public finance accounting. It doesn’t require any judgment about whether Labour’s broader economic policies would hurt prosperity and so the tax base, though that is clearly a&nbsp;risk too. Some might say tax rises on this scale simply couldn’t happen.</p> <p>That they would be politically unfeasible. Yet the history of government entitlement programs shows they are extraordinarily difficult to abolish once introduced. It’s not a&nbsp;credible defence of the manifesto to say “don’t worry — the long‐​term promises are incredible” either.</p> <p>Hard truths about what will happen to your lifetime tax bill sit there, on the pages of Labour’s manifesto in plain sight. The party’s plans for income tax, the economic burdens of their business taxes and the ever‐​expanding expense of many of their spending pledges would see your family handing over more and more of your hard‐​earned income to HMRC over time. Don’t say you weren’t warned.</p> </div> Thu, 28 Nov 2019 11:58:30 -0500 Ryan Bourne https://www.cato.org/publications/commentary/labour-manifesto-lifetime-tax-bombshell-ordinary-families Five Myths about the Labour Manifesto https://www.cato.org/publications/commentary/five-myths-about-labour-manifesto Ryan Bourne <div class="lead text-default"> <p>1. Only the top five per cent of earners will be affected by Labour’s changes to income tax.</p> </div> , <div class="text-default"> <p>Labour say they only intend to jack up income tax for those earning over £80,000 (with new rates of 45 per cent up to £125,000 and 50 per cent beyond that). But scrapping the marriage tax allowance, while reducing dividend allowances and raising tax rates on dividend income, means they are raising income tax burdens much lower down the earnings scale.</p> <p>Around 1.8 million families obtained the marriage tax allowance in 2018/19, with 1.5 million more eligible. Over ten per cent of the existing total £13.25 billion dividend tax liability for 2018/19 was borne by savers and basic rate taxpayers, let alone those earning between £50,000 and £80,000. Basic and higher rate payers with dividend income would suffer allowance cuts and see their tax rates rise from 7.5 per cent and 32.5 per cent to 20 per cent and 40 per cent, respectively, under Corbyn’s plans. Many people earning below £80,000, in other words, will see their income tax burden rise.</p> <p>What’s more, Corbyn’s new tax bands will be for life, not just for Christmas. The threshold for the 45% rate would be fixed in cash terms rather than indexed — dragging more people into these higher rates as incomes rise. And, since the rich aren’t some fixed group, over a&nbsp;lifecycle many more people will be affected.&nbsp;<a href="https://www.ifs.org.uk/publications/14303" target="_blank" rel="noopener noreferrer">Estimates suggest</a>&nbsp;3.4 per cent of people will enter the top one per cent of earners at some stage in life. Assuming (conservatively) a&nbsp;similar multiple for the top 5&nbsp;per cent, around 15–20 per cent of income earners would experience higher marginal rates over their lifetime under Labour’s income tax plans.</p> <p>2. Only the rich will be affected by the overall tax changes.</p> <p>Richard Burgon intimated on&nbsp;<em>Question Time</em>&nbsp;that only the rich will be affected by Labour’s overall £83 billion revenue grab. We’ve seen that’s not true, but suppose it was: the average increase in revenue for people in the top five per cent of earners would need be £53,000 per year to raise that revenue. Currently, the top five per cent pay £94 billion in income taxes on a&nbsp;gross income of £283 billion. So “asking” for another £83 billion from them (no matter the source of tax) looks, shall we say, “difficult.”</p> <p>Labour supporters went crazy when I&nbsp;<a href="https://twitter.com/MrRBourne/status/1197498937600598016?s=20" target="_blank" rel="noopener noreferrer">pointed this out</a>, claiming I’d ignored revenue from corporation tax hikes, expanding stamp duty, and more. But that’s the point: Labour’s income tax changes would raise only £5.4 billion of the £83 billion revenues they desire. Their other tax rises have economic burdens that hurt far beyond “the rich.”</p> <p>The&nbsp;<a href="http://www.adamsmith.org/s/CorpTax8.pdf" target="_blank" rel="noopener noreferrer">best evidence</a>&nbsp;that we have on the economic incidence of Corporation Tax (which Labour would raise from 19 to 26 per cent) suggests that anywhere&nbsp;<a href="https://scholar.princeton.edu/sites/default/files/zidar/files/sz_localeconcorptax_aer_2016.pdf" target="_blank" rel="noopener noreferrer">between 30 per cent</a>&nbsp;and&nbsp;<a href="https://cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7503/2006-09.pdf" target="_blank" rel="noopener noreferrer">70 per cent</a>&nbsp;of the burden ultimately falls on workers.&nbsp;<a href="http://www.ifs.org.uk/wps/wp0411.pdf" target="_blank" rel="noopener noreferrer">Existing evidence</a>&nbsp;suggests a&nbsp;financial transactions tax will ultimately hit both pension funds and, again, workers. The idea it’s “the rich” or even “business” who pays, leaving ordinary folk unaffected, is just false.</p> <p>3. Boris Johnson is “lying” about Labour Corporation Tax rates.</p> <p>Johnson has claimed Labour would raise Corporation Tax to the highest level in Europe. C4’s “Fact Check”&nbsp;<a href="https://www.channel4.com/news/factcheck/factcheck-johnson-wrong-about-labour-corporation-tax" target="_blank" rel="noopener noreferrer">labelled this “wrong,”</a>&nbsp;explaining that a&nbsp;26 per cent rate would still be below those economic powerhouses of France, Belgium, Portugal, and Greece.</p> <p>Labour do reckon they&nbsp;<a href="https://twitter.com/PJTheEconomist/status/1197568734552055811?s=20" target="_blank" rel="noopener noreferrer">can raise more from Corporation Tax</a>&nbsp;as a&nbsp;proportion of GDP than other developed countries. But, practically, Boris was correct about the headline rate, too — at least, for companies’ UK profits affected by Labour’s expropriation of shares for “Inclusive Ownership Funds.”</p> <p>Such businesses would be mandated to give up ten per cent of any profits (determined for Corporation Tax purposes) to IOFs. That’s functionally equivalent to another ten percentage point hike in Corporation Tax rate from the point of view of shareholders, taking the UK’s effective rate to a&nbsp;massive 36 per cent — not just the highest in Europe, but the whole OECD.</p> <p>You might quibble that this isn’t strictly a “tax,” but a&nbsp;shared ownership scheme. But the IOFs are mandated, not voluntary. And any dividends above £500 go directly and entirely to the government. If it looks like a&nbsp;tax, and quacks like a&nbsp;tax.…</p> <p>4. That Labour’s day‐​to‐​day tax and spend plans are moderate.</p> <p>The 2010 election saw Labour argue that planned Conservative cuts of £6 billion in the Parliament’s first year would be huge and devastating. These days, Labour can announce £12 billion per year for WASPI women as a&nbsp;mere manifesto addendum.</p> <p>This is indicative of where debate is at. Labour plan £150 billion extra in government spending before debt interest by 2023/24 (£83 billion current spending, £55 billion investment spending, and £12 billion WASPI). That’s a&nbsp;16 per cent jump from today’s projections — equivalent to almost adding another NHS or growing government by up to eight percentage points, permanently, over one Parliament!</p> <p>Spending at that level has never been sustained here; taxing at it is unprecedented. Some promises — free social care, prescriptions, TV licenses and fixing the retirement age at 66 — worsen the long‐​term debt headwinds associated with ageing. Then there’s the renationalisations (assumed not to impact the public finances), which history suggests will result in ongoing taxpayer subsidies if Labour intends to follow through in meaningfully reducing prices.</p> <p>True, Scandinavian countries have sustained governments at Labour’s proposed size. But these social democratic states mainly transfer money, and don’t engage in Labour‐​style rampant interventionism. Nor do their governments pretend&nbsp;<a href="https://taxfoundation.org/how-scandinavian-countries-pay-their-government-spending/" target="_blank" rel="noopener noreferrer">only businesses and the rich will pay</a>.</p> <p>In contrast, Labour’s tax plans have almost only downside revenue risk. Take hiking Capital Gains Tax rates. Given you only pay it when you sell an asset, many asset holders would likely defer gains and postpone income if a&nbsp;Labour government looked unstable, hoping for a&nbsp;Tory re‐​election reversing the policy. Elsewhere, heroic assumptions on the revenues from unitary taxation, the financial transaction tax, and more, has seen some legal experts conclude that revenues might be&nbsp;<a href="https://twitter.com/DanNeidle/status/1197512726584664065?s=20" target="_blank" rel="noopener noreferrer">£20 billion lower than Labour plan for</a>, even presuming they are right on the economics of other tax rises.</p> <p>5. The main economic problem with Labour’s manifesto is that it’s just unaffordable.</p> <p>Focusing on tax and spend, we downplay the likely massive negative cumulative impact of Labour’s policy on long‐​term growth.</p> <p>From property rights incursions to more intrusive wage and price controls; mobilising resources through the Green New Deal to entrenching a&nbsp;quasi‐​Yugoslavian form of shared ownership, historical evidence suggests GDP will suffer a&nbsp;lot over time. Ignoring this because it’s difficult to measure makes laughable other partial analysis, such as the Resolution Foundation’s report claiming that Labour’s agenda would be better for child poverty.</p> <p>Labour‐​supporting economists believe their investment plans are “good for growth.” But when the state competes for resources, the hurdle for improving economic health is whether government activity corrects market failures or is more productive than the private activity it crowds out. Given Labour’s aim for “green” and “social” transformation, and experience of major state investment programs worldwide, colour me doubtful. If you believe a&nbsp;massive new portfolio overseen by politicians such as John McDonnell will hugely improve public sector net worth, I&nbsp;have a £1 Millennium Dome to sell you.</p> </div> Wed, 27 Nov 2019 11:11:29 -0500 Ryan Bourne https://www.cato.org/publications/commentary/five-myths-about-labour-manifesto