The Pin Factory Blog

Yesterday, Moody’s credit rating agency gave UK debt a clean bill of health, a show of confidence in the Government’s ability to pay its debts.

Asked why the AAA rating was maintained, an analyst with the firm explained: “Moody's stable outlook... is largely driven by the government's commitment to stabilise and eventually reverse the deterioration in its financial strength.”

George Osborne will be pleased. Such remarks vindicate the Government’s deficit reduction strategy. The rationale underlying it was always that failing to cut spending now would simply defer a heightened misery. With a downgraded rating, the interest rates offered on government bonds would have to rise to attract investors deterred by the bond’s newfound riskiness. Huge debt interest payments, serviceable only through economy killing tax rises or spending cuts far larger than those currently mooted, would be the norm. By acting quickly, the Treasury appears to have stayed this nightmarish scenario.

Yet Moody’s praise was not without its warnings. A “resumption of official support programmes” (i.e. direct fiscal stimuli or the underwriting of toxic assets etc) could cause “larger government budget deficits, thereby exerting negative pressure on the AAA rating.” It is thus vital that the government sticks the course and refuses to cave to the manifold vested interests shrieking from the sidelines for increased expenditure. A balanced budget must be in sight by the end of the parliament. 

For once, I agree with Vince Cable. The Government’s cap on non-EU immigration is bad for British business.

Preventing businesses from accessing the skills they need weakens their incentive to operate in the UK. As Vince points out, firms have already relocated to more friendly environments: over at the BBC he tells of two investment banks that have shifted operations to Hong Kong, having been allowed to recruit only 30-40 people from overseas rather than their usual hundreds.

The cap is a greater threat to industry at the more skilled end of the jobs market. One would expect the British strawberry picking industry to survive without foreign labour because the skills required to pick strawberries are relatively homogenous consisting, primarily, in owning a pair of hands. However, this is not true of, say, the British football industry. Were the Premier League denied the opportunity to showcase the unique skills of Ronaldinho and Tévez, one would not expect it to survive for all that long.

An outright cap, then, seems a silly option indeed. It fails to draw a distinction between more and less skilled workers. This enables the ludicrous possibility that the quota could be filled with substitutable labour and thus bar access to the more unique skills that firms struggle to obtain domestically.

A more sensible immigration policy recognises that some skills can be obtained domestically and others can’t. Given that immigration confronts us with trade-offs (domestic unemployment, strains on infrastructure and the like), it is best that British labour is used wherever it can perform the job well (strawberry picking) and immigration permitted wherever domestic supply of the relevant skills is short (the Premier League is one example, but there are many others). Immigration can be incredibly beneficial. Skills based systems (such as Australia’s) account for this fact, channelling foreign labour into the industries where it is most needed. Regrettably, the blanket cap on non-EU immigration does not.

I sit watching the American primary season unfold with more than a hint of envy. Whilst our general elections merely have us choose between the various parties’ pre-selected candidates (often parachuted into seats by party HQ or drawn from the ranks of somewhat enigmatic local party structures), American electors choose who contests the election under each party’s banner. To see why this fuels my good-natured envy, one need only consider how surprisingly radical (in the best of ways) the implications of adopting open primaries on this side of the Atlantic would be.

First, it would do away with the notion of a safe seat altogether. No longer could the 70% of MPs sitting in safe seats even risk remaining unresponsive to their constituents’ wishes. John McCain’s reluctant shuffle to the right when facing an ultra-conservative challenger in the Arizona contest nicely demonstrates a primary’s ability to realign the views of representatives in safe seats with those of their constituents. Furthermore, open primaries stop Party HQ and the Whips from handing out safe seats like sweeties, as rewards for keeping in line and on message. Any reform encouraging MPs to place their constituents’ interests before the party interest is itself to be encouraged.

Second, it would broaden the ideological range of candidates elected to Parliament. Currently, British party bosses can stamp out the selection prospects of Rand Paul-esque candidates, despite their popularity within a constituency, perhaps because their views are too extreme or detract from the national message. Open primaries remove this possibility, allowing localities to choose who represents them, whatever the country thinks a large.

Is it just me, or do open primaries sound like a better way of reinvigorating British democracy than the alternative vote?

Today has seen announcements by two praiseworthy councils that, dare I say it, strike of innovative cost cutting.

Birmingham City council has shown that “I can reduce redundancies and cut costs” need not be a contradiction. The plan is simple, as Conservative Home explains:

Suppose you have person A in a necessary job retires and person B who wishes to continue in employment but is in a post that is being scrapped. Rather than recruit a new person for the necessary job and make the person redundant for the post being scrapped you redeploy person B to take over from person B.

Not only are there fewer redundancies, the costs of hiring from outside and making person B redundant are eliminated altogether. Taxpayers and council workers both win.

Hammersmith and Fulham’s efficiencies are somewhat different, gained by scrapping unnecessarily burdensome regulation. The council estimates that simplifying the planning system, removing the licence needed to pierce an ear and shredding the 10-page form requiring filing by any school wishing to hold events featuring music, amongst others, would save £200 million were they implemented across the country.

These innovations, good in themselves, are important for two further reasons. First, they lend support to one of the strongest arguments for localism and the breaking up of our centralised state; that smaller bodies are generally better at generating good ideas than sluggish monoliths. Second, they suggest that those busy thrusting bleeding stumps into the face of anyone suggesting ‘cuts’ doth protest too much. If one council can locate £200 million of efficiencies in the small, £4bn Local Government budget, just think of the savings a diligent Treasury official could find. Contrary to what the some in the media might think, nothing like 100% of the impending budget cuts need come from frontline services.

Via James Delingpole, I see that the last vestige of the BBC’s non-partisan façade has finally slipped:

"Behold the spending review slider! Pay attention, my vicious right-wing audience. You know those 144,625 new affordable homes you want to never see built? Well, cut the Housing Budget by 25% and they never will be! Want to lower the basic pension by £30 a week? Drag that slider to a 30% Welfare cut and watch those poor retirees squirm. Efficiency savings? Cuts to needless bureaucracy? Don’t talk such rot! My viscous free-market perspective necessitates that every penny of my cuts contribute to the great cause of crippling front line services. Up for some poor bashing anyone? I’ll go fetch my golf clubs. Oh I’m salivating just thinking of the devastation my swingeing cuts could achieve were only I at the Treasury!"

Some people just don’t get it. That is the only conclusion I can reach after, having picked up my copy of the Metro this morning, this affront to economics greeted me on the front page:

“More than 1.3million private sector have been lost since 2008 but the blow has been cushioned by an increase in public sector posts, the TUC said.”

Let’s examine this carefully. The private sector has shed jobs and the government has increased taxes (OK it may have borrowed, but borrowing is just deferred taxation) to pay for an expansion of the public sector. The TUC believes, then, that raising taxes lessens the impact of an economic crisis. It really beggars belief: “oh, you’re shedding jobs at the moment? Don’t worry, I’m from the government and I’m here to help. Dip into your struggling profits, give the money to me to spend and everything will be dandy!”

Such a view is, clearly, ridiculous. Increasing taxes to pay for public sector expansion reduces the amount of money we have to spend on other goods and services. Whilst new jobs are created when the government spends money, other jobs are lost when it raises the money it spends. Instead of having the private sector grow its way out of recession, we end the process with an enlarged public sector and a shifting of costs from the private sector to the taxpayer (and the creation of new ones if we include more generous public sector pensions, administration etc).

Just think about it a moment. If an expanded public sector is the best way of coping with recession, why don’t we abstract the TUC’s argument to its logical conclusion? Why not call for the nationalisation of all industry the second Britain dips into recession? Do we restrain ourselves because we know that doing so would kill prospects for growth?

Brendan, to quote Bastiat, “you compare the nation, perhaps, to a parched tract of land, and the tax to a fertilizing rain. Be it so. But you ought also to ask yourself where are the sources of this rain and whether it is not the tax itself which draws away the moisture from the ground and dries it up?”

Yesterday the Spanish Parliament passed labour market reforms aimed at driving the country’s unemployment rate beneath its current 20%; the highest of any Eurozone member.

These reforms, if somewhat late, are set to be sucessful. In any economy, the rate of unemployment is determined by the rate of hiring and the rate of job separation. If the former is greater than the latter, unemployment falls and vice versa.

The centrepiece of the reforms, reducing the severance pay employers must award laid off workers from 45 days wages for every 100 worked to 33 days wages for every 100 worked, incentivises both greater hiring and separation as it makes both cheaper. However, Spain is slowly coming out of recession; her firms are looking to hire not fire. In this context, the reform is catalytic to a recovery in the Spanish employment figures.

Of course, when the Spanish economy next nosedives these same reforms will facilitate a faster shedding of labour. Policies promoting labour market flexibility are often, wrongly, criticised on this account. They are deemed pro-cyclical, a violent exaggeration of boom and bust that results in employment being hit hard as soon as the economy falters.

Yet what does this criticism actually mean? Pro-cyclical policies are simply those enabling output and employment to adjust quickly to market conditions. Stripping away the non-wage costs of employment enables labour markets to better right themselves. Although more jobs may be shed in recession, the recession itself will be shorter because firms are freer to reorganise their production in light of the new circumstances, encouraging a quicker return to profit and expanding production. Longer term, structural damage is also likely reduced. If a business can spare itself by shedding labour quickly, it will still be around to hire again when conditions improve.

Spain seems to have grasped these ideas and I have confidence that employment will rise as she pursues labour market flexibility. Although the UK’s labour market remains one of the most flexible in the world, we would do well to defy complacency. It seems timely to re-examine our own labour market regulations and weed out remaining frictions.

Anyone who has applied for a student loan, completed a tax return or renewed a passport can tell you how thoroughly useless the government and its executive agencies are at providing services.

Indeed, my recent wrangling with the Student Loans Company involved no less than: the sending of an application; the resending of the application because, when processing the original one, the SCL confused my elder brother for my father; the making of three phone calls after, having confirmed that my father and my brother are, indeed, two different people, the SCL waited two weeks before re-processing my application; and a final long (and still on-going) wait as I anticipate the arrival through the post of my loan offer. My need of the word “re-processing” there ought be indictment enough of the public service malady.

These government failures take on even ghastlier appearances when viewed from the towering heights of private sector accomplishment. It seems a comparative miracle that I can buy groceries at midnight from my local Tesco with one hand and simultaneously book a flight to the other side of the world using the i-Phone clasped in the other. Anybody (I’m looking at you Ed Balls) who maintains that the public sector can lead innovation need only look around him to realise how mistaken he is.

Just think about it a moment. Whilst the government struggles to supply basic forms of these services, through the private sector you can: have your bins emptied every week; retire at an age other than sixty-five; access your medical records when you have an accident; book a GP appointment online and choose who delivers your letters.

I’m pretty sure that this list is nowhere near exhaustive. Any additions?

As tempted as I am to unleash a tirade upon your union for turning my usually easy journey home into an expedition of Crusoeian proportions last night, I shall restrain myself. Instead, I’ll attempt to show you and your striking union members that the advent of the Oyster Card is to be celebrated, not used as an excuse for disrupting my tube-ride home.

Now, Bob, since the introduction of the Oyster Card, the proportion of journeys using a traditional ticket has fallen to one in twenty. It seems obvious that fewer tickets sold means fewer ticket office staff needed. Indeed, Transport for London has identified eight hundred jobs that no longer need performing.

Yet this is where you climb atop your soapbox, dust off your megaphone and shout “workers of the world unite”, taking to your picket to fiercely defend your conception of your members’ interests. “Whilst the jobs no loner need doing”, you decry, “it is a great evil that the employer should even think of not employing workers to perform them”.

And this is where we disagree, or, rather, where you are wrong. Yes the Oyster Card has rendered eight hundred of the jobs your members were performing redundant. However, the resulting redundancies free up labour that can then be used producing more of the goodies that me and you both enjoy. As the former ticket officers start new jobs, we’ll have just as much tube travel as before (thanks to the Oyster card) in addition to whatever the former ticket office staff now produce. In short, we will have more stuff. We will have become richer!

Try to understand, Bob, I don’t lack sympathy for the workers whom may be without jobs for a while. Rather, I recognise that everyone (including they) will benefit if they move from work done cheaper by technology into work better performed by people. Of course, this requires such jobs being available for them to move into, a more likely scenario in the vibrant free market economy you never quite seem to endorse.

Now, in fairness to you Bob, it’s not only your Rail Maritime and Transport Union that doesn’t understand the economics underlying your strike action. If you could forward this to the head of the Transport Salaried Staffs Association I’d be most grateful. More importantly, though, could your guys get back to work before my journey home later?

As an anticipant sun climbs over Westminster Palace, Members of Parliament flock to the capital and take up their seats for the new session of Parliament opening today. The mini-session before the summer recess saw the Government move quickly, issuing the Emergency Budget as a start on deficit reduction and passing the (mainly) excellent Academies Act. We at the Adam Smith Institute are hopeful that this session will be greeted with a similar flurry of reforming activity. In particular, we wish to see Parliament approve the following this session:

• Welfare Reform: Ian Duncan Smith seems to have the right idea; ensuring that work always pays by tapering away benefits at a constant rate. Whilst we recommend a more localist approach, a simplified system infinitely improves upon the status quo.
• The Great Repeal Bill: The scrappage: of ID cards, Contact Point database and restrictive business regulation, amongst other things, is to be welcomed by all of a socially liberal stripe. Yet, let’s just hope that the final text more represents the unofficial wiki-site than the botched ‘Your Freedom’ consultation.
• A Budget that reconsiders the role, and appropriate size, of the state: 2011-2012 will be a crucial year for setting Britain’s public finances on a sustainable trajectory. As we’ve argued before, our huge budget deficit requires us to comprehensively review all public expenditure with the aim of shrinking the state from its current, unsustainable 52.5% of GDP. This much seems likely, but ideally Parliament should pressure the Coalition to abandon its ring-fencing of Health and Foreign Development. Savings are possible in both of these departments.
• Further devolution: Although the Calman Commissions’ proposals were, as my colleague delicately put it at the time, “a bit of a dog’s breakfast”, giving Scotland greater fiscal autonomy is a step in the right direction and at least does away with the Barnett formula. Giving Wales greater powers in the devolved areas is also a good proposal. However, as I have blogged recently, these proposals do nothing to address the West Lothian question; we need an English Parliament.
• Election of local police chiefs: Currently, constables are upwardly accountable to Whitehall, spending far too much of their time jumping through mandarin hoops and chasing central targets. We’d like to see a return to community led policing, where officers are responsive to those they serve. It seems the surest way to avoid ‘Ciggybusters’ MK II.
• The Public Bodies (Reform) Bill: Finally, a bonfire of the quangos! This Bill promises to scrap many quangos and make the remaining more accountable to ministers. Although we prefer parliamentary accountability, any clamp down on these blights to productive activity is welcome. The bonfire could also be improved by using consumer protection agencies as fuel.

Although we’ll push further for reforms in this vein, any parliamentary session that approves all of them would be great by recent standards. Let’s hope that it is this one.