The Pin Factory Blog

Just a week after the release of the White Paper on education, new data has been released showing that educational standards in the UK are stagnating compared to the other developed nations. The PISA survey, carried out by the OECD, examines the reading, maths and science ability of a sample of 15 year olds from 65 developed countries. The findings of the tests carried out last year indicate that students in England have dropped from 17th to 25th in reading; 24th to 28th in maths; and 14th to 16th in science compared the previous survey conducted in 2006.

The findings show that, despite the huge rise in spending on education over the past decade, the impact has been limited. In fact, in countries like Germany and Hungary that had similar rankings as England in the survey, the spending per student was just £40,000 and £28,000 respectively while England spent £54,000. It also emerged that only seven other OECD countries spend more per student than the UK. It is not so much the high spending that is the concern here; it is its ineffectiveness. The government have thrown money at education and these results show that it is not the solution.

What is required is the overhaul of the education system. While the white paper released last week is a start, if the government want to see true improvement in educational standards then Gove has to allow Free Schools to be profit-making institutions. Only by doing this can the UK hope to move beyond average and retake its place as one of the best providers of quality education in the world. For-profit Free Schools will create diversity in the system and create an environment where excellence and innovation are at the heart of teaching and education. By changing the way our schools are run the benefits will pass on to the pupil and the education they receive will improve, and as a result the UK’s ranking.

David McKenzie has an interesting post on the World Bank blog today about his new paper, which compares the gains to developing world household income from New Zealand's seasonal migration program with forms of microfinance, conditional cash transfer programmes. The results are pretty unequivocal:

As David says, there really is no competition – migrant workers send some of their extra incomes back to their families and enormously increase those families' income. Rather than costly and usually ineffective spending on development, economic growth in poor countries might be more successfully facilitated by programs like New Zealand's. The anti-immigration crowd might not even object if it was seasonally-focused – say, retail during Christmastime and farming work during harvest time – and didn't allow the families of the workers to come with them.

Earlier this week I went on Radio Five to talk about Lord Turner’s suggestion that the directors of failed banks should face having two years salary clawed back by the financial regulators (available here at 1:49:00). Surprisingly enough, I didn’t think much of the idea.

It is true that Lord Turner is identifying a real and serious problem: bank directors are sometimes insulated from the consequences of their business decisions, and have an incentive to take on more risk as a result.

But as well as being ethically dubious – the burden of proof would rest with bank directors, who would be forced to justify perfectly legal activities or face arbitrary punishment – Lord Turner’s proposal is a distraction from the real problems in the banking sector. Politicians and the media enjoy obsessing about executive compensation, but in the real world it is a very marginal issue.

The real problem is threefold:

• Firstly, we all know that governments won’t let banks fail. Shareholders and bondholders know they aren’t going to lose money, so the market supervision of banks is weak.
• Secondly, deposits are guaranteed by the government, which means people pay almost no attention to what the banks are doing with their money.
• Thirdly, commercial banks can always borrow money from the Bank of England to paper over liquidity problems – this encourages them to spread themselves thin.

The result of these government interventions is that the banking sector is hard-wired for risk in a very fundamental way. In this context, after-the-event clawback of directors’ salaries will make virtually no difference – aside from feeding anti-banker, class war sentiment.

On that point, I was quite astonished to be asked why I objected to Lord Turner’s proposals, given that bankers earn loads of money, and rules like these would make poorer people ‘feel better’. The point of financial regulation isn’t to make people feel better about themselves – it is to ensure that we have a stable financial system. That’s the only basis on which Lord Turner’s proposal should be judged.

What would a better approach look like? Well, we need a proper bank resolution scheme that avoids bailouts and makes sure bondholders and shareholders lose out – compulsory debt-for-equity swaps may be a sensible idea. We need the Bank of England to be much stricter on lending money to banks, perhaps even going so far as to close the discount window. It needs to be made clear that it is up to the banks themselves to stay liquid and solvent. And we need to get rid of deposit insurance, perhaps requiring banks to offer a 100 percent reserved ‘safe haven’ account while publishing reserve ratios for other accounts, so that depositors demand an appropriate degree of conservatism. 

For more on free market approach to financial reform, see Professor Anthony Evans’ 2 days, 2 weeks, 2 months: A proposal for sound money. On the deposit insurance point, see the Carswell-Baker Bill.

Videos of all of the speakers at the Institute’s Liberty Lectures have been uploaded to our YouTube channel for anyone who could not attend. The annual event, which took place over the Summer, brought together the country’s top thinkers on liberty to provide thought-provoking talks on the libertarian approach to economic, philosophical and political concepts for students.

Dr Tim Evans, President of the Libertarian Alliance, kicked off the afternoon’s lectures with ‘The Importance of Liberty’. He explained the underlying principles of Libertarianism: life, liberty and property and the link between liberty and capitalism. Dr Eamonn Butler, Director of the Adam Smith Institute, then talked on how markets work. He argued that the free market works in mysterious ways and caters to our wants and desires. In contrast to this government is inefficient and the services it offers give little choice and are expensive for the public.

Dr John Meadowcroft then gave a talk on the rather excitingly titled topic of ‘Sex, Drugs and Liberty’. He gave a strong criticism of prohibition and why it is morally wrong as it undermines our individual right to self-ownership. Next, Dr Mark Pennington gave a talk on public choice theory. Mark highlighted how government intervention is more damaging than an imperfect market, especially as government is controlled by special interest groups. Professor Anthony Evans, from the European Business School, showed how the Austrian school predicted the crash and explained the Austrian theory on the causes of the cycles of booms and busts. Finally, Dr Richard Wellings, from the Institute of Economic Affairs, gave a convincing talk on the role of government, arguing for a limited government whilst highlighting the dangers of big government.

It was a fascinating afternoon of top class speakers and definitely worth a watch.

Full playlist here.

While Ireland’s economic collapse continues unabated, more and more implausible and counterproductive solutions become reality. Over the course of two years, several bailout packages have increased public sector external debt (that owed to creditors outside the country) to 1,305 percent of GDP.

The latest bailout will put every Irish man, woman and child on the hook for an additional €20,000, regardless of whether they lent a “helping” hand to produce such an imbalanced state of affairs. While the morality of indebting innocent citizens to save culpable bankers is questionable, it may be time to reassess if there was a better roadmap to recovery that the Irish could have followed.

Read the whole article.

Today’s vote on the higher education funding changes is an important one, though sadly it has lost many of the better points made in the Browne Review. Until there’s a free market in fees, with the price of a degree reflecting its cost and the demand for places, well-performing students will still struggle to get the place they want. If history has shown us anything, it’s that price controls harm the consumer most of all. Similarly, the cap on fees means that taxpayers will still have to subsidize other people to go to university and universities will struggle for funding in the state system.

Still, the bill is a step forward. Increasing the student’s contribution is right and means that the person who will be the overwhelming beneficiary of the degree will pay for most of it. The student loan system will probably continue to be massively inefficient, but at least it means that those students from poor families who do succeed in state schools will be able to study at quality universities.

Alternatives like a graduate tax, as proposed by some Labour politicians – and rejected by others – would disincentivize the work done by the most productive people. It’s also not clear to me why the NUS prefers an extra tax that would hang around for graduates’ entire lives to a finite sum that graduates can pay off and not have to worry about. When you think about how much debt people are willing to incur when buying a house, the £18,000–£27,000 cost of a degree doesn’t seem too bad, especially since, according to the OECD, graduates earn an average of 57% more than non-graduates.

I somewhat understand students who feel hard done by – the Lib Dems are the ones who made the error in signing the “No Fees” pledge – although students really ought to learn that part of being an adult is self-reliance. The Liberal Democrats’ violation of that pledge should be a warning against the danger of this sort of pandering. I don’t think they expected to ever be in a position to violate the pledge when they made it, but they are. But, to their credit, they’re taking an enormously harmful step politically in voting for these reforms and going back on the error. Good for them.

Thomas Byrne and Anton Howes, the founders of the Students For Tuition Fee Reform group, have a good post on Comment is Free today arguing that students have misjudged the tuition fees changes proposed by the government, and in fact they would give students a better deal than they currently have.

They make an important point:

People from poorer backgrounds are much less likely to go to university, but research carried out for the Sutton Trust showed there is almost no difference between the participation rates of the poorest students and better-off peers with the same A-level results. . . . The issue here, then, is not fees, but that poorer students are being let down by a broken school system before even thinking about aspiring to university.

This is the key point that many people don't discuss in the fees debate. So few students from poor backgrounds end up going to good universities not because the fee system prevents them, but because the school system stops them from qualifying in the first place. This is the main thing that holds back the poor from better university education and, because the problem takes place long before that point, no amount of bursaries or grants can change it.

Depending on who you listen to, recent student unrest over government plans to reform education funding is one of two things: either the collective tantrum of a generation of spoilt children, or the righteous awakening of a dynamic generation of radicals. The former opinion was expressed in the Prime Minister’s recent op-ed in the Evening Standard: in headmasterly fashion, he admonished students for not knowing “the full facts about what they're objecting to”. The latter view has been on display from the students themselves: when "occupations, barricades and walkouts” were called for, they duly materialized. It is easy, too, to mistake their organization for confidence – see the Telegraph’s Peter Oborne, who last month gushed hysterically that young people had at long last acquired “the energy to go out and do something”.

This media narrative presents a false dichotomy. There are, without a doubt, plenty of students who either 1) do know the full facts; 2) do not care; or 3) are members of Conservative Future.

So what, then, are we to make of these protesters?

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The ASI receives many contributions on education – and especially how and what children should be taught. What would really benefit virtually every teenager is far more emphasis on personal finance. To be sure, many secondary schools do teach some elements of personal finance, a subject that most adults will need to address during their lives. There are four particular areas – mortgages, pensions, insurance/assurance and social security.

Given that UK owner-occupation is now c70%, a basic understanding of mortgages is especially important, including repayment calculations, endowment policies and loan-to-value data. In the latter case, some borrowers of Northern Rock’s infamous 125% “Together” mortgage might have thought more carefully about the potential downside.

Whilst pensions may seem very distant to a teenager, a basic knowledge of pension arrangements can only be beneficial, if only understanding the concepts of occupational pensions, the many variations – defined benefit v defined contributions – and commutation of pension rights.

The complex area of insurance/assurance – ranging from car insurance to life assurance – is also poorly understood, although virtually everybody will have some involvement with the subject in their adult years.

Lastly, many individuals would benefit from some knowledge of the social security system, ranging from the few remaining universal benefits to the state retirement pension scheme.

Major changes to the £200 billion per year social security programme are currently underway - very few people fully understand how it operates. Aren’t most teenagers better off learning about these four subjects – with direct relevance to their lives - rather than about Henry VIII’s six wives?

From Megan McArdle's post about the difficulty of leaving the eurozone, here's a country-by-country list of bank assets as a percentage of GDP:

• Luxembourg: 2,461%
• Ireland: 872%
• Switzerland: 723%
• Denmark: 477%
• Iceland: 458%
• Netherlands: 432%
• United Kingdom: 389%
• Belgium: 380%
• Sweden: 340%
• France: 338%
• Austria: 299%
• Spain: 251%
• Germany: 246%
• Finland: 205%
• Australia: 205%
• Portugal: 188%
• Canada: 157%
• Italy: 151%
• Greece: 141%

(For comparison, total banking assets in the U.S. are equal to approximately 82 percent of GDP.) Hat tip to Tyler Cowen for the post title.

We published Gabriel Stein's How To Leave EMU yesterday.