‘Radical’ policy, electoral cycles, protests and term-length

Implementing ‘radical’ policy carries risks. Abolishing marriage law, scrapping the minimum wage or converting a central banking system into one of free banking carries the inherent risk of ‘shocking’ the population, to put it mildly. There are remedial measures that can be taken but rigid electoral conventions and the length of governments’ terms makes their implementation more difficult.

For example, suddenly abolishing the minimum wage would likely cause immediate harm to those on it (or being paid close to it) if it were done in an improper, ‘shocking’ manner – and that’s not even considering the long-term sociological impact of the resulting aversion to ‘free market’ ideas involving ‘liberalisation’ and ‘deregulation’. Putting aside the long-term individual, communal and intergenerational psychological impact of poorly managed liberalisation policies, the immediate harm is mainly caused by the fact that the affected individuals have little time to prepare for it and, therefore, any immediate harm can be mitigated if policy is announced well in advance.

On the 9th December 2010, the House of Commons voted to raise the tuition fees cap. By then, so many students had already applied to university and were due to start in 2011 (though, admittedly, the tuition fee rise would not be effective until 2012) and the students from the year below who had made plans based on previous estimates would feel the brunt of this. One and a half years is hardly enough for those students and their families to make suitable provisions for a 3 or 4-year, full-time course at Uni (which has increasingly become the preserve of the middle-class).

Furthermore, the sense of an impending tuition fee rise no doubt exacerbated the sentiments necessary for a strike. If, instead, they announced their plans at the start of the term but delayed actual implementation until mid-way or late into the term, any protests may actually be smaller since people would have had a longer time to lobby/reason with the government and, indeed, for the policy’s advocates to reason with and persuade the people.

Thus, when planning to implement such policy, an adequately advanced announcement ensures that those affected have time to make provisions and, therefore, significantly diminish any potential, immediate harm caused upon implementation.

The problem, however, is the phenomenon of behavioural changes during electoral cycles; politicians and governments behave differently before and after elections (think promises before and actions after elections as well as populist policies in the run-up to elections) – they want to win elections and, sometimes, expectations-stability when implementing radical policy is sacrificed.

One possible policy suggestion here is to allow the electorate to choose how long they would like the government’s term to be during the elections (by indicating a preferred term-length and then collating the results according to a collated ranking system or weighted average of some sort – of course, selecting the optimal social preference ordering methodology is controversial but that is beyond the scope of this blog post). If the electorate were to opt for a longer term-length, it would be a signal (quite possibly of confidence or of a desire for longer-lasting stability or simply a desire to delay future elections etc.) and this means that otherwise shocking policy can be implemented with less immediate harm. Conversely, shorter term-lengths will ensure that those governments with shaky mandates will be time-constrained in implementing their more extreme policy proposals.

Local government cuts needn’t be the end of the world

Local governments are having their spending power cut by 1.8% in real terms next year. Local councils pay for things like social care, some education, public transport and roads, and some of the arts. So this cut is not so popular in some quarters.

I hate relying on ‘waste cutting’ as a way of making spending cuts, but local councils really do seem to waste a lot of money. Since 2010 they’ve made £10bn in efficiency savings, and a third of councils say they can make bigger savings. I’m sure at least some of the other two-thirds are just being shy. The Local Government Association estimates that local governments can continue making efficiency savings at between 1 and 2 percent per year. So that’s something.

The big spending items are social care and waste spending. Both of these can be reformed so that people who can afford to have to pay for themselves. Waste collection is often contracted out, and there is academic evidence that doing so results in significant cost reductions. (There’s an easy way for councils who do not already do this to save some cash.) But more significantly there’s no real reason that more of the actual payments for this should not be moved to private residents as well, at least those who can afford it. 

Social care is much trickier and, as the population gets older and lives for longer, paying for it is becoming a bigger and bigger problem. Those people who can afford to pay for their end-of-life care should do so, but there is the problem that this disincentivises saving. Nevertheless it is hard to see a case for people who live in social housing and earn low amounts of money paying for the end-of-life care of people who own the big houses that they live in. Reforming this wouldn’t solve problems in the short run, but it might help stave off a bigger funding problem in the medium run.

Normally everyone focuses in on arts funding. In my view, there is no role for government in arts funding at all. I won’t convince you of this here, but Pete Spence might. And there are all the weird little things that local governments spend their money on that could be cut to save even a tiny bit of money. Where I live, in Lambeth, half the adverts I see seem to be thinly-veiled political campaign posters (paid for by me and my neighbours).

And, funnily enough, there’s one way councils could raise quite a lot of money and solve another problem in the process. The country needs a lot more houses, and planning permission is the main thing standing in the way. In some parts of the country, a piece of agricultural land that gets planning permission rises in value by one hundred times. Councils should be allowed and encouraged to auction off development rights for new houses. That would raise money for them and help tackle the housing shortage.

The problem here is that housing demand is not equal across the country, and it’s the richer places like London and the south east that would benefit the most from this. So there’s probably a case for some minority fraction of the money raised being redistributed to poorer authorities. In general I like the principle of council funding redistribution from rich to poor parts of the country, but that does reduces the incentive for councils to improve the economic prospects of their own areas. Though perhaps they lack the powers to do this anyway.

We have a government deficit that most people want reduced, some very large areas of central government spending that most people want increased (pensions, healthcare), and a general consensus that economic growth is a good thing (so tax rises are out). Something’s gotta give and there is almost nothing that can be cut painlessly. But given some willingness to reform alongside cutting, local government cuts could be the right way to go.

Left – Right / Open – Closed

James Kirkup over at the Telegraph has an article on how the Left-Right divide no longer seems to apply to the UK’s political parties. We should expect Left-wingers to be hostile to free markets and big business, he argues, and Right-wingers to embrace them. However, reality is far less clear-cut.

UKIP is increasingly honing an anti-corporate edge, criticizing both the European Commission and the Labour party for being in bed with large, multinational firms with little regard for ‘the national interest’. UKIP are simultaneously daubed ‘more Thatcherite than Thatcher ’ – and indeed, plays up to this when useful – yet considered left of the Conservatives by voters.

Kirkup also notes that whilst Labour, UKIP and parts of the Conservative leadership are busy immigrant-bashing, a ‘curious band of political actors’ are fighting the immigrant’s corner, including ‘nasty party’ London Mayor BoJo, the ‘old lefty’ Vince Cable, and (apparently, shock horror!) the ASI.

Libertarians have long claimed that the Left/Right distinction is largely redundant, arguing that the Nolan chart – which plots support for economic & political freedom across two axis – yields far clearer understanding of political ideology. Today, variations of such political quizzes and graphs abound, including the somewhat absurdist 5-axis offering.

Kirkup’s analysis is simpler; that politics is no longer about Left or Right, but whether we should be an open or closed nation.

This certainly makes some sense in the current political climate. UKIP isn’t really left or right, but ‘closed’ – looking inwards for a sense of ‘Britishness’ and for British values we may or may not have ever possesed. The distinction can be broken down further, with individual policies analyzed the same way. Conservatives are, for example, typically open to business, but closed to immigration. You could widen the definition of ‘open’ and ‘closed’ out, too – for example, the Lib Dems are open to the issue of prison and drug law reform, whereas the Tories are far more closed. They’re open to things like NHS and schools reform, though – whilst Labour tend to be closed to such possibilities.

It might then be a useful strategy not to consider whether a party is Left or Right wing, but whether individual policies are broadly open or closed. Disregarding the left/right stigma could help individuals focus upon what it is they actually care about. Clearly, this dichotomy doesn’t work for everything – monetary policy, for example, or attitudes towards the EU – although you could argue that openness generally correlates with a preference for smaller government.

Certainly, openness is a defining characteristic of the ASI. We favour openness in terms of international trade, the movement of people, competition, experimentation in the public sector, and social attitudes.

In this context, open policies reflect the freedom of individuals to make their own choices without unnecessary restriction. They encourage new ideas and welcome change. In contrast, closed policies seek to restrict potentially disruptive activity and unwanted influence, in an attempt to maintain some status quo or protect particular interests. This tendency cuts right across the political spectrum, but, as a think tank, is one that we endeavour to avoid.

One reason why we get bad policies

If the What Works Centre for Local Economic Growth didn’t exist someone would have to invent it. It analyses policies to see which are the most effective in supporting and increasing local economic growth. Although its focus is local, most of its findings have national implications.

So far, the centre has looked at a number of policy areas. A theme cutting across all of its findings is that to a large extent we don’t really know what works. Too often, the evidence is inconclusive or lacking.

On access to finance:

  • We found very few studies that look at the impact of schemes on both access to finance (direct effect of the scheme) and on the subsequent performance of firms (indirect effects of the scheme).
  • While most programmes appear to improve access to finance, there is much weaker evidence that this leads to improved firm performance. This makes it much harder to assess whether access to finance interventions really improve the wider economic outcomes (e.g. productivity, employment) that policymakers care about.
  • As with other reviews, we found very few studies that gathered (or had access to) information on scheme costs. As a result, we have very little evidence on the value for money of different interventions.

On business advice:

  • There is insufficient evidence to establish the effectiveness of sector specific programmes compared to more general programmes.
  • We found no high quality impact evaluations that explicitly look at the outcomes for female-headed or BME businesses.
  • We found two high-quality evaluations of programmes aimed at incubating start-ups. Both programmes were targeted at unemployed people and show mixed results overall. However, there is a lack of impact evaluation for Dragons’ Den-type accelerator programmes that aim to launch high-growth businesses and involve competitive entry.

On employment training:

  • We have found little evidence which provides robust, consistent insight into the relative value for money of different approaches. Most assessments of ‘cost per outcome’ fail to provide a control group for comparison.
  • We found no evidence that would suggest local delivery is more or less effective than national delivery.

As the above suggests, on key areas of government policy we lack evidence of what works, particularly when it comes to determining value for money. Given the billions spent on various schemes this simply isn’t good enough.

The way to move forward from this is to work backwards, ensuring that a robust framework of analysis is build into each and every government programme so that we can know how successful (or otherwise) each intervention is. Crucially this should be done in a way that lets it be compared by the same metrics also being measured in other schemes trying to achieve similar outcomes.

Residing in the economic departments of our universities are the brains to do exactly this – to date though, policymakers have lacked the gumption to systematically experiment, measure and evaluate what works. Until they do we will just keep getting ad hoc policies with enough Rumsfeldian known unknowns to make an economist cry.

Philip Salter is director of The Entrepreneurs Network.

Osborne scraps the worst tax in Britain – the ASI’s reaction to the Autumn Statement

Here are our comments on today’s Autumn Statement:

Stamp duty:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

The old stamp duty slab system was one of the worst taxes Britain had, and we welcome the Chancellor’s radicalism in abolishing it, rather than simply tinkering around the edges.

According to the best economic research, raising £1 through stamp duty imposes £2-£5 of cost on the economy. Though it will still, as a transactions tax, cost the economy heavily, the reform will reduce the economic cost substantially. This is a tax cut for the squeezed middle that will make a big difference to a lot of people’s lives. Politically, it could be a game-changer.

Business rates:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

A cap on business rate rises is welcome but the rates system itself needs more fundamental reform. The longer rates take to be revalued, the more distortionary the system is, penalising firms located in areas that have done badly since the last valuation. The longer the gap between rates revaluations, the greater the penalty for businesses in poorer areas and the effective subsidy for businesses in richer ones. Ideally the government should move towards a system of constantly rolling rates revaluations. If Zoopla can judge land values accurately on a rolling basis, so can HM Treasury.

Road infrastructure:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Infrastructure investment, especially into congested roads, is bound to pass a cost-benefit analysis. The problem is that we had to wait this long. If private firms could build roads, funded by tolls, then we’d likely have all of these roads already. As well as providing funds for investment, and making sure the investment goes to the most in-demand areas, pricing roads also means they get used more efficiently.

Pensions: 55% tax, tax-free inherited ISA

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

The Chancellor is right to kill off the iniquitous 55% tax on inherited pensions, as well as the tax on inherited ISAs. If people have saved for their retirement but die before exhausting their nest-egg, it should go straight to their dependents, not to the Chancellor.

NHS Spending:

Communications Manager at the Adam Smith Institute, Kate Andrews, said:

The Conservatives, along with the opposition parties, are playing politics with the NHS budget. Everyone is vying to be seen as the ‘party of the NHS’ but no one is willing to have a serious conversation about the reforms that could make the NHS financially viable for the next ten years, let alone for future generations; like charging small fees for non-emergency visits.

It’s been estimated that the NHS could fall into a budget crisis as early as 2015, which could result in cuts to core staff, longer patient waiting lists, and a deterioration in the quality of health care. While the extra £2 billion per year proposed by Osborne today will offsets short-term worries, it merely kicks the can down the road for a little while longer. Serious proposals to address the spending and demand that comes with free care ‘at the point of use’ could not come soon enough.

Personal Allowance rise:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The Adam Smith Institute has called for the personal allowance to be raised to the full-time minimum wage rate for over a decade and it is welcome to see the government move in this direction. But the National Insurance Contributions threshold has been left untouched, which costs full-time minimum wage workers £667.68 a year. To really help low-income workers the Chancellor should make raising the National Insurance threshold one of his top priorities.

Capital gains tax on property for foreigners:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Capital gains taxes are some of the worst ones on the statute book, making society poorer by reducing the efficiency of investment and its total amount, but if we have to have them then everyone should pay them.

This is not just because of fairness, but because it causes massive distortions when different groups face different tax rates. In this case it’s likely to both lead to excessive foreign ownership of property—both by favouring foreigners over natives in property taxes and by favouring property over other assets for foreigners.

Masters degree loans:

Director of The Entrepreneurs Network, Philip Salter, said:

By extending Entrepreneurs’ Relief and R&D tax credits George Osborne is backing Britain’s entrepreneurs. However, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions. Banks already provide Professional and Career Development Loans, and entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are responding to the demand for loans for postgraduate studies. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.

The deficit:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The deficit is still enormous and much higher than anybody expected at the beginning of this Parliament. We are borrowing £100bn this year, both because planned cuts to the welfare budget have not taken place and because the growth we have had has not translated into much extra tax revenue. But as high as this is, the Chancellor’s plans to reduce the deficit still seem credible – financial markets are lending to the country at unprecedentedly cheap levels and once productivity eventually does start to recover, things should begin to look considerably better.

Notes to editors:

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.