The Pin Factory Blog

The UK Labour party wants to end higher-rate tax relief on pension contributions, arguing that current reliefs are a subsidy to higher earners. As I argued on Monday, they are not – they simply defer tax on that part of a person's income that they defer drawing, and put into a pension investment instead. But what should the right policy on pensions be?

The straight libertarian argument is that governments have no business trying to encourage savings, whether through tax deferral, outright subsidy, or anything else. To do so distorts the market and puts the values of the authorities ahead of the values of the general public.

But of course we are not living in a libertarian paradise. The fact is that we have a large state welfare apparatus, with something like one-eighth of government spending going on transfer payments. And unless people are encouraged to make provision for their retirement, some (or perhaps many, given the natural human tendency to value present income more than future income) will consciously choose not to save while they are in work and rely on state welfare once they have retired. There is, therefore, a case for subsidising pension contributions as a way of incentivising people to provide for their own income in retirement, rather than relying on state benefits.

If that is so, then the state has no business encouraging people to save more than they need to save in order to keep themselves off the welfare rolls. That would suggest that any state encouragement of pension contributions should be limited. Once you have saved enough to prevent yourself being a charge on the welfare system in retirement, you should receive no further tax relief.

It also suggests that you should indeed convert the bulk of your pension pot into an annuity, providing you with a regular retirement income – or that you draw down your pension pot at a steady rate. Otherwise there would be 'double dipping' - people using the tax relief to accumulate pension pots that they then spend liberally, before declaring themselves impoverished and then relying on state welfare.

Again, though, practicality may intervene. It may be complicated to grant tax relief to some contributors rather than others; there is a bureaucratic cost to checking how much people have actually saved. Likewise, annuity rates may fluctuate considerably, perhaps leaving people with much lower pension income than they anticipated. And drawdown arrangements can be hard for people to understand and for the tax authorities to police.

Inevitably, such considerations make pensions complicated – and that complexity must discourage people from paying in to pension plans. A simple regime has much going for it – say a straight pound-for-pound matching by government of everything you put into a pension – up to a total or annual limit, calculated to be enough to keep folk off the welfare rolls in retirement. Easy. The only trouble is, you can't just tear up the existing pension contracts that people have, as pensions are inherently long-term commitments. And there are lots of those different arrangements, because the pension rules have been changed many times in the past. Which means that pensions will continue to confuse the general public. Annoying, but true.

At the moment President Obama is riding high on the back of the passing of his healthcare plans, but before too long he, and the US economy, will be on a downswing again. That's according to Dominic Frisby of Money Morning, who believes you can see four-year up and down cycles in stock markets in America, and indeed all over the world.

He's got some charts from the Dow and the Nikkei to back him up, and yes, you do see cycles, some more pronounced than others, but definite four-year cycles nonetheless. So the question is, why do they exist?

It's simple, and it's back to government as usual. With a four-year election cycle, there is an upswing of optimism that comes in with any new President. Then the administration starts doing all the 'bad' things it needs to do to balance its books, and optimism wanes. So we head on to a four-year low. Then the administration's focus turns to getting re-elected, so it starts spending money like water and the markets turn up. Pretty soon that turns out to be unaffordable and...well, the rest you know.

It's plausible; and on this theory, the second half of 2010 will be a lot uglier than the first. We've already had the high point of this particular cycle. Buckle up for the descent.

Transport for London doesn’t offer the best of service. I’m sure most people who live or work in the capital have lost count of the number of times they have been have been late for an engagement or told their service is not running. This is mainly because the complex task of keeping the city moving is controlled by politcians who indulge in grand, top-down schemes. This creates a culture of misdirection and mismanagement.
 
The scheme recently launched by TfL to provide 6,000 new ‘hire bikes’ to the capital looked optimistic at first. A fairly simple, yet effective way to relieve congestion on the roads, free-up public transport and cut carbon emissions. Only the public sector could find a way to turn this straight-forward idea into a farce. And they have - spectacularly.
 
They have now announced that none of the bikes will not be given padlocks and anybody supplying their own padlock will be fined £150. A deposit will be paid before a bike can be hired, and will naturally be unredeemable if the bike is stolen. So effectively TfL is denying the cyclists the right to protect their money. If people cannot lock their hired bikes, they are simply not going to use the scheme.

As of January 1st, the Czech Republic’s drug policy is changing. While the personal use of illicit drugs was decriminalized a year ago, possession of the vague “larger than small" amount of a substance still lead to prosecution. The difficulty the public, police and courts faced in judging this amount has lead to government clarifying the levels acceptable for personal consumption, such as 15 grams of Marijuana, 4 tablets of ecstasy, a gram of cocaine and 1.5 grams of heroin. Setting out the law in a clear way and using common sense to designate a ‘reasonable’ level of drug possession makes it easier for all to monitor and respect the law.

While any move from the outright prohibition of drugs is positive, Czech reform is half-baked. The possession of drugs (apart from small amounts of certain drugs) remains a crime; this will ensure that drugs will continue to be procured, trafficked and traded illegally, and often by large organized gangs. The total ‘cost’ of drugs is thus likely to remain high. The new reform does allow the Czechs to own a small number of their own cannabis plants, which is a positive step in allowing the controlled production of illicit drugs to take place. However, such tolerance must be applied to the whole of the drugs market.

The fact remains that to minimize the damage of drugs they must be dealt with maturely and logically. If they were to be legalized and subsequently regulated in a method similar to tobacco or alcohol, the source and quality of substances would be better regulated. Drug use would become safer, the scale of drug use could become better monitored and those needing help may be more likely to ask for it. Personal liberty would also be increased, which is no bad thing. The moves in Latin America, Portugal and the Czech Republic to adopt a more sensible drugs approach should be encouraged. Perhaps in time our own leaders may learn that you cannot legislate a problem away.

The last Conservative administration under John Major used to agonise about passing too many regulations. They even set up a taskforce to reduce it. Tony Blair replaced that with a “Better Regulation Taskforce” and better turned out to mean more – the flow of new regulations doubled. No surprise there.

Although two thirds of the regulatory burden in money terms arises from EU-sourced regulations, less than one third of the number of regulations are due to the EU. In other words, the UK afflicts about 200 regulations on itself which the rest of the EU consider unnecessary.

Both the Major and Blair governments claimed they would reduce the stock of existing regulations. In both cases, the Whitehall machine ground down the suggestions to the point where some administrative simplification was achieved, some groups were consolidated (e.g. fire regulations) and a very few regulations were nullified, perhaps five a year compared with the 250-300 new ones. Both governments emitted positive noises about deregulation and called for suggestions. The IoD was one of the organisations that responded with a list, a little list, of regulations that would not be missed, that never would be missed. 258 of the IoD’s suggestions were, in October 2009, batted into the long grass. Just 11 would be “taken forward”. And I wouldn’t hold your breath on those.

The government claims that regulation is a net benefit but their numbers take alleged benefits for the voting public and then subtract the costs to business. Having business pay for welfare is attractive to the Chancellor but it is covert taxation. Business, in bearing the cost, becomes less competitive and less productive. The unions are happy in the short-term but they have learned nothing from the London and Liverpool docks.

As regulation drags Britain down we can at least have a little fun at Whitehall’s expense. Each month ASI will publish a recent daft regulation which we do not need even if the mandarins think we do. Watch this space.

So far...

1. Mandatory parenting needs assessment – ASBOs
2. The Building (Local Authority Charges) Regulations 2010
3. Reservoir flood plans: Impact assessment (17 December 2009)
4. Energy snoopers
5. The governmental cost of doing nothing

One of the more persistent fallacies in economics is “Lump Theory": that there is only so much to go around and the question is how it is share it.

The most common example of this is the Lump Theory of Labour, where new entrants to the job market are alleged to take away work from existing workers. This is usually used to bash immigrants, though it has in the past been used to argue for the Closed Shop and for restricting labour-market participation on grounds of gender, age and race.

Another example is what we might call the Lump Theory of Wealth, the Mercantilist belief that money leaving the country means less wealth for citizens. This ignores the rather simple fact that pounds are pieces of paper whereas the stuff they buy is usually far more useful: are we really poorer if we give a Chinaman twenty five pieces of paper, each of which says “Ten Pounds" on it, and he gives us a television? It also ignores the fact that pounds can only be spent in the UK, so eventually they must make their way back here either to buy our exports or as loans to government, business or citizens.

Monday’s Daily Mail had a textbook example of this in the article 'Immigrants send home £4.9m a day'. According to the Mail, “The economy is losing £4.9million every day because of the huge sums immigrants send home to their relatives..." Migrationwatch, the anti-immigration lobby group, suggested that this is enough to build two new aircraft carriers and argued that “claims that there are only positive economic benefits from mass immigration are clearly untrue."

All exchanges in a free society are voluntary; both parties benefit. If companies are paying foreign workers £4.9m a day (for the sake of argument let us ignore the difference between wages and remittances), it must be because companies (and therefore Britain) must be getting something that in the companies’ judgement is worth more than £4.9m. For example, if those foreigners were employed in ship yards, they would get £4.9m a day and we would get (say) Andrew Green’s two aircraft carriers. Thus the labour that these migrants are selling to the UK is beneficial to us.

What is more, those £4.9m cannot be spent abroad: the pound is not legal tender there. At some point the pound must return to the UK, either stimulating exports or providing much-needed credit to UK industry or government. Thus, having gained from the labour of the migrant, UK businesses then gain from the desire of his family to import goods or lend money for profit.

Sadly, this simple economic logic is beyond the lumpen intellect of Migrationwatch and the Daily Mail. To them, as to the Mercantilists against whom Adam Smith railed 233 years ago, the wealth of nations is a zero-sum game expressed by the flow of money.

What with the ongoing eurozone crisis, G8 summits and NATO confabs, politicians from around the world continue to dominate the headlines – but things don’t seem to be getting any better. Amid all that hot air, though, were a couple of nice pearls of wisdom in the past week. Both suggested salvation from beyond the world of politics.

At a press conference on the occasion of his receipt of the Templeton prize, the Dalai Lama blamed last summer’s riots on young people “being brought up to believe that life was just easy. Life is not easy. If you take for granted that life will be easy, then anger develops, frustration and riots.”

Indeed. Politicians spend a lot of time promising to make life easy, alleviate risk and absolve individuals from the consequences of their behaviour.

Meanwhile, in a BBC interview prompted by the government’s scrapping of nutritional regulations for school lunches, celebrity chef Jamie Oliver said “I’ve given up on politics. My focus for the next 15 years is business and people. That is where the hope is. Governments are too short term. They’re too transient…They really don’t understand. There’s a political agenda but when you make these changes there’s very physical things that happen that they know nothing about which is very dangerous.”

Indeed, again. Jamie will probably be more successful spreading the gospel of healthy eating as a businessman than as a lobbyist.

Both express a sentiment reflected in the UK’s recent local elections when just less than a third of the electorate bothered to vote. That was the real news in the election – the vast majority of the population recognize that the government is just irrelevant to most of their needs and aspirations.

Whatever politicians may say and promise, life is not easy and they’re unreliable partners.

Theodore Dalrylmple is spot on about the ‘big society’ in today’s Daily Express:

THE Big Society is a bad name for a sensible idea: namely that citizens should not rely upon the State and its bureaucracies for their own welfare. Instead, they should form voluntary associations to look after both themselves and others…

He points to two big problems with the ‘cradle-to-grave’ state:

The problem with the State taking care of everything is twofold. First it tends to destroy our character, something that can be observed every day. Our faculties such as prudence and planning for unpleasant eventualities are lost if they are not exercised, a trend surely borne out by the fact that we as a nation save nothing and borrow much.

The second problem is that the State isn’t very good at what it does. How many of us find that, if we can afford it, we are willing to pay privately for services that are supposed to be provided by the State, such as education and dentistry? People pay twice over, first in taxes, then as fees – and the taxes drive up the fees.

Finally, he highlights how the state promotes atomization in society:

And there is another way in which handing over everything to the State hardens our hearts: we come to believe that, having paid our taxes, we have paid our dues to society. When we have spent half of our time, nearly, in working for the State (as we do even if we are employed in the private sector), we do not feel much inclined to perform social service afterwards, even for those close to us. Where the State takes care of us all, we become separated from one another…

In the name of social solidarity we have turned ourselves into a lonely crowd.

You can read the whole thing here. Incidentally, Dalrymple also has a new book out at the moment: Spoilt Rotten: The Toxic Cult of Sentimentality. You can buy it from Amazon here.

The Home Affairs Committee has reported on the arrest of Conservative frontbencher Damian Green MP. Late last year, police barged into Parliament, and with the – unprecedented – agreement of the Sergeant at Arms (who is supposed to protect MPs from state officials), rifled through Green's office, arrested and held him, and went on to search his constituency office. His home too was ransacked and, say friends, left 'uninhabitable'. Naturally, his computers and phones were confiscated and his email put out of commission.

His crime? Some dreadful terrorist plot? No. He had received information from a Home Office whistle-blower, exposing the embarrassing fact that the Home Office managed to grant security guard licences to illegal immigrants, and even gave one a job. The whistle-blower was arrested in a dawn raid, too.

This jackbooted (or is that Jaqui-booted) thuggery confirms my point in The Rotten State of Britain – that when you give people power, they will use it. Citing 'national security', twenty counter-terrorist police were sent in to rake over the home and offices of a well-liked MP who had merely embarrassed ministers. The Home Secretary says she didn't know the arrests were planned – in which case she should be fired for incompetence, being out of control of her officials and police who organized the raid. If she did know, she should be fired – for a major assault on the integrity of Parliament, which is supposed to protect us from people like her.

The Committee says that the 'national security' excuse for the raid was rather rich. Green was arrested for doing what ministers weren't doing – just telling the truth. And Opposition, Gordon Brown made great use of leaked material to embarrass the government, without having twenty counter-terrorist police unleashed on him.

MPs can't be above the law. But this was just state thuggery against a representative of the people. And the police shouldn't be above the law either. Bullying their way into Parliament without a warrant tore up about 350 years of hard-won constitutional precedent that was supposed to protect our representatives from harassment by the powerful. The last time this happened, it caused a civil war.

Nor can Parliament work if people can't write confidentially to their MPs without other people snooping on them. I don't imagine that the police limited their scrutiny of Green's computers to the few emails he might have had from the whistle-blower. This isn't about MPs or some decrepit rule of 'privilege' – it's about members of the public being protected from the unrestrained power of ministers and officials. The Speaker of the House of Commons should put his foot down. But he can't because at last report he was on a taxpayer-funded junket to Dubai. That's how rotten our state has become.

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