The Pin Factory Blog

The European Commission has launched an investigation into oil prices. They suspect that prices may have been artificially inflated in order to swindle motorists out of their cash.

They are right. And they should start their investigation at the grand offices located at 1 Horse Guards Road, London SW1A 2HQ. That's not the headquarters of Shell or BP, but the home of the UK government's Treasury. After all, more than half the price that motorists pay at the pump is in fact tax. The product itself costs about 48p a litre to produce and get to the pump. The retailer gets about 5p. But on top of that, there is fuel duty of 58p for a litre. And 20% VAT on top of all that. Indeed, because VAT is added to the whole price, including the fuel duty, motorists are actually paying a tax on a tax!

VAT, of course, was raised recently in order to help balance the government's books in the wake of its bail-out of the banks. So that explains part of the increase in prices. More comes from the 'fuel escalator' – the principle that fuel duty should rise by more than inflation, in an attempt to induce us to leave the car at home and save the planet. (Politicians are remarkably adept at picking our pockets while telling us it's for our own good.) The escalator forced up UK fuel prices from below the EU average, to make them now among the very highest in Europe. And the tax on fuel is now several times what any economist can justify as a fair charge for the carbon that vehicles emit.

The bottom line is that more than tax on motor fuel is more than 80p a litre. Which makes George Osborne's offer to 'stabilise' petrol prices by shaving 1p off the tax look rather feeble. If the European Commission wants to get to the heart of the great petrol price rip-off, they should immediately call the Chancellor in for questioning.

Recently, Kier Martland produced an article in The Libertarian attacking Sam Bowman's take on immigration, suggesting an alternative libertarian view on the issue – using Hoppe to back up the position. I think this view is entirely mistaken. Indeed, Anthony Gregory and Walter Block take apart Hoppe's position here and Block again here.

The position taken by Hoppe is that nobody should be able to make a claim on the state without 100% consent from those paying for it, including for goods such as roads. The issue is that the state does exist, so long as there is government we should seek to ensure a policy of least damage done. By having high costs or even bans to hire migrants, the state would be taking away people's right to freely associate and make contracts. Further, by increasing the cost of labour, and doing other such damage to the economy as described in Bowman's article, restrictions on immigration do damage to the taxpayer. Hoppe's “second best” position simply doesn't hold true.

If one group in society objects to immigration, that does not mean migration is wrong because they pay a small percentage of the cost (even though, again, immigrants are a net positive for the tax collector). Indeed, the same argument would hold true for economic nationalists or greens who wished for only local goods to be sold in the economy. By importing foreign products, one would be initiating trespass on the roads by transporting goods unwanted by third parties. The same could be said of any good transported that an individual disapproved of, whether alcohol, meat products or any other “vice”. Similarly, Christian Scientists or others who disapprove of modern medicine might insist that taxpayer roads not be used for transporting any related materials. The position is ridiculous, you cannot support absolute rights to reject immigration whilst not supporting the same absolute right to reject other goods and services people might disapprove of.

By suggesting an increase in government control of migration, both Martland and Hoppe are going the wrong way on this issue – it is not about defending the taxpayer. Increasing the scope of the state, and the cost to taxation in policing it, as the Hoppeans propose, is damaging. What about those who pay taxes that DO want immigrants to use government services such as roads? Are their rights lesser than those who are for government restriction? Even if the costs and size of government are larger to be more restrictive? Should they be forced to fund border forces in this way? The Hoppean position on immigration is illogical; you do not reduce the scope of the state by increasing it and the number of tasks it undertakes. We should be looking at ways to limit the damage and cost of government now, and not sit in ivory towers trying to fudge a philosophical position that takes away the right of free association.

Easter in Britain is one of the busiest shopping days of the year, with garden centres and DIY stores in particular full of people stimulated by the spring weather – well, when we are not having an Arctic spell – to bring a bit of a new look into their homes and gardens.

But larger stores, like those same garden centres and DIY stores, will be able to open only six hours on Easter Sunday – like every Sunday. Convenience stores can stay open longer, but retail premises larger than 280 square metres are allowed only six hours.

That alone should make us question the Sunday trading hours. It is a completely arbitrary number: why not 250 or 300 or 350 square metres? Laws should apply to everyone, or to nobody.

Since limited Sunday trading was introduced, Sunday has become an important shopping day. It gives families in particular a little more time at the weekend for those large purchases that they want to make together. It used to be hard to do that and get in the weekend food shopping at the same time. It has actually made things more relaxed.

Remember too that other important shopping days often fall on a Sunday – Christmas Eve and Boxing Day, for example. Retailers right now could really use the boost of a proper day's trading at these times, especially those who are  losing trade to online alternatives.

The Sunday trading laws were relaxed for the Olympics and the world did not come to an end. Subject to reasonable planning restrictions to prevent local nuisance, we should relax them entirely. Why should the government decide whether people can and cannot shop, or can and cannot open for business?

The law states that employees can refuse to work on a Sunday without fear of retribution. That should really apply to other days too – not everyone has Sunday as their religious day of rest. And of course, nobody has to shop, or open their shop, on Sunday if they do not want to. Why should those who do not want to be able to force the rest of us to comply with their choices?

What do you think of when picturing an ‘innovator’? I would hazard a guess that the skinny, t-shirted frame of a computer developer forces his way into mind. He is likely in the middle of developing a new app or website, and is keen to end his summons before your mind’s eye to get on with typing inscrutable code and eating pop tarts.

This is a shame. Not the interruption of our computer nerd - who we’ll leave alone now - but the fact that innovation has become such an internet and computer centred phenomenon. It is also, however, no coincidence. The ‘techy’ sectors have enjoyed huge advances in recent years in no small part because of the relative lack of regulation and red tape they’ve faced.

This has kept start-up costs low, compliance with legislation cheap, and product development swift. The economic benefits of this business freedom have been extraordinary. In 2010 the UK internet economy contributed £121bn to GDP, in 2016 this is set to be £225bn. This is a remarkable 86% growth in 6 years. According to McKinsey in 2011 2.6 jobs were created for every (mainly high-street) job lost. It is no surprise that London’s ‘Silicon Roundabout’ has grown in notoriety in recent years. We would do well to follow the advice of Dominique Lazanski’s recent ASI paper to keep the stellar growth going.

Other sectors have not been so lucky – over the decades industries like pharmaceuticals and food production, which once saw equally impressive innovation, have been overwhelmed by creeping legislative burdens. The rise of the grisly ‘ealf and safety brigade, backed by big business eager to block new entrants, has gradually put a stop to the leaping advances. The regulatory obstacles are so great now that aspirin would not be passed by the FDA (it would be red flagged because it risks causing gastrointenstinal bleeding). Similarly, rising levels of regulation contributed to the end of so-called ‘green revolution’ in food production between the 1940s and 70s, which hugely increased yields and lowered prices.

The risk of failing to comply with standards discourages businesses from engaging in the kind of innovation that can lead to radical break-throughs. It is safer to opt for more mundane improvements safe in the knowledge that they will be allowed to make it to the market-place.

I can hear the hard-hatted inspectors and boardrooms bursting to object. ‘This regulation is designed specifically for the benefit of consumers, they clamour; in its absence people would be exposed to improperly tested, and therefore potentially lethal medicines and foods. ‘Are you in favour of sacrificing human lives at the altar of innovation?’ they ask.

I can think of two replies to this. First, in the developing world millions die of starvation and disease; if more rapid advances were allowed many more lives would be saved than lost. Second, as our President Dr. Madsen Pirie argued so persuasively on the Daily Politics, the expectation of progress and improvement is an important component of a society’s well-being. Increased optimism about the development of new life-saving medicines and lower food prices would be a welcome addition to looking forward to the new iPad.

A bonfire of regulation would attract the best innovative minds from around the world and reignite economic growth and job creation in Britain. Exit double dip recession, enter double digit levels of growth. Who knows, we might even discover another drug as effective as aspirin. 

Is there anything more terrifying and dangerous to liberty than a 'moral panic'? I use the term in its sociological sense as the horsemeat saga fairly seems to fit the bill. One can almost write the script: a small finding, further investigations hit the front pages, the press become fixated and call for the heads of those responsible, government steps in, calls go out for a public enquiry and regulation or a toughening up of the rules and more spending on enforcement... In a few weeks the issue itself is largely forgotten except that the resultant regulations last forever. Worryingly, the scandal has also prompted attacks on international trade in food products and displayed the economic nationalism we see in this country with calls to eat only British meat.

The most puzzling feature of this particular saga and many others is the belief that additional regulation can solve the problem. In many ways, food was one of the first areas of the economy to be regulated under the Food Adulteration Protection Act of 1860, prompted by noticeably similar Victorian fears. In a curious and amusing echo of the banking crisis, we already have a regulator called the FSA, the Food Standards Agency (is the repetition of acronyms just coincidence, or a sign that we have so many quangos there aren't enough names?), which runs a Food Authenticity Programme. Although the FSA has been at the centre of the scandal, DEFRA also has powers in this area.

It is clear that there has been widespread adulteration of food products despite the presence of these institutions. Indeed, as with the banking crisis, it may be that regulation has encouraged it in various ways. Interestingly, a former bureaucrat at the FSA has suggested that the EU may be partially responsible owing to its ban on 'de-sinewed meat'. What is evident is that regulators will not prevent such events happening. Instead, as the ban on de-sinewed meat suggests, regulation will cause unintended consequences. Additional requirements for 'traceability' and more enforcement will increase costs for supplier which will be passed on and further drive up food prices for already hard-pressed low-income consumers, or it will promote cost-cutting and thus adulteration. Regulation will tend to drive smaller firms out of the marketplace, allowing room for monopolists to dominate the market. One should note that food industry lobby groups are usually happy to call for more regulation as well.

Surely, it would be better to allow a more competitive and de-regulated marketplace, where consumers could choose whether they paid additional costs to guarantee the quality of their products and where market innovations could find more effective ways of policing?  Why is it that, whenever a crisis such as this occurs, calls for more regulation emerge despite (i) the failure of existing regulation (ii) the evidence that regulation may actually have contributed to the crisis and (iii) the effect of regulation will allow monopolistic behaviours and ultimately harm the consumer?

We around here are pretty much in with the idea of free immigration. Even the scary statistics coming out of places like MigrationWatch show that there's a very small (about £4 a year I recall) benefit to the indigenous population. And of course the value to the immigrant is vast making it a definite pareto improvement. And as Bryan Caplan likes to point out, the immigration of low skilled immigrants still enables a more fine grained division of labour within the country to everyone's benefit.

But OK, let's be a tad political and realise that not everyone agrees with these obvious truths. That immigration must be limited in some manner. So, err, how have we ended up with a set of immigration restrictions that are so stupid?

The Royal Society says a separate government scheme introduced in 2011 to attract 1,000 top academics and artists had allowed only 50 people in.

That a government policy fails is hardly a surprise. But OK, they're trying to get top academics in. So why would the new rules have meant that one of our recent Nobel Laureates couldn't have got in?

Russian-born physicist Professor Sir Andre Geim said new restrictions on non-European Union immigrants, including minimum salary requirements of at least £31,000 and tighter student visa rules, are blocking the brightest academics from working at British institutions.

Well, you see, the thing is that British academics aren't all that well paid:

Sir Andre, 54, first arrived in the UK in the early 1990s as a Russian citizen with a permit to work as a post-doctoral fellow at Nottingham University. His salary would have been around £27,000 in today's money, meaning that he would have been barred from entry under the minimum salary requirement.

So the government wants to get all these top academics coming in, to the point where they've got a scheme to aid them in coming in. At the same time its own salaries that it pays to top academics (and yes, post-doctoral students are indeed that, they're all the people having the bright ideas. Professors are those who are old enough to have stopped having new ideas) mean that they cannot immigrate into this country under the requirements for immigrants to have a high salary.

Something of a facepalm moment that.

Which brings us to an important point. Government just isn't capable of doing these complicated things. Is incapable of the finesse necessary to achieve solutions to tricky problems. So we might well be better off if they didn't even try. You know, cut government back to the basics of defending the country and maintaining at least a semblance of law and order. Once they've shown they can manage that we might allow them to at least trying more difficult things. But not until they've shown they can master the basics.

During a downturn, calls for regulation to protect the most vulnerable grow more common — and more worrying. The costs of regulation are costs on goods and on jobs, and likely to reduce the availability of both. When the economy is floundering, further regulation will serve to put the brakes on growth. Here are three reasons to oppose more regulation.

Regime uncertainty

If businesses can’t be certain of future regulation, this disrupts their future planning. Even in the absence of the state it is difficult for entrepreneurs to anticipate future patterns. Often heavy handed and clunky regulation is thought out by those with little knowledge of the businesses they attempt to control.

Regulators can also be captured by large businesses who find it easy to be compliant with more regulation. It is small businesses who can not cope with this complexity who suffer most. Rather than protecting the public, a climate of meddling regulation can scare off new businesses, and in turn new activity and jobs.

Old regulations become obsolete

You have probably seen a compilation of ancient and bizarre laws still on the statute books. Rules on how horses and carriages may be used are still around. While no government has deregulated in such areas, innovation has made the rules all but redundant. As the electric telegraph replaced the letter, the phone replaced the telegraph, and so now do voice over IP and other forms of electronic communication replace it.

We can rely on human progress to invent new things that politicians have not yet found ways to restrict. It is interesting to note that since the financial crisis it is technology, the least regulated sector, that has performed best. If government does not introduce new regulation, then politicians need not pay so much lip-service to deregulation. Human creativity will do the job for us.

Markets do it better

The good news is that government is not the only regulator. Voluntary exchange leads to market-based regulation. It is in the interest of firms to not sell a product that poses a risk to the consumer. Companies do not tend to sell dangerous furniture. If a product is poorly constructed, such that it may cause injury, the producer could face reputational damage. It is this direct feedback mechanism of profits that makes the businessman accountable to consumers. To truly empower the 99%, the regulation of the market over firms is direct, as opposed to sluggish democratic processes.

We all know that militant trade unionists went over the top in the Sixties and Seventies. But the rot set in a lot earlier. During the First World War, the American government nationalized the country's railways. They were returned to the private sector in 1920, in a dilapidated state.

The Pennsylvania Railroad was desperate to repair the damage to its infrastructure and the staff's morale. It realized that its staff were an important asset and that they needed to be motivated to prevent technical faults and ensure the network worked smoothly. So Ivy Lee, the company's PR advisor, argued that "The employee must want to do his job for all it is worth or [a train wreck] may happen". The company agreed, and decided the best way to get enthusiastic staff was to pay its staff better than any other railway.

At this point, the trade unions had a tantrum. According to Ray Heibert's biography of Lee, the unions opposed the pay rise because, they argued, pay scales had to be set nationally for all the railways.

How generous of them.

British car insurance advertisements are going to change. Right now they are populated by annoying Welsh opera singers, stick cartoon figures, and meerkats. But all of these are likely soon to be made redundant, replaced perhaps by white kittens with pink bows, giggling babies and sophisticated-looking models with designer handbags. So I predict.

Why? Because of the latest daft 'equality' regulation from the European Union. From December 21, insurers will be banned from offering cheaper insurance premiums to women, following a ruling by the European Court of Justice (ECJ). According to motoring groups, it means that women will face a 25% increase in their premiums, despite the fact that they are statistically much safer drivers. On average, women take shorter journeys, obey the speed limits more faithfully and brake less hard. But they could be facing premium bills of £400 on an average family car.

The most accident-prone drivers, of course, are young men. They are less experienced, enjoy speeding and barking, and drive more at night – often in the company of inebriated friends who egg them on to take risks. Which is why young men aged 17-22 pay average premiums of £1,604 compared to the £1,127 paid by females of the same age, according to the Automobile Association. A survey by the comparison website uSwitch.com reports that just over one in eight (13%) female drivers think they will not be able to afford to keep motoring. Apart from the inconvenience, that may also reduce the employment prospects of women who depend on their own transport to get to work safely.

The ECJ ruling is motivated by noble intentions – to remove discrimination between the sexes. But it is economically illiterate. And the trouble with economically illiterate legal or political decisions is that they produce widespread unintended and indeed unwelcome consequences.

The illiteracy here is the belief – and how often we hear it – that insurance is about 'pooling risk'. That instead of bearing the whole risk of certain events individually – ill health, car accidents, household disasters – we each chip in a little and compensate those who suffer when the risk becomes reality.

In fact, insurance is nothing of the sort. It is about putting a price on a risk. The insurer calculates your risk, and charges you a premium that reflects the likelihood of the misfortune actually happening to you, the amount that they would have to pay out to compensate, and a little bit of profit for the service they give you – which is peace of mind. And as information technology advances, such risks can be calculated more and more precisely. Houses in certain postcodes, for example, are more likely to be burgled than those in others. But more than that: whether you live in the middle of a street or on the corner, in a house or an apartment block, on the ground floor or the first floor, behind a door with secure locks or not – all these are relevant factors, and insurers price them accordingly. The same is true of motor insurance. If you are young, male, or you drive a flash red car, you are more likely to cost the insurers money than if you are older, female, in a modest runabout. You pay more to reflect those risks.

It may sound unfair, but in fact this price system does a useful job, encouraging people to minimise the risks they expose themselves to. For example, one reason why young men have high accident rates is because they drive at night with those tipsy pals of theirs. But insurers are now trialling in-car technology that reports motorists' driving habits back to them. And a young person who agrees not to drive late at night can, as a result, get cheaper premiums, reflecting the lower risks.

Of course, people cannot change their sex – or at least, it is not easy and hardly worth doing solely to get cheaper insurance. So the insurance price difference between men and women is not something that can be moderated by an easy behavioural change. Hence the notion that women are being discriminated against. Someone in an area with high burglary risk can install locks and alarms. Men are pretty well stuck with being men, with all their faults.

But trying to make equality legislation take the strain is mixing up markets and civics, and trying to make markets do things they are quite unqualified to do. Once governments start manipulating prices, perverse incentives and disruptive effects ripple out through the entire economy, and nobody knows that ultimate damage they will wreak. It is better to let the price system do its job, then deal with any unwelcome results through the welfare system. We do not ensure that everyone has access to food by putting price caps on supermarket prices. We know that if we did, pretty soon the shelves would be empty. Instead, we give cash to needy people. Likewise, if we want to keep down the insurance premiums of men so they equalise those of women, we should subsidise men through the tax system, not force the insurance providers to do it. Either way we will get perverse incentives and will see more, dangerous, male drivers on the road, so either way it is a daft policy. But when you mess with the price system, that is what happens.

Insurers, of course, certainly do not want customers who they cannot charge the proper price for, and who are more likely to cause them to pay out. More than ever, they will be pursuing female customers, rather than male. The enterprising ones will be advertising insurance in ways and through media that are so girly that no self-respecting red-blooded male would go near them. If you like kittens and babies, you are in for a treat.

This week the UK former deputy prime minister Lord Heseltine will present a report on boosting economic growth in Britain's regions. The fact that the report is 80 pages long and has taken six months to compile is surely evidence that its analysis and conclusions are far too complicated. It is actually pretty obvious what is holding back growth, not just in Britain's regions, but all over.

Lord Heseltine, who as a business minister promised to 'intervene before breakfast, dinner and tea' is expected to propose the following.

1) Tax credit changes to encourage businesses to spend more money on research and development, and on developing skills.

Here we go again. Experienced business people make perfectly rational decisions on how much to invest in their future products, based on the cost of that investments and their predictions of its likely effectiveness in winning new business – but politicians tell them they are wrong and that they ought to spend more. It seems so obvious: how can anyone be against spending more on research and skills development? But the fact is that these things have certain costs and uncertain benefits, and business people have to make their own judgement about whether the risk justifies the cost. And the fact is that companies right now are sitting on cash and not investing it for perfectly sound reasons – they cannot see where the new business is likely to come from. Economic growth in Europe is flatlining. Consumers are doing what governments ought to do and are paying down their debt rather than spending like they did before. It is wrong to use the tax system in an attempt to suspend reality.

2) A big boost to the £1bn Regional Growth Fund, set up by the present government to help regional businesses.

And funded by whom? From the taxes, of course, paid by individuals and lots of other businesses in those same regions and elsewhere in the country. And as those taxes rise, business people find their budgets being squeezed as demands come in for VAT, national insurance, PAYE, the rates and all the rest. At best they decide not to hire any new people: at worse they have to lay workers off; at worst they cannot make the books balance and the business closes. But of course everyone sees the grants and loans made by the public bodies, while nobody notices the hundreds and thousands of small businesses crippled by over-high taxes. The policy is like quietly drawing water out of one side of lake, taking it round to the other side (spilling some on the say), and throwing it in with great fanfare, crowing about how much you are raising the level.

3) A wider role and more funding to Local Enterprise Partnerships, bodies comprised of business people and local authority officials.

You do not need vast funds to make local authority officers get up from their desks and find out what local businesses actually need. Nor to get business people to represent their concerns to local authorities. All top-down, enforced 'partnerships' are the same: they become a talking-shop between people who have the time and patience to talk. Most business people, however, are far too busy for such bureaucracy. The old Regional Development Authorities were a case in point. Everyone engaged in them thought they were wonderful, and enjoyed spending the taxpayers' money. Most others thought them a complete waste of time and energy. This policy will do no good at all.

4) Scrapping dozens of district councils in order to simplify local government.

An odd policy, given the government's aim of getting decisions made more locally than they are at the moment. It is a return to (or perhaps an extension of) the existing centralism and giantism that exists in local government – a trend consolidated by the creation of super-authorities in the early 1970s. But larger local government bodies do not mean greater efficiency. Rather, they mean more distant decision making by people who inevitably, because of the size of the organisation, think more bureaucratically and less locally. There is a case for shedding a tier of local government, certainly: the present structure is confusing and allows many a buck to be passed. But with today's technologies the case is to have smaller authorities, not larger ones. Small organisations can still do big things, if they do them together. The trouble with big organisations is that they are very bad at doing small things or dealing with individual cases.

So what, then, do we really need to pull Britain's regions out of the doldrums?

We could start by lowering taxes on businesses – things like national insurance, company and capital taxes –and lowering them for good. Some people say that this would be folly because the government is already spending more than it rakes in through taxes. But you do not lower a deficit by raising taxes: that just smothers trade and economic growth. As the Nobel economist Milton Friedman pointed out, governments spend everything they collect in taxes, then as much as they can get away with. Higher taxes just mean bigger government and less careful spending – as well as more grandstanding politicians and more interventionist reports.

A second growth strategy is to slash the regulation on businesses – particularly regulation on small businesses and particularly all the workplace regulation that has been imposed in the last fifteen years. Perhaps the easiest strategy would simply be to exempt small businesses from it all entirely. The trouble is that workplace regulation like the Social Chapter provisions, the working hours rules, and maternity and paternity conditions have been imposed largely as the result of EU directives and regulations. So those who want to reduce workplace regulations in the UK find themselves hitting the brick wall of the UK's EU membership. And there are, of course, many positive benefits to EU membership. Yet the weight of this regulation has, in recent years, arguably turned the balance negative. It is another good reason (along with the banking and budgetary integration that is the only way to hold the euro together) to renegotiate the UK's relationship within the EU – something that Lord Heseltine would hate. But there are signs that such a renegotiation may not be far off.