The Pin Factory Blog

I know first-hand how appalling NHS care of elderly patients can be. I've been a critic of the NHS for at least the last 35 years, but even so, the inhumanity of how it treated my mother in her last weeks took my breath away. And I'm usually pretty good at taking public servants to task, but even so, the whole experience left me sobbing with frustration. Yet I knew then, as we all know now, that such treatment was not the exception. It was, as I could see from life on my mother's ward and as we now all see from the stories that are peppering the press, the norm.

It all happened at a time when the NHS had received a huge cash boost from Gordon Brown and many people were arguing that it provided excellent value for money in terms of medical outcomes, such as longevity. Current data on the UK's awful record on cancer outcomes is just one indicator that this is not so. But even if the NHS's technical outcomes were the best in the world (and it's far short of that), what is most wrong with it is that it treats people inhumanely.

In a recent book on The Morality of Capitalism, US think-tanker Tom Palmer talks of his treatment for a serious condition in both public and private hospitals. In the private hospital, he was seen quickly by the right people, treated as a human being, everyone took an interest in him, and they respected his wishes. In the public hospital, he waited, was bossed around despite being in pain, had no human engagement with his doctor, and was generally treated as a piece of meat.

I don't think for a minute that working for a private or a public institution fundamentally changes people's basic humanity. But the incentives in a private system nevertheless encourage them to show more of their human side. That is because they see the clients they have to deal with as valued customers: their job, their income, would not exist if those customers were not satisfied. And they know from their own experience that the way a service is delivered – the cheeriness, the human engagement, the concern – are as much a part of a customer's satisfaction as getting the service itself. By contrast, the incentive structure in too many public services induces staff to regard customers as a necessary inconvenience. Shouldn't we prefer a system that positively encourages and brings out people's humanity, rather than one that discourages and so obviously represses it?

Another day brings another call for more government intervention. A report published yesterday by the charity Shelter suggests that rent levels in the private rental sector are ‘unaffordable’ in 55% of English local authority areas. One might raise the question of the ultimate arbitrariness of the measure of affordability used, but there are more serious concerns. The Guardian reported that Director of Shelter Campbell Robb ‘[S]aid it was time for the government to urgently consider how private renting could become a stable, affordable option for families "and not a heavy financial burden that makes parents choose between buying food for their children and paying the rent."’

To me that sounds worryingly like a call for rent controls, which was certainly how the question was approached on the Today programme yesterday morning. Similarly, the Borough of Newham has introduced a mandatory licensing scheme in an effort to reduce the problems caused by ‘rogue landlords’.

Fortunately, the Housing Minister Grant Shapps seemed rather more sensible. He dismissed rent control as folly and argued that the answer to the problem was more house building. I would observe that the oft-repeated call for building more ‘affordable’ housing is a logical nonsense; if more housing is built where there is demand, all housing will become more affordable.

For those of us who wish to be reminded of the damage that rent controls can do to housing supply and rent prices we need look no further than the disastrous experience of the UK itself or in the USA as demonstrated by William Tucker’s Zoning, Rent Controls and Affordable Housing. Licensing, aside from the costs of administration, will only reduce the number of properties available by making it harder for landlords to rent properties and will encourage landlords to evade enforcement, thus further reducing the ability of tenants to protect themselves.

What Shelter et al. seem to have overlooked are the causes of increases in rent prices – these are complex but the root cause is excessive demand for housing over supply, largely caused by government manipulation of the housing market via interventions in planning and zoning.

Perhaps even more significant as a cause of the problem are the monetary interventions which have inflated and continue to inflate a housing price bubble. Moreover, the control of a large stock of ‘social housing’ further distorts the operation of the market. What Shelter are calling for is more intervention to correct problems caused by intervention!

Poverty is on the march.  The “we’re all doomed” message still makes people giggle, but there is ample evidence that unless we U-turn our policies towards aspiration and wealth creation, very many of us will indeed be doomed to a steady increase in poverty for ever larger parts of the population. Yes, unless we change tack, many of those rioters will never ever be in work. I have no doubt that many will be fine – but then, even Sierra Leone has people who do more than just survive.

According to Shelter private rents are now unaffordable in 55% of local authorities in England, with rents costing more than 35% of average local take-home pay. Unemployment has reached a 17-year high, with 2.57 million people out of work. Home ownership has been falling since 2003 according to Andrew Heywood of the Royal Institution of Chartered Surveyors. The IMF has cut the UK’s economic growth forecast to 1.1% in 2011.

In most cases, the increase in poverty stems from bad government policies pursued by previous governments:

• The Bank of England's Monetary Policy Committee dug the double dip. The artificial boom, created by loose monetary policy (elastic money), has burst. The first dip was treated with some more money printing which has now (almost) led to a double dip. Through QE, the MPC has opted for more infection to battle the disease. And inflation has impoverished savers and disincentivized saving. Today's savers will be tomorrow's poor.
• We are paying the bill for yesterday’s party. Excessive state spending, the increase of which has been reduced by the present government, was largely funded by borrowing. In other words: the economic prosperity of our children was mortgage for today’s pleasures.
• We are effectively banning wealth creation. Excessive tax drives wealth creating individuals and businesses overseas and disincentives people to set up businesses.
• We have an Everest of red tape. Excessive regulation – usually EU regulation gold-plated in Whitehall – makes us uncompetitive.
• The Chinese love our employment protection laws. The main beneficiaries of labour protection laws have been labourers in developing countries, who now suddenly find themselves in a job, while ours are on the dole.
• "Little Europeans" hide behind walls to keep wealth out. EU trade barriers hinder wealth-creating free trade.
• Shifting resources from the private sector to the state results in a net loss of wealth. The growth of the size of the state (state spending) comes at the expense of the private sector, which has to pay for it. The public sector is usually less productive than the private sector, so a pound taken from the private sector produces less than one pound's worth of value in the public sector.

Why not choose a return to free market economics instead? When the Conservative Party held its party conference in Manchester last week, the formula for success was staring them in the face. Magnificent buildings built in the free market period between 1850 and 1900 are sprinkled all over the city. Maybe we could create the climate to build such magnificence again, so our children can say, “Our parents did things right”, instead of, “Our parents robbed us blind”.

Easy on the cheddar, chubby! Don't even think about eating those fries, fatty! Do I even have to mention the profiteroles, porky? Are these merely playground taunts? Worringly, they increasingly echo the voice of governments worldwide.

Owing to the rise of so called 'fat taxes', authorities are taking an ever-more active part in what their citizens digest (and what comes out of their wallets, of course). In the last few months alone, Hungary, France and Denmark have all implemented their own 'fat tax'. And whilst, as it stands, no gendarme will be confiscating your next banana-split, authorities, in their paternalistic wisdom, are increasingly frowning upon foods deemed undesirable.

Take Denmark, for example: a range of fatty foods, including even milk and butter, will be subjected to a tax if their saturated fat content is above 2.3%. The price of a pack of butter, for example, will increase by 45% due to the tax. Therefore, so it is thought, those selfish souls who indulge themselves on fatty foods will buy tofu and lentils instead: hey presto, obesity problem solved!

Things are never so simple, of course. The tax has already been received by many Danish firms as a 'bureaucratic nightmare', piling on additional costs to firms in an already tough period. Once more, any tax such as this is going to be inherently regressive; those least able to afford any price increases will be hit the hardest. But what does it matter? The French 'fat tax' is expected to raise an estimated €120,000,000 p.a.. A nice little earner.

Nor are we immune to such government meddling here in Perfidious Albion. Having successfully tackled all our other social, political and economic dilemmas, David Cameron is allegedly so enamoured by the idea of a 'fat tax' that he is toying with the idea of implementing one of our very own, as too are Finland and Romania.

Most are in agreement that obesity is a society-wide problem. The more rotund we become, the more our healthcare costs increase. So what's the solution? Surely not pricing poor people out of the market for fatty foods. We must seek a solution other than 'more taxes' – the default position of any government. Perhaps our BMIs could be helped by making it easier for people to help out at sport clubs without undergoing a raft of CRB checks, or by reforming our health system which currently permits the cost of atrocious health habits to be picked up by someone else.

Sadly the precedent has already been set. When we already allow the government to dictate what we may and may not consume in the form of innumerable drugs, letting them control what we eat is a logical advancement. And it will all be done for our 'own good'.

And nor is this merely a European phenomenon: the world over governments are beguiled with the notion of controlling our bodies. In New York, for example, it is now compulsory to display the calorific content of foods, presumably because people use to think that a bucket of KFC was a healthy snack. How long is it till cars are plastered with images of car-crash victims? After all, cars are dangers, didn't you know?

Along with this, Chicago's new mayor has implemented a mandatory 'wellness programme', in which one can only presume that those unworthy enough to be a few pounds overweight are scolded by their organic-mung-bean-fed superiors. 

Can't we be left alone to comfort-eat in peace? Lord knows we need it, considering how grim the new is nowadays. If only someone would implement a tax on bad ideas produced by government.

Most people are familiar with what I call the Swedish Fallacy – the reliance on Sweden by people on all sides of the spectrum to back up whatever policy proposal they're making, as if Sweden is a paradise on earth that everybody can emulate by adopting the same policies. It's especially common on the left: they have high taxes and a dynamic economy, so higher taxes must not be a bad thing! A new report from the Libera Foundation, a Finnish think tank, throws a spanner into those works:

One should remember that the golden age of Swedish entrepreneurship, where one successful firm after another was founded in the small country and gained international renown, occurred during a time where taxes and the scope of government were quite limited. Sweden shifted to radicalized social democratic policies in the 1960s, 1970s, and the 1980s. . . .

It is, however, important to remember that Sweden, like other Nordic nations, has compensated for these policies by improving economic liberty in other fields. Some reforms, such as the partial privatization of the mandatory pensions system and voucher systems in schools and health care surpass what has been possible to implement in most developed nations.

Swedish society is not necessarily moving away from the idea of a welfare state, but continuous reforms are implemented towards economic liberty within the scope of welfare. The rise of government has been stopped and even reversed in recent years. The nation is again returning to the free market policies which served it so well in the past.

This is a point that Tim Worstall has made in the past as well. The report also discusses the cultural factors that make such high taxes tolerable. Yes, Sweden is a high tax, high welfare country, but it's also remarkably free market by most other measures. Indeed, it might be that the only way they're able to pay for so much welfare is because in many other respects they take a more laissez-faire approach to their economy than we do.

That should be food for thought for socialists who want to take from the rich to give to the poor – if a free market maximises the money they have to redistribute in the medium-term, the most sincere socialist position might be to favour fairly high taxes and low regulation. It's not something I'd support – high taxes are still bad news for lots of reasons – but I'd prefer it to the primitive central planning that many on the left still favour. I don't think Sweden's a paradise, but it might still be able to teach the left a thing or two about how to pay for the welfare state they want.

Our new report, ‘Taxing Talent: How Britain Can Attract and Retain the World’s Best Workers’, looks at the challenges the UK will face in terms of migration policy over the coming years. It argues that Britain must focus on attracting highly skilled migrants and that the key to doing this is to lower income taxes.

The report reveals how critically important immigration is to the British economy. With an ageing population and a looming pensions crisis, the UK needs to attract about 270,000 new migrants each year. Furthermore immigration is important in creating a flexible workforce, which is necessary if we want to see economic prosperity.

Although we have the 4th highest number of highly skilled immigrants in the OECD, we also have one of the highest rates of emigration by highly skilled workers. In light of this, the government needs to focus on policies that will both attract and retain the most valuable migrants and native workers.

The report reveals that there are a number of factors that impact a migrant’s decision to move to or stay in Britain. These include social and professional networks, employment prospects, wages and professional development prospects. However the report also revealed that the tax burden is a crucial factor influencing highly skilled workers’ choice of where to emigrate to. Furthermore it is one of the only variables that the government can influence in the short run with any success.

Where tax breaks have been tried, they have failed. Tax breaks don’t retain migrant workers: Instead, the government should abolish the 50p tax rate and reduce the 20p and 40p rates to attract the most productive migrants to Britain. We need to have an internationally competitive tax system if we want to keep our native highly skilled workers and attract talent to Britain.

The government’s current policy of an immigration cap could lead to negative economic consequences. Instead our report proposes introducing an “open borders, closed public accounts” system, which would make migrants use private insurers for healthcare and other large welfare expenditures. This would make the UK open to migrants whilst addressing concerns over public service abuse.

If we want to see the UK’s economy revitalised, we need to make Britain amongst the top places in the world for highly skilled workers to live. As our previous report on the 50p tax outlined, it’s crucial we cut taxes to remain internationally competitive. As our report argues, we cannot afford to keep on taxing talent out of the UK.

Today's a big day for the Hayek Club – Allister Heath, editor of City AM, is our newest recruit. The Hayek Club, you'll recall, is the collection of pundits, economists and politicians who have accepted a loosely Hayekian narrative to explain the Great Recession. (It's inspired by Greg Mankiw's remarkably popular Pigou Club – nobody asks to join; membership is thrust upon them.) In his Editor's Letter today on the Nobel Prize winners, Heath writes:

While a lot of the new classical economists’ conclusions were right, and they did actually warn about bubbles, the way they reached them and their methodology and philosophical understanding of the limitations to knowledge were flawed. People aren’t as rational as they assumed. They also wrongly downplayed the role of the money supply in causing cycles.

Hence why I find the second category of non-Keynesian economics more interesting: the latest incarnation of the more traditional classical school, including the better Austrian thinkers, whose conclusions are similar but whose approach is much more realistic. Keynes was wrong, as yesterday’s Nobel prize winners rightly point out, a lesson many need to rediscover. But he wasn’t always wrong for the reasons Sargent and Sims thought.

The whole article is worth a read. It's great to see serious, mainstream thinkers like Heath giving the Austrians another look. He joins a growing club of heavyweights, including the Chief Economist of Deutsche Bank, an influential backbencher, a former President of the Kansas City Federal Reserve Bank, and many others. The road to widespread acceptance is long and winding, but the Austrians may be getting there.

One of the seemingly natural reactions to an economic downturn is protectionism. The Great Depression is the classic example where this reaction has had its most significant, and indeed, negative impact on recovery, further weakening exports, imports and trade generally. Many nations now resist this temptation in relation to the free trade of goods; however, free trade has rarely ever been extended to the persons entering the UK from outside the European Union. We ought to question this policy as it too is a barrier to recovery.

The coalition government has now limited the number of skilled workers who may enter the UK from outside the EEA to just over 20,000, down from over 100,000 in recent years. On September 12th, the Migration Advisory Committee advised that the shortage occupation list be revised down further limiting the types of skilled work migrants may undertake under the Tier 2 points based system. It should be acknowledged that the size of this potential segment of the population is less than 1% of the UK workforce and that skilled migrants no longer qualify for a work visa in their own right. That is, they will need to be sponsored by an employer to qualify. Further, these workers pay tax, contributing to the welfare state under which they have absolutely no recourse to public funds or benefits.

The juxtaposition is that while the UK has signed onto free movement for both skilled and unskilled labour within the EU they are now over compensating by actively restricting migrants that would actually contribute to an economic recovery.

A leading immigration expert has pointed out that overseas nationals that are sponsored by companies to migrate to the UK cost the employer three times as much as hiring a resident worker; evidence employers are doing so at their own cost and that their skills are much needed.

The free movement of persons has often been excluded from the free market debate as human capital has greater implications for the state than does say, raw goods. However, in a tertiary economy where intellectual power in the form of patents, research and development as well as skilled labour fuel economic recovery, government policy is out of synch with progressive policy. Say what you like about unskilled labour flowing in from across Europe, but to do so in relation to skilled labour disadvantages employers who require specific skills to drive growth and may not be available locally. It is time to develop our experiences from the past and apply them in a modern context.

The All Party Parliamentary Group on Economics, Money and Banking and Steve Baker MP in association with The Cobden Centre, the Institute of Economic Affairs, the Adam Smith Institute and the Institute for Public Policy Research cordially invite you to a discussion on:

Is the Global Economy Heading for Monetary Breakdown?
The Threat Posed by Elastic Paper Money

Tuesday 11 October 2011
Committee Room 7
Palace of Westminster
4.00pm-5.30pm

with

Steve Baker MP, Chairman and Conservative MP for Wycombe

Dr. Tim Evans, Chief Executive of The Cobden Centre

Detlev Schlichter, author, Paper Money Collapse:
The Folly of Elastic Money and the Coming Monetary Breakdown

Detlev Schlichter’s analysis might be controversial but it is logical and rigorous. Explaining in detail what he believes to be the real causes behind the world’s current economic woes, he paints a frightening picture of the global monetary breakdown he now believes is underway. The event is a must for anyone concerned with the future of the world economy and our society.