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In the case of sugar, the nanny state really does know best

In the case of sugar, the nanny state really does know best

Boris Johnson created a furore last week by announcing that he was considering getting rid of the so-called sugar tax.

Was he right to question the levy, or does it serve a purpose?

Introduced in April 2018, manufacturers now have to pay more tax if their drinks contain a high amount of sugar.

The producers can still make high sugar drinks and pass the extra cost onto the customers, but over 50 per cent of them seem to have responded by reformulating and cutting back the sugar content of their products.

Now, we know that well-intentioned policies such as the sugar tax can have unforeseen consequences.

For instance, an important paper in the American Economic Review in 2006 by Jerome Adda and Francesca Cornaglia, then at UCL, examined the impact of the different tax rates on cigarettes imposed across various American states.

They found that the higher the tax, the fewer cigarettes were bought. But smokers compensated by both switching to brands with higher tar content and by smoking further down the stub.

If anything, higher taxes led to a more damaging health outcome.

There’s also the – admittedly less firmly based – anecdotal evidence of a rise in shoplifting in Scotland after the minimum pricing law on alcohol was introduced last year. The incentive to steal has certainly been created: a two-litre bottle of strong cider that could be bought for just £2.50 now costs at least £7.50.

On the sugar tax, however, Boris is not on such strong ground.

A 2013 study published in the well-regarded PLOS ONE journal found a clear positive relationship – using evidence across 175 countries – between sugar consumption and national diabetes rates.

Similarly, I published a paper last December in Palgrave Communications with Alex Bentley and Damian Ruck, two anthropologists at the University of Tennessee, looking at obesity and diabetes rates over time in the American states and counties (the subdivisions of the states).

The growth in obesity (and with it, diabetes) in America has been both rapid and frightening.

In 1990, Mississippi had the highest obesity rate of any state, at 15 per cent of the population. But by 2015, such a population would have looked exceptionally svelte – the lowest obesity rate was 22 per cent in Colorado, and several states had rates over 35 per cent.

In 1990, there was no correlation between household income and obesity or diabetes rates. Yet by 2015, a strong negative correlation existed both across the states and across the counties within each state. Poor people had become hugely and disproportionately fat.

The emergence of so-called food deserts – areas where the population has difficulty in accessing affordable and nutritious food – is an important determinant. The evidence also suggests that the growth of high fructose corn syrup in the food economy is another.

There is a definite role for public policy in combating obesity and diabetes. Both the products on the shelves of supermarkets and the content of those products are legitimate concerns.

Of course, the negative link between obesity and income suggests that relatively modest gains in alleviating poverty could yield substantial reductions in obesity and diabetes rates, and the temptation to mock the nanny state is always strong.

But in the case of sugar, nanny sometimes does know best.

As published in City AM Thursday 11th July 2019
Image: Carbonated drinks via  pxhere licensed under CC0 1.0
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The left’s support for university students is fuelled by political self-interest

The left’s support for university students is fuelled by political self-interest

Why do left-wing politicians want to shower money on privileged members of society?

In general, university students have a higher intellectual ability than non-students, and often come from more desirable socio-economic backgrounds. But leftists can’t do enough for them.

For instance, Jeremy Corbyn in 2017 promised to abolish tuition fees from 2018 onwards. He went on: “I don’t see why those that had the historical misfortune to be at university during the £9,000 period should be burdened excessively compared to those that went before or those that come after. I will deal with it.”

The poor old chap didn’t seem to realise that this would cost almost £100bn. But this figure is dwarfed by the commitment made a week ago by would-be Democratic presidential candidate Bernie Sanders.

Sanders said that he would abolish student debt in America – all $1.6 trillion of it.

The answer to the question posed at the start is very easy. Half of the relevant age group in the UK now goes to university – only slightly less than in the US – and being a graduate has become a key determinant in voting Labour here or Democrat over there. It is pure self-interest on the parts of Corbyn and Sanders.

In truth, the people who really need help are those who do not go on to college. They are the ones who really feel the pressure on wage rates, working conditions, and living standards.

Yet Bernie and Jeremy do not seem to show the same level of concern for them. Indeed, they are asking poorer people who do not go to university to pay taxes in order to support the better-off people who do.

In practice, many students will of course never pay off the loans that they have taken out. This is simply because they will not earn above £25,000 a year, the threshold which triggers repayment of nine pence in the pound on anything above this number.

The think tank Onward released a report earlier this year which showed that five years after graduating, 40 per cent of graduates earned less than this threshold. The median earnings of students of creative arts, for example, was only £23,200 even 10 years after graduation.

So we might reasonably wonder why student numbers continue to rise, despite the increasing evidence that having a degree does little or nothing for the earnings of these marginal additions.

In subjects such as creative arts, one possibility is that it is a rational gamble by students. There is a huge level of inequality in the creative industries; a small number earn vast amounts, while most earn relatively little. Why not take a punt and see if you draw a winning ticket?

But the most plausible reason is that, for many students who occupy places at our less prestigious institutions, education is a consumption good rather than an investment. They get paid to spend three years studying without the pressure of having a regular job.

For contrast, Switzerland prospers despite sending only 10 per cent of its young people to university.

Perhaps it’s time for a drastic rethink of the entire system.

As published in City AM Wednesday 3rd July 2019
Image: Student Protest by Roger Blackwell via  Flickr licensed under CC BY-2.0
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Tragedy awaits if we don’t bridge the gap between beliefs and reality in the NHS

Tragedy awaits if we don’t bridge the gap between beliefs and reality in the NHS

A tragic story over the weekend revealed how a man who died of lung cancer was failed abysmally by the NHS.

Two separate sets of doctors omitted to tell him for over a year that he had the disease.

The added poignancy of the news item was that the victim was a relative of Nye Bevan, the Welsh socialist politician who founded the NHS in the late 1940s.

Almost everyone has an account of how either they or someone well-known to them has been let down by the NHS.

On a mundane level, a few years ago I had an accident which involved knee surgery, so I was on crutches for a few weeks. I had been waiting for months for a minor operation on my hand. By coincidence the date was fixed while I was on crutches.

The mere fact that I could not attend meant I went to the back of the queue. In vain, I pointed out that I had just had a knee operation at the same hospital and needed hands for the crutches. It was many weeks later I discovered that the knee and hand consultants had offices literally next door to each other. But their staff were somehow unable to communicate.

The evidence of poor performance by the NHS is not just based on casual empiricism and anecdote. In terms of survival from lung cancer, for example, a major study by the Swedish Institute for Health Economics shows that only one country in the EU has a worse record than the UK: Bulgaria.

Cancer survival rates are improving everywhere, but the UK lags behind. Five-year survival from colon cancer, for example, averages 58 per cent across the EU. It is 52 per cent in the UK.

Bevan was a great believer in Soviet-style central planning, so it was natural for him to set the NHS up on these lines. Significantly, no other developed country has chosen to design their own health service in a centrally-planned way.

Despite the widespread knowledge of the failings of the NHS, it continues to attract strong emotional support across the electorate and defensiveness whenever anyone tentatively suggests reforming it. Witness the frenzied rage which greeted the US ambassador’s remarks earlier this month that America would want access to the NHS in any post-Brexit trade deal.

This dissonance between beliefs and reality is an example of an important challenge to the rational choice theory of economics.

As published in City AM Wednesday 26th June 2019
Image: NHS by Gordon Joly via  Flickr licensed under CC BY-2.0
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If you’re panicking about a spike in oil prices, look to history for a silver lining

If you’re panicking about a spike in oil prices, look to history for a silver lining

The tanker attacks in the Gulf of Oman have raised fears of a sharp increase in the price of oil.

These are currently being offset by worries about a slowdown in the world economy and a drop in the demand for oil.

But what if the conflict escalated and oil prices really did go through the roof?

We’ve actually been here before, in 1973/74. Then, Opec flexed its muscles and the oil price rose four-fold. Today, that would mean the price rising to well over $200 a barrel.

The oil shock in the 1970s came at a time when the institutional structures created by America in the aftermath of the Second World War were already crumbling.

The Bretton Woods agreement of 1944 imposed fixed exchange rates on the western world. Devaluations were few and far between, and countries were expected to focus their monetary policies on stabilising the exchange rate.

This effectively ended in 1971, when President Richard Nixon terminated the convertibility of the US dollar to gold at a fixed price of $35 an ounce.

There are parallels in the world of today. The long-standing trend towards freer trade, for example, has been brought into question.

One of the characters in the popular American comic strip Doonesbury once described the 1970s as a “kidney stone of a decade”. The experience of the UK certainly merited that description. Inflation soared to more than 20 per cent. Unemployment trebled, to the then incredible level of over a million. Strikes plagued the economy. The nationalised industries were worse than useless. It could easily take six months for the state-controlled telephone company to install a landline.

This is the decade in which Jeremy Corbyn’s ideas were formed. He bathes in its rosy glow with fond nostalgia.

There is little chance of inflation surging in a similar way today.

In the early 1970s, the inflationary pressure already existed. The inflation rate in 1973, prior to the oil price increase, was eight per cent in the UK and seven per cent even in Germany. Ted Heath had approved a scheme – which seemed lunatic even at the time – that wages would rise, not every year, but every month in line with prices. Rapidly rising inflation was built into the system.

The oil price rise transferred, in the short term, income from the west to the oil producers.  So a shallow recession would be more or less guaranteed. However, the oil producers eventually have to spend their increased income, and opportunities are created.

Looking back, there was a silver lining. It is not a coincidence that this was the decade in which future Nobel Laureate Bill Nordhaus began his lifelong mission to integrate energy and climate into economic models.

The massive increase in the oil price induced firms to start to move away from reliance on oil. It gave market incentives to invent, fund, and develop new low-carbon products and processes.

A big hike in the oil price today would cause problems. But at least the script is familiar, and it would accelerate carbon reduction.

As published in City AM Wednesday 19th June 2019
Image: Tanker via Pixabay
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From taxes to cats, May’s government has been an affront to Tory ideology

From taxes to cats, May’s government has been an affront to Tory ideology

Theresa May has finally announced her resignation. How can we capture the flavour of her tenure in office?

This can be found in the dry and measured content of the Economic and Fiscal Outlook from the Office for Budget Responsibility (OBR).

The OBR stated in its latest publication in March 2019 that: “the tax receipts-to-GDP ratio ends the forecast in 2023-24 slightly higher than its 2018-19 level”.

Of course, this is a forecast, and all the usual caveats need to be attached. But, remarkably, it was the intention of a Conservative government for taxation to be higher in five years’ time than it is now.

Already, taxes are high. Taxes as a percentage of GDP in 2018/19 were higher than at any time since 1979, the first year with Margaret Thatcher as Prime Minister.

Gordon Brown effectively ran economic policy from 1997 until 2010. Even at the time, he was satirically referred to as the Great Helmsman, a name bestowed upon leaders of centrally-planned economies such as Joseph Stalin.

Brown could not resist detailed meddling of the most microscopic variety, exactly as if he were in charge of a Five Year Plan in the old Soviet Union. But during his long reign, taxes as a percentage of GDP remained lower than they are now.

And it’s not just taxes but regulation too where the government under May is behaving in a decidedly un-Conservative manner.

Despite what the Tories like to say, the culture of interference seems to have got even worse under May.

A rather minor issue symbolises the mentality of the May regime. This is the Cats’ Bill, a private member’s bill sponsored by Rehman Chishti, Tory MP for Gillingham and Rainham. Michael Gove has described the bill as an “inspiration”.

There is undoubtedly a problem with cats being hit by motor vehicles. Campaigners estimate that 250,000 are either killed or injured every year in this way. These incidents create a great deal of stress and unhappiness for the owners. It would obviously be good if the number could be reduced.

The bill would force owners to microchip their cats so that they could be identified. This seems reasonable. But Chishti proposes that a motorist hitting a cat should be required not just to stop, but to report the incident to a vet, on pain of a fine of up to £20,000.

The bill is brought in with the very best of intentions. But it will simply create another regulated industry.

Vets will demand that the motorist pay a fee for their effort in making a record of the accident – even better, that they get a special subsidy from the taxpayer.

Civil servants will be recruited to check that the vets’ forms are correctly filled in. There will be demands for new regulations on vets to ensure that they are trained to comply with the new law, and a way to enforce these rules for drivers.

None of this seems to have occurred to Chishti. For him, a problem exists, and the way you solve it is by state intervention.

Another way, of course, is for owners to take more personal responsibility for their cats, but that doesn’t seem to occur to politicians.

From cats to taxes, May essentially created a social democratic government, not a Conservative one.

As published in City AM Wednesday 29th May 2019

Image: British Cat by Colicaranica via Wikimedia is licensed under CC BY-SA 3.0
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Puzzled over Australia’s shock election result? Economics can help explain

Puzzled over Australia’s shock election result? Economics can help explain

The surprise of the week was the re-election of the centre-right Coalition government in the Australian General Election.

The Labor opposition had led every major opinion poll for the past two years. But Scott Morrison of the Coalition is still Prime Minister – and it is his Labor opponent who is resigning as leader.

Economists, regardless of their own political views, can take pleasure in this result. It is yet another illustration of the importance of what economics calls revealed preference over stated preference.

The concept of stated preference is the bedrock of the entire polling industry. People are asked to give their views on hypothetical questions. Who will you vote for? Do you prefer Pepsi or Coke?

George Gallup introduced opinion polls in America in the 1930s. His flash of genius was to combine questionnaires with what at the time was the infant science of statistical theory. He used the latter, for example, to work out that a broadly accurate picture of opinion in the whole of the US could be obtained from a sample survey of only a few thousand people.

Since then, polling techniques have become much more sophisticated. Their fundamental problem is not the statistical science, but the fact that their results depend upon stated preference. In contrast, with revealed preference people quite literally reveal their preference by making an actual choice. They vote for the Coalition and not Labor. They buy Pepsi and not Coke.

On social media, people – perhaps unwittingly – reveal a great deal about themselves, their opinions, and their emotions. Analysis based on this data will surely supplant the existing approaches of the polling industry.

This is of course by no means the only close result which opinion polls have failed to call. In our own 2017 election, for example, most polls indicated that Theresa May was heading for a comfortable majority.

But the Australian election is also particularly interesting because of the issues over which it was fought, reflected in the results.

There were big swings against Labor in Queensland, for example. A key issue here is coal mining – in particular, a major new mine proposed by the Adani company.

A secret opinion survey was leaked on 14 May. It claimed to find that in Queensland itself the coal mining industry was “nearing crisis” and had “strong negative perceptions”.

Yet on 18 May, the Queensland electorate swung decisively against Labor, which had made climate change and emissions control a major part of its platform.

Similarly, Labor campaigned on the policy of abolishing franking credits. These may seem esoteric, but the effect was widely understood: pensions would become taxed more heavily. As a result, over-65s voted overwhelmingly against Labor.

No matter how right-on they may seem and how much support they get in polls, many environmentalist policies are not popular in practice. The gilet jaunes movement in France is further testimony to this.

And people reveal a consistent preference for paying less rather than more tax.

Whoever becomes Conservative leader might find it useful to learn from the Australian result.

As published in City AM Wednesday 22nd May 2019
Image: Australian Voting Booths by Australian Electoral Commission via Wikimedia is licensed under CC BY 3.0 AU
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