The Pin Factory Blog

Here in Hong Kong, I'm concerned at the way it's going. Every time I come here, it seems to get more 'welfarist'. Once the most deregulated, free-market place in the world, now it's got the minimum wage, and people are talking about a universal (government run) pension system. As elections loom, and the transition to full enfranchisement advances, politicians are keener and keener to promise bread and circuses. And one thing leads to another: the minimum wage is one thing, but when it comes with new regulations on maximum working hours and minimum holiday entitlements, it suddenly starts to get a lot more expensive than was originally advertised. Inflation is noticeable in Hong Kong, and a large part of it is due to the minimum wage effect. Apartment owners are already complaining at the effect it is having on their management charges.

It would be less worrying if all this were coming from China, as observers expected it might at the time of the handover in 1997. But some of the politicians in Hong Kong seem to be redder than those in Beijing. True, there was something of a movement to shift the place leftwards because everyone wanted to get on the right side of the new bosses. But Beijing these days does not seem too bothered about how Hong Kong runs itself; it is the Hong Kong politicians themselves that are leading things.

Hong Kong still features high, or top, of those indexed of economic freedom, with an enviably low ratio of government expenditure to GDP in the twenties. Well yes, if you exclude things like the Jockey Club, which is a sort of institutional welfare system, or the public monopolies and the revenues that they generate, and other things that are really government but don't appear on the books. It seems almost certain that mainland China's government expenditure is, proportionately, quite a bit less. And, of course, it is half that of the home of liberalism, the UK. Makes you wonder who the communists are, really.

One of the more laudable attempts of the government to reduce bureaucracy is a drive towards tax simplification. Two highlights are the abolition of complicated reliefs (though the Taxpayers’ Alliance quickly observed that the benefit was undone by other meddling in the Budget); and the possible merger of National Insurance Contributions with Income Tax. This last one could be a red herring though – the government has only announced a consultation and many seriously doubt whether any Government would ever want to flag up the fact that the basic rate of tax is not 20p but 31p.

The big prize in the lottery is a flat tax. It both simplifies tax and raises revenue. The Coalition Agreement neither mentions, nor excludes it. But it does mention a drive towards more competitive, simpler and fairer taxes: a flat tax ticks all these boxes.

A flat tax would:

1. Increase revenue as the black economy will disappear; tax exiles will repatriate their fortunes; and instead of paying for expensive advisers the rich will simply pay the tax;
2. Increase the revenue as the economy will grow (as was the case when Thatcher and Reagan cut taxes);
3. Maintain a zero rate for those who are less well off by putting the threshold from which tax becomes payable at a high enough level;
4. Do away with a large chunk of the HM Revenue’s expensive administration

It’s win-win. It is not a handout to the rich: in countries where a flat tax rate was introduced the wealthiest people in society ended up paying a larger percentage of the total tax take.

The Government has the choice. By doing not very much, it can conserve the socialist dogmas of yesteryear. Or it can reform. Radically and irreversibly. I guess it takes guts and ambition to go down as leaders rather than followers.

The "public benefit test" is a misguided attempt to force consolidation in the independent education market, argues James Croft.

This week the long running dispute between the Independent Schools Council (ISC) and the Charity Commission moves towards a conclusion in the courts. While Robert Pearce’s comments on Friday will come as a disappointment to association members hoping for clarity on the question of how schools may meet the new public benefit requirement, I can’t help but think that the issue has become little more than a distracting side-show.

The government has already made it quite clear that the Chair of the Commission must desist or be relieved her responsibilities; a future resumption of her unsuccessful attempts to force consolidation in the sector was always unlikely. In so far as the foray was the brainchild of Labour policymakers, the announcement on Friday that the Commission’s programme of assessments ‘is at an end’ and that irrespective of the outcome of the case ‘the commission intends to review the guidance in the light of its experience of its use’ comes as no surprise either: while politically useful in pacifying interests on the left of the party, this aspect of Labour’s policy excursion into the charitable sector has been far from successful in policy terms. [Continue reading]

There's a small club of musicians and actors who've protested against absurdly high tax rates. The classic is George Harrison's Beatles song, Taxman – "Should five percent appear too small /  Be thankful I don't take it all". (That wouldn't sound out of place in most debates about tax today, sadly.) And, of course, there's Michael Caine's explanation of the Laffer Curve – "I left for eight years when tax was put up to 82 per cent. The newspapers said: "Michael Caine's leaving: let him go, the stupid, overpaid, loudmouth idiot, who cares where he goes?" Well, you didn't get 82 per cent tax from me for eight years." 

The newest member of this elite club is Adele, whose (rather good) song "Rolling in the Deep" you've probably heard ad infinitum in Radio 2. She's not pulling any punches:

"I'm mortified to have to pay 50%. Trains are always late, most state schools are s*** and I've gotta give you, like, four million quid? Are you having a laugh? When I got my tax bill in from [my album] 19 I was ready to go and buy a gun and randomly open fire."

A bit extreme, but I can't blame her for being frustrated. The Guardian is a lot sniffier – how dare she resent paying half her earnings for inefficient state services!

Robert Nozick used the example of basketballer Wilt Chamberlain to show that even a society that began with equal wealth would quickly become quite unequal:

Suppose that among the members of this [equal] society is Wilt Chamberlain, and that he has as a condition of his contract with his team that he will play only if each person coming to see the game puts twenty-five cents into a special box at the gate of the sports arena, the contents of which will go to him. Suppose further that over the course of the season, one million fans decide to pay the twenty-five cents to watch him play. The result will be a new distribution, D2, in which Chamberlain now has $250,000, much more than anyone else.

Is it just to take half of Chamberlain's earnings in this example? Why should the state interfere in simple and just exchanges like this? Nobody could claim that Chamberlain doesn't deserve the money – people want to give it to him because they want to see him play. But, as with George Harrison and Adele, he'll end up much richer than any one person in the audience. There are lots of people out there who wonder why they have to cough up so much of the money they earn just to pay for late trains and bad schools. Welcome to the club, Adele.

Last week, the Daily Mail has a front-page headline that said, “Sir Fred’s affair: why we do have a right to know”. This is a sentiment that I’ve heard a lot when people are talking about super-injunctions. People have the right to know this, people have the right to know that, and so on.

But none of us have a right to know anything about any private individual. Our rights are just not the issue. The issue is about whether someone who knows something about someone else is free to say it. It’s all about the individual’s right to freedom of speech.

And I take a pretty hard line on this: the law should not be used to prohibit anyone from speaking the truth. Yes, there is a strong case for preventing the media reporting information about private individuals that has been obtained illegally. But beyond that, freedom of speech trumps other considerations.

Of course, I couldn’t care less which footballer has been sleeping with which z-list celebrity. And I’d much prefer to live in a society where other people didn’t care either. But my tastes don’t matter. Freedom of speech does. End of story.

Ultimately, Eamonn is right: if you live in the public eye, you shouldn’t do anything that you’re not prepared to see reported in the News of the World. It might not be fair. It might be a sign of cultural degradation. But that's the way it is. The lawyers don't get a say in the matter.

The FT reports that Sir John Vickers, the chairman of the Independent Commission on Banking, has admitted to the Treasury select committee that the commission’s proposed reforms “might not prevent more failures or free the taxpayer from providing support to the sector.” He is absolutely right, and that’s why the commission’s proposals are somewhat deficient.

As I’ve written before, by far the most pressing task facing financial reformers is to reintroduce proper market discipline into the banking. Bank executives need to know, beyond any doubt, that they won’t be bailed out if they make bad business decisions. Bondholders – that is, people or institutions who lend money to banks – need to know that their investment isn’t risk free. Even savers and depositors need to realise that their money is only as safe as the bank holding it is sensible.

Such market discipline would do far more for financial stability than any amount of regulation and enlightened ‘supervision’ – with all the information and incentive problems that brings with it – ever could.

But some people say this is just pie-in-the-sky stuff. They argue that while – yes – a real free market in banking might work, that’s just not something we’re ever going to have. Democracy, they say, means that banks are always inevitably going to be bailed out. At the very least depositors (and probably bondholders too) are going to receive full or partial government protection. In other words, they say that you just can’t possibly eliminate the risk subsidy that government gives the banks, and which inclines the financial system towards instability.

I hope this isn’t the case, but if it is, it probably suggests a far more radical regulatory approach than the Independent Commission on Banking has considered. It might even point in the direction of ‘narrow’ or ‘limited purpose’ banking, which would involve imposing strict structural divisions in the finance industry, and require banks to hold dramatically higher levels of liquid reserves. Bank of England governor Mervyn King has nodded in this direction.

Of course, I’d much prefer the free market option, but the trouble with the Independent Commission on Banking’s proposals is – arguably – that they do neither one thing nor the other. They don’t eliminate moral hazard and risk subsidies or restore real market discipline to the financial sector. But they don’t offer a particularly strong regulatory response either. As such, the banking sector is liable to cause more problems in future.

Ireland has joined the increasing number of EU states that have begun seizing or taxing private pension funds to plug their budget deficits. Under the Irish plan, a 0.6% tax will be levied against private pensions for the next four years, in order to fund a stimulus package. Note that this will be a tax on the capital itself, not the gains.

The plan is, of course, ludicrous: classic "gombeen economics", in the words of the Irish Times's commentator (gombeen is an Irish word for a corrupt wheeler-dealer), that will only make Ireland's situation worse. And stimulus packages are a Keynesian folly. At best they do nothing, at worst they bankrupt countries and lead to lost decades of stagnation. And the principle of raiding people's savings, made on good faith, to pay for a government project is immoral in and of itself. But, however much we might sympathise, that is Ireland’s challenge. The real danger is that we might see the same kind of thing over here.

From next year private sector workers will be automatically enrolled into a pension fund. A tax similar to the Irish levy wouldn't yield the government a huge amount, but it would plug a hole in its finances. If the recovery that the government expects doesn’t come through, it isn’t hard to foresee a “temporary” levy on pension pots. Like the Irish levy, it might start small. But remember: the first income tax was just 2%, and was originally introduced to fund the Napoleonic Wars. Small, temporary taxes have habit of sticking around and growing.

Even a tiny pension confiscation would have a seismic impact: just as the Irish government’s levy has broken the good faith in which Irish pension holders invested their money, so would the faith that Britain’s system relies on. It may be coincidence that pension contributions are being made mandatory at the same time that this is happening abroad, but the inability to disengage from private pensions would free the government’s hands to raid these funds. Such a tax would be deceitful, deter investment, and undermine people's ability to provide for themselves in their old age – yet another step away from self-sufficiency, towards dependence on the state.

How likely is this to happen? Sadly, it may be inevitable. Hungary, Poland, France and other EU states have carried out straightforward pension seizures, and a levy might be presented as a “lucky escape”. Yeah, right. Some might say, optimistically, that a pension tax would be politically unfeasible in Britain. But if a strong recovery doesn’t take place (and so far, growth figures have undershot the government’s projections), and the government continues to buckle to special interest pressure, the pensions nest egg might be too tempting to resist.

Yesterday's blog on copyright raised interesting questions about the very nature of property itself. Many convinced free-marketeers and libertarians seem to believe that 'property rights' are undeniable, permanent and immutable, and endow them with an almost mystical quality. I see the crucial importance of property rights as well: you can't expect people to work hard and build up capital if it can simply be stolen by others, including politicians. Property is one of the foundations of a liberal social order.

But as Milton Friedman (no leftie, he) pointed out in Capitalism and Freedom, defining what constitutes property is problematic, and often controversial. Should my ownership of a piece of land, he asks, deny others the right to fly over it in an aircraft? Precisely what rights should the shareholders of a company have? And, indeed, what should be the rules on patents or copyright? Terence Kealey, another robust liberal, argues that there should be no patents (most inventions are hard to replicate and the financial reward tends to come early), but that there should be copyright (since words are almost costless for others to replicate).

Plainly, these things are matters of judgement. They are decided in a social context. It might be a kind of natural evolution, as Hayek suggests, in which particular property rules come to be adopted, almost without thinking, because they work and support the smooth functioning of a society. It may be that the rules evolve through the common law process. (The most wonderful examples here are those regarding property disputes between neighbours, which have left us with rules such as, yes, you can cut down the branches of a neighbour's tree that spreads over your garden, but you have to offer them back the wood!). Sometimes the rights are defined in statute, as with shareholders' rights – thought that can be more hit and miss in terms of getting the balances just right.

Hume argued that it did not much matter what the property rights were, as long as they were known and certain. Indeed, that certainty, like the certainty that you are not going to be expropriated by some political majority, is important. Yet content is surely important too: different property rules could make large differences to the economic and social outcome. With such outcomes in mind, property rights fans can argue for particular arrangements, citing the evidence for their general benefit; but that does not put any such rule beyond dispute. We do need to be robust, though: the 'Red Tory' argument is that all market arrangements are the product of social bargaining, meaning there is no seam between politics and economics. That way lies the increasing politicisation and control of economic life.

Britain’s furore over legal gagging orders – superinjunctions – raises some serious questions for rights and the rule of law in a free society.

Do people have a right to privacy? Well, I have certain information, such as my bank login codes, that I think should be protected from being made known to the public, so yes. But should that extend to, say, the illicit affair of a top footballer, whose wife and children could be damaged by the media circus surrounding its revelation? Are ‘pro-family’ politicians fair game if they cheat on their spouses? But should politicians who make no moral pronouncements be allowed privacy with respect to their private lives?

One thing that is certain is that the rule of law isn’t working. There is one law for the rich who can afford to take out gagging orders, and another for the poor who can be libelled but cannot afford the huge cost of defending themselves. Until we make the courts a lot cheaper – and that means denationalising them and opening the legal profession up to competition – such injustice will remain.

And how far can or should one country’s courts attempt to block information that is freely available elsewhere? The law can’t defend people against reality, and the reality is that the superinjunction names are all out there.

Press freedom is essential, though. Back in 1957, the editor of the Express, John Junor, was called to the Bar of the House of Commons and made to apologise for revealing the special petrol allowances that MPs granted themselves. We need our leaders to be held to account.

Our legal system should follow reality, not try to distort it. That means that politicians and celebrities will need to follow a new rule. Don’t do anything that you are not prepared to see reported in the News of the World. The amazing thing is (as the expenses scandal showed) how few of them actually follow this rule. But in the age of instant and cheap information, what other option is there?

The Digital Opportunity (PDF), the independent review of intellectual property (IP) published last week after being commissioned by the government in 2010, is one of the most important contributions to the IP debate in years. IP laws, it says, have become hostage to special interest groups – “lobbynomics”, in the report’s words – and do not serve the purpose that its advocates claim it does. The balance between protecting past innovators and promoting future ones has not been struck and, says the report, evidence should drive policy – not lobbying by rent-seekers.

IP is one of the toughest areas of policy to get right. The challenge is to protect innovators’ rewards, and thus promoting innovation, without stifling future innovation by making these protections too stringent and long-lasting. The problem is complicated even more by criticisms of the concept of intellectual property itself. Critics argue that IP laws are effective restrictions of private property rights: I should be allowed to arrange my own property in any pattern I like, and bits on a computer or words on a page should be no different. The idea that a non-scarce resource should not have property rights assigned to it is appealing, but if granted it removes much of the incentive for people to write books and create innovations.

I sympathise with the anti-IP argument, but I’m an agnostic. And, for the foreseeable future, it’s clear that only gradual change can take place. And even IP's critics should support reform that makes it less strict. There’s no need to make perfect the enemy of good.

What would evidence-driven copyright law look like? (I won't discuss patents here, although this argument should roughly apply to patents as well as copyright.) The length should be determined by looking at earnings distributions for things like music and books, and cut the copyright protection period to only include, say, the first nine-tenths of the average distribution. Most copyrighted productions follow a power law – the bulk of their earnings from a novel or movie will usually be earned in the first couple of years (see diagram above). It’s the initial high earnings that IP should be aiming to protect, not the “long tail” that comes afterwards. This would reduce the stifling effects that copyright has, without reducing much of the innovation incentive, since most profits would still be protected.

Drastically shortening the copyright coverage period would hardly be perfect – it wouldn’t solve the problem of piracy, and would create some unfortunate outcomes where the creator of a work that only becomes popular after the copyright period misses out. But a big reduction in IP coverage periods, based on the income distribution of copyrighted works, would be a step towards promoting innovation that doesn’t undermine the income incentive to innovate.