The Pin Factory Blog

Sometimes the best action a government can take is no action at all. So it is with the Conservative - Liberal Democrat coalition’s publication earlier this week with its “Programme for Government”. The plan of action includes 31 subjects from Banking through Europe to Universities and Further Education. Conspicuous by its absence is any specific section on Housing.

This is a good thing and hopefully a recognition that the root cause of the global credit crunch and subsequent Great Recession was the bursting of massive housing bubbles, starting in the US but quickly spreading to the UK, Ireland, Spain and others. By its silence, the Con-Lib coalition is staying away from that minefield. Yes, there’s a handful of innocuous proposals in the Programme’s Communities and Local Government section such as exploring a range of measures to bring empty homes into use, promoting shared ownership schemes and creating trusts that will make it simpler for communities to provide homes for local people. But these don’t amount to any clarion call for the masses to buy in and trade up.

Thankfully, there’s no wild John Prescott-type targets for millions of new homes across the land and no housing-specific tax changes. Most mercifully, the document has taken up this blog’s suggestion last week to banish the use of the term “housing ladder.” More than anything, Britain’s housing sector needs a period of benign neglect to find its own equilibrium. Dave, Nick, resist any temptations to fiddle about here.

A decline in the UK home ownership rate from its current 70% should channel savings into actually productive investments rather than merely inflating paper measures of personal wealth. And it should increase mobility as people are more able to relocate to where the jobs are. Germany seems to be housing its people just fine with a home ownership rate of around 50% and some people here in the UK may discover they actually prefer a renter’s lifestyle free from home repairs, insurance costs and tedious dinner party chat about house prices.

By contrast, the US is incorrectly adopting a do-nothing strategy regarding its own housing sector. The financial reform legislation now ploughing through Congress hits all the populist anti-banking symptoms but ignores the disease itself. Fannie Mae and Freddie Mac, the two gargantuan federal agencies that did more to fuel the housing bubble than anything else, are yet to be reformed.

Last week I saw Robin Hood at the cinema. It is a truly, extraordinarily bad film: long, boring and yet, at times, preposterously silly. The low point came towards the end, when a bloodied, chainmailed Robin lept out of the English Channel, and gave a dramatic, slow motion roar. The whole audience burst out laughing. But it’s a real shame the film is so terrible, because it actually has quite a libertarian message. This is the not the Robin Hood conjured up by those Tobin tax advocates, who think confiscating bank profits will solve all the world’s problems. This Robin makes speeches about liberty, battles King John’s tax collectors, and even tries to force the King to sign an early version of Magna Carta. If the film hadn’t been so utterly charmless, I’d have been cheering him on.

***

This version of the Robin Hood story made me think of Jean Baptiste Colbert’s famous quote: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. King John, plainly, failed to master that art. Yet modern governments have become very good at it, taking up to half of what people earn without triggering a revolt, or even any serious resistance. The reason is that people today often pay their taxes without realizing it. Most is simply withheld by their employers, while much of the rest is passed on to the taxman by retailers. I suspect a lot more people would be advocating low taxes if they had to actually reach into their pockets and pay them directly. In this spirit, perhaps it is time for tax withholding to go.

***

On Friday, I saw a rather pathetic protest taking place on Palace Street, near Victoria. ‘No sanctions for North Korea’ was the general theme: one man stood holding a big sickle and hammer flag with ‘bolshevism’ written on it, while the other read a prepared speech through a loud-speaker. South Korean ‘conservatives’ are the real villains, apparently, and North Korea is a people’s paradise. At first I laughed, but on reflection it makes me quite angry. Too many people continue to see communism, which has killed a hundred million people in the last Century, as a nice idea that didn’t quite work out. But the truth is that communism is an evil, inhuman ideology that can only lead to tyranny. The sickle and hammer deserves to be as reviled as the swastika.

You've no doubt done this yourself: made some passing reference to the existence of the Laffer Curve only to have some lefty splutter that such a thing is just a creation of the neo-liberal objectively pro-fascist anti-taxation league and no doubt you eat babies too, don't you, don't you!

Sadly for that end of the political spectrum which did not attend their university's "reality is not optional" lecture there really is something called the Laffer Curve. For each and every tax, in each and every society, there is a tax rate which will maximise revenues collected from that tax. Go over this rate and tax collected will fall. As this little example from the US shows us:

A random sample of littered cigarette packs reveals that 75 percent of the cigarettes used in Chicago bring no tax revenue to the city, according to researchers at the University of Illinois at Chicago. The lost potential revenue totals about $10 million per month, said David Merriman,......Chicago's state and local taxes totaled $4.05 per pack, compared to $1.37 outside Cook County, in July 2007, when the teams collected the packs. The $2.68 difference reduced the likelihood that a pack was purchased in Chicago by almost 60 percent......."This research suggests that an increase of $1 per pack in Illinois, as recently proposed, would drive more Chicago residents to buy their cigarettes in Indiana," Merriman said.

Note that this research does not, in and of itself, show that current Chicago baccy taxes are beyond the peak of the curve. Only that we can see that people are changing their behaviour to avoid the tax and thus diminishing the amount collected from said tax. And if enough do that then we get indeed a decline in the revenues collected.

Now it might well be true that the people buying their fags outside Chicago and smoking them inside are breaking the law, which makes them very naughty boys and girls indeed. But that doesn't change the fact that there is this Laffer Curve thing going on. Raise tax levels too high and revenue collected from said taxes will fall. It might be that people simply change their behaviour (smoke less, work less in the case of incomes taxe, take fewer risks with new business adventures with capital gains taxes, not bother squeezing the last drops of efficiency out of a company with corporation taxes) and it might be that they lie, cheat and smuggle (all taxes) but it really is true that raising tax rates and levels does not always raise the amount of tax collected.

Though far from perfect, the Coalition manifesto contains a pleasingly consistent commitment to transfer power away from central government and towards individuals, communities and local levels of government. Pre-election rhetoric has transformed into solid policy commitments, forming the basis for a refreshingly ‘liberal’ government after years of statist Labour control.

One area of reform looks set to be policing, as Theresa May’s speech at the Police Federation annual conference confirmed. After insisting that “I’m not interested in running the police”, May vowed to cut down the health and safety laws and the level of paperwork that the police are currently constrained by, through measures such as abolishing the stop and search form. Another positive idea was to give the police the power to charge suspects for a wider range of minor crimes. At present, charging decisions are made by the Crown Prosecution Service, for whom the police must prepare detailed case files, even in the case of a guilty plea. Securing a go-ahead from the CPS can be a lengthy process, while their ‘conviction rate‘ targets mean they can be more interested in scoring easy convictions then pursuing serious, but more hazy cases. Returning some charging powers to the police would give them greater responsibility, while cutting costs and hugely freeing up police time.

May also signaled that under the Coalition government, there would be transfer of power from Whitehall to local communities in regards to police accountability. This would be done by cutting Key Performance Indicators, political gimmicks and the creation of directly-elected local police commissioners, who would hopefully replace the useless and toothless Local Police Authority quangos. Such a figure would bring better accountability to local forces, forge closer links between citizens and police and remove the need for central government micromanagement. Some people have criticized this move, believing it to be a politicization of the police that will result in hardline populist policies forced upon them. However, it is ridiculous to argue that crime and the ways to address it are not political issues. As it stands, the police are already subject to incessant political meddling from the Home Office- which a local police commissioner would remove. The government must stand strong to enforce this transformative policy, which would give communities a unique and tailored policing plan and the police true accountability to the public whilst retaining their operational independence.

I don't think there's anyone at all left (at least, not among those sentient) who would disagree with the idea that one way out of our current financial and debt troubles is to have a bit more economic growth. Such growth would mop up unemployment, increases taxes collected (without raising rates or changing incentives), reduce the deficit directly and as a percentage of GDP and while perhaps not paying off the National Debt at least reduce it as a precentage of that same GDP.

So, a "Dash for Growth" then but preferably not in the manner that this was tried in the early 70s. A hint of a different method is here:

The European Commission estimates the administrative burden of Greece's bureaucracy—the value of work devoted to dealing with government-imposed administration—is equivalent to 7% of gross domestic product, twice the EU average.

Do note that this is the EU's estimation of Greece alone's burden: they're not including the EU's own imposition of such burdens. But even if we take only this very low ball estimate, in the UK economy that average rate is £50 billion a year. And further note that that isn't the value of what we are prevented from doing by regulation, the opportunity cost: it is purely the effort put into filling in the forms.

To take one recent example: it is necessary to have a licence for two or more to sing folk songs in a pub. This £50 billion cost is not including the number of such dirges not sung, the pints not sunk as people attempt to blot out the noise. It is purely the cost of applying for the licences for such fiestas as do occur.

So, as a method of increasing economic growth we might want to have that bonfire of the regulations. We can all make our own list of the nonsenses which are demanded of us, the permissions that must be acquired before we can do any more than sit upon our own fundaments. Whoever's list we use we could boost growth in two ways: firstly by turning such entirely unproductive pencil sucking into effort that produces value and secondly by allowing economic activity which is currently dissuaded from coming into being by the costs of said pencil sucking.

We get to be freer, richer and further away from national bankruptcy all at the same time.

What's not to like about this idea?

The proposed increase in Capital Gains Tax, inherited by the coalition from the Liberal-Democrats, has attracted a measure of criticism. It has been denounced because it will hit quite small savers, especially if the threshold is lowered from £10,100 to £2,000, as featured in the Lib-Dem manifesto.

Critics have pointed out that some of the 'gain' has resulted from inflation, and that in some cases the tax will be more than any real increase in value. Others have identified inherited 'second homes' as likely to pull quite ordinary households into the tax's net.

The Adam Smith Institute has now published research pointing to an even bigger drawback: the tax increase will produce less revenue for the Treasury, not more. Drawing on the experience of other countries, the ASI report, The Effect of Capital Gains Tax Rises on Revenue, shows how it has been decreases in the rates of capital gains tax which have produced additional revenue, while increased rates have diminished it.

The evidence is overwhelming. When capital gains taxes are increased, people are less ready to realize gains and expose them to tax, so the tax base is diminished, and so are revenues. The effect is likely to be even more stark in the UK, where the increase will be widely regarded as temporary. Unlike income, people can choose to postpone capital gains, and do so when the tax on them increases.

By making capital investment less attractive, increased capital taxes result in lower levels of investment. The productivity gains produced by investment are reduced, as are the wage increases which they bring in their wake, and the price reductions enabled by lower unit costs.

The proposed increase in Capital Gains Tax made no economic sense when it first appeared in the Lib-Dem manifesto. Now that it has been examined and analyzed, it makes even less. If the government goes ahead, it will subject the economy to a self-inflicted wound, and will have nothing to show for it in return. Unlike some disasters, this one is entirely voluntary and should be avoided.

In their last six years in opposition, the Tories produced no less than four shadow green papers on how they would tackle regulation and de-regulation. Each began with a blank sheet and demonstrated that each set of authors had learned little or nothing from their predecessors nor from the experience of the current administration, nor the one before.

Some of us would like to imagine that policy develops continuously, integrating experience, research evidence and the discussion of new ideas. We have previously suggested that a one or two year moratorium on new UK regulation would allow learning to take place and break the Whitehall culture of regulation. EU regulation would of course continue, but the UK should not regulate at all in areas the EU regulates. It simply burdens UK business relative to the rest of Europe. If they don’t need it, why should we? So a moratorium on UK regulation is perfectly feasible.

The coalition agreement is a new set of patent nostrums, ungrounded in experience or debate. The shadow regulation minister, John Penrose, no longer has that portfolio and although the new minister, Mark Prisk, was shadow regulation minister a while back, he did not author any of the four shadow green papers.

It is great to see the back of some of the earlier ideas, like having Professor Richard Thaler replacing regulation by nudging, but some old hobby horses, like the gold plating myth, remain. Sunset clauses will be required but the previous administration said that too but they didn’t deliver. I’ll bet the coalition does not know why it failed even if they know it did. Much more important are post implementation reviews to establish if the regulations worked at all. They should happen, but don’t, and there’s no mention of that.

On the other hand, they propose to dive into corporate reporting which the Financial Reporting Council and Accounting Standards Board are actually developing very well. What happened to small government/Big Society?

They are ill-informed on new business set-ups. One of Brown’s successes was to make the UK one of the easiest countries to set up new business. And the coalition’s section on financial regulatory reform seems to be unaware that New Labour handed that over to Brussels.

From a strong field, the motherhood prize goes to “We will review employment and workplace laws, for employers and employees, to ensure they maximise flexibility for both parties while protecting fairness and providing the competitive environment required for enterprise to thrive.” How on earth can that be achieved by regulation? No doubt they will set up a commission to bring that about – chaired by Willie Walsh.

New Transport Secretary of State, Philip Hammond, and his deputy, Theresa Villiers – undeservedly omitted from the Cabinet – have many transport issues to address. Which are the priorities?

First on aviation; the decision to scrap BA’s third runway project at Heathrow is sensible. However, the proposed expansions of both Gatwick and Stansted should continue. But the BA/Heathrow problems will not disappear. BA has three chronic problems – aggressive competition, especially in Europe from Ryanair and Easyjet, seemingly intractable union differences and the accursed c£3 billion pension deficit. Every effort must be made to turn round BA. The eventual aim should be a highly competitive, non-union airline, preferably without any pension schemes, and with legacy liabilities being transferred elsewhere. As for Heathrow, the Department should seriously consider how it can auction off landing slots on a similar basis to the mobile spectrum.

On the trains, sorting out Network Rail – with a governance body more reminiscent of the hapless Football Association – is a priority. Its soaring net debt - £23 billion – should be cut. Train franchises require attention. Longer, larger franchises are preferable. Prescribing an integrated franchise, similar to the Isle of Wight model, should be tried as a pre-requisite to the eventual integration of the network.

On the underground, close liaison is needed with TfL to ensure that the massive capex overruns of the past do not recur. Furthermore, the very expensive Crossrail project should be deferred until public borrowing falls.

Action on the roads is less urgent, but the priority should be plugging bottlenecks and filling potholes – and forgetting yet more bus market investigations.

Improving the UK’s docks is important. Hence, the controversial Dibden Bay project should be reviewed, whilst the larger Trust Ports should be modernized – and preferably privatized.

No shortage of issues?

Allegations of waste and cronyism in foreign aid are nothing new. Since the 1960s, both economists and taxpayers have increasingly regarded governmental foreign aid as “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.” (Lord Bauer) It now appears that the new government may have got the message, too. At least to some extent.

Things have changed pretty swiftly at the £5-billion-a-year Department for International Development (DfID) since May 6th. Last year, when International Policy Network’s report on Fake Aid highlighted how over £1 billion in so-called foreign aid had been spent on “communication”, “awareness” and “advocacy”, the then minister Gareth Thomas argued that “we should do more, rather than less, of this.” 

Further, when the Daily Telegraph reported on £50 million worth of “overseas aid” that never even left British shores, a DfID spokesperson defended the spending as “in line with our obligations under the 2002 International Development Act” and “to help the British public get involved in the fight against global poverty”.

And DFID remained silent when over £3.6 million of taxpayers’ money was revealed to have been assigned to the Trade Union Congress.

But now the incoming coalition government seems to be cutting such profligate and dubious spending. Andrew Mitchell has declared an immediate freeze on new “awareness” spending by DfID, and a pledge that only projects that satisfy “tough results-based criteria” will be funded in future.

Andrew Mitchell’s proposal to cut “awareness” spending is indubitably a good start and shows the right attitude from the new secretary of state for development. Another way in which Britain could help the fight against poverty is by maintaining an open economy. Immigration not only benefits Britain, but also allows economic migrants to contribute an estimated £926 million per year in remittances to their home country. 

This kind of private philanthropy should not be underestimated. UK companies already invest nearly £30 billion in developing countries and private individuals donated £9.9bn in 2009, partially to development charities.

Vast rethinks on aid and migration are unlikely to come anytime soon among timid politicians. In this midst, Andrew Mitchell has to be congratulated for taking a swift and bold stand against the more absurd elements of DfID’s spending.
 

Andrea Marchesetti is a research assistant at the International Policy Network. 

I'm no Tory, but many Conservatives I spoke to at a function last night are very alarmed at what's going on with the 1922 Committee. The 1922 is the grouping of backbench Tory MPs, which (since 1923, actually) has always represented the views of the rank and file in Parliament to the leadership.

Now there is a plan to allow ministers to attend and speak at the 1922, which would of course completely rob it of its robustness and independence. If backbenchers thought that ministers (and whips) were keeping an eye on them as they discussed Party policy, there would be no free discussion at all.

The leadership's argument is that shadow ministers attended the 1922 when the Tories were in Opposition, so what is the problem? But the fact is that when you are in government, things are entirely different. The Prime Minister and the Executive in the UK have huge powers, including powers of patronage. If they were admitted into private backbench discussions, MPs would hardly dare to raise disagreements with the leadership, as they would when in Opposition.

Worse, it seems that the new, tenderfoot MPs have been whipped to vote for the leadership's proposal.

But frankly, what business is it of the leadership how the 1922 manages its affairs? The whole point is that it is an independent voice of backbenchers.

One can argue that a rise in Capital Gains Tax, or a referendum on Alternative Vote, or any of the other dubious policies, are a matter of agreement between coalition partners and so there has to be a bit of give and take. But the 1922 is an entirely Tory affair. It is the leadership that is trying to lay down the rules and emasculate the backbenchers. It is the worst kind of central control. The kind of centralism we were supposed to have put behind us. This is alarming.

For more information on this check out Jonathan Isaby's blog here.