Which aid is worthwhile?

In the second edition of “How to Win Every Argument” I introduce 12 new fallacies, one of which is the False Zero Sum Game.  This is the fallacy of supposing something to be in fixed supply when it is not.  Some suppose that if some countries are to grow richer, others must become poorer.  In fact wealth is not in fixed supply; it can be created.

Another fallacy I did not include is the inverse of this one, where people suppose an unlimited supply of something limited.  Given that countries will not allocate the whole of their GDP to foreign aid, a limited aid budget is available.  The question is “How can it be spent most effectively?”  One answer is that supplied by the Copenhagen Consensus established by Bjorn Lomborg.  Distinguished economists meet every 4 years to assess how to prioritize limited funds.  Its rigour has earned it a reputation for fairness.

In an article published a year ago, Matt Ridley described how Lomborg handed the UN Open Working Group slips of paper representing worthwhile projects and had them place them in order of priority.  They were startled, coming from a mindset that “everything is important.”  Lomborg then had 60 economists calculate the cost-effectiveness of different targets, and list their likely benefits:

1.  Every dollar spent on reducing malnutrition yields $59 in benefits.  Better fed, children’s learning improves and they become more productive members of society.

2.  A dollar spent combating malaria and tuberculosis brings $35 in gains.  These diseases cause sickness that reduces the ability to do productive work.

3.  A dollar spent fighting HIV brings $11 in returns, and so on.

By contrast, each dollar spent on programmes to limit global warming to 2 degrees Celsius brings only 2 cents in benefits.

In his article Ridley lists his own top priorities, adding boosting preprimary education, which he suggests might return $30 per dollar spent.  He suggests that universal access to sexual and reproductive health would save mothers’ lives and lower birthrates, yielding perhaps $150 per dollar spent on it.  Finally Ridley suggests that expanding free trade could deliver “phenomenal improvements to the welfare of the poor in surprisingly quick time.”  “A successful Doha Round of the WTO could deliver annual benefits of $3 trillion for the developing world by 2020, rising to $100 trillion by the end of the century.”

It is a rewarding discipline to compare the effectiveness of different projects, and to explore which ones would do most good with the limited funds.  It has the potential to make aid more effective at achieving worthwhile goals.

Time for a 40% top rate

Lord Lawson has called for George Osborne to lower the top rate of income tax to 40% in his July budget.  It is a timely call that echoes former times.  When Nigel Lawson, as he then was, was preparing his 1988 budget, the ASI published research showing that if he lowered the top rate from 60% to 40%, the Treasury would soon gain revenue, even though the government share would be smaller in relative terms, and the burden on business would be lighter.  

Chancellor Lawson did just that, lowering the top rate to 40% and the starting rate from 29% down to 25%.  This was his trademark tax simplification.  From a myriad of rates and thresholds he now had reduced income tax to only two rates.

Not only did Treasury revenue increase as predicted, but the richest 10% ended up paying a higher share of the total.  From just over a third, their share rose to just under half of the total.  Again, this was what research had forecast would happen.  By contrast, when Labour reneged on its election promise and raised to top rate to 50%, official figures show that it raised nothing like the £2.9bn glibly forecast by Alistair Darling.  And when the coalition lowered it back to 45%, the tax loss was estimated at only £100m.

To cover the political charge of lowering tax for top-rate payers while cutting the welfare bill, Mr Osborne might try a new tactic.  He should lower the top rate from 45% to 40% on a two-year trial basis.  If after that time two results had not been achieved, he should promise to revisit it.

The two results required would be:

1. That the revenue raised from income tax was now higher than it was from a top rate of 45%, or about to become so, and

2.  That the proportion of income tax paid by the top 1%, the top 5% and the top 10% of earners was now higher, or about to become so, than it had been under a top rate of 45%.

Lord Lawson is completely right.  Lowering the top rate to 40% would make Britain a more attractive place to do business.  It would attract talent and investment to boost our economy.  It would achieve growth at no cost to the Exchequer, and it would create jobs.  More to the point, it would send a signal to the world that the UK was once again achievement oriented.  Mr Osborne should be brave.

Sensible regulation

Regulation involves compliance costs that large businesses can afford more readily than can small firms.  Indeed, big business sometimes colludes with government and bureaucracy to have regulations that make market entry difficult for start-up and small competitors.

Regulation should be cost-effective, doing as little economic damage as possible, limiting competition or increasing prices as little as it can while achieving its objectives.  Above every regulator’s desk should be inscribed the words: “Competition is the best regulator,” for it is the ability of the customer to go elsewhere that compels firms to keep their quality high and their prices low.

Above all, regulation should be sensible.  Those who have no experience of business are unlikely to produce sensible regulations unless they consult with those who have.  Part of the problem is that things change.  New products and processes render old regulations irrelevant or inappropriate, and legislators struggle to add extra pages of detail to keep up with events.  The pile of regulatory requirements grows higher.

One possible solution might be to draw on the tradition of English Common Law, relying on precedent rather than on closely-written requirements.  For example, many pages of detail set out what toilet facilities employers have to provide for employees.  A general requirement that employers should have to provide ‘decent toilet facilities’ immediately begs the question of “What counts as decent?”  It could be determined by a series of decisions by juries and tribunals, so that an understanding of what was expected would soon emerge.

The advantage of this method is that it would incorporate the common sense of those sitting in judgement, and could adapt in response to changing times, just as Common Law does. 

This is not the Continental tradition of statute law.  Law there tends to be made by legislators and bureaucrats rather than by juries.  The rules are written down in advance and in detail, rather than emerging from a series of decisions dealing with circumstances.  EU regulations are made in this way, and there is little prospect of them changing.  

Mr Cameron might make part of his EU negotiating stance that the 95% of UK firms which do not export to the EU should not be subject to EU regulations.  A common law system of regulation could then be applied to them, making regulation more sympathetic and more flexible, lowering compliance costs and making it easier for new firms to start up.  It would give a significant boost to the economy.

A proposal to solve the housing crisis

The problem is not that people lack the resources to buy houses; it is that there are simply not enough houses.  People are living longer, more choose to live singly, and immigrants increase the population.  Schemes that help people to obtain mortgages direct extra funds into housing without increasing the supply, and put more upward pressure on house prices.

The Green Belt acts as a corset around our cities, forcing people to live beyond it and commute through it, with attendant pollution and congestion.  They need houses near the edge of cities, but the Green Belt stops them.

The first step is to classify Green Belt land into its three types.  There is verdant land, with fields, meadows and woods – what most people think of when they think about Green Belts.  There is ‘brown,’ or damaged land, including abandoned mines and quarries and former industrial buildings.  Thirdly there is agricultural land, much of it given to intensive cultivation on vast fields using fertilizers and pesticides.  It falls well short of being environmentally friendly.

Once the land is classified into its three types, the verdant land should be left untouched.  All of the ‘brown’ land should be made available for building.  In addition a one-mile deep strip of agricultural land at the inner edge of the Green Belt should be made available for house-building.  In compensation, at least a mile of agricultural land beyond the outer edge of the Green Belt should be added to it as verdant Green Belt.

The grant of planning permission within this extra land near cities would dramatically lower the cost of housing land, putting downward pressure on house prices.  The million extra homes that could be built on this land would have a similar effect.  A move such as this would increase the supply of housing and make it less expensive, bringing home-ownership within reach of many.  

Furthermore, there would be a net gain of properly ‘green’ land by the outer extension of the Belt with more verdant land.  The prospect of extra housing, a curb on the upward spiral of prices, and with no loss of green land, all suggest this might be a practical and popular help to the housing problem.

The Chancellor should unleash his inner self

As Chancellor of the Exchequer Nigel Lawson made it a feature that in every one of his budgets he would simplify taxes and abolish at least one tax altogether.  George Osborne has been dealt a difficult hand, but has played it reasonably well, achieving the highest growth rate in Western Europe, and helping the UK economy create more jobs than the rest of the EU combined, more than 1,000 each day.

One senses that he is at heart a believer in simplifying taxes and lowering them wherever possible.  He wants to emulate Nigel Lawson, perhaps, but is constrained by the need to bring down the deficit and the debt.  Nevertheless, he could take his first steps down Lawson Street in his July budget.

First the abolition.  He should end stamp duty on shares.  This tax diminishes the capital available to companies for investment and expansion.  It takes money from pension funds and decreases both the size of people’s pensions and the incentives to save for them.  Its abolition would immediately increase the value of listed companies, augmenting their capital, and, as Tim Worstall points out, extra capital allied to labour increases productivity and the potential for wage increases.  Abolition would thus be a gain for both pensioners and workers, and the growth generated would soon repay its Treasury shortfall.

For simplification, National Insurance must be a prime candidate.  It is a tax in all but name, and a complex one at that with its various classes and sub-classes.  It is calculated differently from income tax and with different thresholds.  It is a huge burden on employees, especially on the low-paid.  Even the so-called “employer” contribution in fact comes from the wage pool that would otherwise have gone direct to the employee.  Many business leaders and economists have called for NI to be merged with income tax.  The Chancellor could make a start in his July budget by having NI calculated in the same way as income tax, and subject to the same thresholds.  This would avoid many of the costs that the present duplication entails, as well as making life simpler for employers calculating deductions for their workers.  It would also make it more transparent.

The call, therefore, is for lower taxes and simpler taxes.  Over to you, Chancellor.