The Pin Factory Blog

The news that the BBC may be planning to radically shrink the output of its local radio stations, merging them into the output of Radio Five Live, should not surprise us.

The ASI has been saying for some years that the BBC – as a free-to-air tax-funded institution – is fatally flawed. Our view has also been that it will die of a thousand cuts like this week's news, as it fails to cope with multiple global media organisations that can price their services for customers.

Crucially, those competitors learn from those customers and can innovate to capture new revenues. If it were priced, some local BBC stations might well find their feet as a voice for a subscribing local community audience. They would use low powered cheap transmitters, small studios with modern small scale equipment and a lot of volunteer staff. Of all electronic media radio it might be the one to survive like this, although my bet is that it would be on the internet more than the airwaves.

Instead, BBC local radio carries all the overheads of cushioned personnel, over-sized buildings, globally capable equipment, and the electronic networking capabilities of the worldwide BBC News agency, acting as a journalistic "stringer" to the very expensive core news operation.

The BBC cannot go on like this. It has to face the real world, grow into new challenges and compete with new media. It does not need to retain its local arms at high cost to the taxpayer. Shrinking their airtime to become a small element buried inside Radio Five Live which is the present proposal is a good start. My guess is that this is the beginning of the end for the network of local stations.

The standard retort to those who say that governments cannot borrow more, forever, has been that if this were so in the short term, then we'd see the bond vigilantes. The interest rates demanded would rise, pushing bond prices down and raising the costs of government borrowing. You know, like has happened in Greece, Ireland, Spain and Portugal....

More accurately, we would see the effect of such bondsters: they would influence prices simply by not buying any bonds, meaning their actions would not be directly visible.

Which leads us to something that, while not an immediate sign of the coming apocalypse, should at least make people give pause for thought.

Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28).

To unravel this for you. The world's largest private sector bond fund now has no holdings at all in the world's largest bond market, that for US Government debt.

Yes, this is only one bond vigilante but where Bill Gross and Pimco go others tend to follow.

And do note that whether people should not buy, or dump their holdings of, Treasuries based on sound analysis of the full faith and credit of the United States is entirely irrelevant. It matters only whether they will or not. If they do, then interest rates will rise, nipping in the bud a recovery and condemning future generations to paying even more interest on the national debt, soaring as it is as a result of the massive deficit.

It's not that I want to scare anyone or anything, but we do have one extremely large bond buyer now on strike and it won't take all that many to do so to make it obvious where those bond vigilantes are and what they're not doing.

The idea that there is "too much choice" and that this makes us unhappy appears to be entering modern conventional wisdom. It certainly rings true: after all, if presented with hundreds of pension plans, I'm probably more likely to put off the decision and not get one at all. The most persuasive case seems to have been made by Barry Schwarz in this TED talk from six years ago.

He may be right. Too much choice could well make us very unhappy. The problem is that the assumption by many seems to be that we should get government to limit our choices. However, by entrusting this sort of decision to government, we're allowing someone else to decide what's in our best interests without much of a say in how those interests are defined. Even if we agree with that view of what's good, chances are somebody else doesn't, but will still have that choice forced upon them. Leaving it up to faceless bureaucrats or politicians could even mean leaving us with no choice at all.

Schwarz uses the caricature of someone asking "is there a phone that doesn't do too much" in a shop and being answered "no". However, in a market system, this sort of problem is seen as an opportunity. If we really do want less choice, the entrepreneur has every incentive to meet this new and evolving demand. In fact, unlike a government-suppressed system of one-cap-on-choices-fits-all, niche markets and products can be created to cater to everyone's individual preference for decision reduction.

Using his other examples, when given the difficult choices of healthcare plans or jeans, why can't we employ healthcare consultants or style gurus to choose the best ones on our behalf? We can even choose which experts we want to place our trust in. In fact, the uncertainty creates whole new markets and industries for expert choice-makers like healthcare plan consultants, style gurus, maybe even lifestyle coaches. The possibilities are endless and unpredictable. Ironically, given the origin of his complaint, it seems that Schwarz has forgotten how the market innovates to meet demands.

Anton Howes is a co-founder of the Liberty League, a network for UK-based libertarians.

I like the FT’s Westminster blog, but it had a post yesterday that bothered me:

Interesting to see the BBC today picking up the letter to the Telegraph from 21 “high-profile” businessmen and Tories complaining about the high-speed rail project.

Britain’s public service broadcaster forgot to cover a letter two weeks ago – from over 60 businessmen – in favour of HS2, which I wrote about in the FT.

The pro campaign dwarf the anti in both quality and quantity of signatories, it would appear.

The writer goes on to mock the relatively unknown signatories of the anti-HS2 letter compared with big, pro-HS2 businesses like BAE Systems, John Lewis and Siemens. Because big business likes HS2, the thinking goes, it’s a good thing. Well, maybe, but I’m not sure the opinions of established businesses are relevant at all when trying to decide how the government should spend its money.

It’s quite possible that HS2 might benefit big, established businesses. So would a government subsidy for businesses of a certain size, but it would be bad economic policy. It’s extremely naïve to assume that what’s good for big, established businesses is good for the rest of us. We’re all paying for HS2 and, as with most big government projects, the voices in favour are loud and united, and voices against are quiet and scattered. Here’s Simon Jenkins:

[Nobody] ever considers it the done thing to raise the taxpayer question. Whatever is spent is worth it, and paying for it is the great undebated. . . . I notice that interviewers never put the "taxpayer question". They invariably ask: "When will the minister do more, spend more, intervene more?" They never ask why is he not cutting deeper, and perhaps saving more of the nation's resources and taxpayers' money. They are hard-wired to high spending.

I recommend Jenkins’ whole article. What he identifies is a case of concentrated gains and dispersed losses, a basic element of public choice economics. The big businesses lobbying the government may stand to gain from HS2, but the only cost to them is the cost of that lobbying – low risk, high reward. The people who’ll have to cough up are taxpayers, but because the costs of lobbying are hefty for individuals versus the costs of doing nothing, they end up being underrepresented. (Incidentally, much of this goes for defence projects as well.)

The phenomenon of concentrated gains and dispersed losses means that government has a big incentive to spend and regulate in favour of special interest groups. In this case, big business stands to gain something at very little cost to itself, while no individual will lose out enough for an effective counterattack to be worthwhile. Prominent businessmen calling for more spending for might be impressive, but let’s remember who ends up paying.

I was at the Burgess Hill Fair Trade Festival on Wednesday, debating whether Fair Trade was a help or a hindrance to the developing world. I must have surprised them by being quite ambivalent about the topic: I was supposed to be arguing against it, but I had some quite positive things to say about Fair Trade. What I really wanted to argue was that our trade structures have to change if we’re serious about fighting poverty on a respectable scale.

People have a tendency to pitch Fair Trade against free trade, as if there’s a tension between the two. Quite the opposite, really – Fair Trade is quite a good example of how consumers in a free market can use their buying power to effect change that they want. I think a lot of people on the free market side have (unfairly) seen Fair Trade as being anti-market, but I see no difference between paying for the satisfaction of giving money to a Fair Trade farmer, and paying for the satisfaction of driving a nicer car. It’s part of the market mechanism, and a very nice example of how individuals’ purchasing power can advance the social goals that they like. And it makes a nice change from the people who want the government to sort out the world's problems.

Nevertheless, Fair Trade is still a flawed system. Most Fair Trade farmers are in Latin America, even though poverty is generally far worse in Africa – so buying Fair Trade coffee over non-Fair Trade coffee can mean that your money goes to a Mexican rather than a Kenyan farmer. This may change, but right now the fact is that Fair Trade products can deprive the world’s poorest farmers of their income in favour of relatively well-off ones. And if it gets bigger, Fair Trade risks affecting global supply and disincentivising other types of production in the developing world. This probably isn’t a problem right now, because Fair Trade is a very small part of the market, but someday it might be.

There are also lots of alternatives to Fair Trade – in an excellent IEA report on the topic, Sushil Mohan points out that gourmet coffee growers in Rwanda have been able to achieve prices as high as $55/kilo, versus the market average of $1.30/kilo for ordinary-grade beans. To be fair to my debate opponent, he didn’t claim that Fair Trade was perfect. 

The most important point to remember when thinking about Fair Trade is that, while it’s a decent humanitarian mechanism, it won't do much to help poor countries' economic growth. For that, they need to be able to trade freely with us. The EU’s monstrous Common Agricultural Policy simultaneously subsidizes European farmers with one hand, and imposes extortionate tariffs on goods from the developing world on the other. The one comparative advantage that poor countries might have is thus nullified at taxpayers’ expense.

I'm relaxed about Fair Trade, and I admire its supporters' use of exchange-based market mechanisms to advance their goals. There's no contradiction between Fair Trade and free trade – but achieving the latter is a lot more important.

A free society uses the pricing system to send signals between people who do not know each other personally. A society without a pricing system is like an organism with malfunctioning nervous system. Every attempt to tamper with the nervous system of a society will weaken some social activity.

The European Court of Justice has recently ruled that insurers will not be allowed to use gender as a factor in pricing risk. This ruling is based on an European principle that “equality between women and men must be ensured in all areas”. The ruling violates the freedom of individuals to set the terms of contracts between them and as such is unjust. 

Because the ruling also distorts the spontaneously emerged pricing system in the market for risks, it will have detrimental effects to the quality and quantity of risk management performed in the society.

People using services of insurance companies should on average expect slightly deteriorating service or increasing costs of insurance. The best way to respond is to review your risky activities, like driving or traveling, and check if it makes sense to do more of less of them as the cost of insurance changes. For example young inexperienced male drivers, especially under 18, might want to drive more and young inexperienced female drivers might want to drive less.

People working for insurance companies should expect reduced enjoyment from work as some natural and spontaneous activities are replaced with directives. Their organizations are a part of the society’s nervous system and they will be weakened. Employees should take extra care for their organisations and not let them catch some other virus in the process. The way to do this is to be extra careful when starting new projects and making other changes. 

Insurance consultants should charge more. The way to do it is to scare insurers about the Directive and then to offer new services to review compliance. 

People interested in why this is happening should read John Galt’s speech. 

Everyone else should watch out for more inexperienced male drivers under 18 when crossing the streets.

On ‘No Smoking Day’ the government announced its intention to ban the display of tobacco in shops and to seriously considering requiring plain packaging for all tobacco products.

Both of these measures are fundamentally illiberal. Neither is justified based on the evidence (have display bans in Iceland and Canada further reduced youth smoking or helped people to quit? No.). And both will create all sorts of unintended consequences (display bans will cost shopkeepers thousands of pounds, plain packaging will severely exacerbate existing problems with counterfeiting).

But there’s a deeper sense in which I find the ‘war on tobacco’ disturbing. It seems to me that tobacco is at the coalface of a much bigger cultural battle, in which capitalism, individualism and rationality are all coming under relentless attack by the enemies of freedom.

Industries are vilified for lacking a so-called ‘social purpose’, regardless of whether they are providing a good or service that people freely want to purchase. The government spends our money on campaigns to ‘denormalize’ anyone who refuses to conform to the politically correct lifestyle ethic. Reason is rejected in favour of preachy junk science and tabloid-friendly scare stories.

I’m reminded of Ayn Rand’s The Fountainhead, and in particular Ellsworth Toohey’s speech to Peter Keating on how to rule the world:

Look at the moral atmosphere of today. Everything enjoyable, from cigarettes to sex to ambition to the profit motive, is considered depraved or sinful. Just prove that a thing makes men happy -- and you've damned it. That's how far we've come. We've tied happiness to guilt. And we've got mankind by the throat. Throw your first-born into a sacrificial furnace -- lie on a bed of nails -- go into the desert to mortify the flesh -- don't dance -- don't go to the movies on Sunday -- don't try to get rich -- don't smoke -- don't drink. It's all the same line… Kill the individual. Kill man’s soul. The rest will follow automatically.

There comes a point under every tax rate where raising taxes will cause less money to be raised. Those who can afford to do so may work less, because the trade-off of work to leisure becomes less profitable, increase their tax evasion efforts, or move to a different tax regime altogether. This isn’t a libertarian or “right-wing” argument, it’s a simple statement that if government wishes to raise as much revenue as possible, it should recognise that more is sometimes less. And then there’s the growth rate. Higher taxes mean lower growth, so the government should try to strike a balance between paying for itself and not being too much of a burden on private enterprise.

Our new report, The Revenue and Growth Effects of Britain’s High Personal Taxes (PDF), argues that Britain’s current income tax regime is too high. It looks at international comparisons of tax rates and notes that, in a ranking of the marginal tax rates of the 86 largest economies in the world, Britain comes 83rd. In other words, only three other large economies have higher marginal tax rates than Britain.

Surveys of businesses suggest that many are thinking about moving overseas. We saw that this week in the news that HSBC, which paid £1.2 billion in tax last year and did not receive any bailout cash, may be relocating its HQ out of London (though HSBC deny the rumours). There has been a 28% increase in the numbers of bankers moving to Zurich and, as Jan blogged on Monday, some hedge funds are moving to Malta. It’s hard to know exactly how many high earners will leave, but the fact that 1% of the country pays 24% of the tax means that even a relatively small number of people leaving can have big implications for the country’s revenues.

When Nigel Lawson cut the upper tax rate in the 1980s, revenues rose dramatically as the economy grew. As this report argues, the paradox that cutting taxes can sometimes boost revenues applies to Britain today, and the budget later this month should reflect this. If the Chancellor wants to to cut the deficit, he’ll need to cut taxes first.

You can download the report here.

Over on Cato-at-Liberty, Chris Edwards proposes a new rule for US public spending – that its growth should be limited, by law, to a maximum of three percent a year (roughly equivalent to inflation plus population growth). That seems a reasonable goal, he says, and could gain broad centrist support.

It is easy to see the appeal: if UK public spending had only grown by 3 percent a year since 2000, we would currently be spending £470bn rather than £697bn a year. That ‘saving’ of £227bn would wipe out the budget deficit with enough left over to abolish VAT (not that this would necessarily be the priority). The graph below shows how things might have been.

But how about projecting the 3 percent rule forward? The graph below assumes that the coalition government meets it spending targets up until 2015-16, and that public spending grows by only three percent a year thereafter. Based on project nominal GDP growth of 5 percent a year, spending would decline from 48 percent of GDP now, to 37 percent in 2020, and then 31 percent in 2030.

Now, that might be a much slower rate of progress than many of us would like. But it does show that – in the long run – you don’t need to do anything all that dramatic in order to significantly reduce the share of the economy consumed by the state. All you need is a long-term commitment to fiscal responsibility, and the discipline to stick to it.

Edwards also flags up a couple of additional benefits of the 3 percent rule: (1) “one advantage of an annual growth cap is that it would lock-in any spending cuts that are made, and thus spending would be ratcheted downwards” and (2) “A fixed percent cap would also encourage policymakers to support a low-inflation policy by the Fed because the lower was inflation, the higher the budget limit in constant dollar terms.”

It gets my vote.

Today is the 235th anniversary of the publication of The Wealth of Nations by Adam Smith. For a quarter of the last millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for most of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market.

The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live. Yes, it's very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. And yet it is the book which took economics out of its primitive phase and made it distinctly modern. We can understand what Smith says because it is all around us today.

The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country's wealth is what it produces. He had invented the idea of gross national product. And the wealth of the citizens of that country depends on how many there are. He had invented the idea of GDP per capita. And so it goes on.

But surely his greatest breakthrough was the realisation that we do not have to grow or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world.