Ten initiatives to help young people: 8. Help with work-elated transport costs

The cost of travel to and from work falls particularly hard on young people because it often constitutes a higher proportion of their wages than it does for more established people.  The cost can run into thousands of pounds a year,.  Although young people (16-25) with railcards can qualify for one-third reductions on travel, these are only for off-peak travel, which is no use to people travelling to and from work at peak hours. It would help many young people if the cost of journeying to and from work were treated as a legitimate business expense and could be deducted from taxable income.  The proposal is that for those under 25, the ones who qualify for a young person's railcard, they would be allowed the cost of their commuting to and from work as a tax-deductible expense.  This would, of course, mean that the Treasury would receive less tax money from them.  But there would be gains, too, in that it would make work more attractive and would result in more young people in work and off benefits.  Furthermore, the increased spending power this would give some young people would increase the other taxes they paid to HMRC.

Someone in London starting out on perhaps £13,000 a year might currently spend almost £2,500 on an annual season ticket for London's Underground zones 1-6.  If this were tax deductible, it would take them below the threshold and out of income tax altogether.  Given the government's current commitment to raising the starting threshold of income tax to the level of the minimum wage, this would be of help to even more people in the future.

What is true for travel to and from work in London is true for other cities, albeit often on a smaller scale.  Living in city centres tends to be more expensive than living on the outskirts.  Young people are caught between the high rents of central accommodation and the high travel costs incurred by living further out.  Although yearly season tickets can reduce the cost somewhat, many young people simply cannot afford the capital outlay it would take to buy one, and have to settle for monthly or even weekly tickets.  Making commuting costs tax-deductible for people aged under 25 would be of immediate and practical help.

If you don't believe us will you believe Paul Krugman?

We've been repeating ourselves recently in shouting that the entire house price nonsense is simply a result of the restrictions on who may build what and where. The answer being to loosen or abolish those restrictions and the problems will go away. We have also been told that we're just thinking too simplistically. So, instead, how about President Obama's Chair of the Council of Economic Advisers and the Nobel Laureate Paul Krugman?

And this is part of a broader national story. As Jason Furman, the chairman of the White House Council of Economic Advisers, recently pointed out, national housing prices have risen much faster than construction costs since the 1990s, and land-use restrictions are the most likely culprit. Yes, this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.

Here in the UK housing prices have been rising much faster than building costs. We've got the same problem with the same cause: land-use restrictions.

The answer is, as we've been saying and as is said there, relax or abolish those land-use restrictions.

Abolish the Town and Country Planning Act 1947 and successors.

Sense at last on the net migration cap

Few issues divide opinion as much as the net migration cap. The vast majority of the public think immigration is far too high. A small minority – myself included – is more liberal on the issue. Which is why I was encouraged to hear that George Osborne has, risking the wrath of the home secretary, indicated that foreign students will be excluded from official migration figures. It’s entirely possible, of course, that this is no more than a knee-jerk reaction to the news last week that net migration hit a new high of 336,000 in the 12 months to June. The news undermines both the Tories’ unachievable aim of reducing net migration to the low tens of thousands, and ministers’ increasingly fierce rhetoric on the subject.

But education is one of this country’s great success stories. Every year, thousands of students come here to study. Yet the government has made it difficult for them to enter, expensive to stay while studying, and virtually impossible to remain in the UK when their courses are finished, even though, as the Chancellor has pointed out, the British public is far more concerned with “permanent” migrants.

Migration Observatory research in 2011 found that only 29 per cent of the public included students among the groups that they think about when they think about immigrants, far less than the other major groups (asylum applicants, workers and family migrants). Of the students who arrived in 2006, only 17 per cent remained in the UK in 2011, and only 32 per cent of people want student numbers reduced. They’re right: we should encourage the best and brightest students to stay in Britain after graduating. We have a significant comparative advantage in higher education and if we fail to retain the best talent, we are wasting our excellent educational resources.

The government’s adherence to its crude migration target is clouding the debate on the costs and benefits of immigration, and threatening the UK’s reputation as an open, competitive economy. Excluding students from the cap would mitigate some of the harm caused by the arbitrary cap to British business – which has presented them from hiring the best programmers, engineers and scientists from around the world. It is often thought that only large corporations, especially within the financial sectors, recruit non-EU migrants. This is far from the truth: companies of all sizes and sectors benefit from employing non-EU migrant staff.

The government’s policies on immigration aren’t working. But excluding students from the net migration cap is a step in the right direction.

Why shops stock up on christmas goods so early

For the past few weeks I’ve heard/read several people bemoaning the fact that shops are stocking Christmas goods earlier and earlier.  You only need to see a tree and tinsel in the shop window in late October and there will be a mass moan.  Here’s what the moaners don’t understand – you cannot really blame the shops for opening earlier and earlier, it isn’t really their fault.  If the critics knew about non-linearities and feedback effects they would understand what is happening.

To see why shops are opening earlier, consider this simplified feedback model.  Suppose we have M & S, Debenhams, John Lewis and Jarrold’s in the city centre.  A long time ago all four shops used to stock their Christmas goods from December 1st.  One day M & S try to obtain the advantage over the other three by stocking their Christmas goods a week earlier (from November 24th).  Debenhams, John Lewis and Jarrold’s have three choices; they can do nothing, they can emulate M & S, or they can go one better and stock their Christmas goods earlier (say, from November 17th).  If they do nothing they risk losing a week’s vital Christmas trade from opportunist shoppers to M & S; if they emulate M & S then there’s nothing stopping M & S doing the same again, leaving Debenhams, John Lewis and Jarrold’s on the November 24th date and stocking their Christmas goods a week earlier (from November 17th). So, quite naturally in response they pick the best of the three options by stocking their Christmas goods earlier than M & S.  But it doesn’t stop there – what then happens is that each one of their competitors will look to outdo the other by choosing a date earlier than the others.  This continues over the years – and if you obtain the statistics you would find a pattern of increased early Christmas stock to match and/or outdo the competition.

This is what happens when feedback effects occur; the shops are continually under pressure to stock their Christmas goods earlier and earlier to obtain an advantage, which is why you see all these shops beginning their Christmas trading at times that are, to many of you, premature.  Their hand has been forced, lest they lose vital trade time to their competitors.  The shops are subject to "feedback" effects – whereby a particular parameter x changes and via a "feedback" route the change in x causes further change in x (thus x is "feeding" back to itself). Feedback systems, depending on the kind of feedback involved, can produce varying "curves" of change when plotted on graph paper – some of which are quite chaotic.

There is a ‘but’ of course – if it were just down to procuring an advantage by trading earlier then M & S, Debenhams, John Lewis and Jarrold’s would all begin their Christmas trading earlier and earlier to the point where it is far too early for Christmas considerations.  But, of course, it isn’t like that – there is a balance to be struck, because the shelf room they take up with Christmas stock amounts to a loss of shelf space for other more saleable goods if they are displayed too premature for the festive season.  The decorations, wrapping paper, cards, bumper chocolates, etc would be counter-productive stock if they were displayed in August in the hope of obtaining a festive head start on the rival shops – which is why the balance between being too early and too late in the year is of huge importance.

Well, doesn't this just kill the Marmot Review

We did in fact read the Marmot Review, on the grounds that we suffer so that you don't have to. And we were, we're afraid to have to say it, deeply unimpressed with it. We have no doubt at all that a certain amount of the health inequality in the UK is a result of economic inequality. But we would also insist that a certain amount of the economic inequality in the UK is due to health inequality. And it's that second that Marmot entirely disregarded. The Review insisted that if only we reduced economic inequality then health inequality would disappear: even as it is obvious that reducing the economic form of inequality won't have any effect at all on that second form of it. So, we now see this:

Thousands of people with cancer will feel “cold and lonely” this Christmas because they do not have enough money to celebrate or heat their homes, a charity has said.

Almost 170,000 people in the UK with cancer are unable to join in special family events such as Christmas due to a lack of cash, according to Macmillan Cancer Support.

Its survey of almost 1,000 people living with cancer found 9% had to miss out on visiting family and friends because they could not afford it.

Other research of more than 1,600 people who have been in touch with Macmillan found 28% were unable to adequately heat their home in winter due to money worries.

The charity has previously found 83% people with cancer are on average £570 a month worse off as a result of their diagnosis.

That health inequality leads to economic inequality is therefore proven. Marmot is wrong.

It's trivially obvious that this was bad law in the first place

Laws that are passed in a wave of moral panic always, but always, turn out to be bad laws. And so it is, to absolutely no ones' surprise, with the laws over pictures of people in the nuddy being sent over mobile telephones. Some seem to be recognising at least a part of it:

More than 1,000 under-18s have been investigated for sexting since 2012, with many ending up with a conviction under child pornography laws which can affect their education, work and travel opportunities in adulthood. The group’s report said: “The drive for crime recording integrity is needlessly drawing other children and young people into the criminal justice system, impacting on their long-term welfare and future career opportunities.” It called on the Home Office to re-write rules which set out how police record such incidents as crimes, as well as other “low-level” incidents such as fights between children who live in local authority care.

It is worse than this report states, of course it is. Not only are those under 18 who send such pictures possibly criminals, with life long records, those who receive them can be, and sometimes are, prosecuted for the possession of child pornography. A criminal record for such being something that we'd not really wish upon anyone.

To state how absurd the situation is, well, it's absurd. Take a 16 year old girl, entirely legally in a sexual relationship. She may offer her enbonpoint to her lover to be gnawed, kneaded, caressed and kissed, yet if that lover is over 18 and possesses a picture of said breasts in their natural state they are guilty of possession of child pornography. Yes, there are mitigating factors available but the standard penalty is 5 years jail for this.

A 16 year old sends her girlfriend a semi naked selfie and it's 5 years in the jug?

This could only have come about as the result of one of the more absurd moral panics.

What's really at the heart of this is:

The practice of sending nude or explicit photographs over the internet has become “normal” among teenagers who rarely think through the consequences, the agency added.

Delving into our vague memories of Karl Marx, the level of technology determines social relationships. And this is simply one of those times that a change in technology has led to a change in such relationships. Teenagers are, as anyone with a reasonable memory will recall, remarkably interested in sex. The ubiquity of cameras has changed how they express that interest.

Shrug. It hardly seems like a good reason to criminalise the behaviour of an entire generation. The social mores of what is done and how will be sorted out by the society that is doing it and really, no one needs to be jailed for it. Perhaps that process won't be entirely crisis or problem free, but jailing people over sexting isn't going to help matters in the slightest.

Taxes: best when broad

Here at the ASI we like taxes to be as predictable, as flat, as broad-based and as non-distortionary as possible—not to mention as low as possible. Until we've convinced everyone that we don't really need the government for most of the things it does now, we're going to need to raise revenue somehow. We want to do this in a way that reduces social welfare (and the economic activity that produces the goods to consume that produces the individual welfare that we sum to get social welfare) as little as possible.

Now we may sometimes need to use 'Pigovian' taxes—ones that discourage certain activities because they have negative outcomes on others—but most choices do not have substantial externalities. And in a society where property rights are clear and extensive, most substantial externalities will be priced in. For example, when roads are owned, their owners charge what we might call 'congestion charges': lots of problems arise only when some crucial good is un-owned and thus un-priced.

But generally we're just picking up revenue somewhere to pursue some government activity we view as worth the costs. Any non-Pigovian tax is going to reduce economic activity and welfare, but some more than others. For example, taxing investment into capital disincentivises most the activities which bring us greater productivity and wealth in the future. By contrast, if we could magically know, and tax, each individual's innate ability we wouldn't distort any decisions at all—because no decisions could change their tax liability.

The upshot of all of this is that broad-based consumption taxes are the best method of raising tax we can actually do. A 20% (or higher) tax on any good at any time leaves us as free to decide between options as no taxes, even though we have less in total to go round. By contrast any tax on capital or savings biases us in favour of current consumption over future consumption (and an income tax is partly a tax on savings).

The IFS tells us that scrapping all UK VAT exemptions would have raised £26-28bn in 2010-11 (since which we have grown substantially in real and nominal terms). In their view we could compensate everyone fully and still have £3bn left over.

A new job market paper from Bibek Adhikari at Tulane University in New Orleans takes this result further. Because VATs are usually implemented country wide, Adhikari builds 'synthetic controls'—essentially imaginary countries made up of weighted bits of other countries that didn't implement VATs—to properly test the effect of large-scale consumption taxation.

He finds that switching to consumption taxation leads to more capital invested per worker and higher total factor productivity (a measure of how good we are at using inputs), thereby raising output per head. In his words:

Five years after the reform, TFP of the treated group is 9.9 percent higher compared to the synthetic group and at its highest, the TFP of the treated group is 11.6 percent higher than the synthetic group.

So the ASI was right then!

Ten initiatives to help young people: 7. Charter cities

London acts like a magnet, drawing enterprise, industry and talent to its orbit, and leaving other cities, especially in the North, with fewer jobs and opportunities.  The proposed "Northern Powerhouse" is designed to redress this situation to some extent.  Young people below the age of 25 find it particularly difficult outside London because of a shortage of starter jobs.   A further initiative would be to allow selected Northern cities to opt for "Charter City" status, under which they would acquire a series of powers to determine locally things that are otherwise decided nationally.  This would include business rates and a raft of regulations.  Start-ups would be made easier, with specific measures to reduce the costs of starting businesses and the time it took to do so.  

The idea would be to attract investment and jobs, and to create new opportunities for local residents and those who chose to move there.  Young people would benefit from this along with the rest of the population, but there could be specific measures under the "Charter City" status targeted at the under 25s in particular.  They could be exempted from Council Tax.  They could be given assistance with accommodation.  Firms that took on people aged under 25 could be rewarded for doing so by lower rates and taxes.  Planning and zoning regulations could be eased for them.

The proposal for "Charter Cities" borrows something from the Enterprise Zones of a generation ago, but would in addition learn from some of their shortcomings and improve upon the original idea.  Much could be learned from a study of how successful cities abroad manage to make themselves attractive to new businesses and to draw in investment.  For the most part this consists not of handouts and subsidies, but of government, both local and national, removing some of the burdens it imposes on business, and lowering the barriers they must cross to establish themselves.

Germany's "bonfire of restrictions" post World War II led to the German economic miracle, and Hong Kong's famously liberal approach to businesses led to an explosion of wealth and opportunity.  The "Charter Cities" would aim to capture some of that approach and achieve some of that success.  Governments, local and national, would have to think long-term, postponing some of the revenues they could achieve in the present for the prospect of much greater revenues in the future, and the expansion of businesses generated by the measures would provide young people with the prospect of advancement.

Something to remember about COP21

Jeremy Warner is probably right about the outcome of COP21 here, that great gabfest to talk about climate change:

Ever clearer is that the debate on climate change is essentially over. Whether just a modern day delusion or not, virtually all political leaders now buy into the idea of man-made warming, and most of them seem willing to do something about it.

The question, as always, is what should be done. We have long taken the above view: the truth or not of climate change is not the important point. Politics is about what people believe, not the truth. Thus we've been advocating a carbon tax on the grounds that we know they're going to do something so we might as well tell everyone to do what will cure the problem, if it exists, at least cost. Usefully, it's also what every economist looking at the problem has also said, from Stern through Nordhaus to Tol.

However, there's an implication of that:

Much fiercer carbon taxes are coming, driving huge change not just in energy consumption and production, but in all the myriad industries that depend on hydro-carbons, from plastics to automotive, metal bashing and even many service activities, which can be surprisingly energy intensive.

That's actually not true, not here in the UK at least. Because we largely already have a carbon tax. It's not distributed correctly, this is true (too much on petrol, not enough on farming) but overall we're already coughing up about the "correct" amount as calculated by Stern (and more than Nordhaus or Tol would suggest for today). The combination of the fuel duty escalator, the EU's cap and trade, the minimum carbon price and so on, while they're not quite exactly the way it should all be done, do have roughly the right effect and size. According to Stern's numbers the UK should be paying something like £30 billion a year in carbon tax given the roughly 500 million tonnes CO2 a year. We're already paying that much when you tot everything up so we're done.

Yes, it's entirely true that some other people might have a lot of work to do to meet whatever is agreed in Paris. But as far as the UK is concerned we're done, we've already put the correct and recommended policies into place. We've nothing else that we need to do except perhaps a little tinkering here and there. There's most certainly no justification for significant rises in the general tax level, whatever COP21 agrees. Not that that's what we'll be told of course....

There's a very slight problem with asteroid mining

Much excitement as the US decides that it's just fine if people go space mining. Which is interesting of course, for the UN rules say that while you're entirely free to go mining you're not to do it for a profit, it must be "for the benefit of all". Which slightly puts a damper on things. But there's another problem which the new US rules don't address: it's still not possible to own a deposit or resource up there. You are, now, under the new US rules, which the rest of the world doesn't recognise, allowed to explore, find and mine something, for that potential profit. But as soon as you start doing that then anyone else who can get there is entirely allowed to go mine that same deposit. That puts another damper on the economics of the adventure. However, as we've said around here before there's a rather more basic problem with the idea:

If that proposal is too large to take seriously, your horizons may have become too Earth-bound. The would-be asteroid miner Planetary Resources launched back in 2010. Its investors include Larry Page and Eric Schmidt of Google, whose bet on driverless cars sounded pretty silly a few years ago as well. While space mining remains a moonshot, with vast challenges for its pioneers, the potential rewards are stellar. One estimate suggests a single asteroid could contain more platinum than has ever been mined on Earth.

Mining asteroids to provide materials to build something in space sounds like a great idea given the cost of getting mass into space. Very early American houses were built, sometimes, of brick carried as ballast across the Atlantic: it didn't take long for people to realise that digging up some American clay and baking it was a more sensible idea. So it will be up there, use the resources there, not carry everything with us.

However, those starry eyed at the idea of those vast resources of platinum. What is the Earth bound price of platinum going to be if we double the amount that humanity has to play with? Somewhat lower than it currently is would be our prediction. And the elasticity of demand is, with respect to price, quite low for this metal. Meaning that a large increase in supply will lead to a very large decrease in price.

Again as we've said before, finding a bit of platinum up there would allow it to be sold down here for a high price, but a bit wouldn't cover the fixed costs of going. And finding a lot would depress the price possibly sufficiently that finding a lot wouldn't cover the price of going.

Doesn't mean we shouldn't go, doesn't mean we shouldn't go mining, but our slide rule tells us that mining for precious metals ain't gonna be the way to pay for it all. Rather an interesting twist on Adam Smith's diamonds and water paradox really: the truly valuable thing up there is likely to be the water that humans desperately need and is currently in very short supply.