The future of freeports

In 1983, 36 years ago, Dr Eamonn Butler and Dr Madsen Pirie, founders of the Adam Smith Institute, wrote Free Ports. 3 years later, Dr Butler co-authored Free Ports Experiment. In 1981, the ASI had proposed freeports for the UK – and six were established – but their chances of great success were scuppered from both sides by the EU and HM Treasury. The European Union steadfastly refused to ease any of their choking regulations – and the UK Treasury, similarly, refused to ease VAT or tariffs. According to Dr Madsen Pirie in the Spectator today, ‘the freeports were effectively just reduced to being bonded warehouses, where goods could be stored, and only be taxed when they left.’

The Adam Smith Institute has long been clear that this isn’t what freeports should be about. Freeports could, and should, be hi-tech, high enterprise hubs for the British economy, springboards for regional and global competition through free trade, and gateways to local employment and prosperity.

Freeports aren’t a new concept – they rose to prominence in post-Renaissance Italy – and they aren’t a complex idea. As Dr Butler explains in his piece for the Telegraph today: ‘take a bit of land near a port or airport and treat it as if it were a foreign country as far as import/export trade is concerned. So, people can fly or ship in goods from abroad, store, consolidate, process, assemble, package or label them in the freeport, and fly or ship them out again. All this with no import tariffs, no VAT or any other taxes, and no paperwork when the goods leave. All plain and simple for the importers and exporters, and a nice generator of jobs, enterprise and investment for the local community.’

Despite the simple nature of freeports policy – and the limited cost to the public purse – government has insisted on getting them wrong in the past. The sites rolled out when the Adam Smith Institute first championed the idea were chosen by the government for political reasons, not for sound business ones. Freeports should have regulations which are as simple as possible – and tax codes to match. Freeports should be treated as foreign territory in many ways – and managed through an independent port operator – not a meddling government.

If done right, freeports can be a huge win for post-Brexit Britain. We can increase the capacity of our ports, develop strategic assets needed to be a serious global player on trade, and boost jobs and British products at the same time. As Dr Pirie said today: ‘Liz Truss, as the new International Trade Secretary should be bold. We should support her fight for real freeports, ones that can draw business, wealth and jobs to some of the UK’s ports, located in areas that have not kept pace with its economic expansion, and which could be regenerated with a such a boost. Low taxes and low regulation mixed with high-tech and tall global ambition — a recipe for success.’

Freeports are one of those policies which can make one really excited for the future – if they’re rolled out in the right way. Since 1981, the Adam Smith Institute has led the calls for freeports policy – and there’s now a wealth of evidence from around the world that shows we’re right. If done properly, freeports can be serious assets to an economy – we look forward to continuing to make the case for them. 

Actually Angus, Millions of Americans aren't living on $2 a day

Nobel Prize Winners seem to have a habit of making bizarre claims that make you question whether they were really brilliant in the first place. Take Nobel Prize Winning Chemist Kary Mullis: after picking up a big cheque in Sweden, he went on to claim that HIV and AIDS weren't linked and that OJ Simpson was innocent. Or Nobel Prize Winning Physicist Brain Josephson who believes that psychokinesis is real and that water has 'memory'.

In a similar vein (although somewhat less severe), Nobel Prize Winning Economist Angus Deaton has written an essay attacking a view he dubs "Cosmopolitan Prioritarianism". Described by him as "an ethical rule that says we should think of everyone in the world in the same way, no matter where they live, and then focus help where it helps the most."

Most Cosmopolitan Prioritarians (of which I'd class myself, as well as my colleagues Sam Bowman and Ben Southwood), tend to be big fans of globalisation and free trade. While free trade benefits both developed and developing countries, it also reduces wages in places like Port Talbot, that are wealthy compared to India or Ghana but not by UK standards. But this is worth it for the truly breathtaking declines in extreme poverty in poor countries.

Now it's not unusual for an economist to bash globalisation, indeed since David Autor's paper on the effect of Chinese Imports on US labour markets, it's become the 'trendy' thing to do.

But, Angus Deaton goes further a makes a truly bizarre claim.

But several million Americans – black, white, and Hispanic – now live in households with per capita income of less than $2 a day, essentially the same standard that the World Bank uses to define destitution-level poverty in India or Africa. Finding shelter in the United States on that income is so difficult that $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India or Africa.

Citing research by Edin and Shaefer, here Deaton implies that there several million Americans who have substantially worse lives than Sub-Saharan Africans living in extreme poverty. This just doesn't pass the smell test.

Indeed, the ASI's own Tim Worstall already dealt with this rather misleading statistic back in September 2015.

They use an odd definition of income. One that doesn’t include all income in fact. They look only at cash income. But the US spends $500 billion a year on things like Medicaid and other health care services for poor people. That’s obviously got to be part of poor peoples’ incomes as well then. And then there’s Section 8 housing vouchers which pay for habitation for many poor people. This is also excluded. In their most restrictive version of income they don’t even include Food Stamps.

So what they’re really measuring is the cash incomes of the poorest people without accounting for pretty much all the things that are done to increase the total incomes (such total income being equal to consumption possibilities of course) of those poor people.

And that’s where their large rise in this form of poverty comes from. They are, as above, measuring only the cash income of poor people, including cash from welfare. But this system was deliberately changed in the 1990s to reduce the amount of cash welfare people got and increase the amount of in kind welfare (ie, Section 8, EITC, SNAP and so on) that people got.

But that's not all, there's even more reasons to doubt this zombie stat. First, the survey Edin and Shaefer use to compile their data systematically underestimates the benefits received by poor Americans.

Second, a whole bunch of people list their income as $0 in the survey, which given that it's nigh-on impossible to live on $0 worth of resources, suggests that there are serious measurement errors.

Indeed, when the Brookings Institute put the numbers under scrutiny, they found that virtually no Americans were living on under $2 a day.

It's certainly true that many Americans are struggling so far, and we probably do more to compensate those who've gained less from globalisation (perhaps with a Negative Income Tax). But when Deaton says "perhaps it is not so clear that the greatest needs are on the other side of the world." He's simply wrong.

It's official, Uber saves lives

Tomorrow, the European Commission is set release its findings from a year long investigation into the Sharing Economy. Interestingly they're expected to go against many European cities who are increasingly trying to regulate ridesharing out of existence.

Last week, I argued that attempts to protect consumers by regulating supposedly unsafe products often backfired, because those products are often substitutes for even riskier products and behaviours. In particular, I pointed to Austin's fingerprint background check requirement that made Uber and Lyft prohibitively expensive to run in the city, and led to consumers taking even riskier journeys. But, if anything the harms of driving Uber and Lyft out of town are even greater than I made out.

At least that's according to a new Working Paper from Angela Dills and Sean Mulholland, which investigated the impact of Uber's entry to a city on vehicle accidents and crime. They looked at data across 150 cities and counties on a range of metrics, from vehicle accidents and DUI arrests, to drunk and disorderly conduct and aggravated assault. 

Dills and Mulholland point out that there's a range of ways that Uber might affect crime and accident rates. Maybe it'll increase accidents because Uber drivers are more likely to be distracted both by smart phones and passengers. Maybe it'll increase driver-on-passenger assaults as unsafe drivers sneak through lax background checks. Maybe it'll increase assault widely, as more folks get their drink on, safe in the knowledge they don't have to be the designated driver.

But the data doesn't bear out any of these fears. Dills and Mulholland came away with two major findings.

First, the rate of vehicular accidents falls quite dramatically when Uber enters a city, with traffic fatalities declining by 16.6 per cent over a year. This can be explained by both a reduction in the number of people driving under the influence, as well as the fact that the people most likely to use Uber (i.e. millennials) are terrible drivers and anything that keeps them off the road is a good thing.

Second, they find declines in arrests for both assaults and disorderly conduct. This may be because Uber reduces passenger wait times, lowering the risk of someone being attacked while waiting for a cab. This finding is especially important as governments have attempted to impose minimum wait times on ridesharing services with varying success (thankfully, TFL's proposals were roundly rejected).

As city governments increasingly move to crack down upon ride-sharing services like Uber on the grounds of public safety, legislators should take these findings very seriously. Bans on Uber aren't just bad economics, they can kill.

Counterfactuals matter

Alex Tabarrok at Marginal Revolution has a really great post on car safety in India, which illustrates a major problem with attempts by government to protect consumers by regulating unsafe products out of existence.

According to the Global New Car Assessment Program, 5 out of 7 new cars made for the Indian market lacked airbags and would fail basic UN crash tests. Tabarrok quotes Global NCAP Secretary General David Ward "Global NCAP strongly believes that no manufacturer anywhere in the world should be developing new models that are so clearly sub-standard".

But demonstrating that a product is unsafe is not sufficient to show that regulating it would make people safer. As Tabarrok shows, counterfactuals matter:

Let’s take a closer look. These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India.

Motorcycles are also much more dangerous than cars.

The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400 (somewhat older estimates here a, b, c) and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.

Substitution effects are basic economics, but regulators often ignore the fact that consumers responding to incentives will switch to cheaper and often (less safer) alternatives.

Take the European Union's recent Tobacco Products Directive:

Cartridges and tanks of e-liquid will be limited to 2ml, a incredibly small amount, and refill containers to 10ml, completely preventing bulk-buying and outlawing the products users find most convenient. The maximum strength will be 20mg, ruling out high strength varieties that most closely approximate cigarettes.

The regulators who drafted this law hope to see the public's health improve as vapers switch to safer, lower strength E-Cigarettes, but it could very likely have the opposite effect. As E-Cigarettes, which are 95-99% safer than traditional cigarettes, become weaker and less convenient, consumers have less of an incentive to switch from tobacco to e-liquids. 

Likewise, attempts to improve public safety by banning low-risk tobacco products like Snus have backfired spectacularly.

Or take for instance, Austin, Texas. Its City Council imposed onerous regulations on private ridesharing companies like Uber and Lyft with the stated aim of protecting the public from unsavoury drivers. One of the key sticking points was a finger-print background check requirement that went far beyond what was expected for standard Yellow Cabs.

Uber and Lyft responded by going Galt. They left Austin altogether. What happened next shouldn't surprise anyone. The Drive reports:

Though the city frightened voters with terrifying depictions of a plague of Uber-rape, it’s now come out that people with sexual assault convictions, and even drunk-driving arrests, are actually allowed to drive cabs in Austin, few questions asked. "If you have ever been convicted of theft at any point, you could never get a chauffeur's permit,” a city council member told a local news station. “That just seems like too much.”

Then there are the opportunists who are actually thriving. I talked to one driver who seemed to be enjoying himself in this bizarre ecosystem of random auto-barter. Because of his “local media presence and history of bartending in the city,” he immediately scored an under-the-table gig providing two to three rides a day to executives from a prominent entertainment company, as well as whatever else he could cadge up on Facebook.

Attempts by government to protect the consumer too often fail to consider the counterfactual, if policymakers and regulators took substitution effects seriously, many regulations wouldn't see the light of day.

We're parking up the wrong tree

With air pollution linked to nearly 40,000 deaths every year, tackling London’s air quality crisis will be one of new Mayor Sadiq Khan’s biggest priorities. It’s a shame then to see that he’s neglected one free market solution on offer. Using market demand to set parking charges could bring emissions down by reducing congestion and encouraging more people to use public transport. It’d also raise more revenue for Borough councils, allowing them to bring council tax rates down.

People often talk about parking spaces as if they were public goods, yet as MarketUrbanism’s Emily Washington points out, parking spaces are not a public good like clean air. By breathing in clean air I don’t diminish the amount of clean air available for you, yet this isn’t the case with parking: every person who parks deprives everyone else of that parking space. Giving away a scarce resource for free should be anathema to conservatives, yet bizarrely it’s often Conservative politicians who make the case for either free or heavily underpriced parking. As UCLA Urban Planning Professor Donald Shoup keenly observed “Staunch conservatives often become ardent communists when it comes to parking”. 

For example, last year former Community Secretary (and former ardent communist) Eric Pickles imposed a series of regulations on local councils, making it harder for them to raise revenue from parking charges, with restrictions on parking enforcement and ring-fencing for what the money raised by parking charges can be spent on. Pickles argues that keeping the cost of parking low will benefit both motorists and the high street.

But, the evidence doesn’t stand up. What underpricing parking actually causes is excessive congestion as the scarcity of parking spaces encourages drivers to cruise around looking for an empty space. Prof. Shoup looked at sixteen different studies, which measured cruising behaviour in the central business districts of major cities. He found that they average time spent cruising for a parking space was around 8 minutes, and that at any one time 30% of cars in the traffic flow were cruising for a parking space.

This is no less true when the parking is provided by a council, and not a private landowner or business—we should want government organisations to ape private firms by using prices to clear markets as much as possible.

Cruising isn’t the only way underpriced parking causes congestion. Cheap pricing acts as a subsidy to motorists at the expense of the tax payer. 95% of parking away from home is free to the motorist, and households spend on average £47 a year on parking, a very small fraction of the £1,600 per vehicle spent on fuel each year.  Yet Shoup’s research suggests that the value of a parking space in a major city, is something in the range of tens of thousands of pounds. If motorists bore the true costs of car travel, they’d be much less likely to use their car and more likely to switch to public transport, further reducing congestion.

This reduces air pollution in two ways. By reducing both the total number of cars emitting fumes and the amount of fumes each car emits. As cars stuck in slow-moving traffic emit more than those in free-flow.

What about the risk to the high street? Advocates of free parking argue that charging more for parking will hit high street retailers and further contributing to the long term decline in high street retail. But the evidence is weak. Free parking advocates typically rely on surveys of what drivers say they would do if parking prices change, however as economists frequently find out, revealed preferences can differ widely from stated preferences. 

One study in the German city of Herford found that when free parking was introduced it had no effect on overall sales, but did increase traffic. Shoup’s own research suggests free parking can actually reduce the number of visitors to an area, as free parking encourages long parking stays restricting the number of visitors who can actually park. In fact, in many cases it’s the local workers who take advantage of the free parking spaces., reducing the number of spaces available for consumers.

Pricing parking based on market demand would encourage a more efficient allocation of a scarce resource. It would mean less congestion, cut air pollution, and reduced taxes for Londoners. It wouldn’t hurt high streets and with new technology, it’s easier than ever before.

There's more to the minimum wage than 1998

One of the difficulties in economics is isolating the effects of particular actions in a very complex world. If we cut income tax this year and next year tax revenues are a little higher, it’s tempting to attribute that to the tax cut. But maybe it’s actually because oil prices fell, or because growth was picking up anyway.

To get around this, economists try to aggregate large numbers of data points – that is, look at lots of different times when we cut income tax and see what the effect on revenues were, ideally adjusting for things we know might affect growth, like the price of oil. Using lots of different data points helps us to cancel out ‘noise’ and focus in on the effects we really care about.

Another example: If oil prices rise, and consumption of oil doesn’t fall, we don’t throw out our model that says people use less oil when prices rise—we acknowledge that oil’s price isn’t the only factor. Perhaps it was particularly cold just after oil prices rose, so people needed more for heating; perhaps there was a big national holiday and everyone used their car more. Similarly when the price of labour jumps and employment doesn’t fall, this doesn’t mean that employers don’t take wages into account, it might mean there are countervailing factors: employers can pass some costs on; employers can reduce other benefits; or employers are going to reduce hiring to take account.

This is why it can be foolish to point to a single example of a tax cut appearing to raise revenues or to point to a single example of raising or introducing a minimum wage not causing unemployment. The latter has been very common recently. We didn’t see unemployment rise in 1998 when we introduced the National Minimum Wage, so people saying the new National Living Wage will hit jobs are on thin ice.

The LSE’s Prof Alan Manning, who is an expert on minimum wages, does this in the FT today, being quoted as saying that “prophecies of doom … turned out to be wildly inaccurate then; I suspect they will be this time as well.” I guess Prof Manning is being glib – he knows all the literature and that a single event isn’t indicative of very much, but it’s misleading to most people reading who do not.

The graph above, via Menzie Chinn, shows a meta-analysis of the impact of minimum wage rises on employment from 1,424 data points – an elasticity of -0.5 means that a 1% rise in the minimum wage is associated with a 0.5% fall in employment for the affected group. The red line is the mid-point of a range (-0.1 to -0.3) suggested by David Neumark. The graph above seems to suggest that the effect is negative but small; Neumark argues that the international evidence points to a clear disemployment effect.

Other research, which is again based on data from large numbers of events, not a single event, suggests that minimum wage rises tend to slow down job creation rates over time. The effect here seems to be that employers are reluctant to actually fire workers (perhaps for the same reasons they are reluctant to do so during recessions) but become less willing or able to hire new ones. Another paper suggests that job losses are avoided by passing the costs on to consumers.

The right is guilty of the kind of error I'm criticising, too – the OBR disputes the claim that cutting the 50p tax rate really raised revenues, suggesting that the increased revenue came from people deferring income until the rate was cut. I don’t hear many supporters of the 50p cut acknowledging that.

It also needs to be pointed out that the level, not just the rate, of the rise in the minimum wage matters too. In 1998 the NMW was introduced at £3.60 per hour, or £5.71 in today’s prices; the new National Living Wage will be £7.20 per hour. A comparably small rise may still raise the level to a high enough point that it does cause serious problems in terms of job losses.

It may be that the NLW does cause job losses, which are masked by other positive effects. It may be that it doesn’t, but the economy dips anyway and it looks as if it does. It will be impossible to say either way if we just look at this one event. The trick is to look at many events and test our hypotheses against the aggregate, not to cherry pick single events to make a point.

Ooooh the outrage over Tesco and the other supermarkets

That Tesco's brands a few of its products with the names of fictitious farms is amusing, as is the outrage that this has brought forth from the usual suspects. But then matters take a turn for the worse as we get a question of such driveling stupidity as to potentially make our brains leaks from our ears. Or possibly to ponder whether this has already happened to the questioner. We refer to this from Yvonne Roberts:

How have we allowed a system to emerge that squeezes the whole supply chain in the name of profit and seduces us into ignoring our carbon footprint for that dubious consumer privilege called “choice”?

For this is the point and purpose of having an economy in the first place. Both Adam Smith and Frederic Bastiat tell us that we must always look at economic questions from the point of view of consumption. And we can and do go further than that ourselves: the point of this whole economy thing is to maximise the consumption possibilities of the population. What is to be consumed, how such consumption is to be valued, being the choice of said population. If choice is what said people value then an increase in such choice is an addition to the value they gain from consumption: which is, again we insist, the reason we have this whole structure of markets, exchange, production and all the rest. This is the very purpose of our efforts: to increase consumption opportunities.

Profit is simply a method of keeping score along the way. If you make a profit in your production process then that means that you are adding value. The value of your outputs is greater than the value of your inputs. More accurately, the alternative uses of those inputs would produce less value added for consumers to enjoy. Thus profit is a good thing, losses bad, for losses indicate that you are subtracting, rather than adding, that value which can then be consumed.

If growing a pig in Belgium, slaughtering it in Germany and eating it in England produces more value for the consumers to consume than to grow, slaughter and consume a similar pig in England then so be it: this is the very point of it all, to produce the greatest value of output that may be consumed from the limited resources at our disposal.

Choice, consumers, consumption, these are not things to be disdained from the comfort of an Islington eyrie, they are the entire damn point of having a society or an economy in the first place.

Take the Easter egg. The salt may have come from China; palm oil from south east Asia; whey from New Zealand; sugar from the Caribbean; cocoa from South America, on and on. Britain imports food from more than 180 countries.

Ain't it just fantabulously wondrous?

Sugar is not uniquely bad

The government's new "sugar tax" is a bit of a mess. First of all, it's not a sugar tax—it's a tax on the sugar in soft drinks except fruit juices and those based around milk. Secondly, given that people can easily substitute into other sweet and calorific foods, a tax at the rate the government's proposing is expected to reduce calorie intakes by about 2 kcal each.

But I think that these are relatively minor concerns. After all, the government will probably follow up this baby step with more extensive measures, with a broader, more logical scope, and set at a higher level. The bigger issue is that a couple of papers in the latest issue of the International Journal of Obesity question the entire narrative that sugar is a unique, hellish, dietary evil.

Just as the diet-obsessed obsessively avoided fat in the 1980s (just read the book American Psycho—protagonist Patrick Bateman won't eat a single fried thing), those attempting to follow the best diet guidance avoid sugar today. The Harvard School of Public Health and the Swedish diet buraeu have set the trend. But what if the current anti-sugar crusade is just a rerun of previous dietary fads?

This seems at least possible, given these last two papers. The first, by Luc Tappy, argues that popular ideas about the especially bad nature of sugars in general and fructose in particular are based on misconceptions and misunderstandings:

In this closing perspective, the author exposes why targeting a single nutrient like sugar is in his opinion unlikely to be efficient in preventing obesity and metabolic diseases. He defends the proposal that the concept of fructose toxicity is based on major misconceptions of nutritional physiology. He specifically proposes that (1) sugar being a non-essential nutrient does not obligatorily imply that it has no beneficial effect; (2) alterations of blood triglyceride concentration and hepatic glucose production within the normal range may merely reflect adaptations to a fructose-rich diet rather than early markers of diseases; (3) overfeeding is a normal physiological response to exposure to an energy-dense, palatable nutrient rather than the consequence of ‘leptin resistance’; (4) we may presently overemphasize the role of biological regulations and of gene-related heredity when assessing the effects of fructose in particular, and the determinants of obesity in general.

The second, by Theodore Angelopoulos and James Rippe questions the validity and quality of most of the animal model studies that have been used to push the line that sugar is uniquely important in obesity or health (as opposed to over-eating in general). It says:

The effects of added sugars on various chronic conditions are highly controversial. Some investigators have argued that added sugars increase the risk of obesity, diabetes and cardiovascular disease. However, few randomized controlled trials are available to support these assertions. The literature is further complicated by animal studies, as well as studies which compare pure fructose to pure glucose (neither of which is consumed to any appreciable degree in the human diet) and studies where large doses of added sugars beyond normal levels of human consumption have been administered. Various scientific and public health organizations have offered disparate recommendations for upper limits of added sugar. In this article, we will review recent randomized controlled trials and prospective cohort studies. We conclude that the normal added sugars in the human diet (for example, sucrose, high-fructose corn syrup and isoglucose) when consumed within the normal range of normal human consumption or substituted isoenergetically for other carbohydrates, do not appear to cause a unique risk of obesity, diabetes or cardiovascular disease.

I am not an expert in nutrition, and I am not qualified to judge whether these papers are the best in the whole of nutrition. But the evidence on 'sugar is evil' seems far from clear. As such, even if the practical problems with the levy are solved, I don't expect the sugar tax to have many positive effects either on obesity or on health.

A fascinating question in The Guardian

A fascinating question in The Guardian to which we have the answer.

Where now are the earthly paradises from which an idealist can take hope?

Well, yes, where?

With Barack Obama on his way to a changing Cuba, the left is fast running out of countries to revere

In our lifetimes the answer, which country should the British left look to as the example of the good society, has changed. From the various Soviet abominations, through Nicaragua, some have more lately looked to Greece, to Argentina under the Kirchners, possibly to Brazil and Venezuela. There was a brief moment when Pol Pot was the man although that little embarrassment is generally smoothed over now. And of course Cuba's totalitarian poverty has always been there as a goal.

Yet if we were to rerun matters from when socialism was first thought of as a reasonable method of organising society, say the 1870s or 1880s, we'd have to admit that none of those places have done as well as the North Atlantic countries that almost all of us reading here inhabit. The largely capitalist, largely free market, economies are those that have delivered that list of wants and desires. Free at the point of use education, health care. Cheap food for all, the UK is currently falling down a bit on decent and cheap housing but most of Europe manages it. It is possible in our current day and age for a human to flourish as no other groups of societies have ever managed to permit, let alone allow or encourage.

That is, if we think of the stated goals then the road to that socialist paradise is some version of the capitalist free marketism. And we're really not all that sure how important the capitalist part is, even though we're entirely adamant that the free market part is vital. Because almost all of the disasters of those socialist attempts have come from the attempts to destroy markets rather than the simple nationalisation of the means of production.

There are of course possible variations within this system. The Nordics do rather more taxing and redistributing than we do for example. They are also notably more free market, robustly so, than the US or UK. But the end result of our 150 years or so of experimentation seems to be that if you want to make the common man better off then you're restricted to that narrow band of policy choices somewhere between classical liberalism and social democracy. We've tried almost all of the other schemes out there in one place or another and none of them have worked. Corporatist fascism doesn't, anti-marketism doesn't, the various flavours of socialism lite don't and the attempt to get to communism was a disaster everywhere.

That is, if you want to create utopia you really ought to have the gumption to note that by any historical or global standard, you are standing in it. Nope, it's not perfect, we too can find things that we think can be done better. We can even think of radical policies that we would hope to see enacted: but the basic underlying structure of a society that works seems to have been proven. Let the market rip and tidy up around the edges as much as you desire. Tax it more or less heavily as you wish to redistribute. We would tax less than others, they would redistribute more than we. But if anyone really does want to lay claim to the title of "scientific socialism" then it really is necessary that they take account of the evidence.

What actually can we prove works? A largely market, even free market, society with some level of taxation and redistribution on top of it. Nothing else does seem to.

Business rates are a tax on landlords, not on businesses

There is such a thing as a bad tax cut, and business rates relief for small businesses is one of them. Despite what the Chancellor claimed in his budget yesterday, reducing rates will likely be a tax cut for landlords, not businesses. Business rates are a tax on non-domestic property, paid by the occupier rather than the owner and based on the property's rentable value. Since they are paid by the renting business, most people assume it is businesses who lose out because of them.

In fact, the burden of the tax seems to mostly fall on the property owners, not the firms occupying them. This is because when rates are cut, rents rise in proportion to that cut. Lower rates means higher rents. That means that the level of business rates makes no difference to the operating costs of businesses that rent their premises, and cuts to business rates will end up giving money to landlords, not business.

The theory, at least, goes like this: Because supply of land is fixed, the total rental value of a property is determined entirely by demand – how much would-be renters are willing to pay to rent there.

Firms think in terms of the total cost of occupying somewhere, and the division between rates and rents is not relevant to them. They don’t care who gets the money, they care about how much it costs, all in all, to be located somewhere. When the amount they have to spend on rates rises, the amount they can spend on rents falls. When rates fall, the amount they can spend on rents rises.

This theory is borne out by empirical evidence. In 2003 Dr Nigel Mehdi looked at the introduction of the Uniform Business Rate in 1990, which replaced property taxes that differed greatly before then. He found that, across London, property values adjusted so that total occupancy costs between matched properties equalized over time. In other words, where rates fell, rents rose; where rates rose, rents fell.

The Institute for Fiscal Studies’s 1996 paper “Who Pays Business Rates?” looked at the same event on a national level and produced a similar finding, in the long run.

But how long is the long run? In the time it takes for rents to rise (as old rental agreements expire and new ones are made), businesses will capture the reduction in rates. But this may not be very long. A recent paper by the British Property Federation looked at five revaluations between 1990 and 2010 and found that within two to three years 75% of the value of a business rates change had been factored in to rents.

So while we should expect this business rates exemption to fairly quickly be offset by higher rents, how does the fact that small businesses only are exempted factor in? I’m less sure about this, but I suspect we may see a similar effect to what happens with Housing Benefit. Rents will rise overall, but recipients of the exemption (small businesses) will end up being slightly better overall. Unfortunately this comes at a cost to other businesses, and most of the benefit will go to landowners.

There is also the “Francification” problem of having hard cut-off points for business benefits based on their size (which the small business exemption does, based on property values). Hard cut-offs lead to situations like France’s where firms cluster at the cut-off point – the chart above shows how many firms have restricted themselves to 49 employees to avoid all the legislation that kicks in for ‘big’ firms with 50 employees or more. The second problem is that small businesses are not inherently better than big businesses, and benefiting them at the expense of larger firms is likely to be wealth-destroying overall.

Business rates are bad mostly because they tax the property value, rather than the underlying land value, so they disincentivise investment in better property or machinery (when that machinery is rateable). A wise Chancellor would move rates to being a tax on the land value alone, and skip the destructive gimmicks like this one.