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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

A lesson from Indiana?

Written by Tom Clougherty | Friday 12 December 2008

I went to a fascinating lunchtime discussion at the International Policy Network yesterday. The guest of honour was Grace-Marie Turner (left), the president of the Galen Institute in DC and an expert in free-market healthcare reform. She gave a fascinating talk about the problems facing US healthcare, and the approach President-elect Obama is likely to take to reform.

One of the interesting things about the healthcare debate in the US is that they actually have so many different systems operating at once: there are health savings accounts, private insurance, managed care, government 'insurance' (Medicare), and even single-payer systems (healthcare for veterans and native Americans). And then there is Medicaid (publicly-funded healthcare for the poor), which operates differently in every state. Such multiplicity may make the system difficult for outsiders to understand, but it also means that there is enormous scope for both experimentation and the analysis of different policies.

One state in particular seems to be taking an innovative – and potentially very significant  – approach. Indiana Governor Mitch Daniels has essentially turned Medicaid into a high-deductible insurance plan for those earning less than 200 percent of the Federal Poverty Level. Participants get fully subsidized and comprehensive healthcare, but must pay for the first $1100 of annual treatment themselves. The plan requires individuals to make mandatory monthly contributions (topped up by the state if necessary) to a health savings account, which can then be used to pay directly for these expenses.

The great thing about this system is that ensures everyone has access to healthcare while also confining 'insurance' to its proper place – protecting people against big-ticket expenses. Extending third-party payment to minor treatments (as most health systems, public or private do) is actually a major driver of cost inflation in healthcare, since it imposes significant administrative costs, gives both the doctor and the patient an incentive to maximise costs, and blunts incentives to stay healthy. Getting patients to pay directly solves these problems.

It is fairly easy to see how such a system could be translated into the UK as a major NHS reform, which could have significant benefits for patients, doctors and taxpayers.

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A lesson from the US

Written by Junksmith | Friday 11 September 2009

Spending more on public schools doesn’t increase students’ academic performance. Fill in the blank.

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A lesson in outsourcing

Written by Philip Salter | Monday 04 October 2010

internetI’m not sure how this story passed me by, but it is a rather fascinating development in how children are taught. For £12 per hour, Ashmount Primary in Islington is now outsourcing some of its teaching to the university town of Ludhiana in the Punjab.

The school is clearly happy with the service from BrightSpark, which allows for one-on-one tuition via videocalling over the internet. Assistant headteacher Rebecca Stacey said: “We were approached to do the pilot, and started very small with just a few pupils, but we quickly realised it was having a positive impact and so increased it so half of our Year 6 pupils are using it.” It just goes to show that, despite the lack of market incentives, some teaching professionals in the state sector are still willing to put children ahead of the teachers – something that should be commended.

Some of the comments from teachers on the TES website show how misguided the objections to this practice are:

Objection 1: “This idea stinks. It is all about a private sector company making money out of UK education.”

Answer: No – it is all about a private company offering a superior service at a cheaper cost. What matters is the result for children.

Objection 2: “I’m a fully qualified primary school teacher, with years of experience, who has specialised in Maths support and who was made redundant. I'm now considering relocating to New Zealand so I think you can imagine how I feel about this.”

Answer: The fact that people lose their jobs is never something to celebrate (politicians excepted), but the children, schools and parents should be free to improve their lot and not be sacrificed for the benefit of less efficient teachers and methods.

Objection 3: “The ethical issue is whether one can hire teachers for salaries and working conditions which would under no circumstances be unacceptable in UK. Ask yourself why you would have different standards for people in these two countries!”

Answer: This is profoundly naïve. These employees are freely choosing to work in what are in fact very good conditions relative to the majority of the population. To take it away and make their lives worse would be wrong.

The subversion of the power of vested interests that this move represents could, if it takes off, have a profound influence on quality of teaching in this country. When it comes to education, we have a lot learn from the rest of the world. India already has many private schools for the poor, while the cultural value that the people place in education could inspire a society disillusioned on the transformative power of education.

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A letter to the Archbishop of York

Written by Tim Worstall | Monday 22 July 2013

The Most Reverend & Right Honourable Dr. John Sentamu, Archbishop of York

The Office of the Archbishop of York

Bishopthorpe Palace Bishopthorpe, York YO23 2GE

21 July 2013

Your Grace,

I note from today's Observer that you are concerned about the Living Wage. I write to make a point that I suspect the usual suspects will not make to you. The importance of understanding that the living wage is calculated as a pre-tax number.

We here at the Adam Smith Institute agree that the Joseph Rowntree Foundation is indeed measuring poverty in the correct manner. We derive this from Adam Smith's comments on a linen shirt: it is not a necessity. However, if one lives in a society where being unable to afford a linen shirt means that you are regarded as poor, then in that society, if you cannot afford a linen shirt you are indeed regarded as poor. The JRF numbers are gathered in a similar manner: what do focus groups think people should be able to do in order to be regarded as not poor in this time and place? Add up the costs of those things and we reach that living wage. This is a much better definition of poverty than the more usual reference to some percentage of median income.

However, it is absolutely vital to understand that those numbers are pre-tax. The importance of this is as follows: if it were not for the amount that government takes from such meagre wages then the minimum wage would indeed be, to an acceptable level of accuracy, that living wage.

An example to make this clear. Assume 37.5 hours a week of work for 52 weeks of the year. At that living wage of £7.45 an hour this is a gross weekly income of £279.40 (I round slightly) or £14,527.50 a year. We are all agreed that this is not a large sum.

From this sum the recipient will have to pay employees' national insurance. This starts at £109 per week and is charged at 12%. £20.50 per week in such charges, or £1,063.30 per year.

There is also income tax to pay. This starts at £9,440 this year and is charged at 20%. £1,017.5 in such taxation.

We can see therefore that the net income from the living wage is some £12,446.70 a year. This is not greatly different from the gross income on the minimum wage: £6.19 an hour for 37.5 hours for 52 weeks is £12,070.50. Or if we wish to bring that back to a rate per hour, the difference between the post-tax living wage and the pre-tax minimum wage is some 19 pence per hour.

Unfortunately it does not stop there. There is also employers' national insurance to pay. Some insist that it is actually the employer who carries the burden of this tax. Almost all economists disagree, insisting that it is the employee who does in the form of lower wages. Indeed, we have it on the word of an expert of great eminence, Richard Murphy of Tax Research (who is funded in part of the Joseph Rowntree organisations, just to show his impartiality on this point), that it is indeed the employees who carry the burden of this tax. The calculation is slightly complex, but it's reasonable enough to claim that it is a further 13.8 % of those wages (it isn't, it's 13.8% of the total wages including the employers' NI but let us keep the maths simple) meaning a further £20 to £23 a week deducted from those wages. Or a further £1,196 a year.

If we add all of this together we find that the living wage of £7.45 an hour actually provides a lower post-tax standard of living than the minimum wage of £6.19 an hour free of taxation would provide. That latter would provide £12,070.50 a year to live on. By no means a great sum but still larger than the £11,250.7 that is available from the living wage after the politicians have taken their very much more than tithe.

It is indeed possible to play with these calculations, to make them more accurate. But the same end result will always come out. The current minimum wage, free of income tax and national insurance, would provide a higher standard of living than the proposed living wage under the current taxation system.

It is for this reason that I have been proposing for some years now, in fact ever since the first JRF calculations on the living wage were published, that the personal allowance for both income tax and national insurance be raised to the full time full year minimum wage. This would, at a stroke, raise that minimum wage to a higher standard of living than the proposed living wage. With the advantage that we only have to convince the Chancellor of the Exchequer of the righteousness of this path, not millions of employers across the country.

I look forward to the results of your investigation into low wages and am convinced that you will come to the same conclusion that we have. The shockingly low disposable incomes of the working poor in this country are not the result of any meanness or avarice on the part of employers: it is simply that the government taxes the working poor too much. Given this, that we can convert the minimum wage into something better than the living wage simply by ceasing the political depredations upon the pockets of the populace, I assume that your conclusion will be that the personal allowance, including that for national insurance, should be substantially raised.

After all, it's not really a particularly complex point. If you want people to have more money then tax them less.

yours sincerely,

Tim Worstall

Senior Fellow

Adam Smith Institute

London SW1

 

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A Level results: Funding reform

Written by Matthew Triggs | Tuesday 17 August 2010

It’s difficult not to feel sorry for those students receiving their A Level results this Thursday. Last year 3500 applicants who achieved three A grades were denied places while it is estimated that as many as 200,000 applicants may be turned down this year. If we wish to see more of our young people studying at university, we must acknowledge the need to fund a greater number of university places.

However, given the scale of Britain’s budget deficit, few people would be comfortable diverting more public funds to universities. This leaves private funding. While philanthropy is helpful, the size of the problem necessitates that students themselves must pay for any expansion of higher education. Fee increases seem the obvious source of funding. Unlike a graduate tax, fees are collected upfront. The shortage of places is an immediate problem. As such, it requires an immediate solution. An increase in fees can allow the expansion of university places to begin right away.

Furthermore, a fee increase would channel existing resources to those degrees that yield higher graduate premiums (i.e. those that are most valuable). Were fees to double, a three-year degree would cost the student about £21,000 (excluding the other private costs associated with university, such as accommodation). If the expected premium of a degree were less than this, it wouldn’t be worth applying for. Such degrees would thus be decreasingly taken up. Public funding for these degrees would be set free and could instead be spent increasing the number of places on degree courses that offer better returns to the student. Degree programmes that allow higher incomes to be commanded would be made more widely available whilst ‘Mickey Mouse degrees’, which do little good for those studying them, would be scaled back.

Increased tuition fees could do more than close the gap between applications and university places. They could do so in a way that doubly expands the availability of the most worthwhile degrees.

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A Liberal Party

Written by Wordsmith | Tuesday 29 September 2009

Liberty does not consist in making others do what you think right. The difference between a free Government and a Government which is not free is principally this – that a Government which is not free interferes with everything it can, and a free Government interferes with nothing except what it must. A despotic Government tries to make everybody do what it wishes, a Liberal Government tries, so far as the safety of society will permit, to allow everybody to do what he wishes. It has been the function of the Liberal Party consistently to maintain the doctrine of individual liberty. It is because they have done so that England is the country where people can do more what they please than in any country in the world.

– Sir William Harcourt, 1873.

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A libertarian defence of 'social justice'

Written by Sam Bowman | Wednesday 19 December 2012

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A libertarian Fed?

Written by Adrian Day | Tuesday 05 May 2009

A bewildering article in the Financial Times by economist Henry Kaufman made the peculiar claim that the Federal Reserve had a commitment to libertarian dogma and laissez faire. He obviously does not understand these words. Despite Alan Greenspan’s early writings, his actions at the Fed should have disabused any of the idea that the Greenspan Fed was in any sense libertarian.

Indeed, throughout his tenure, Greenspan was constantly berated by free-market and libertarian economists. Bill Fleckenstein called him “bubble-blower in chief".

In his widely-noted article in the FT, Kaufman cites as examples of the Greenspan Fed’s failings the growth of securitization, quantitative risk modeling, and the infamous failure to recognize bubbles. But there are in no sense libertarian; the last, indeed, is just blindness and ignorance.

There is now widespread discussion among U.S. establishment economists about how to recognize asset bubbles; Treasury Secretary Tim Geithner wants to establish a study group to devise ways of making sure bubbles to do not become dangerous. But many observers, including libertarian-inclined economists and even more casual observers, warned repeatedly about the housing bubble and the Fed’s primary role in creating it, by keeping monetary policy far-too-easy for far-too-long after 9/11. This is not Monday morning quarterbacking; the warnings were loud and repeated as the bubble built.

The “Greenspan put" (by creating an asymmetry between risk and reward), was another major legacy of the Greenspan Fed; it helped ensure the bubbles grew larger and longer; there is no sense in which that can be deemed “libertarian".

We might agree on some of the failings of the Greenspan Federal Reserve, but we should at least call it something it clearly wasn’t.

Indeed, the very concept of the Federal Reserve is the antithesis of libertarian dogma: it is a price fixer (interest rates) and a government-enforced monopoly (issuer of monetary notes). There is now a move afoot in the U.S., led by Rep. Ron Paul, a Misean, to abolish the Federal Reserve. More likely to get somewhere in the short term is another move, also led by Paul but with growing bi-partisan support, to force the Fed to open its books. After all, despite all the much-vaunted talk of independence, the Fed is just another branch of government and taxpayers and savers are on the hook for its profligacy.

Adrian Day is president of a money management firm specializing in global and resource equities. He can be contacted via his website.

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A libertarian one-liner

Written by Sam Bowman | Tuesday 28 September 2010

If you’re not willing to have somebody hauled off at gunpoint over the project, then it’s probably not a legitimate concern of the state.

Kevin D. Williamson

(Via Arnold Kling)

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A libertarian solution to the welfare state we’re in

Written by Peter Hill | Wednesday 27 February 2013

The Coalition's welfare reforms are too timid, says economist Peter Hill. Welfare-to-work schemes have failed, and adding more state intervention will only compound the problems. What is needed is a reform package that time limits out of work benefits, turns benefits into a genuine unemployment insurance scheme, and more.

Given all the bold statements of Iain Duncan-Smith about restoring fairness and making work pay one could easily be swept away by the hype.  The reforms set out by the coalition include the introduction of the ‘Universal Credit’ in an effort to streamline the cacophony of benefits and tax credits inherited from Labour, the introduction of a benefit cap of £26,000 for families on benefits, and a tightening of conditionality surrounding disability to ensure that all those capable of work do seek it.

With this swathe of seemingly radical reform taking place one would expect spending by the Department for Work and Pensions to soon reverse from the relentless upward trends seen under Labour.  Sadly, this will not be the case with spending set to increase by an average of £4.29 billion per annum over the course of this Parliament comparing on marginally better than £4.43 billion per annum increase during Labour’s time in office.  According to ONS data unemployment has also only fallen from 2.51 million to 2.49 million since the coalition came to power and growth remains stagnant.

Read this article.

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