The Pin Factory Blog

The Adam Smith Institute is looking for a bright, enthusiastic student on their gap year between school and university to come and work for us. The role would be a mixture of administrative work around the office and helping the ASI team with their research and policy work on an ad hoc basis.

It’s a great opportunity if you want to gain some experience in an exciting think tank. We are nice, fun people to work with, so candidates should enjoy working with others as part of a team. You should be interested in our work and willing to roll up your sleeves to do some of the less glamorous work around the office too.

This position pays £5/hour, and depending on the candidate is either a six-month or year-long position.

If you’d like to apply, send the following to tng@adamsmith.org:

1. an up-to-date CV;
2. two hundred words about yourself and why you think you’d be good for the job;
3. a four hundred word blogpost in the style of the ASI blog about why liberty is the best policy in an area of your choosing.

Applications close on June 10th.

"Most of the Irish establishment is sadly mistaken in thinking that our problems are rooted in rogue banking behaviour or lax political oversight. The real problem was systematically mispriced credit resulting from our EMU membership." So says Cormac Lucey at Liberal Ireland, who argues that the factors in Ireland's ruin all seem to have one point of origin — the euro. Here's a graph of Dublin property prices, before and after entry to the euro:

The problem is that nobody can know what the natural rate of interest should be to prevent excess savings or borrowing. I am probably in a minority of people who think that euro rates were both too low during the boom, and are now too high — the worst of both worlds and a major factor in the Eurozone's continued recession. Contrast that with a country like Sweden, which has managed to keep nominal GDP fairly steady over the last few years and has avoided the worst of the global recession. As a less-bad option, the case for lots of different central banks with their own currencies trying lots of different monetary policies grows.

In yesterday's City AM I responded to Vince Cable's condemnation of the boyband One Direction's £25m earnings. The point that Cable missed, I argued, was that income is a reflection of value created for other people: 

Earnings are not a reflection of moral worth, they’re a product of how much other people are willing to pay for your work. If a lot of people are willing to pay you just a little, you can make a lot of money.

To understand how high pay can be fair, the philosopher Robert Nozick suggested a thought experiment. Imagine a society where wealth was distributed equally. Now suppose a great basketball player, like the legendary US player Wilt Chamberlain, comes along. Everyone wants to see Chamberlain play, and his team charges fans an extra 25 cents to see him.

After the first season, 1m people have paid to see Chamberlain’s games. His income for that season is $250,000 – much more than anyone started off with. Is there an injustice here? Chamberlain is happy and his fans are happy. They could have spent their money on something else, but seeing him added enough value to their lives to be worth that extra 25 cents.

Would anyone say that these earnings were “grossly immoral”? Adding a little bit of value to a lot of people’s lives is a good thing, and if people are willing to pay for that, good for the Chamberlains of this world. Some may prefer Beethoven to Harry Styles, but One Direction’s fans disagree.

It hasn't propelled me to international pop-stardom, as I'd hoped, but you might still want to read the whole thing.

There's a lot to like about the Reason Foundation's new report, "The Argument for Equal Marriage". Its basic argument is:

1. Marriage has changed enormously over time.
2. Same-sex marriage is just another change, and on the scale of possible changes that can be made to "marriage", it is far less significant than changes that have already been made to the status of women.
3. "Traditional" marriage as defined by the monotheistic traditions has treated both women and gay people badly, and it is therefore not wise to use it as a basis for law or public policy.

As the report says,

"Marriage has been put through the laundromat of the Enlightenment, two waves of feminism, and the civil rights movement: what we have now would be unrecognizable to Bracton or Blackstone or Jesus, and this is a good thing. If one were to isolate the greatest change in the definition of marriage over time, it would come down to a choice between the enactment of unilateral divorce (with its attendant effect on murder, suicide, and domestic violence rates) and the ending of coverture, granting women property rights in marriage and separate legal personality. Compared to these definitional shifts, equal marriage is peanuts."

Read the whole report. Last month I wrote for The Guardian that marriage, gay or straight, should be taken out of the hands of the state.

Immigration is good for us. With every major party now promising to ‘get tough’ on immigration, it’s easy to forget that immigrants bring new skills to the country, allow for more specialization, tend to be more entrepreneurial than average, pay more in to the welfare state than they take out, and make things cheaper by doing the jobs that Britons won't.

No political figure of any stature will say any of these things. Instead, people like David Cameron and Ed Miliband and Nick Clegg focus on the two potential problems with immigration: that, other things being equal, immigrants may push down average wages, and that an unrestricted welfare state incentivises immigration by people who want to draw benefits instead of working.

These are both valid points, but insignificant ones. Ben Powell points out that the wage-depression claim ignores the fact that immigrants demand goods and services (raising wages for those things) as well as supplying them. It also assumes that immigrants always directly compete with indigenous workers for jobs. If immigrants are doing jobs that indigenous workers will not (or cannot) do, like highly unskilled service industry work, then they are not outcompeting indigenous workers.

There is quite a bit of evidence to suggest that this is the case in Britain. Fraser Nelson has shown the high effective marginal tax rates that people on welfare face if they want to enter the workforce. If these Britons are unwilling to take low-paid jobs, then there is no harm to them caused by immigrants taking these jobs. On the contrary, the fact that these jobs are being done by someone adds to the number of goods and services that everyone in Britain can take advantage of. (There is one other point: if people’s lives are getting better overall, who cares where in the world they happened to be born? Not me. But even I do not expect any politician to go so far as to say that all men are created equal.)

The second point against immigrants is usually the one focused on by politicians. The problem here is that a valid theoretical point is assumed to be a significant problem in actual fact. Here, the numbers simply do not bear the theory out.

As it happens, we don’t actually have an unrestricted welfare state – most major forms of welfare and state services are limited to UK residents. And, if anything, the evidence suggests that immigrants are less likely than Britons to draw out of work benefits – according to Jonathan Portes, “migrants represent about 13% of all workers, but only 7% percent of out-of-work claimants”. What a surprise: the people leaving behind their friends, family and communities are the ones who most want to make better lives for themselves. Again and again, empirical studies have shown that immigrants pay more in than they take out.

In any case, if we have a benefits system that is open to exploitation, why only worry about it being exploited by non-Britons? Conversely, if benefits are necessary to maintain a basic standard of welfare, why doesn't the welfare of non-Britons matter? There is a good case for reforming benefits so that they complement work instead of substituting it, but that has nothing to do with immigration.

Like most ‘major policy announcements’, the specific proposals outlined by the Prime Minister today will probably be forgotten soon enough. Even if they do end up becoming law, they will not affect many people. But what David Cameron and Ed Miliband and Nick Clegg have achieved is to throw out any chance of a policy line that, however unpopular, has the rare political virtue of being right.

It’s not saying much, but this was George Osborne’s best budget yet. These tax cuts are long overdue, though they are not significant enough to solve Britain’s growth problem. Cutting taxes for businesses will stimulate investment and job creation, and reducing the tax burden for low- and middle-income earners will make life easier for them.

But government spending is still rising by £20bn this year. The government’s plans to meddle in the housing market are staggeringly misjudged, and we risk repeating exactly the same policy mistake that led to the US subprime mortgage bubble. And we’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end in sight.

The Good

Personal allowance raised to £10,000 by 2014. Income taxes are smothering workers. The taxman takes more than 30p out of every pound earned by low- and middle-income workers above the personal allowance. Raising the personal allowance to £10,000 ahead of schedule is a significant step to reducing the tax burden for low- and middle-income workers, and creates the tantalising prospect of the personal allowance being pegged to the minimum wage rate in 2015.

Corporation tax to be cut to 20% by 2015. At last, an encouragingly bold tax cut for business. The corporation tax rate will be falling from 28% to 24% this April, then from 24% to 21% next year, and finally from 21% to 20% in 2015. Although this does indeed put Britain ahead of other ‘major economies’, small countries like Ireland (which has a corporation tax rate of just 12.5%) will still be able to outcompete Britain in attracting investment from multinational corporations.

Employers’ national insurance bills cut by £2,000 for every firm. Employers' NICs are a direct tax on jobs, so tax relief should allow some businesses to take on extra employees. The cut will have the most pronounced impact on micro-businesses, 450,000 of which will reportedly be taken out of tax altogether.

Beer duty to be cut by 1p, and the ‘beer duty escalator’ to be scrapped. Two weeks ago the government was pushing for minimum alcohol pricing, and now it’s cutting the price of beer. It might not be cutting duty by much, but it’s a welcome change after years of miserable, anti-poor paternalism. And scrapping the outrageous ‘beer duty escalator’ is long overdue. No Chancellor should be able to pretend that a tax hike is out of their hands.

The Bad

The Bank of England’s 2% inflation target to stay in place. Inflation targeting has failed. It creates invisible excess inflation during boom periods (by keeping prices rising by 2% when prices should be falling because of productivity gains) and cannot offset changes in velocity in bust periods, leading to secondary deflations that amplify the damage caused by the initial bust. An alternative, rules-based system (such as an NGDP target based on a futures market instead of the discretion of the Monetary Policy Committee) would be a much less harmful mandate for the Bank of England. Mark Carney had indicated that he was sympathetic to this kind of reform. By giving up the chance to rethink British monetary policy, the Chancellor has snatched defeat from the jaws of victory.

20% tax relief on childcare vouchers up to £6,000 per child from 2015. Expensive childcare is a consequence of the costly regulations, such as mandatory maximum children-to-staff ratios (3:1 for under-5s and 1:1 for infants under one year old). If the government wants to make childcare more affordable, cutting these sorts of regulations back would be a better place to start than using taxpayers’ money to pay for childcare for parents earning up to £300,000/year.

Tax avoidance and evasion measures aimed at recouping £3bn in unpaid taxes. Tax avoidance is a legal and legitimate response to the perverse incentives of a complex tax code created by politicians trying to exempt a pet project or special interest that they favour. Tax evasion, too, is a rational response to high taxes and is only possible because of the complications in our tax code. The best way to reduce evasion is to simplify the tax code, not to persecute people taking advantages of a corrupt system.

£3bn extra for new projects every year from 2015-16 until 2020, totalling £15bn. Capital spending projects are always popular with politicians who want to leave a expensive railway line, bridge or motorway as a legacy, but there is a long history of infrastructure projects doing little help their flagging economies. Barack Obama’s $800bn stimulus package, launched in 2009, focused on ‘shovel-ready’ projects and did virtually nothing, as did successive Japanese stimulus programmes in the 1990s and 2000s. Any extra money from spending cuts should be given back to the private sector through tax cuts, where it can do the most good.

…and the Ugly

Bank guarantees to underpin £130bn of new mortgage lending for three years from 2014. Apparently the Treasury has not learned the lesson of 2008: injecting taxpayer money into the housing sector will simply inflate prices, distorting price signals and stoking the housing bubble that already seems to be growing in the housing sector. Houses are expensive because supply is restricted by the planning system. Instead of throwing money at the problem and driving prices up even more, the government should have the courage to liberalize planning to allow more development, including on green belt land.

Government ministers picking winners. Fiddling with tax breaks for specific industries is a mug’s game. There is no way the government can know which industries to promote, and these projects inevitably collapse into a mess of overcomplicated grant schemes and politics-driven bailouts of failing firms. Only consumers can pick winners.

Government spending is still rising. Despite all the talk of cuts, the government will still be spending £761bn this year, nearly £20bn more than last year. By leaving healthcare alone and failing to carry out the big structural reforms needed to reduce social security spending, the government  is not matching its rhetoric on spending with the action needed. We’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end to the borrowing in sight.

Bryan Caplan lists a few reasons to be sceptical about the Card & Krueger study that purportedly shows no unemployment effect from minimum wages. His overall point is that, beyond traditional labour economics, there is quite a lot of empirical evidence to show that minimum wages create unemployment. My favourite point:

4. The literature on Keynesian macroeconomics.  If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment.  If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

I wrote about the labour economics research into minimum wages in a paper on the Living Wage last year. Even if you think minimum wages are a good thing, the levelof ambiguity around the consequences of raising the minimum wage should give you pause for thought. There are no straightforward solutions to low pay, but if there are ways of increasing the net income of the poor that don't risk putting people on the margin out of work, aren't these the ones that we should focus on?

The daffodils are out and the annual uproar at bankers' bonuses is upon us. The EU’s bonus cap is a well-timed, predictably silly play to the gallery, but we shouldn't assume that our own banking rules are much more sensible.

Any rules about what private firms pay their employees are, of course, absurd. Aside from the base illiberalism of interfering in people’s privacy, there is the practical problem that a cap on pay would drive bankers abroad. Imagine if there was a cap on footballers’ pay – within a year, the Swiss Premier League would be world class.

A cap on bonuses will also make financial firms more sensitive to downturns in business. The purpose of bonuses is to give firms flexibility in how much they pay, so that they can pay employees much less in bad years than they would in good years without having to sack people.

In a free market, the problem of bonuses encouraging short-term profit maximisation at the cost of long-term sustainability would not be an issue – the firms that pursued that strategy would go out of business soon enough. The problem is that any large firm that acts badly like this is protected from its mistakes by things like deposit insurance and bailouts.

The other problem is that the government has already bailed out quite a few banks, and those banks also want to pay bonuses to their employees. On the one hand, this is perfectly sensible – it’s crucial that we have competent executives in government-owned banks to minimise the loss of value to taxpayers.

On the other hand, aren’t we against extravagant public sector pay? The big problem with the public sector is that, internally, it lacks the price signals that make markets work relatively efficiently. It’s true that the public sector can mimic market prices to an extent, but only very crudely. RBS can borrow money at a significant discount because of the implied promise of government backing. (All banks operate under the promise of an implied government bailout, and explicit deposit insurance.) Without a functioning price system, there’s no way of telling how much RBS’s CEO deserves.

The reality is that nobody really knows how much to pay RBS’s executives. Mimicking the private sector isn’t enough – without private shareholders to answer to and a genuine threat of loss, RBS’s bonuses are no more wiser spent than Bury council’s iPads for its binmen.

Yes, a cap on bonuses is a dumb idea. But so is any state involvement in the banking sector. If the government’s going to fight against the latest example of EU overreach, it would do well to get its own house in order as well.

Robert Halfon MP’s campaign to reintroduce the 10p tax now appears to have been a success. After David Cameron’s hint that it would be introduced in the next budget and Ed Miliband’s announcement today that Labour would reintroduce it after the election, it seems inevitable that it will be a part of the next budget.

Many in the free market movement have expressed their dismay at this. The CPS’s Ryan Bourne has argued convincingly that it would be better to raise the personal allowance more instead of introducing a new band of tax, primarily on the grounds of simplicity.

I agree with him, but I am still pleased that the government is going for the 10p rate. Where I differ is that I do not see the reforms as being a case of either/or. The personal allowance will be raised to £10,000 – as I argued in my paper Just Rewards last year, it should be pegged to at least the minimum wage level – but it seems unlikely to be raised beyond that.

George Osborne is unlikely to see a raise beyond £10k as being worth the reduction in revenue – raising the personal allowance was a Lib Dem policy before the election, and it would be hard for the Conservatives to claim special credit for raising it even further. This proposal essentially allows the Conservatives to claim credit for something – taxing low-income earners less – that they should have been for all along. The effect is basically the same.

I am not really convinced that the addition of another tax band will be significantly complicating. The length of Tolley’s Tax Guide, a rough but useful guide to tax code complexity, has doubled since 1997 – not because there are extra bands (you could fit a hundred different bands on a single page) but because of the number of special exemptions and loopholes created by government to favour certain groups over others. This, it seems to me, is the real meat in the tax simplification sandwich.

I would love to see a “simple tax” proposal to scrap all the complications in income tax but preserve two different tax rates, so that the argument over tax simplification former was not bound up in the (quite different) argument over whether we should have a single band of tax or not. (Incidentally, if you’re a tax expert and you might be interested in writing this, get in touch.)

It is hard to object in principle to the idea that taxing a billionaire causes less harm to him than taxing a hospital porter at the same rate does to the porter. Indeed, anyone who believes in a tax free personal allowance and a single flat rate of tax, in effect, is acknowledging that principle as well. This isn’t to say that the practical arguments for a single rate of tax – the incentive effects and the political impetus for lower taxes created by putting all taxpayers onto the same band – aren’t very strong, just that there are good arguments in the other direction, too.

There are good arguments against the 10p rate, but most are based on an assumption that the alternative would be a further rise to the personal allowance, rather than the status quo. Alas, because of the politics, I think it’s 10p or nothing. That’s why I’ll support it – it’s a flawed tax cut, but it’s a tax cut nonetheless.