Break the monopoly on liquor in Virginia

Our Deputy Director, Sam Bowman, is currently out in Virginia taking part in the Atlas Network's Think Tanks MBA, where he has started campaigning for the state of Virginia to release their monopoly hold on the sale of liquor. Watch the video below to find out more.  

The campaign tweets from @PrivatiseVABC and can also be contacted through their website here.

For Mr. Chakrabortty: why we saved banking and aren't saving steel

Over in The Guardian Mr. Chakrabortty asks us this fascinating rhetorical question:

Why don’t we save our steelworkers, when we’ve spent billions on bankers?

There's two answers to this, neither rhetorical.

The first is that those billions we spent upon bankers, that trillion in fact, was temporary:

Imagine what would happen if manufacturing were centred around the capital, and its executives had Downing Street on speed dial. Actually, you needn’t imagine – merely remember the meltdown of 2008. Then Gordon Brown was so desperate to save the City that the IMF estimates he propped it up with £1.2 trillion of public money. That’s the equivalent of nearly £20,000 from every man, woman and child in the country doled out to bankers in direct cash, loans and taxpayer guarantees.

The vast majority of this was emergency liquidity provision, something that a central bank is supposed to do in a fractional reserve banking system. It's all been paid back, with interest. It's not made a loss, far from it, it's made a profit for the taxpayer. Yes, there's interesting arguments we can have about those residual stakes in Lloyds and RBS but it's absolutely not true that it all "cost" each taxpayer that sort of sum. That we use the central bank in a fractional reserve system to do what the central bank should do in a fractional reserve system is not in any manner an abuse of said system.

The second answer is that we actually want to continue having a financial system after that wobble of the Crash. It's not in fact true that we want to have a basic steel industry. Technology does change, there's little to no reason for rich countries to still be running blast furnaces. Which is why so many of them have closed over recent decades in those rich countries. It's not just here: even the French let the Florange furnaces close. Making basic steel is, these days, a pretty basic industry. Those parts of the British steel industry that are making the high value added products (like the higher end of the stainless steel industry) are still, as they have been all along, exporting to places like China. And this is what makes a country rich in the first place: that it concentrates on the high value added parts of production. Simply because that's how high wages can be paid, concentrating on doing things with high value added.

In a nutshell, aid to banking was a temporary measure to cover a known weakness of the system, a system we most definitely wanted to retain (try thinking about an economy with no banking system: it's to think of an economy with no economy). Aid to basic steel production, from virgin materials in those blast furnaces, would need to be permanent as it is in fact a residual technology, one that we almost certainly shouldn't be doing any more given the low value added.

If the problem were, as it was in banking, to do with short term liquidity and confidence in the steel industry then sure, why not think about covering, at a profit, that gap using the power of government and the taxpayers' funds? But if that ain't the problem then what's the justification?

Once more on trade and the EU

As Caparo Steel crumbles into the dust we've got the usual appearance of someone arguing for state aid. We don't, we're afraid, accept this argument:

Our steel industry today is in exactly the same position. China’s state-owned enterprises are not just selling steel below the cost of production in the UK. They are selling below the cost of production in China. This is not a fair fight to discover who is the most efficient producer of steel. It is a geo-political strategy for economic domination. As soon as Britain’s steel industry has disappeared, the price will go back up again and major steel consumers like the construction industry and car manufacturers will have no escape from higher international prices.

There's very little evidence that this has ever been a successful strategy for anyone. For no one can ever find a case where the newly victorious survivors of the price war have been able to raise prices enough to make up for their losses in the price war. Such attacks just don't work as an economic strategy: as the results of the Chinese rare earths war show. Once China thought it had an uncontestable monopoly, in 2010, it raised prices significantly. This called forth some 400 companies (at one count at one time) to contest that monopoly and now prices are, only 5 years later, well below what they were in 2010.

Further, even if it is true that prices will rise in the future, it makes absolutely no difference at all whether some of the surviving factories are in the UK. Because the basic problem is that there's more steel plants, making more steel, than anyone wants to use at profitable prices. Therefore some of those plants must close. Offering state aid to certain plants makes no difference at all to that calculus. When the requisite number of plants have closed, whether those closing be in China or the UK, then that steel price will rise again and all will be paying that international price. And all will be paying that international price whether some of the survivors are in the UK or not.

Thus, state aid makes no difference at all to the future price of steel to UK manufacturers. It's just a cost to us taxpayers: a cost that we shouldn't have to bear.

There's also this remarkable lack of knowledge about the situation at hand:

Second, the Government has failed to make full use of the powers granted by the World Trade Organisation (WTO) to prevent nations from undermining economic competition. Selling below the cost of production (called dumping in trade jargon) is against WTO rules. The EU accepts that Chinese steel is being dumped and restrictions have been accepted, but nowhere near enough. Perhaps our government thinks that pursuing claims under the WTO rules is abandoning free-market principles. Far from it; enforcing the rules is upholding free enterprise.

The UK doesn't get to talk to the WTO. Extra-EU trade is a sole competence of the EU.

What's really happening in the steel industry

The Guardian worries about what is happening in Redcar and Scunthorpe to the steel industry of Britain:

Politics seems to have absented itself from the old industries. They still employ hundreds of thousands of people, support a highly skilled workforce and contribute millions of pounds in value to Britain’s exports, yet Mr Osborne, who made building the motif of his conference address and put the Northern Powerhouse as its geographical heartland, was speaking of Manchester, innovative science and new technologies. Nor did Mr McDonnell have anything to say about the old industries and their communities that return scores of Labour MPs and employ thousands of trade unionists (although he did say the fate of Redcar workers inspired his U-turn on the fiscal charter). His new team of economic advisers might talk, as the economist Mariana Mazzucato does, of the entrepreneurial state, but it is not the fate of steel workers that inspires their theories.

Steel is a foundation industry for any economy that is based on manufacturing. Closing the plant, supporting and retraining the workforce and cleaning up the site will cost hundreds of millions of pounds. The old industries need a new industrial strategy.

Oddly enough, it was one of us here at the ASI, who explained what is going on with the steel industry. In an article. In the Guardian.

However, no one wants the two blast furnaces there which make up the other part of the plant, as we can now make our ingots of steel out of scrap. It's a standard assumption in the metals world that no one will ever again build a new blast furnace in the rich, industrialised countries. Not only do we not need them, we don't need all the ones we've already got.

So, as I say, that half of the Florange plant is closing because the hippies have won – as they should indeed have done on this one particular point.

Yes, there's high energy costs in the UK as a result of the green obsessions. Yes, Chinese made steel is cheap right now. But the real underlying point is that both Redcar and Scunthorpe are based upon blast furnaces and that's just a level of technology that we don't need very much in this country any more. As a result of everyone going off and doing what we've been urged to do for decades now, work out how to recycle things.

That is, the closing of blast furnaces is evidence of the success of an industrial strategy. Sure, might be a good strategy, might be a bad one, but it is the result of a quite deliberate strategy.

In which we sympathise with a letter in the Telegraph

We find ourselves nodding in agreement at this letter:

Mr Walters said there are some benefits to being a member, but that the level of bureaucracy is a heavy burden on the state. “If we get ourselves out of the bureaucratic nightmare Europe creates, that would be beneficial. And the amount of money spent propping up that bureaucracy. There would be no worries about an exit.”

Because of course "Europe" is a political union with people who do this:

Four French bakers have been found guilty of working too much and hit with fines after sparking national debate over their desire to stay open seven days a week. A court in Dax, south-western France, handed €500 (£368) fines to the four from the town and nearby Saint-Paul-les-Dax saying they had flouted a 1999 prefectural order obliging any bakery to remain closed for at least one day per week.

Note that this is not about giving the staff (nor even the boss) a day off or two. This is an insistence that the actual premises must close for one day a week. Supposedly so:

Jean-Pierre Crouzet, head of the national baker's and confectioner's confederation backed the status quo, saying it encouraged competition by obliging people to buy bread elsewhere at least once a week.

That is, in the view of the French Bakers' union, the French people are too stupid to understand the concept of shopping around. A problem which can only be solved by having one seventh of the country's bread, confectionery and patisseries plant and capital inoperative on any single day.

We really are of the opinion that this is something that the market unaided can solve. And, further, should be left to solve.

Yes of course Donald Trump is wrong about Nafta

More interesting is why Trump is wrong about Nafta:

Recently, Donald Trump made a strong claim about the North American Free Trade Agreement (NAFTA) in an interview on CBS 60 Minutes:

"It's a disaster. ... We will either renegotiate it, or we will break it. Because, you know, every agreement has an end. ... Every agreement has to be fair. Every agreement has a defraud clause. We're being defrauded by all these countries."

And we have an, admittedly incomplete as yet, theory for why we think businessmen are often quite as bad as they are at economics. We would expect them, given that they are usually playing in the private sector, to be rather better than they are at how private markets work. And certainly someone in Trump's industry should understand public choice arguments.

But our theory is that so much of what a business actually does is trying to beat economics that the knowledge of the underlying theory rather gets missed. Just as one example, every business is trying to gain market power, the ability to set prices. From the economic theory point of view this is a very bad idea: and it's the competition that markets provide that stops every business from gaining that market power.

And something similar happens with trade: when running a business you are obviously going to try to reduce your inputs. Of anything: one of the ways to succeed is to minimise inputs. And yet when we talk about the whole economy, about trade, the aim and point of the entire exercise is to maximise those imports, those inputs. That's why we're doing it, to gain the maximal amount possible of the resources and labour of foreigners that our people get to consume.

So, much of the time, running a business is trying to beat economics. Thus a businessman can often have a distorted idea of what desirable economic policy is.

There are those who will make the leap from this claim to the one that therefore we must regulate businesses because they are "anti-economic". To which we would respond yes, of course , we must do so. And we do do so, we insist on competitive markets which is exactly the correct antidote to such attempted behaviour.

On the consistency of Willy Hutton

Of the varied commentators that parade and prance across the national life we have a certain weakness for Will Hutton. As a wonderful example of the, umm, consistency which is required to remain as an authoritative national voice over the decades. For example, it's a very good idea, in fact we should remake British business in this image, that companies are largely family owned, with a secure shareholding structure, so that management can get on with looking to the long term of the business and not be distracted by the flightiness of the here today gone in milliseconds nature of the stock market:

The proposed new Companies Act would set out a new legal framework that will privilege long-term, engaged investment. Mutuals should be created to aggregate proxy votes, and cast them on behalf of shareholders. The basic voting share will continue as now, but it will attract more votes the longer it is held; if shares are lent, voting rights will be forgone. This will strike many in London as going too far – a dagger at the heart of British capitalism. But when Google floated, its founders Sergey Brin and Larry Page issued two classes of shares, with class A shares having 10 times more votes than class B – so Brin and Page ended up with 37.6% of the votes for 3.7% of the shares. As they said in the letter accompanying the initial public offering, “we have set up a corporate structure that will make it much harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long-term, innovative approach.” Ten years on from the flotation, who can say they were wrong?

LinkedIn offered its original long-term shareholders 10 times the votes when it floated in 2011, and the Glazers floated Manchester United in New York rather than London because American rules allowed the family shares to have 10 times as many votes. Owners in mainland Europe – from the Wallenbergs in Sweden, who have holdings in most of Sweden’s top companies, to the Piëch family, part-owners of Porsche – use similar devices. Where there is business success and innovation, look for non-British corporate structures.

This trinity – business purpose, trusteeship and a range of committed shareholders – will be the foundation for the creation of purposeful companies, freed to behave like long‑term trusts rather than dance to the tune of peripatetic day traders. They will be value creators rather than rent extractors. It would be stakeholder capitalism in practice.

These proposals must be supported by a new takeover regime. The argument in hostile takeovers should not just be over price: it should be whether business purpose is being protected – with both sides being required to ask their shareholders’ view – and long-term shareholders’ votes privileged over those who have bought for a quick buck. The government should refer bids that create public-interest concerns and use the Competition and Markets Authority more aggressively. In short, takeovers, especially hostile takeovers, should be the exception rather than the rule of British business life.

We quote at length to show that this is not some throw away line, but central to Willy's vision of how business life should operate.

That was in February. This month we are told that it's a very good idea, in fact we should remake British business in this image, that companies are largely not family owned, with a secure shareholding structure, so that management can get on with looking to the long term of the business and not be distracted by the flightiness of the here today gone in milliseconds nature of the stock market:

Former CEO Martin Winterkorn, who resigned last week over the scandal, claims he knew nothing of what was going on, blaming a few unnamed executives for making a catastrophic error of judgment. Winterkorn was the consummate German engineer, knowing every dimension of engine performance; if he did not know how the dirty diesel engines of some popular VW brands were successfully passing US emission tests it was only because he chose not to ask. He did not need to. He had the backing of the Porsche family, who own just over 50% per cent of VW’s shares and who agree to vote as a block; the support too of the state of Saxony with a further 20% per cent –and of union members on the supervisory board. Winterkorn could run a company of 600,000, as Süddeutsche Zeitung remarked, as if it were North Korea.

VW is about production and jobs which trumps concerns about environmental sustainability – a culture than unites unions as much as the Porsche family.

And that's even in the same newspaper. So, umm, yes, the consistency of Willy Hutton. We wonder if he's heard of consistency?

Six points about the Trade Union Bill

1. Making striking more difficult might be a good thing. The most controversial part of the bill is the part requiring at least 50% turnout in strikes overall (so 25% of members must vote in favour), and for public sector strikes the backing of at least 40% of those eligible to vote. This certainly does make striking less easy, but it hardly makes it impossible. If workers really feel that they need to strike, they can still do so, provided they get 25% or 40% of total members (for private and public sector workers respectively) to agree with them. This does make it harder for people like Len McCluskey and Mark Serwotka to call strikes that most union members don’t want, though.
2. Most workers aren’t in a union. Only 14% of private sector workers and 54% of public sector workers – 25% overall – are in a union. That means that strikes, even if they are good for union workers, only benefit a small number of workers. And everyone else is inconvenienced by them: strikes can be costly and time-consuming for people who use the services that the striking workers provide.
3. People who are in a union are generally middle-income workers. According to the ONS, “Middle-income earners were more likely to be trade union members than either high or low paid employees. About 38 per cent of employees who earned between £500 and £999 were members of a trade union, compared with 21 per cent of employees earning £1,000 or more. The proportion of employees earning less than £250 who were trade union members was 15 per cent.” Also, “Employees in professional occupations are more likely to be trade union members” (this includes jobs like nurses).
4. Why shouldn’t firms be allowed to hire agency workers to fill in for striking workers? Workers who take part in official strikes (as defined here) are protected from being fired, except after 12 weeks of striking if the employer has tried to settle the dispute. This privilege is popular but if the only reason to stop firms from hiring replacement workers is that it makes strikes less powerful it’s not clear why this is a bad thing.
5. Some parts of the bill do seem draconian. Making strikers wear armbands may be justifiable if there is a problem with identifying workers who are actually working and who are taking part in the strike – I don’t know if this is the case. Requiring picketers to give their names to the police seems entirely overboard, though, and David Davis is probably right that it’s unnecessary.
6. Strikes do cost money, though some might have a surprising upside too. Between 2011 and 2014 (inclusive) about 3 million days worth of labour were lost directly because of strikes. That's costly and does not include the time lost from people working from home, leaving work early, coming in late, etc. (Giles Wilkes points out that over the same period 520 million days were lost to illness. With that context, 3 million doesn't sound very high.) But there may be surprising upside too – a Cambridge paper released today says that the February 2014 tube strike was a net positives in efficiency terms, because 1 in 20 people who found a new route to work stuck with it after that, and the long-term savings to them from that outweigh the daily losses to the other 19 in 20 workers. I'm not sure if that scales to other strikes, but it's quite a nifty finding either way. (NB: I haven't read the full paper yet, so I can't vouch for it.)

So, voluntary cooperation works again then

There really is, as Garret Hardin pointed out, a problem called the Tragedy of the Commons. When a resource is exploited on an open access basis (ie, a Marxian one) and if demand on that resource is greater than the regeneration capacity then some form of management is required or the resource will be exhausted. In the modern era this means that the bureaucrats get to write lots of regulations. However, as Elinor Ostrom went on to get the Nobel for pointing out, it doesn't have to be this way:

The local Vezo people subsist, on average, on $1.72 a day, well below the $2 a day official poverty line, and depend on fishing. After detailed discussions with the charity .and in village meetings, they decided to institute a series of two to three month closures of just a fifth of their octopus fishing areas, to give stocks time to recover. Just a single, experimental such closure, in 2004, has so far been followed by more than 100 others along the southwest coast. The results, the study shows, have been dramatic. Octopus catches in the month after the closures – carried out under traditional laws, and enforced by the local communities themselves – are seven times as great, on average, as in the month immediately before them. Partly this is down to a big influx of fishers to the newly reopened areas, but – even so – individual catches almost doubled. Average incomes shot up by over 130 per cent, and did not fall significantly during the closure periods because the people then directed their efforts to the 80 per cent of their areas that remained open.

An octopus fishery is hugely well suited to such a system. Relatively short lived creatures (perhaps 6 months in the wild) and they usually die shortly after their one mating extravaganza. But Ostrom's point was much more than that, it was that voluntary cooperation, in a group small enough to be able to cooperate properly (up to some few thousand people perhaps), can indeed solve these sorts of problems. Perhaps, as here, people might need to be told how to do it but that's fine, none of us know everything.

Of course, as all three of Hardin, Ostrom and Coase have pointed out, not all problems of this type can be so solved. Which means that our necessary trick is to work out which ones can be and to leave those to voluntary cooperation to solve. Those that absolutely do require government intervention (which would need the cooperation of tens of millions perhaps, thus requiring that element of compulsion that only government does have) would, well, they'd need government action.

That is, we should be cutting government back to only those things which must be done and which can only be done by government. The rest of it, the stuff we can do for ourselves, we'll get on with ourselves.

Notes from a 'slum-dweller'

Yesterday was quite a heavy one for the ASI Twitter accounts, with what seemed like the world and his politically-correct wife piling onto one the student winners of our ‘Young Writer on Liberty’ competition for his suggestion that Britain could benefit from the creation of slums.

Clearly, 'slums' is an evocative and emotionally-charged word: As the author conceded, there probably wouldn’t have been any pushback if he’d just titled the piece ‘Britain needs more microflats for dynamic urban communities’. And perhaps the title was ultimately misleading, because the post didn’t actually agitate for open sewers, no electricity and dysentry for the UK’s most vulnerable, but instead relaxing restrictions on the type of homes which may be built. Still, the competition asked for bold and original thinking, and that’s exactly what we got.

A common response to the article was (in more safe-for-work terms) ‘Pah! I'd like to see the author actually live in the kind of odious accommodation he calls for!', and other retorts based on the idea that living in a sub-regulatory optimal stock of housing would in fact be unbearable. So, at this point I’d like to take one for the team, and say a few words in defence of slums. For, you see, I’m something of a ‘slum dweller’ myself. (You know what, I very much object to suggesting that where I live is a ‘slum’. But it fits the definition by reference of the original article, namely housing which fails to meet 'acceptable'/ legal living standards, and would be labelled as such by critics).

I’m part of a growing group of ‘property guardians’, who protect and look after a range of disused buildings—from houses to churches to schools and offices—while they’re unoccupied and waiting to be refurbished, demolished or repurposed. With the company I'm a guardian for, none of the properties have gas, and they have only limited hot water points. They're unfurnished, often with stripped-out floors, walls and kitchen equipment.  When they first come to be occupied they're usually grimy and dirty, with broken light fittings and rubbish left by the original inhabitants. And, perhaps most controversially, guardians only need receive two weeks notice before they can be kicked out of their current place.

Most people instinctively recoil when they hear all this. But in exchange for these kinds of conditions, guardians get a place to live at far-below market rent, often in a prime location, and with a amount of living space otherwise unobtainable.

I'm currently living in an old library-cum-theatre-cum-community space in South-East London (see picture above), which was initially inhabited by squatters after the council closed it down. The first guardians to move in reported mouse droppings (from cannibalistic mice, it turns out, for they proceeded to eat my taxidermy collection), people’s urine and general filth. It's covered in warnings about the asbestos, and we wash in temporary showers by the old cubicled toilets.

There's no way in hell that these kind of properties would get built for human habitation.

You wouldn't be able to put a tenant in one, either: The property guardian business only works by circumventing all the regulations and restrictions which apply to the rental market, instead registering guardians as live-in security and granting them a ‘temporary licence agreement’ for a particular room.

But instead of being trashed as exploitative and unconscionable, these property management companies (rightly) win awards for the innovative and socially beneficial service they provide. In London, such schemes are so oversubscribed that prospective guardians sometimes literally race to a new property to claim a space in it. I genuinely love being a guardian.

I’m lucky: I could afford a decent room in a normal flat, but I’d honestly just rather not spend close to 50% of my pay packet on one. The people I live with range from students to freelance artists to young professionals, some of whom have also signed up for the ‘luxury’ of lower rent and the excitement of living in unique spaces. For others, the scheme has allowed them to move to London to study or set up their business; an opportunity they otherwise wouldn’t have been able to afford.

That’s the kind of chance we want more people to have. Property guardianship will only ever be a niche offering available to some, while the current system restricts the type and level of further experimentation that can be done with alternative living setups.

The point of this post isn’t to prove that those with lower incomes can get by in far lower living standards, thankyouverymuch. Instead, it’s to show that there already is clear demand for affordable housing which doesn't conform to current rental standards, and which may fall below the 'acceptable' or accustomed living standard for much of the population.

There’s more than one thing we can can do to help the UK’s housing crisis, some of which are more long-term or politically palatable than others. Personally, I still think building over some of that damn green belt is the best way to go. But underneath the clickbait title of Wednesday’s piece, there’s more than a kernel of truth to the idea that given the choice, some will willingly tradeoff regulations and protection for rent. And I'm one of them.