There's no reforming the EU without understanding it

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Once again the Daily Telegraph (“Brussels plots fresh City of London power grab”, 8th August) and like-minded media have become irrationally frenzied by EU moves that are wrong but nevertheless entirely rational.  London has been reminded that the three UK financial regulators will have to give up their regulatory powers to Brussels and become merely supervisors. As this Institute pointed out in our letter to The Times in June 2009, the UK governmentagreed that the previous March.  It was President Sarkozy’s price for attending the London G10 Summit in April.   The necessary legal framework was agreed by Parliament before that summer’s recess. The government and the City were silent at the time and in the five years since.  It is no use yelping now.  Brussels is only implementing what we agreed.

The worry now is that the City and the government ignorance of Brussels and its processes make EU reform all the less likely.  One needs to understand and then work the system to succeed.  The UK negotiators’ failure is demonstrated by the 55 occasions on which we have sought to block some new Brussels initiative or other and been over-ruled each time.  The French and the Germans know how to garner support for what they want done; the British government clearly hasn’t a clue.

If the past five years, during which the EU financial regulation issue has been ignored by City and government, show anything, it is that the Foreign and Commonwealth Office and HM Treasury have been asleep at the wheel.  The FCO lacks backbone and is notoriously pro-EU. We need a new team.

Obviously some of the existing team do have some understanding of the EU.  Perhaps we need an exam, supervised by Michael Gove, to sift out the good ones and then complete the new team with our finest negotiators first to understand what has to be done and then to prepare the way.  It will make little difference to the UK’s position in the EU if our involvement, for the few years preparation will take, is little more than keeping bums on seats.

The Coalition has at least done some of the preparation in asking and thinking about what reforms Britain would like but that is no more than a Santa Claus wish list without a plan to achieve any reform.

A final thought along these lines is to put the new team under John Major’s charge.  He is the last British Prime Minister successfully to have negotiated any substantial matter with the EU.

The reason we're all such fat lardbuckets

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A number of reasons are put forward as to why the nation has, in its entirety, become a population of fat lardbuckets. Big Food pushes ever more unhealthy comestibles upon us, advertising to children is for some reasons still allowed, there's no tax on sugar, or fat, we've even got those who insist that inequality causes obesity. Of course, all these reasons come with their own solutions: we should ban advertising to children, or of "unhealthy" food, or reduce inequality or something. As Chris Snowden shows in his latest little report (The Fat Lie)all of those reasoned proffered are simply wrong:

If we look at the average body mass of English adults since 1993, we see a steady increase from 72.4 kg to 77.4 kg (Figure 7). This seven per cent increase contrasts sharply with the data from DEFRA which shows a decline in domestic calorie consumption of nine per cent in the same period (Figure 8). If we confine ourselves to the period 2002-12, for which we have solid data for food consumed inside and outside the home, we see the same ‘paradox’: an increase in average body weight of two kilograms coinciding with a decline in calorie consumption of 4.1 per cent and a decline in sugar consumption of 7.4 per cent.

Britons are eating fewer calories than we all used to. What is causing the increase in weight is that we're all also doing less physical labour than we used to. The imbalance between calories consumption and expenditure is growing but not the total amount of calorie consumption. We've thus got under-expenditure of calories, not over-consumption of them.

Note that if we are all consuming fewer calories this does then mean that if Big Food has been trying to get us to eat more they've failed and failed dismally.

It's also worth noting one more thing, that inequality argument. This should really be turned on its head: it is greater equality that is to blame here. There's always been a certain calorie richness, calorie density, to the British working class diet as compared to its middle class (or even upper) equivalent. This made perfect sense back in the days of heavy manual labour. We now have much greater equality in the workplace, there's very few of us making a living from the exercise of our muscles rather than what's between our ears. And that greater equality has had a larger effect on those still eating that culturally calorie dense diet than it has on those whose diet adapted to less physical labour earlier.

It is still possible to point out that it's the poorer among us who are the lardbuckets. But this isn't the result of ineq1uality at all, it's the result of greater equality in the workplace, in all of us now expending fewer calories in pursuit of our daily bread.

Actually, people aren't willing to pay more tax for the NHS

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There's a report out announcing that loads of people would be entirely happy to pay more tax if that extra cash was allocated to the NHS. Two important things #to say about this. The first being that it's untrue and the second being that if it is then that's just great:

Almost half of voters say they would be happy to pay more income tax as long as the money went directly to the NHS, which is facing a £30bn gap in its finances by 2020.

Polling firm ComRes found that 49% of people would be prepared to pay more tax to help fund the health service, one in three (33%) people said they would not be ready to do so, and 18% did not know either way.

However, if only the views of those who expressed an opinion are considered, as many as 60% of people are willing to pay more tax to help the NHS providing its wide range of services; 40% are not.

The reason it's not true is our old friend revealed preferences. We should never try to divine what people really want from what they say: we should instead look at what they do. And we do have a method of being able to pay extra tax: simply send the cheque to "The Accountant, 2 Horse Guards Road, London SW1" and they're absolutely delighted to apply it to whatever area of public spending you wish to inform them you favour. Admittedly it's a few years since I looked into this but in that year an entire 5 people had actually done so and four of them were dead, leaving bequests.

So revealed preferences tells us that exactly one live person was actually willing to pay higher taxes for any reason at all, not just for the NHS.

But let's assume for a moment that this is in fact true. That the reason, perhaps, that more people don't pay is because they don't know where Mr. Accountant resides? All we have to do is tell everyone where he does and that's the problem solved, isn't it? A few people to open the flood of envelopes that will no doubt overwhelm the office and we're done. Everyone who wants to pay more tax for the NHS may do so and no one who does not needs to.

If only all public policy questions were as simple to solve as this one.

An infrastructure push does not lead to a boost to GDP

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We've heard much these past few years about how now id just the time to have an infrastructure surge. It's said often enough that a recession is just when we should be building all those roads, railways, council houses and the rest. Obama even tried to find those $800 billion worth of shovel ready projects just raring to do. With no great success it should be said. Sadly, this just doesn't seem to work. From the IMF:

This paper has examined whether major public investment drives in the past have served to promote or accelerate national economic growth. It is not about whether in theory public investment drives could accelerate growth, but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth.

The answer appears to be “probably very little”. This conclusion pertains to the drives – the big increases in public capital spending – not necessarily to routine levels of public investment. And furthermore the evidence here is not about whether public capital can promote growth by averting the emergence of bottlenecks. Major public investment campaigns continue to be advocated in several countries as a major trigger for economic growth, and on this issue, whether they have in fact triggered growth, the evidence for a positive effect of public capital on GDP or GDP growth is weak. … It is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite – major drives in the past have been followed by slumps rather than booms.

In theory it should work, in practice it doesn't, which is a bit of a conundrum. The practical answer to which puzzle is that government is probably even worse at doing things than we generally think. Thus we'd probably be better off limiting it to that very small set of things that both must be done and that only government can do. Something which is a very small overlap indeed.

A new ASI report finds a foreign player crackdown would do nothing to help England's football team

A new report released today by the Adam Smith Institute blasts the FA's proposals to crack down on foreign players, finding:

  • No link between native play time in the Premier League and performance of English national team
  • No link between amount of minutes played by Englishmen ten years ago and performance today
  • A strong link between foreign players and Premier League quality

The FA's plan to crack down on foreign players in the Premier League would damage the league's quality and success in European club competitions, without any benefit to the English national team's performance, according to a new study from the Adam Smith Institute, an economic think tank.

In the first research of its kind, there was no link found between the time English players get on the pitch and the performance of the national team.

The report, "Sweet FA - Why foreign player crackdowns hurt English football", found this to be true for performance measured in FIFA points, world ranking, or placing at major championships—i.e. the World Cup and European Championship. This also goes for the other major leagues in Europe—Spain's La Liga, Germany's Bundesliga, and Italy's Serie A.

The report also rejected as baseless the claim that a reduced amount of playing time for English players five or ten years prior affected English international performance.

But the report did find evidence of a strong link between a league's UEFA coefficient and the prevalence of foreign players—leagues with more non-natives are stronger, and stronger leagues have more non-natives.

This suggests that Greg Dyke's scheme to tighten up work permit rules for foreign (or just non-EU) players would harm the English Premier League—the world's most popular and successful league—without any concomitant benefit to the English national team.

Paper author Ben Southwood, Head of Policy at the Adam Smith Institute, said:

"It is widely believed that England's perceived underperformance at recent international competitions owes something to the reduced fraction of minutes English players are playing in the Premier League—but up until now no one's really studied the question with any kind of rigour.

"My numbers are not final but they suggest there is no real link between the amount of football English players play in the Premier League (or across the top four European Leagues) and English international performance.

"If the reduced quantity of experience is a problem, then it is being balanced out by the massively improved quality—or something else".

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

We'll take good policy from anyone who wants to offer it

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As we regularly point out here, at the ASI we're not party political. But we do propose policies that we think would be good to political parties. As such it's nice when someone, anyone (we're not proud!) decides that implementing a policy we've been recommending would be a good idea. So it is with the announcement that the LibDems are going to have a £12,500 a year personal tax allowance in their manifesto:

The Liberal Democrats have pledged to raise the income tax personal allowance to at least £12,500, in manifesto plans announced on Thursday.

The party has also signalled it would seek to increase the amount people can earn before paying National Insurance.

Danny Alexander, the chief secretary to the Treasury, said the allowance would rise by the end of the next parliament. The move would cut income tax for 30 million workers and save the typical basic rate taxpayer £400 a year, the party claimed. It would also benefit more than six million pensioners.

The ASI has for years argued that the personal allowance should be much higher. But we started to point out, a few years ago when the Living Wage movement first started out, that it's simply ridiculous that people earning the minimum wage face income tax. The entire point of the minimum wage is that this is a minimum politically or socially acceptable amount that people should earn (whether you believe there should be a minimum wage is another matter). That at the margin government then nicks 40% of it in various taxes is just not on. so we've been saying that, even if people don't like our flat tax plan (£15k personal allowance and a flat rate income tax above that) can we all at least agree that the personal tax allowance should be that full time, full year, minimum wage?

The reason that Danny Alexander is saying £12,500 a year as the allowance is because that's what that minimum wage was a couple of years ago when he was first asked about the suggestion.

We would go further though (we always go further) and insist that it should rise to the current minimum wage, whatever that is in any year. And also that the NI contribution limits (yes, for both employers' and employees') need to rise to that same level. For we do still have that simple problem. If the minimum wage is the irreducible minimum that it is just and righteous that someone receives for their labour then it's just not on that government dip its sticky fingers into it.

And it's also worth pointing out that doing this will immediately make the minimum wage above the Living Wage. For we don't actually have a low wage problem in the UK: we have tax poverty.

Explaining the success of the Finnish education system

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It's a standard enough trope: the Finnish education system does very well so our education system should be just like the Finnish one. Meaning comprehensives for all and put the private education system to death. That is, of course, attractive to those who have been arguing for decades that we should put the private sector education system to death and have comprehensives for all. There's an interesting new paper arguing that it really might not be all that simple:

Finland has been noted to perform consistently very well in the international PISA assessments for many years, but it also has a relatively low per capita number of Nobel Prize winners. We draw upon a large body of proxy data and direct evidence, including the first ever use of RTs to calculate the Finnish IQ and the first ever use of the WAIS IV and PISA scores in the same capacity. Based on these data, we hypothesize that Finns perform so consistently well in PISA because they have a higher IQ overall than other European countries and exhibit a specialized slow life history strategy characterized by high Agreeableness and Conscientiousness, and low Psychoticism and Extraversion. Most of these traits predict educational success but all would suppress genius and creativity amongst this population.

If Finnish children are both brighter than those in other countries and also the culture itself supports conscientious hard work then yes, we might well think that that has an impact upon the success of the education system.

Spotting the effect of the minimum wage

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  The first place we'd expect to see the effects on unemployment of a minimum wage that was too high is of course in the unemployment rate among teenagers and the young. For these are the people with little to no training, no job skills, and thus those that a minimum wage is going to be binding on. So, what do we see in the UK?

Centre-left think tank the Institute for Public Policy Research (IPPR) says that a full-blown economic recovery will not resolve the UK's youth unemployment problem.

Its latest report says despite steady falls in unemployment, there are still 868,000 out-of-work 16 to 24-year-olds.

Later on Wednesday, the latest official UK unemployment figures will be revealed.

They have been falling steadily for the last year. Gap

The IPPR highlights a striking mismatch between what young people are training for and the types of jobs available.

For example, it says, 94,000 people were trained in beauty and hair for just 18,000 jobs, while only 123,000 were trained in the construction and engineering sectors for an advertised 275,000 jobs.

The IPPR says youth unemployment is lower in countries where the vocational route into employment through formal education and training is as clear as the academic route.

It says this helps, as it puts the two on a higher perceived footing.

We're certainly willing to believe that more vocational training would be a good idea. We could have institutions of higher learning that specifically existed to teach people how to do real world jobs rather than providing a more theoretical education as at a university. Perhaps we could call them Polytechnics of Technical Schools?

But that the IPPR insists that even a full economic recovery will lead to there still being a large amount of teenage unemployment means that we really do have a minimum wage that is too high. Yes, even that special, lower, minimum wage for the young is too high: all we need as proof perfect of this contention is that statement that there will still be heavy youth unemployment even at the top of the economic cycle.

Switching mobile networks is easier than switching governments

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Unlike lots of people on the right, I like Owen Jones. He’s good natured and often challenges orthodoxy on his own side, and he’s a thought-provoking writer. 

Having said that, I usually disagree with what he writes on economics. His Guardian piece this week, which called for the nationalisation of the UK's mobile network operators, was a good example. It’s tempting to dismiss it as clickbait, but it represents a train of thought that is increasing in popularity. And if nothing else it may shift the Overton Window.

Jones starts by pointing out that nationalisation of big industries is very popular among the public at large. “While our political overlords are besotted with Milton Friedman, the public seem to be lodged somewhere between John Maynard Keynes and Karl Marx.” 

A fair point. He might also have noted that the public disagrees with him about lots of other things: the obvious example is hanging, where the public is somewhere between Roger Helmer and Oswald Mosley, but there’s also immigration, which 55% of people want reduced ‘a lot’ (and another 21% want reduced ‘a little’). The Great British public thinks the benefits system is too generous by a 2-to-1 margin, and think that ‘politicians need to do more to reduce the amount of money paid out in benefits’ by a 3-to-1 margin. And so on. On these issues, and presumably many others, I assume Jones thinks the public needs further persuasion.

It isn’t necessarily that the public really is bloodthirsty or xenophobic or anti-poor or quasi-Marxist; it’s that the public is extremely uninformed about most things. How could you judge whether we needed more or less immigration if you thought we had more than twice as much immigration as we actually do? How could you judge whether the railroads should be nationalised or not if you did not know that passenger numbers had doubled since privatization, after decades of decline under the state?

Jones claims that mobile phone networks are an inefficient natural monopoly, without any real reasons given. This claim is untrue. The UK has four competing mobile networks (Vodafone, O2, Three and EE, which was formed by a merger by T-Mobile and Orange) and dozens of aftermarket “mobile virtual network operators” that lease wireless spectrum from those four networks (GiffGaff and Tesco Mobile are two popular examples). None of these networks are unusually profitable and all spend enormous amounts on marketing. Try spending a day in a city without seeing at least one advert for each company. This is not the behaviour of monopolistic industry!

(There are a couple of other frustrating errors in the piece. For instance, a typical £32-a-month 24-month contract can get you an iPhone worth £550, not a device worth £200 as Jones claims.)

Yes, signal blackspots are annoying. (Take it from someone who spent his teenage life having to walk into the garden to send a text message.) And mobile networks’ customer service really does suck sometimes! But Jones is comparing reality with an ideal where resources are infinite. Since resources are not infinite, we have to have some way of deciding what imperfections are tolerable. 

For example, as annoying as blackspots are, the optimal amount of coverage is obviously less than 100%. The phone networks reckon they cover around 99% of the population, and as frustrating as it is when you’re in that last 1%, the marginal costs rise dramatically when you try to cover that last 1%. We could cover them at great cost, meaning that we have less money to spend on other important things elsewhere. The question is one of priorities.

Ultimately, the important question that Jones does not answer (or ask) is, compared to what? Private sector firms might be irritating sometimes. Unless you can show that nationalised firms would be less irritating and better overall, that doesn’t tell us anything about what we should do. 

There are lots of examples of nationalised firms that were absolutely terrible. Tim remembers waiting three months for a landline when the GPO ran the phones; and then there is the huge drop-off in rail passenger numbers under British Rail, followed by an equally huge recovery after privatisation:

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The fact that the state funded some of the scientific research that led to the iPhone doesn’t mean that we’d have better phones if we nationalised Apple. (It might be a case for state funding for scientific research that is released into the public domain, though.) As Tim says, “The State can be just as good as the market at invention, the creation of really cool new technologies. But it’s terrible compared to the market at innovation, the getting of that new technology into peoples’ hands so that they can do cool and interesting new things with it.” 

Economies of scale exist, as Jones suggests, but so do diseconomies of scale. Firms can be too big. And when you have a single network (whether it’s privately or publicly owned), customers lose all ability to ‘exit’ a firm that is giving them a bad service, so the only recourse they have is at the ballot box. 

Which brings us back to the first problem with Jones’s piece: politics is a complicated business about which we know little. If we don’t like what we’ve got, we have to hope that a majority of other voters agrees with us – and even if we’re right, they may not be informed enough to agree with us. 

It’s a lot easier to switch mobile phone providers than it is to switch governments. Ultimately, it’s that pluralism and freedom of exit that drives improvements in markets, and tends to make governments relatively bad at doing things. For all the mobile network industry’s problems, the question is: compared to what?

Boris's BOGOF

Boris Johnson’s putative return to the Commons overwhelmed any publicity for his, or rather Gerard Lyons’s, strategic analysis of the UK’s in/out EU options: The Europe Report: A Win-Win Situation, released 6th August.  Four possible outcomes are envisaged: staying in either a largely unreformed EU or one reformed to the UK’s liking.  The two departure options are seen as (a) good EU relations and pro-growth UK reforms and (b) poor EU relations and an inward-looking UK. Lyons makes the good point that “the UK can only achieve serious reform if it is serious about leaving, and it can only be serious about leaving if it believed that is better than an unreformed EU.”  The title would have you believe both staying in a reformed EU and leaving are “Win Situations” that we can either choose one or use it to achieve the other, i.e. Buy One and Get One Free.

Lyons has produced an important review of the issues facing each sector but, at the end of the day, his conclusions are based on simple assumptions of the economic outcomes from each option.  We do not need 108 pages of report, and 130 pages of appendices, to be told that the two high growth scenarios are more attractive than the two low growth ones.  Furthermore, the conclusion that the two high growth scenarios are economically equivalent is similarly based on heroic assumptions. Lyons’s Panglossian vision of the UK outside the EU and reforming itself begs a great number of questions.  The world is not ordered according to the way we order ourselves: trading with the EU will still be governed by EU regulations, likewise the US.

The paper has a number of failings: in particular it is not specific about the EU and UK reforms that would be needed, still less how they could be achieved and how likely that would be.  For example, the only hope of securing the EU reform the UK seeks is for the UK to show benefit for EU as a whole, not just the UK.  UK proposals to improve the EU market for financial services looks, to the rest of the EU, like UK self interest.  We know that the rest of the EU does not accept the UK arguments because it is outvoted every time.

How would, as Lyons suggests, the UK leave the EU whilst at the same time improving the UK’s EU relationships?  The chilling legal issue is EU Article 50 under which the remaining members decide the terms of the separation with no involvement of the departing member.  Obviously there would be negotiation so that may not be as ugly as it seems.  Trade would continue and we import more from the rest of the EU than we sell them but that is beside the point: could the UK protect its EU exports better than it could reduce its EU imports?  De Gaulle reckoned that the UK needed continental Europe more than vice versa and the 1960s proved him right.

We should welcome this report for its discussion of many of the issues but we cannot rely on its findings.  The City really does need to come up with a plan to protect its future but this is not it.