Getting educated – like it’s the 21st century

Innovative independent institutions are for those who can afford it and the rest will make do with the stagnant state school system: a status quo forthcoming generations should accept no more. An education revolution is on the horizon and Scotland, following its anticlimactic devolution of education, could lead the change. Solutions to the present state have existed for decades and – if actualised – promise to reinvent the way schooling is viewed for good. The rise of ideas meriting attention must coincide with resolved political leadership to eliminate inertia impeding the education model’s evolution.

Shuffling taxpayers’ money back and forth between priorities has left us at a dead-end off the path to progress. Free university tuition fees for the wealthiest in Scotland are funded by taxes from the pockets of school-leavers who have gone straight into the job market. College places – the stepping stone to higher education for many young people – have suffered drastic decline after a sudden culling of courses. The Scottish government now funds free school meals for every child, regardless of need, until Primary 3. Meanwhile the poorest are taxed on almost half their income.

Politicians with the guts to be radical in education are scarce but an alternative to spending more money is necessary. Improving the quality of state schools from the heart of government has failed, and when not completely, has failed to achieve anywhere near the success possible if the public had the freedom to choose their schools. This includes, most importantly, having the pick of the private sector’s offerings. The idea is straightforward: individuals choose the best educational options available to them with their own interests in mind. A demand for the best quality schools that inevitably ensues is met on the supply side by a multiplication of the best schools and practices. The poorest schools and outdated methods become null and void, unwanted, and die out faster.

Placing choice in the hands of those the decision affects generally does not fail to deliver the goods. Products, services and technology once only enjoyed by the wealthy are now widespread and accessible for the common man. But education has not evolved like everything else. So rare are independent schools that most of the existing tiny private sector is branded elitist. And so self-deprecating are we encouraged to react to our great educational institutions that the recurring “Should private schools be banned?” debate is taken seriously and considered the only radical option. One day, these leading independent schools, though it will require us to be radical in the opposite direction, could be accessible to the average person too.

School vouchers is the practical policy in which this school choice could take shape. The voucher would be a means of subsidising the child as the consumer; instead of subsidising the state’s provision as happens now. Accountability and efficiency have so far been lost while politicians spend other people’s money on other people’s education. Each voucher would represent the cost of the state educating the child. Of course there are then many ways the policy can be created to cater to various factors and income backgrounds. First proposed by Milton Friedman all the way back in the 1960s, school vouchers have featured in UK Party manifestos but have never come to fruition here.

The mantra of Scotland’s current leadership advocates their goal of a fairer Scotland we are all supposed to be striving towards. These are mere words. True fairness is the enhancing of the freedom to choose on the part of everybody. And as it stands this process is not happening. Implementing choice in policy is absolutely imperative as it will not just be conducive to overall improvement of education but it is a tool to innovate and evolve – the key to advancement.

Two cheers for Paul Krugman

Paul Krugman says that this (from this Branco Milanovic paper) gives you recent history in one chart, and it’s hard to disagree:

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Everyone got richer in real terms, although some a lot more than others – and this doesn’t fully include technological developments that make pocket supercomputers cheap enough that even people on quite low incomes (for rich countries) can afford them. Like Scott I am more interested in the bottom 80 percent than the top 20 percent, so this is broadly good news. The bottom 10 percent do seem to be left behind to some extent, but African poverty has still fallen by 38% during this period, and most health-related metrics have improved. Maybe issuing more unskilled work visas to poor Africans and Indians would help to boost the incomes of the bottom 10 percent even more.

In another post, Krugman points out that the left’s “econoheroes” tend to be of a pretty good academic calibre (he cites himself and Joe Stiglitz, both Nobel Prize winners), whereas the most popular economists on the right tend to be slightly less impressive supply-siders. I think that’s fair, and it’s a pity. When’s the last time you heard a right-wing pundit citing Nobel Prize winner (and not-so-secret free marketeer) Eugene Fama’s work on the efficiency of financial markets? Or, indeed, Milton Friedman’s monetary prescription for stagnant economies like Japan or, now, the Eurozone?

Well, we try to here at the Adam Smith Institute, and a very honourable mention goes to the excellent James Pethokoukis at the American Enterprise Institute. There are others, but in general I think Krugman’s point is pretty fair. For example, I often meet right-wingers who think using monetary policy to generate extra inflation during demand-side recessions is somehow a left-wing idea. This would come as a surprise to Milton Friedman!

I have a theory about why: the post-Cold War consensus has been so good for us – that is, the “Overton Window” of debate has shifted so far rightwards — that the best ideas have been absorbed by the ‘centre’ and the less compelling ones are all that’s left over. That seems unsatisfactory to me, but it does leave me wondering what it means to be a free marketeer, if not a strong preoccupation with the supply side. Maybe Hayek has an answer.

The Negative Income Tax and Basic Income are pretty much the same thing

I’ve been talking about the Negative Income Tax lately, and equating it with the idea of a Basic Income. I think most of the policies’ respective advocates would deny that they’re the same policy. In this post I’m going to outline why that’s incorrect and I’m happy to say that they’re basically the same thing.

For the uninitiated, a Negative Income Tax is a form of welfare that replaces most existing welfare schemes with a single payment that supplements the income of the unemployed and low-paid. The payment is withdrawn as your earnings increase, ideally at a gradual enough rate that increasing your earnings (and hence reducing leisure time) is always worthwhile.

An example: a £5,000 basic payment at a 50% marginal withdrawal rate (this means that for every additional pound earned, the worker will receive 50p less in NIT payments). Someone with an income of zero would receive an NIT payment of £5,000, or just under £100/week. If they took a job that paid £5,000/year, they would receive a top-up of £2,500/year; that paid £7,500, a top-up of £1,250/year. Once they reached £10,000/year, they would receive nothing in NIT.

This idea was supported by Milton Friedman, among others, and has a reasonably strong pedigree on the right. Even libertarians who object to income redistribution in principle usually concede that a Negative Income Tax is the least bad form of welfare, because it is administratively simple and perverts incentives less than most welfare schemes. It is particularly appealing to many liberals and libertarians because it is unpaternalistic.

A Basic Income, on the other hand, is usually conceived as a flat payment to everybody irrespective of circumstance. This leads to a very big problem: assuming it replaces most forms of welfare as an NIT does, a basic income high enough for unemployed workers to subsist on would simply not be affordable to pay to everyone. A policy that ideally would be designed to help the poor ends up being a very expensive subsidy to people who do not need extra money.

Advocates of the Basic Income recognize this, and their solution is typically to use the tax system to ‘claw back’ the payment from relatively high earners. So everyone gets the money, but it is withdrawn according to earnings.

In practice, that’s more or less the same as a Negative Income Tax – the only difference is whether the withdrawal takes place at the ‘front’ of the payment (as with the NIT), or the ‘end’ (as with the Basic Income). Strange as it may seem, the policies advocated by Milton Friedman and the Green Party are the same in all but the technical detail.

But even if there is a surprising amount of agreement in terms of the kind of welfare we’d like to see, the detail may be more difficult to agree on. How much should a ‘basic income’ be? When should it begin to be withdrawn, and at what rate?

Questions like this are, I think, likely to be where what breaks up this (unholy?) alliance. But maybe not. Traditional policies like the minimum wage probably do more harm than good, and, rightfully, the question of how to improve the lives of the low paid does not seem to be going away. It will take compromise, but in the Negative Income Tax / Basic Income, we may have an answer.

Ignore the doomsayers: The recovery is real

Some commentators claim that the UK’s current economic recovery is illusory. They say that the recovery is based on an artificial boom fuelled by loose money and will eventually come crashing down to earth.

I think it is very likely that this view is wrong, for at least two reasons. One, the UK does not have loose money that would fuel a credit boom. Two, the best tool we have for telling if the recovery is ‘real’ or not is the market. And the market is telling us that it sees things as looking good.

The idea that we have loose money is extremely common. It is based on the assumption that a Bank of England base rate of 0.5%, historically very low, must mean that money is loose. This is what Milton Friedman referred to as the ‘interest rate fallacy’. It is a fallacy because it fails to ask the key question: ‘compared to what?’

That ‘what’ is, or ought to be, the ‘neutral rate of interest’ – the interest rate where, in David Beckworth’s words, “monetary policy is neither too simulative nor too contractionary and is pushing the economy toward its full potential.” The tightness of money is determined by the central bank rate relative to the neutral rate. If the neutral rate of interest is lower than the base rate, then money is tight.

Is the neutral rate of interest in the UK currently above or below 0.5%? It’s hard to say. Milton Friedman pointed out that usually low rates were a sign of tight, not easy money. This is because low rates almost always coincide with very low inflation, nominal GDP growth and money growth—which Friedman pointed out were much better ways of assessing the stance of policy.

It’s possible to infer from things like NGDP growth (well-below trend until recently) that money has been unusually tight. NGDP growth seems to be returning to the trend rate, if not the trend level, that it was before the crisis. People calling ‘easy money’ may disagree, but if they are simply pointing to low interest rates without trying to compare them to the neutral rate, they’re not proving anything at all.

But even if it’s not down to easy money, maybe the recovery really does sit upon a throne of lies that will inevitably collapse. How could we tell?

Since the world is very, very complex, it is unlikely that one individual expert or panel of experts will be able to possess all the information they would need to make reliable predictions about the future.

Where possible, we should prefer the ‘wisdom of crowds’. And we have something that can do so very effectively: the market. And the market seems pretty optimistic: the FTSE 100 is growing strongly; firms are taking on new staff; gilt yields are extremely low.

Second-guessing the market is particularly unusual for people on the right of the political spectrum. As Josh Barro put it recently, “A conservative is somebody who thinks every market is efficient — except the Treasury bond market.” (A point worth remembering next time you read about the UK’s “looming debt crisis”.)

Of course markets can get things wrong. There is a high degree of uncertainty involved in all predictions like this. But, given a choice between the aggregated judgement of millions of market participants, all bringing their local knowledge to bear, and the judgment of a few experts, I’ll go with the market.

In summary, there’s no reason to think that either we have excessively loose money or that the recovery is illusory. Note that mine is an entirely negative argument – I am not claiming that money is too tight, or just right, nor am I claiming that markets are correct. I’m saying that, given the information we have available to us, we should resist the urge to doomsay. In short: don’t worry, be happy.

Demand Matters

Markets are about supply and demand. Scarcely a more banal thing could be said in economics, and yet some of the time it seems like free-market economists look only at supply. Glance over policy recommendations from a free-marketeer and you’ll often see only tools for freeing up supply—labour market deregulation, planning reform, a bonfire of the quangos, an end to unbalancing subsidies or tax breaks, liberalisation of trade barriers. These are all fantastic things, which we definitely need. And even through the visor of the AS/AD model, even in a slump, these can make things better both by cutting prices and by raising wealth. But either deliberately or unconsciously, these economists are completely avoiding the demand side.

Is this because there are no doctrinaire libertarian things that can be done on the demand side? I’ve certainly heard many policies like quantitative easing called “socialism” by fellow travellers, but I’d like to think that my libertarian-leaning friends were more thoughtful than instinctively dismissing ideas they see as ideologically impure out of hand.

And further than that, there are things we can do to make the demand side more libertarian, at least if we don’t make the perfect the enemy of the good. School voucher systems are not decried for their “socialism” by libertarians despite the fact that under these systems schools are still paid for and run by the state. Monetary policies that are more free market (and more sensible) than our current one should be looked upon in the same way. It’s not the case that anything short of abolishing the central bank is “socialism”—unless we want to completely devalue the word. And even if an intermediate policy were a form of “socialism” or “central planning”, the realistic alternative is not a free market in money, but an abysmal central plan!

What are these intermediate policies that free-marketeers seem to be ignoring? Firstly there is nominal income targeting, which relies on markets both to stabilise demand and to allocate that demand among competing industries according to consumer preferences; and secondly counter-cyclical taxes, which rise automatically in good times and fall in bad times. Those are both thoroughly libertarian and entirely focused on demand.

In fact, the two most important libertarian economists of the 20th century—Friedrich A. Hayek and Milton Friedman—both endorsed demand-side policy, in the right circumstances. Friedman blamed the US Great Depression on the Federal Reserve, allowing a massive collapse in the money supply and aggregate demand. Hayek said that after the inevitable collapse of a misallocated capital structure there could also be “secondary deflations”, where aggregate demand collapses and there is a costly adjustment period. Both would support monetary policy to deal with this issue—stabilising demand, so as to avoid painful adjustments from big inflationary or deflationary shocks. If money is non-neutral in the boom, why would it be neutral in the downturn?

One response libertarians might make is that Say’s Law shows there is nothing we can do about demand. But Say’s Law clearly doesn’t hold in the short-run, and Austrian economists who rightly critique the assumptions economists often make about equilibria should be absolutely clear of this. In the short-run, a dip in aggregate demand—absent any response from the government, central bank, or hypothetical free banks working together—necessitates a period of deflation. But we know that (at least nominal) wages are sticky-downwards, meaning that calling for an adjustment to the new equilibrium means calling for years of the grave evil of unemployment foisted on millions. Say’s Law reasserts itself in the medium- to long-run, and by then the misery and destruction of potential wealth has all already happened.

What libertarians are missing is that the relentless focus on supply is leaving them almost completely out of the conversation, and thus leading to worse policy than necessary. If free marketeers were talking about the best things to do on the demand side, as well as on the supply side, then there would be less of the all-eggs-in-one-basket big project spending stimulus, and more diverse market-oriented ways of countering the demand shortfall.