The Pin Factory Blog

The eighteenth century Scottish judge Alexander Fraser Tytler, said “A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public Treasury”. In other words, democracy evolves into kleptocracy.

If Tytler were alive today, surely he would have added that the rot begins with a state education system and a national syllabus which themselves eulogise the State. What else can cause highly intelligent and educated people to plead for funding of their personal interests, even as Rome is burning?

Thus can eminent scientists seek more taxpayer funding for science, while sportsmen write in the Telegraph that, “A party that prioritises sport might get my vote”. More generally those making good livings from “the arts” (actors, musicians, and so on) seem to bleat almost perpetually in the broadsheet newspapers.

Did all these worthies not learn that science and inventions, sport, and “high-brow” entertainment were thriving features of the UK throughout the 19th century (and earlier), when state funding wasn’t on anybody’s agenda. Indeed, government involvement would have been pooh-poohed on the basis that not only would it come with strings attached; it would also become contaminated. Indeed this has happened in spades to science and statistics in the last 75 years.

The end of democracy is nigh, unless it is severely constrained via a constitution which puts most current government functions firmly off limits. Fat chance.

Terry Arthur is a keen sportsman and played rugby for England in 1966.

Every new regulation should be justified by an accompanying Impact Assessment (IA). Sometimes, to keep themselves busy, Whitehall departments issue IAs even when there is no new regulation to justify. All these people have to find something to do. A recent example is “Crowded Places”.

No one would argue that terrorism has increased the risk for crowded places. The Home Office published an IA for a regulation to address the issue on 11th March. These were the four options they considered:

1. “Do nothing – allow owners and operators of crowded places to continue as before, and accept the risk.”
2. Home Office to publish two guidance documents: good practice for local partners on how best to protect crowded places; and suitable protective security measures for new and retro-fit developments outside the planning framework.
3. Home Office to publish two guidance documents as above plus one from the Department for Communities and Local Government aimed at planners.
4. “Legislate, enforcing suitable security measures for the highest risk buildings.” Quite how  legislation could achieve this is not explained.
   An IA is supposed to compare the costs and benefits of all options but this one did not. The Home Office went straight for option 1, “Do nothing”, which begs the question of why we needed the IA in the first place. Options 2, 3 and 4 were not considered, still less quantified.

Readers thus far might assume that doing nothing costs nothing, or nothing extra. This underestimates the creativity of the Home Office. The IA does not have precise estimates but apparently doing nothing will have transitional and annual implementation costs of “££10s of millions” and “££100s of thousands” respectively. And there will not be any benefits.

It is unkind to suggest the Home Office “is not fit for purpose”: it doesn’t seem to have a purpose which it could fit.

Tim Ambler is a Fellow of the ASI and Honorary Senior Research Fellow of the London Business School.

This blog is part of the ongoing series: Daft regulation of the month. The first port of call for any government that is really committed to cutting useless red tape. Click here to find out more.

Years of fiscal profligacy and an expensive financial crisis have taken their toll on Europe. The sustainability of the European ‘Social Model’ is becoming increasingly unclear. Greece has received huge bailout funds but may still fail to meet it’s debt obligations, Portugal has been forced to effectively halt party politics in order to work through a solution to it’s budget crisis, Spain is acting to tidy up public finances but still looking shaky, as are Italy and Austria, and Germany is rightly terrified of the potentially dire consequences of the Greek disease spreading further. The nightmare scenario is that one of the weaker countries defaults on it’s debts, or gets close enough to seriously spook the markets, thus setting off a domino effect throughout the region.

Which brings us to the UK. Alistair Darling rightly points out that investors are prepared to buy UK gilts with a comparatively long yield, perhaps indicating relatively high confidence. However, this should not make the next government too complacent. The UK deficit is still more than a hundred billion pounds over the amount required of Euro-zone countries in the ‘convergence criteria’, the rules agreed in Maastricht regarding economic prudence for Europe.

Indeed, investors and analysts in the city are warning that the UK may be downgraded from the current AAA credit rating in a post-election re-evaluation of the country’s public finances. An increase in the cost of borrowing would have disastrous fiscal consequences for the UK, meaning that an even larger proportion of spending would go on debt interest payments. Currently, the treasury forecasts that it will spend more on servicing debt than it will on policing or defence in the coming financial year. Some argue that the only thing separating the UK from the travails of the PIIGS is her comparatively stable economic history and reputation as a financial centre. Whether such a reputation will remain after years of fiscal imbalances remains to be seen.

The UK has a major potential advantage in the city of London. The next UK government will be forced to make extremely difficult decisions about the nature and origins of economic growth: does it risk political humiliation and bow to the City, thus securing a competitive advantage for the nation, or does it ‘rebalance’ the economy, reducing the role of the City, and risk losing what is seen by many as the most dynamic area of the UK economy. The prospect of a hung parliament may complicate things even further.

Either way, it seems clear that times are different now. In the UK and across Europe, governments will not have the kind of money to engage in rounds of public spending of the type seen by Labour in 2001. Will this be a catalyst for reforming public services and welfare states across Europe? The increased pressure on public finances as well as demographic issues, especially in Germany and Italy, would suggest so.

It would be ironic if, as the USA moves towards a more European-style healthcare system, Europe (UK included) starts to realise it can’t afford its own.
 

Today sees the publication of a think piece I have written in reaction to what I believe are two flawed elements of US financial reform bills. The US financial services sector is the largest and most important in the world, many global leaders in investment banking are based and chiefly regulated in the USA. What happens to institutions of the size of JP Morgan Stanley, Goldman Sachs, Citigroup and Lehman Brothers can, as we have seen, have enormous consequences for the financial systems and economies of the world.

It is beyond dispute that reform is necessary, and a diagnosis of the events that caused the crash comes to bear on the proposed reforms. It is my view that at the heart of the crisis was an incentive problem, whereby certain firms where effectively marked as too big to fail, their profits privatised and losses socialised. This is not capitalism; it is neither economically efficient nor morally acceptable and government reforms must reflect the need to establish the appropriate market incentives in finance.

Both the Senate and House bills ostensibly aim to resolve the ‘too big to fail’ problem, but propose reforms that are at best a waste of time and at worst potentially damaging to the financial system. Most alarmingly, Senator Dodd’s reform bill, currently working through the Senate, establishes the principle that the FDIC (Federal Deposit Insurance Corporation) may draw funds from the government to help liquidate banks in a crisis. It is argued that this measure enshrines the principle of a taxpayer bailout, qualifying the legislation as a Bailout Bill.

The legislation shows no commitment to competitive markets in the sector by bestowing the advantage of a potential preferable liquidation on the larger financial firms in case of failure and by failing to ‘break up’ the largest firms as a first port of call. In doing so, it is argued, the bill could cement the fundamental incentive problem, increasing systemic risk and the probability of future large bailouts by the treasury effectively with taxpayer dollars.

While the two reform bills do too little in relation to solving the central incentive problem at play, it is argued that there is an overreaction in the direction of ‘alternative investments’. The regulatory proposals are likely to be futile in this field, as well as being unnecessary.

The House reform bill has already been passed, but the more influential bill written by Senator Dodd and the Banking Committee still faces debate in the Senate. It is crucial, for the sake of US financial stability and that of the world, that some of the bill’s shortcomings are recognised and remedied.

It's hard to find any local folk here in Erbil, the capital of Iraq's Autonomous Region of Kurdistan, who are on the edge of their seats about the outcome of the UK's general election. That's one measure of the declining role the UK plays on the world stage even in this part which was once part of the Empire and which was quite recently invaded by it. Cameron? Brown? Clegg? Not even some fairly senior local businessmen or long-term foreign residents can quite place the names.

Most people around here are either wheeling & dealing in a pretty wide open economy or desperately trying to eke out a living. There's a serious transition going on from decades of oppression and, for now, private business is running well ahead of the pack. This shows up most clearly on the streets where new private buildings and houses are sprouting up all over amidst a shabby infrastructure where roads are unlit, pavements broken and streets full of holes.

Especially notable is the number of men just sitting around, not apparently doing anything - old and young sipping tea; a bored, unthreatening, soldier or policeman or security guard slumped in a chair every hundred yards or so. Also notable is the number of men who are working in services - hotels, restaurants, shops and street vendors. They seem to outnumber customers by a factor of two or three.

Most notable is the absence of women. In any given crowd, it's unlikely more than 10% are female and most of those aren't spring chickens.

What do they all live on? Mostly, it's a kind of welfare-in-work system whereby people pretend (or not) to work in return for a living wage from government ministries, politically-attuned businesses and especially political parties. In the UK, this is called the benefits system. Here in Kurdistan, it's marginal unproductive employment and probably not too dissimilar from many government jobs created by Labour over the past 13 years. End result is the same - keeps the streets quiet.

Overall, though, it looks like movement is in the right direction but with a long way to go yet.

For markets to work efficiently, product information needs to be transmitted between the producer and consumer: competition and regulations mean few businesses could survive while keeping consumers ignorant of their product.. However, prohibition creates black markets, where reliable information is hard to come by. In the market for illicit drugs this is a highly dangerous problem: lack of information about the quality and composition of substances is potentially lethal.

It was therefore interesting to read CUT, a publication by Liverpool John Moores University that looks at the adulterants and bulking agents found within street drugs. Contrary to public perception, dealers don’t cut their wares with copious amounts of rat poison and brick dust, as they have little incentive to bump off their clients. A large number of adulterants are in fact relatively harmless substances such as sugar, caffeine and paracetamol. Nevertheless, the report also found examples of some rather more dangerous contaminants, such as lead within heroin samples and cannabis laced with glass. It also found chemicals such as pesticide and vetinary medicine added to certain drugs to intensify or prolong their effect. However, the report is far from conclusive as it is unable to suggest the percentage of drugs that are adulterated, or even the concentration of contaminants found in existing samples.

The main problem is that street drugs are rarely analyzed for anything other than to assure criminal convictions. Supplied underground, illegal drugs are free from all quality assurances and proper scrutiny, so users are kept in the dark on the risks they are facing. This is just one of the many reasons why policymakers should recognize that the war on drugs has been an utter failure. The market for recreational drugs should be legalized and regulated, bringing £6 billion of activity into a system of proper control. With detailed information easily at hand and stringent quality controls, people would be able to take educated decisions with full responsibility for the consequences.

Paul Romer has an interesting idea: Charter cities. Romer envisions a city where the rules about property and safety and contract and so on are rules that allow individuals to flourish in an urban setting. Basically, the suggestion is that rich countries build and run new cities in poor countries.

It is noble in intentions, but I am not so sure that this plan will work. Like all top-down government initiatives there is a very real risk of the misallocation of resources. Although ‘Western’ governments perform less badly than other countries, they are not the reason that the ‘West’ contains countries that are relatively successful. Instead, it is the laws, culture and mores that have built up organically over hundreds of years, the increased wealth generated by brief periods of freedom, and the growth and strength of institutions that were formed prior to the ballooning state, even if they came to usurped by the governments

The example of Hong Kong is used by Paul Romer to show how a foreign power can export rules that bring about economic development, but the key facet of Hong Kong’s development was the lack of government rules and interventions. The reason it faired better than China was not because the government was not Chinese, but because there was much less government. It was as close to a true laissez-faire case study that we have.

The idea that one can implant new rules into a foreign country and expect all to be fine is frankly utopian. Perhaps given how dire the living standards in many of these countries are, little harm would be done. Yet as with most developmental ideas sold as silver bullets, they are more likely to be costly blanks. With most ‘Western’ governments facing massive public deficits, they should instead focus on how to better run the countries they are currently in charge of.

There is a lot to be said for the wisdom that can come with age. Looking back at how little I knew just three years ago - before I joined the ASI - it is shocking to think how little I knew. Go back a bit further and the trite nonsense that I was spouting at university makes me shudder. At least I was not alone; the place was choc-a-bloc with students, whose grasp of the real world was limited in many weird and wonderful respects. This was not helped by the fact that the majority of academics were living in Never Land. Ignorance ruled.

It therefore does not surprise me that Opinionpanel Research have found that after the first two leaders’ debates, half of students were planning to vote Lib Dem. This is not a criticism of the Lib Dem policies overall (which are not markedly worse than the Conservative ones), but on the specific Lib Dem policy that many students like: vowing to scrap university fees over six years. In effect, a policy to redistribute money from those that will never benefit from higher education to those will.

The fact that most students are of the left, and so should be opposed to regressive taxation, makes the issue perverse, and worryingly I ‘d suggest it goes beyond ‘turkeys not voting for Christmas’. After all, they have already paid (or not). Despite the easy access students have to credit, somehow 'free' higher education has come to be seen as a right. It is time for the debate against subsidised higher education to enter the popular debate. The question is: Are any politicians brave enough to face down the historically riotous students? Perhaps they should, most are too lazy to vote.

As I was walking through Westminster earlier, I saw something really quite beautiful. A red Ferrari 599 was parked next to a silver Prius Hybrid (Pious Hybrid to those of you who watch South Park). Beautiful as the red car is, and no matter how great a demonstration it is of what a capitalist production system can achieve, this is nothing compared to what it represents next to the Prius. That is the fact that in a free, or free-ish society, Ferrari-owner and Prius-owner can happily coexist.

This is something quite unique about liberty, which simply cannot be countered by those on the statist/socialist left wing. In a free society, people can happily organise themselves along communitarian, environmentalist or even socialist lines if they so choose, as long as they don’t initiate force against those who do not wish to live that way. They can drive a hybrid car, recycle their trash, or even give away all their wealth to charitable causes. In a controlled statist society, libertarians would not be allowed to live along the lines they chose to follow.

This clash of ideologies is perhaps worth remembering with tax freedom day about a month away. In a free-ish society, individuals (like Warren Buffet a few years ago) who feel guilty for their owning wealth and don’t regard that day as a day to celebrate at all, are all entitled to give more than demanded of them to the tax man, or to a charity of their choosing. The crucial difference is that under a government that doesn’t have any respect for liberty, that option is absent – there is no choice whether to comply or not.

You might be familiar, if you are brave enough to stray over to the dark side of the UK press, with a book called The Spirit Level. It's the sort of thing that Polly and the rest have been squealing over all year: proof positive that inequality, in and of itself, makes life worse for everyone.

There's really only one slight problem with the book. None of the claims really seem to stand up. Just to show that there's no ideological bias about this, a lefty (well, he's just been selected as a Labor candidate for a safe seat) Australian economist:

In other words, countries that experienced big increases in inequality saw bigger improvements in health than those where inequality stayed stable or fell. In most cases, the effect isn’t significant, but the data certainly don’t support the hypothesis that rising inequality harms population health......After working on inequality and mortality, I have had similar experiences in looking at data on inequality and savings with Alberto Posso (we find no relationship), and in looking at inequality and growth with Dan Andrews and Christopher Jencks (we find that inequality has no impact on growth over the period 1905-2000, and conclude that inequality is good for growth over the period 1960-2000). In both cases, I had begun the project secretly hoping to find that inequality was bad, and wound up reluctantly reporting no such thing.

Not exactly a ringing endorsement of the idea that rising inequality harms either population health or growth there. Another economist looks at the claims here and here's a view from Sweden, showing that some claims really aren't capable of being upheld.

Now you might think that this is all just a bit of sour grapes but it is really a rather important point. The claim that inequality makes us all worse off would be important if true. If it isn't true this is also important: for then we would know that increased inequality doesn't make us all worse off. Whichever part is the truth has huge implications for the amount of redistribution (which of course has its own effects on things like long term growth) we do or don't do.

The importance of that truth is why I'm giving this blogger's new book a plug. The Spirit Level Delusion. It's a detailed factchecking of the claims and evidence: one of the sort that I would have done if I had the necessary skills.

Let's find out what the truth actually is, shall we?