The Pin Factory Blog

Hidden amongst noisy coalition politics are a handful of policy goals whose effects will linger longer in the sphere of public debate than the scandal du jour. Of these, the free schools programme is remarkably fortunate. It has thus far escaped a watering down, where it might have become a shapeless puddle, completely lacking in direction or purpose. Yet, with the final applications for free school-status having rolled in last month, policy-makers and politicians must be careful not only to ensure that the programme is not derailed out of fear of decentralisation, but also to acknowledge that it is insufficient to solve the problem of declining standards.

The potential benefit from the free schools programme is two-fold: on a micro level, parents dissatisfied with the state-funded education available to them are now able to fix the problem for themselves, and other parents will benefit from the resulting greater choice of schools. On a macro, and less publicised level, the allocation of funding within the free school and academy system according to student numbers will subject these schools to market forces.

In time, the worst-performing schools must either improve, or drop out of the system altogether, and be replaced. It is on this macro level that the programme most risks a derailment. Introducing a whole subsector of state employees to the consequences of poor performance (permanent dismissal for incompetence is almost unheard of) will continue to be met with staunch opposition by the notoriously vocal and active unions through which they are represented. Any further reform may simply be brought to a standstill. But it is further reform that is needed: for as long state-funded primary and secondary education is split between schools with per-pupil funding, and those without, there will not be an efficient allocation of resources between schools, and an improvement in standards will not be adequately, if at all, realised.

A system rewarding only that minority of parents – those endowed with the means to widen their choice of local institutions – should not be a satisfactory result. Surely, those schools most in need of upheaval are the very same schools that are the least likely to submit themselves to the market, without the appearance of some benevolent investor. There is a distinct absence of willing capital. All the more worrying we inadvertently add another ‘tier’ to the system. The solution, then, lies in universal implementation; a voucher system, if you like, where state funding follows the student, wherever they go.

Further reading: Profit-making Free Schools: Unlocking the Potential of England's Proprietorial Schools Sector, a report for the Adam Smith Institute by James Croft.

An interesting little paper here.

This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover.

OK, estate agents, easy to get into, lots of people get in and out of it.

....we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell

More agents doesn't mean more house sales or faster house sales.

decreases the market share of experienced agents,

Incumbents lose money because of all the competition.

A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion.

And if that increased competition reduces fees charged the consumers end up vastly better off.

So, if you're an experienced agent, or in fact, an incumbent in any trade, craft or profession, you'll see this as the obvious justification for licensure. Keep the rabble out, reduce competition, beef up fees and the consumer, umm, gets the services of a well regulated profession?

For the rest of us this is the opposite, the proof that licensure is a very bad idea indeed. For we're actually supposed to be running the whole thing for the benefit of the consumers, not the producers. In which case, crush the licensure hurdles and let the free market rip.

Yes, I know, slightly odd question, for why should we want to make it work? Granting politicians the right to splurge money on any old nonsense, whatever the strength of the justification, is unlikely to turn out well.

However, I think we might be able to discern an interesting answer to the question all the same. John Taylor:

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

Now note what is being said here. It is not a rejection of the idea that bigger budget deficits, fiscal stimulus, can work. This is not a rejection at all of the underlying analysis from Keynes himself.

Rather, it's a rejection of giving politicians the right to spray money around when such deficits, such fiscal stimulus, might work. The problem is the discretion: if we had automatic rules about all this it might well work. As, in fact, Keynes himself realised:

I am converted to your proposal…for varying rates of contributions in
good and bad times. (June 16, 1942). Keynes, Collected Writings, vol.
27, p. 208. 

…[Y]ou
are able to show fluctuations in income of an order of magnitude which
is significant in the context… So far as employees are concerned,
reductions in contributions are more likely to lead to increased
expenditure as compared with saving than a reduction in income tax
would, and are free from the objection to a reduction in income tax
that the wealthier classes would benefit disproportionately. At the
same time, the reduction to employers, operating as a mitigation of the
costs of production, will come in particularly helpfully in bad times.  (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.

Now I will admit that I'm inclined to like such an answer. Given that I have in fact worked in politics, that almost every politician I've ever met was, if we equate knowledge of economics with pre-school education, on the verge of being held back again for another year of remedial shoelace tying then yes, the further we keep them from any of the economic levers that influence our lives the happier I am.

But this should also appeal to those who are Keynesians: the setting up of an automatic stabiliser like variations in national insurance charges would mean that the essence of his insight would be hard baked into economic policy. Without any of us having to worry about the quality of those who manage to climb the political greasy pole

It's also clearly in line with basic common sense: life is better with less politics and fewer politicians..

The latest Competition Commission (CC) ruling requiring BAA to sell Stansted and one of its Scottish aiports - probably Glasgow - has to be welcomed. To be sure, this divestment process has been exceedingly protracted - taking over five years to date with the possibility of yet another appeal to the courts by BAA. Back in 2006, Spain's Ferrovial led a consortium which paid over £10 billion for BAA - a take-over that has undoubtedly destroyed shareholder value. Some sympathy has to be extended to the consortium given the wholesale change in the competitive landscape for UK airports - a case of not just moving the goalposts but of shifting the entire pitch.

However, the widely-reported shambles at Heathrow, for which BAA must bear much of the blame, acted as a stimulus for reform. As such, the CC was let loose, which eventually led to the sale of Gatwick for £1.5 billion. It is now proposed that the sale of Stansted should progress with haste. Likely buyers include infrastructure funds, although all potential bidders will carefully scrutinise the amount of capital expenditure that will be required at Stansted. The ownership of Scotland's main airports will also be split, with the likelihood that BAA will retain the thriving Edinburgh airport.

Crucially, as UK airport ownership becomes increasingly fragmented, airlines now have greater choice rather than being dependent on a near BAA monopoly, as was the case before the Gatwick sale - a subject on which Ryanair's outspoken Chief Executive, Michael O'Leary, has robust views. Moreover, greater comparative operating data will become available which should drive up overall efficiency levels. 

Looking forward, the UK's three main airports - Heathrow, Gatwick and Stansted - surrounding London are expected to become increasingly competitive: Luton is also growing strongly. Of course, if you are part of the Ferrovial consortium, you will feel very short-changed by forced sales, such as that at Gatwick. Indeed, such major regulatory U-turns should normally be avoided. But introducing far more competition into the ownership of the UK's airports has to be the best long-term solution.

Although the press is currently caught up in its own misery caused by the hacking scandal, Westminster should not be at the centre of the news. More than ten million people are currently lacking food in the Horn of Africa, and estimates show that one million children are at severe risk of dying. If the EU had refrained from its heavy protectionism we might be in a different place to the sad, avoidable reality of today.

European farmers are assured of their livelihood by the generous subsidies that the Common Agricultural Policy (CAP) provides. This causes major inefficiencies, but that isn't the only problem. The attempt to unsustainably keep European farming alive prevents poorer farmers from selling profitably in the EU, which contributes to squalor in the poorest nations in the world. Despite efforts to gradually reduce these lethal subsidies, the direct consequences will be apparent for many years to come.

In a piece in Bridges Weekly Trade News Digest published by the International Centre for Trade and Sustainable Development, the lack of investment in infrastructure, irrigation, machinery, and fertilisers is emphasized as one major problem in the drought-striken region. Years of dumping subsidised European exports in Africa partly cause this in two ways: firstly, the presence of unfavourable and unfair market conditions has significantly lowered any entrepreneurial incentive to invest as low expectations persist. Secondly, a downward pressure on prices has caused a great share of the farmers in the region to employ unsustainable harvesting techniques. This gradually drives down profits.

In 2006, British households paid an additional £832 in grocery bills as a result of the major subsidy scheme, and throughout the first ten years of this millennium, the CAP has nearly accounted for half of the EU’s entire budget. The EU is one of the biggest practitioners of protectionism in history.

Directly addressing the current famine in Africa in the context of his new book Human Encumbrances: Political Violence and the Great Irish Famine, Dr David Nally of Cambridge University recently stated that:

To tackle global hunger we must… address the legal and institutional structures that directly restrict certain people’s ability to subsist. The reason that this is not done is because these same structures guarantee the high standard of living that many of us have become accustomed to.

Indeed, European farming relies on a frequent dose of life-saving financial support from the EU. This kind of financial support, however, is exactly the kind of institutional structure that restricts the ability of entire populations in specific regions to subsist, and it is time to vehemently oppose European protectionism. According to the European Commission, the annual budget for direct payments, a substantial part of the CAP’s budget, is likely to be cut by 2% per year between 2013 and 2020. Ongoing reforms of the CAP are steps towards the inevitable end: its complete abolition. Now we just need to speed up this process.

There’s more than one row going on in Westminster. Over the weekend, Westminster Council announced changes to its parking policy that would charge for spots on evenings and weekends (you can read the details here). Churchgoers plan to protest the Sunday parking fee, the effect of which would surely be nothing less than mass apostasy. The Council is due to weigh such grievous harms and decide in August whether to implement the proposal.

I doubt that the Council will make its decision on the basis of Church objections, or I at least hope that it will not. A secular government has no business subsidising access to religious services. The bigger question, though, is whether the government has any business subsiding parking at all.

Free parking is something of a misnomer. Automobiles are unique among modes of transport for the enormous terminal capacity they require. Unlike trains, airplanes, and ships, which require their respective – ports, cars demand several parking spaces each. The high cost of this parking is not borne by the motorist but is subsidised by local governments, business owners, and employers. Donald Shoup, the author of The High Cost of Free Parking, claims that the annual invisible subsidy for free parking in the United States may approximate that country’s yearly national defence budget. The UK does not have the same “car culture” as the U.S., but it is still subsidising parking space. The free parking Westminsterites currently enjoy comes directly out of their own pockets, regardless of whether they use it.

This is unfair. The government does not have a responsibility to facilitate car ownership. There is no right to own a car. Many of the people whose taxes pay for parking never use the service. The subsidy makes car ownership artificially cheap, and is distortional. Westminster Council should not only charge on evenings and weekends, but should charge market rates at these and all other times. (As with all new government charges, this should be offset by a general council tax cut.) Or, better yet, sell off parking spaces to the private sector. Now there’s a heretical idea.

We often think of the dangers of central planning as an abstract loss of productivity rather than any concrete personal danger per se. However, as an article in the Telegraph this week demonstrates, oppressive regimes can inflict enormous personal costs on the individuals who become entangled in their overarching plans.

Zhang Shangwu, once a top Chinese gymnast, is now begging on the streets of Beijing. Shangwu was taken from his family at age five to a government run facility where throughout his childhood he trained. And trained. And trained some more. However, after snapping his tendon in 2002, Shangwu received a payout of £3,650 that relieved his local team of any liability and then sent on his way, despite having no tangible skills apart from in the world of uneven bars. 

The Beijing model of authoritarian government is sometimes praised because of the speed with which it can deliver enormous change. Indeed, New York Times columnist Thomas Friedman noted approvingly the “one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century”. Fundamentally, the Chinese government relies on the power of authoritarian rule, or rather the power of compulsion, to deliver results that the democratic models, with their endless checks and balances and respect for individual liberties, cannot match.

Just over a decade ago, the Chinese launched ‘Project 119’ – so named because it identified the number of Olympic medals available in sports that the Chinese had historically had less success, namely ‘athletics, canoeing, rowing, sailing, and swimming’. From beginning to end, the state plays a role in the cultivation of Chinese athletes. After being sent away form their families at young ages, the children put into what are effectively forced labor camps, where labor is rigorous and unrelenting practices. This kind of Soviet-style system had certainly yielded results: China is expected to carry a total of 83 medals in the 2012 games, right behind the US with a projected medal count of 84. Given that back in 1988 in Seoul, China only managed to win 28, this meteoric rise on the Olympic podium should be just as worrying as any South China Sea scuffles. 

Patriotism and a nation’s entire sense of self worth can be tied to their athletes' performance in the Olympics, with success viewed as validation of that country’s system. However, while the centralized push has clearly been effective in improving Chinese medal count, I would ask, at what cost? Aside from the sense of pride that the Chinese people might feel as their athletes ascended the podium, the benefits of this enormously expensive initiative – in both economic and human terms – are not shared by the larger public. Instead, public sports and recreational facilities are left relatively unfunded. Unfortunately, central governments tend to plan in sweeping strokes and lose sight of the individuals that must carry out their elaborate plans. For people like Zhang Shangwu, the cost has been great.

Though it might now be mistaken for a political class cage fight, the News of the World scandal is really about privacy. Interesting, then, to see another public debate swinging wholly against the right to privacy. This Monday, a campaign was launched for Clare’s Law, a proposal that would force the police to reveal, upon request, an individual’s history of violence to his or her partner.

The law is so-named in memory of Clare Woods, who was murdered in 2009 by a man with previous domestic abuse complaints. The proposal enjoys the support of Victims Commissioner Louise Casey, former Home Office Minister Hazel Blears, and the victim’s father. Reportedly, Home Secretary Theresa May is also reviewing the proposal (though her plate is rather full at the moment).

According to Casey, the law will help women avoid abusive relationships. She says, ''This seems common sense to me. Our priority should not be protecting a perpetrator's privacy at the expense of costing a woman's life.”

Casey presents Clare’s Law as a trade-off between an offender’s privacy and a woman’s life. If that were really the choice, I doubt many of us would object. What Casey means, though, is that Clare’s Law barters an offender’s privacy for the possibility of a decreased risk of harm. Domestic abuse is horrible, but this is not the way to solve it.

The issue is risk. An individual has the right to defend herself against direct harm. She has the right to try to avoid risk. She does not have the right to violate another’s privacy to avoid risk, however. Privacy, like all other individual liberties, should be jealously guarded, and is only justifiably breached to protect against direct harm. Probability is insufficient.

To think otherwise denies a tenet of our justice system, that people are innocent until proven guilty. With Clare’s Law, Casey is juxtaposing a rap sheet and crime stats and assuming recidivism. This is unacceptable.

Justifying a rights violation on the basis of likelihood is an argument of infinite regress: mightn’t every woman with whom an offender comes into contact be at risk? Everyone, for that matter? The only acceptable bright-line is actual harm.

The proposal subverts the purposes of punishment. Submitting an ex-felon to perpetual privacy violations does nothing to further the aims of incarceration, deterrence, rehabilitation, or retribution (well, perhaps some ignoble part of the latter). It is likely to alienate offenders who are trying to move on with their lives. Indeed, Clare’s Law actively undermines rehabilitation. Treating offenders as statistical data points denies the possibility of reform.

Violence against women is unacceptable. So are witch hunts and privacy violations. We restrict who can access police files because we believe privacy is important, and correlation is not enough to encroach upon this right.

Abuse of a legal loophole provides sanctuary for billions in creditors' unpaid assets

Keith Boyfield is a Senior Fellow at the Adam Smith Institute; Brian Sturgess is Managing Editor of the Journal of World Economics

The Bank for International Settlements (BIS) - the central bankers’ banker - is a widely respected body that, as the FT’s Martin Wolf points out, was one of the first to warn about the financial tsunami that engulfed global capital markets in 2008. It’s odd then that the institution allows itself to be used as a safe haven by controversial jurisdictions seeking to avoid paying their creditors.

Argentina is the worst abuser. No less than 86 per cent of its total foreign currency reserves - US$45 billion – have been stashed away in Basel, the home of the BIS. That’s twenty times the average share of foreign reserves that central banks hold at the BIS. (Source: derived from the Bank for International Settlements Annual Report 2011) It is astonishing to discover that recently around one third of all deposits held at the BIS relate to two central banks – Argentina and Nigeria. (Source: Wikileaks reference to US embassy (Abuja) note on meeting between Ambassador Robin R Sanders and Nigerian Central Bank Governor Soludo on 3rd November 2008).

A driving factor behind this allocation is the fact that money held on deposit at the BIS is less vulnerable to legal action by unpaid creditors. In the case of Argentina, there are an awful lot of creditors. Argentina ranks as the biggest defaulter in history, reneging on over US$81bn in outstanding loans in 2001. The country remains in default on over US$15 billion in government bonds issues. And pressure is mounting on Argentina to repay its debt. Earlier this month Britain’s Supreme Court removed legal immunity afforded to Argentina with regard to unpaid holders of its defaulted bonds. A similar decision was reached by a court in New York. While these are welcome decisions it remains the case that bondholders are barred from seeking repayment from Argentina’s rapidly accumulating reserves held at the BIS.

Ironically, the Argentine Central Bank is pulled in many directions and may even view the role of the BIS as protection against demands from its own government. Last year, Martin Redrado had to be restored to his position as Bank Governor after Argentine President Christine Cristina Fernández de Kirchner conspired to remove him through an emergency decree. He was hounded out of office for having resisted the release of US6.6 billion from the bank’s reserves to lend to the government.

In order to maintain its hard earned reputation the BIS should crack down on this abuse. Sovereign nations should be deterred from exploiting loopholes in international law that damage the rights of creditors. And if the BIS won’t act, the Swiss government should. The litany of abuse surrounding governance issues at FIFA, also based in Switzerland, has triggered calls for the Swiss government to intervene in soccer’s ruling world body.

The problem is that the Swiss government could not do so, even if it so desired. The BIS was set up by inter-state agreements in 1930, signed in The Hague between France, the United Kingdom, Belgium, Italy and Germany. The BIS’s original goal was to smooth German reparation payments following the First World War. The Swiss government granted the BIS a Charter which was reaffirmed in 1987.

This forbids Switzerland from abrogating or changing the Charter without the joint agreement of the original signatories to the 1930 Hague Agreements. Furthermore, Article 24 of the 1987 agreement absolves Switzerland from any international responsibility for acts or omissions of the Bank or its officials on Swiss territory. So far as the Swiss authorities are concerned, one could say that the BIS might as well be located on the Moon.

Given the widespread abuse of the legal privileges enjoyed by the BIS, there is clearly an urgent case for reform. The governance of the BIS is wrapped in obfuscation and just like commercial banks it needs to be far more transparent about its activities. It is significantly unaccountable for its actions.

The onus therefore lies with the original signatories to the 1930 Treaty along with the 56 central banks who now constitute the Bank’s stakeholders. In this context, Sir Mervyn King, the Governor of the Bank of England, could demonstrate a leadership role in calling for reform. Action is required now if creditors are to receive justice.

For such a basic part of the economy and people’s lives, energy is a remarkably minor topic, politically speaking. The hacking scandal is interesting, but won't affect people's lives in a decade. Energy policy might.

Sadly, environmentalists have been given nearly a free rein in the field of energy policy, without much input from people concerned about the impact of anti-carbon regulations on the economy or poor people’s ability to pay. Note the constant lumping together of energy and climate change policy, as if these are just two sides of the same coin. This is a big mistake. As the “Rational Optimist” Matt Ridley argued in a superb piece for the Times last week (now on his blog, free for the world to read), the price of energy is fundamental to our economic wellbeing:

Cheap energy is the elixir of economic growth. It was Newcastle’s cheap coal that gave the industrial revolution its second wind — substituting energy for labour drove up productivity, creating jobs and enriching both producers and consumers. Conversely, a dear-energy policy destroys jobs. Not only does it drive energy-intensive business overseas; according to Charles Hendry, the Energy Minister, the average British medium-sized business will face an annual energy bill £247,000 higher by 2020 thanks to the carbon policy. That’s equivalent to almost ten jobs it must lose, or cannot create.

Let's accept that a low carbon economy is a desirable thing, but reject the apocalyptic hysteria that some push (without much scientific basis for doing so). That’s one desirable objective out of three or four others – including growing richer, making sure poor people can afford to heat their homes, and encouraging innovation in all sorts of fields. Is there a tension between the low carbon goal and the other ones? A bit, yes, but environmentalists are protesting a little too much when they emphasise carbon reduction over all other priorities.

A decent compromise already exists, and Britain is fortunate enough to have quite a lot of it: shale gas. Shale gas is cheap, efficient and low carbon compared to other fossil fuels. Conservative estimates say that there’s enough shale gas in the US to last at least fifty years. This video from Reason.tv explains some of the process by which shale gas is extracted from the ground – a process known as “fracking”. In this case we really can have our cake and eat it too: everybody should be happy.

But they’re not. Environmentalist groups have condemned fracking, on largely spurious grounds. Indeed, many were for it before they realised that it was an alternative to renewable energy, not a suppliment. Why? Because many in the environmentalist movement, particularly the more politically active ones, are more interested in controlling people's lives than in promoting a “clean” atmosphere. They are the new puritans, who want us to live "good" lives instead of rewarding ones. As a consequence, heavy-handed environmental regulations are making shale gas unviable in Britain. This needs to change so we aren't left behind.

Shale gas is a get-out clause for people who want cheap and clean energy, but it doesn't include the lifestyle changes that hardcore environmentalists want us to make. This is a point that’s been made plenty of times before. But the environmentalist movement's ludicrous opposition to shale gas exploitation underlines its true aims. Many of them don’t really care about the environment, they care about pushing people around. What a shame that, for political expediency, they’re being allowed to.