No war on motorists? Tell that to the world outside Central London

“Left wing think tank wants higher taxes” is a bit of a “dog bites man” story, but the IPPR’s call of higher fuel duty was spiced up by some eye-catching facts about the costs of getting about. Contrary to popular perception, they found that the price of motoring has fallen slightly in real terms in the last ten years. Ipso facto, they conclude, the “war on motorists” is a myth. “Compared to users of public transport,” says the think tank’s associate director, Will Straw, “there is no war on motorists.”

This rather depends on how you define a war and who you think is the aggressor. A breakdown of the figures (see graph below) reveals that bus and train passengers have seen fares increase well above the rate of inflation since 1987, but the costs of taxing, insuring and fueling a car have gone up by even more. If average motoring costs have not risen in real terms, it is thanks to the impressive decline in the cost of buying a vehicle which has consistently beaten inflation and is now lower in both real terms and—quite remarkably—also lower in nominal terms (as of 2010). Globalisation, a genuinely competitive free market and a relative lack of state interference have reduced prices and brought some rare good cheer to drivers.

The same cannot be said of the other costs shown, all of which are dictated by the state (in the case of fuel duty and car tax), or by cartels (OPEC), or by the half-state/half-cartel hybrid of the public transport industry. Fuel and car taxes have gone through the roof by any standard, and while motorists could be forgiven for viewing cheaper cars as a small mercy to take their minds off the looting, the IPPR sees it as justification for taking a little more.

There is no doubt that the pockets of bus and rail passengers have also been systematically picked over the past 25 years, but as high as the prices of bus and train tickets are, they do not represent the true cost of public transport. Local public transport was subsidised by the taxpayer to the tune of almost £5 billion in 2010/11, and close to £8 billion was taken from the public purse to spend on the railways (IPPR, p. 14). No government has yet come to terms with the fundamental problem that public transport is inherently expensive and can only be sustained by forcing those who don’t use it to cough up while making their customers pay twice.

The IPPR helpfully points out that motorists can reduce their expenditure by driving less. As a piece of advice, this is rather like telling commuters to save money by not travelling at peak times; technically true so long as one ignores the essential nature of the journey. They appear to be of the belief that motoring is still the preserve of wealthy Mr Toads, pootling around for fun on a Sunday afternoon, whereas private cars are by some distance the nation’s primary mode of transport.

This metropolitan bias is in evidence when the report notes that 25 per cent of the population do not have access to a car. The IPPR describes this figure as “surprisingly low”. Out here in The Provinces, we might regard it as surprisingly high. A look at the numbers reveals just how marginal public transport is to much of the population outside central London. Nationally, the average household spends £21.60 a week on petrol, diesel and motor oils, but only £2.80 a week on rail and tube fares. The average household spends more on spare parts and accessories for their cars or vans (£1.80) than they do on bus and coach tickets (£1.50). To put it still more starkly, we spend more money on lease cars than we do on bus journeys. As should be obvious, this is not because bus and train fares are especially cheap, but because the average household is considerably less likely to buy them than they are to fill up their tank. (If all these figures seem low, it is because many people use only public OR private transport, and some may not use either very much.)

For the majority of the population who rely on their cars to get about, the miracle of consumer capitalism has alleviated the pain of escalating taxes by providing cheaper vehicles, but it strains credibility to suggest that they enjoy favoured status in government policy. Whether one looks at fuel tax, car tax, bus fares or train tickets, no one escapes from the squeeze. I would be tempted to say that war is being waged on us all were it not for the fact that the cost of motoring is kept artificially high while the cost of public transport is kept artificially low thanks to the way it is subsidised by everyone—motorist, cyclist and pedestrian—whether we like it or not.

The mirage of 'affordable housing'

The publication of the Montague Report into the barriers to institutional investment in private rented homes threw up some interesting headlines. Most of the debate over the report actually seemed to concentrate on a proposal to relax local government requirements on developers to build ‘affordable housing’, as this is imposing higher costs on them as they are forced to sell at below market rates. That local government are free to do so if they wish to suggests that there may actually be some interesting reasons why they have not been doing so, perhaps related to Public Choice dynamics at work – for instance, do local governments have a vested interest in reducing development?

The housing market is a hugely complex area – the Montague Report itself is only examining a particular aspect of how to expand availability in the private rented sector. In many respects it is actually quite a sound report which, apart from this recommendation also rejects such terrible ideas as rent controls and Government guarantee schemes. As the ASI’s Ayn Rand lecture by John Allison of the Cato Institute pointed out, the latter is the route the US has gone down and it has proven disastrous. Similarly, rent controls and stricter regulation of landlords leads to less choice of housing and more landlords operating outside of the law altogether.

Confusingly, however, is what is actually meant by the term ‘affordable housing’ in the UK. In an economic sense, affordable housing usually means a comparison of house or rental prices to median incomes in a particular area. There is no doubt that the UK faces a huge problem of affordability in this sense as this report shows. However, in UK Government-speak, affordable housing actually refers to ‘social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market’. What is meant, therefore, by affordable housing is nothing to do with its affordability but instead the term simply refers to availability of socialised housing. There is no doubt that this confuses the debate: when we hear the term affordable housing, it has nothing to do with affordability of that housing.

For the record, the UK has a high proportion of socially-owned housing by international standards (20%). It must also be said, however, that even a description of affordable housing related to income is arbitrary and flawed because it carries a value judgment as to how much income any particular individual ought to spend on housing as opposed to other items of expenditure or saving, as well as an arbitrary assessment of quality of housing.

It quite clear that many government efforts to provide less expensive housing (to avoid confusion) are actually not merely failing to do so but are actually counter-productive. As the Montague Report itself shows, by forcing developers to build ‘affordable housing’, local governments are hampering supply and are thus making housing less affordable! Unfortunately, the Montague Report also argues for restrictive covenants on build-to-rent housing, noting that rental and owner-occupied housing are competing for the same land. This is treating the symptoms rather than the cause, which is shortage of land for development.

A free market definition of affordable housing must ultimately be the price that consumers are willing to pay for housing. Only consumers should ultimately decide where they want to live, in what kind of dwelling and by what financial arrangement – constrained by the supply of course. Putting it simply, if a million houses were rapidly built around London, it is pretty clear that house prices would fall generally and that this would increase affordability. Even if these were a million mansions, this would still increase the affordability of housing in general. Such building cannot occur, however, due to planning constraint. As the Hilber and Vermuelen report concludes ‘Regulatory constraints imposed by the British planning system can to a large extent explain the high house prices ‘.

The real, long-term problem in the UK housing market – rental or owned – is huge-scale government intervention and distortion of the market. Whilst this has occurred in a number of areas, the constriction of the supply of housing and huge manipulation via the planning system is the most serious cause of the UK’s housing shortage, as this IEA report shows. Even relatively sensible interventions to solve this problem, such as the Montague Report and the National Planning Policy Framework are unlikely to have any substantial impact without major planning liberalisation.

Will more state spending stimulate the economy?

Things look pretty grim in the economy right now, so naturally people want to do something about it. That 'something' seems to be more capital spending in order to stimulate demand and put 'idle' resources to work. That's a bad idea, as Prof Steve Horwitz (whose ASI lecture next month is now fully booked) explains in a blogpost for the LSE's EUROPP blog:

What advocates of stimulus are arguing is that we need spending, just any old spending, to jump start struggling economies. But this argument must assume that it does not matter which capital and which labour are brought out of idleness and into what sorts of activities. They must of necessity ignore the specificity of resources and their limited complementarity. It does us no good to try to force pieces together that don’t fit, as that’s what got us in trouble in the first place. And the point of doing a jigsaw puzzle of this sort is to get the pieces to fit in a way that forms an orderly pattern, not to simply use them all up.

The assumption in most stimulus spending is that there are projects just waiting to be pursued if only we would spend the money. What is overlooked is whether the capital and labour that are idle are the resources best suited to those projects, not to mention whether consumers and citizens even want those outputs in the first place. Just buying, hiring, and producing for the sake of “doing something” will create a structure of production that is quickly found to be unsustainable. A few projects may be “shovel ready,” but most will require engineers and others to do the planning. If the unemployed are mostly construction workers and financial managers, these projects will not be able to find the engineers they need at wages they can afford, and unemployment will not be reduced.

Many people talk about discarding the unrealistic assumptions of neoclassical economics when it comes to policymaking, yet they cling on to notions of aggregate supply and demand that have no bearing on reality. Like capital, labour is heterogeneous: some capital can help to make cars and some can harvest strawberries, but they can't be interchanged quickly or easily -- in the same way, some people are good at designing bridges and others are good at building them. If you treat them as one big lump, you'll make a mistake. Disaggregating the factors of production is key to understanding why Keynesian fiscal stimulus by and large hasn't worked so far.

In a non-homogeneous world, adjustment takes time. As Horwitz says, we can "free up competition, prices, profits, and losses so that entrepreneurs and others can finish the process of tearing down the mistakes of the boom and figure out how to reallocate those resources to their new best uses". I'm struggling to think of one major pro-competitive reform the Coalition government has made since 2010 that would speed up that tearing-down process, and they certainly haven't freed up prices, profits or forced bad banks to make the losses they need to. Maybe that points to why things seem to have gone so badly wrong.

President Obama's blue chart of death

The American Enterprise Institute's James Pethokoukis posts an updated version of the Obama jobs chart. Note the green dot — what the unemployment rate would be like without the early retirements and other people who, in one way or another, have decided to stop looking for jobs altogether.

Of course a stimulus fan would say that this simply proves that the recession was deeper than was initially believed. That's circular logic, but is surprisingly (or unsurprisingly) popular among the upper levels of the Obama Administration. Another interpretation would be that the stimulus made things worse, as I mentioned this morning. The third possibility, compatible with either of the other two, is that this sort of prediction is inherently bogus. Maybe we can't predict the future — and should stop acting like we can.

The Fountainhead comes to London

Ayn Rand seems to be everywhere these days. Paul Ryan, the Republican nominee presumptive for Vice President, is a fan (although his actions have often not matched his words); the world's media have become slightly obsessed with explaining how appallingly individualistic she and her writings were; and, best of all, the Adam Smith Institute's Ayn Rand Lecture this year was a roaring success.

So it's another feather in Ms Rand's overflowing cap that the movie of her book The Fountainhead is being screened in London on Saturday 15th of September:

The Fountainhead is an important and inspirational film – whose author, Ayn Rand, has shot into the public eye recently in the US elections.

The film features some of the best actors of the era, including Gary Cooper and Patricia Neal, and directed by King Vidor, the winner of eight international film awards. In 1979 Vidor was awarded an Honorary Academy Award for his “incomparable achievements as a cinematic creator and innovator.”

The story centres around Howard Roark, an architect who refuses to conform to the uncreative limits that others try to impose upon him. According to Ayn Rand, the author: “Whatever their future, at the dawn of their lives, men seek a noble vision of man’s nature and of life’s potential. There are very few guideposts to find. The Fountainhead is one of them. This is one of the cardinal reasons of The Fountainhead’s lasting appeal: it is a confirmation of the spirit of youth, proclaiming man’s glory, showing how much is possible.”

There are only 85 seats available, so things should fill up pretty quickly. Don't miss it.

Less theory, more reality

Picture the scene: you're in a room full of freedom-loving libertarians - the kind of crowd who unfailingly have an answer for everything -  and a fundamental question surges forth from your cerebral cortex.
'Just why are freedom and the free-market so good then?' Your question is met with a mixture of sympathy and incredulity. One might think this an unparalleled opportunity to extol the virtues of personal and economic freedom and the strength of the individual. However, the response is often lacklustre. In an almost automaton-like manner, void of inspiring message or conviction, the reply comes back: 'Well, you see, Hayek/Smith/Rothbard wrote about that in his book X. It must be true – it's all there in black and white!'

A response with decided limitations. In the often bubble-like environs in which an inspiring young, politically-minded person often find themselves in, this approach tends to go off without a hitch. Fellow like-minded people nod sagely and in agreeing tones affirm: 'it's true, you know. Mises did say that'.

This effectiveness, however, tends to diminish rapidly the moment you step outside of the postcode SW1. Were a similar situation to occur in my Midland home town, your Joe Bloggs would give any combination of the following three responses: 'who?', 'eh?', or a dull, cold stare.

But nor is it just about Mr Bloggs. If students, the most likely decision-makers of the future, are to be converted to the cause of freedom and liberty, throwing around names will achieve little. There is no reason to think that the alienation many of us feel when bombarded with the names of the left-wing holy-of-holies is any less alienating than others hearing about those we hold in such high esteem.

What we need are inspiring real-life examples. There are multitudes of these wherever freedom and liberty are allowed to flourish: the men and women whose inventions, made possible through economic liberty and the freedom of capital, directly benefited themselves and society as a whole; the poets, playwrights and painters who created great works of art, unmolested by restrictions on their conscience and granted independent thought. These are our ambassadors – those who made the watch on your wrist and shoes on your feet.

It is tempting to lapse back into the self-satisfied stance of thinking that we are somehow the enlightened few compared to those who are either too idle, too dim-witted or simply too far-gone to learn about freedom. This is nothing less than a monumental mistake. Many of us bemoan Westminster for being more a political club than a functioning organ of a representative democracy. Whilst not the sole remedy to this grievance, inspiring your man and woman on street of liberty is a crucial first step. Until then, the mental shackles put in place by decades of political misdeeds do not stand a chance of being torn away.

[Deirdre McCloskey wrote a fine example of 'Factual free-market' advocacy recently. — ed]

No nanny no more

Britons do not like nanny.  Despite decades of her telling us what foods we should eat, how much we should drink, and what lifestyles are safe, a majority of us wish she'd stop.  This is the finding of a new poll commissioned by the ASI.  Its full findings are well worth a look, but here's a snapshot.

71% agree that "It's up to me, rather than the government, to secure myself a job," and only 7% disagree.

51% agree that "I think most of my retirement pension will probably come from a pension fund I have saved myself," compared with the 22% who disagree.

Housing divides on party lines, with a majority of Labour voters agreeing that government has a duty to provide it, and a majority of Tory voters disagreeing.

Should government provide advice on what foods people like me should eat and how much to drink?  48% disagree and 22% agree.

The statement that "Politicians and Civil servants are well-equipped to make personal decisions on my behalf" finds only 9% in agreement, versus 65%who disagree.

Would young people like to run their own business?  Of the Of the 18-24 age- group, 49% agreed, versus 27% who did not.  Among 25- 39 year-olds some 44% agreed that they would like to do this, versus 30% who disagreed.

It seems that despite all the nannying, the British prefer to make their own decisions, and young people might well be out there creating the new businesses for our future prosperity.

The full paper can be seen here.

Why Funding for Lending will not work in the long run

The Funding for Lending Scheme (FLS), introduced by the Treasury and the Bank of England at the start of this month, aims to encourage banks and building societies to lend to UK households and businesses by allowing them to borrow from the Bank of England for up to 4 years at lower rates. These rates would be based on the amount that the banks lend out. In theory, this would allow many entrepreneurs to start new businesses that would be unviable without these lowered rates, as well as getting first time buyers on the property ladder.

The scheme has been coolly received by lenders, largely because of the track record for bureaucracy involved in previous government schemes of this nature. There have also been criticisms from the media, namely, that there have been no stipulations as to whom banks can lend to in order to receive their reduced fees, meaning some banks are aiming the savings towards trusted borrowers rather than new investors. To the libertarian, this seems more of a cushion to further market distortion, as the government backing banks to lend to anyone regardless of their ability to repay is what got us into this mess in the first place.

History and the Austrian school of economics tell us that when interest rates are artificially lowered below the market rate, people will simultaneously save less and invest more, but do so with false information about the market, as price signals become relatively distorted. Business schemes that would have been unviable with the higher borrowing rates now seem attractive, and so time preferences (i.e. whether one should spend now or save now) change to favour increased spending. This has a knock on effect on those whom the increased capital in the economy is spent on, usually those who work in the capital goods industries, who also start spending and stop saving. Sooner or later it becomes clear that bad investments have been made based on artificially altered interest rates and nobody has any savings to fall back on.

Our state financial institutions continue to prolong this depression because they refuse to see that it is their continued inteference that is keeping us here. The FLS scheme is the latest in a long line of projects, seceding the National Loan Guarantee Scheme (NGLS), that hope to realign their fundamentally flawed Keynesian cross to boost output. The policymakers pat themselves on the back as economic activity increases, not realising that it is leading those members of society that could bring us out of recession into ruin based on the false information that they send out. As such, regardless of their good intentions, policymakers need to realise that these schemes are not the solution to our problems.

HMRC's 'Tax Dodgers' list shows the absurdity of the UK's tax position

HMRC have published a rogue’s gallery of its most wanted ‘tax dodgers’. I’d better issue to a caveat before the ASI – which doesn’t have a corporate view - get accused of advocating criminality or I get arrested for inciting criminal behaviour by the (thought) Police, probably under the Terrorism Act. So, I can firmly state that I in no way condone criminality or criminal behaviour or support such individuals’ actions.

Although tax law is notoriously opaque and verbose it is quite clear that these people are criminals and have deliberately set out to commit large-scale criminal offences. That said, many otherwise law-abiding individuals are engaged in tax evasion on a daily basis, as we were recently reminded – what separates this from these most-wanted criminals is, in the eyes of HMRC, surely only a matter of degree.

Let’s look more closely at what these people have been up to. Of the twenty, eight seem to have been involved in VAT fraud, fourteen are wanted for smuggling (almost all alcohol and tobacco) and three offenders were involved in fraud using tax credits or money laundering. Unsurprisingly, avoiding indirect tax via VAT fraud and smuggling is the most popular past-time for criminals. This straw-poll is backed up by the official statistics on the ‘tax gap’ here, estimated to be around £35bn in total. The tax gap on VAT is believed to be 16%, that on duty for cigarettes 10% and beer 14% and on hand-rolled tobacco an amazing 46%. On indirect taxes the tax gap is estimated at 10.9% and on direct taxes 6.5%. 

However, without getting into a debate about where the UK might be sitting on its Laffer Curves it is quite obvious that there are some very pernicious effects of our tax rates. Whilst simultaneously failing to maximising its revenue and disincentivising growth creation by law-abiding tax-payers, the UK Government is creating the perfect conditions for the growth of a criminal class. This is true both at this very high level, where criminals are encouraged to operate by such very high rates.

If VAT was, say, 2% rather than 20% would so many people be willing to undertake such risky and illegal activity – not to mention that they would probably find it easier to gain jobs in the legal economy? At the very least, such behaviour shows that we need to end the punitive campaign against smokers, drinkers and drivers: we are merely playing into the hands of criminals as we have done with the campaign against (other) drugs. Instead, I’m waiting for the day when people are willing to start smuggling butter, sugar, salt and cocoa into the country.

This problem is also true at the very mundane level of everyday tax evasion by cash payments to tradesmen – are we going to put them on a website? Or simply impose punitive fines on already hard-pressed business people, no doubt at greatest cost in administration than the actual revenues from the fines? Does such prevalence of this activity instead not indicate that perfectly law-abiding consumers and traders are anxious to avoid paying such extortionate rates of taxation. The Government has taken a grossly high-handed approach and condemning people for behaviours that they would not necessarily wish to engage in. However, if you wish to repair your roof or paint your house, it’s not surprising that people wish to avoid adding 20% to the cost (I speak as a new home-owner who has recently shelled out thousands of pounds of my already heavily-taxed income in SDLT and VAT).

We need to turn such attitudes on their head – these people are sending a clear message to government ‘we are being taxed too much’. Ignore what is said about how much we value ‘public services’ or how much the ‘cuts’ are resented. These are the true, revealed preferences of the population at large. We are paying too much tax and are being criminalised trying to get away from it. We’ve had enough.

Girls surpass boys at A Level: how surprising is that?

OK, perhaps I shouldn't use a distaff side Johnson as a source of fact but this did rather strike me:

It’s A-level results day! If this year is anything like previous years, people will aerate about two things: grade inflation, and girls doing better than boys. Naturally, I disapprove of grade inflation except when it benefits my own children (at the time of writing I don’t know my daughter’s grades…) but when it comes to girls’ success as a cohort, I exult openly.

As a general rule one of the things that we know about education is that girls do better under a system of continuous assessment and boys under a system of competitive examination. This is of course not necessarily true of any one individual: but it is on average across any particular age cohort of children. If you want the girls to do better than the boys then skew the testing system to course work. Want the boys to appear to do better then forget the homework and see what they can regurgitate in two three hour periods in the summertime.

That we really do know that this is true comes from the way that a few years back the system of examinations in Enlgand and Wales was deliberately changed to reflect this very point. GCSEs, A Levels, are now more based upon coursework than they used to be. The actual exams themselves now have less importance in the system than they used to. The stated objective of this change was to lessen the skew in favour of boys that a purely examination based system entailed.

So it is possible to exult about the girls outdoing the boys these days if that's what you want to do. For it would be an example of a government policy, a very rare one indeed, actually achieving the goal originally set out. The educationalists wished to reduce the achievement gap between boys and girls. They did so.

Hurrah.

However, do note how they achieved their goal. Not by improving education in any manner. They did it by changing the scoring method.

Maybe not so hurrah, eh?