The Pin Factory Blog

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.

On Sunday, David Willetts, the universities minister, claimed that a graduate tax is “by far the best option to go for in tough times” when looking to ensure university teaching and research funding is maintained.

Presently, non-medical undergraduate students from middle-income backgrounds pay between 15 and 30% of the costs of their degrees. Taxpayers and university endowments pay the rest and subsidise interest on student loans. This means that undergraduates pay far less than the full cost of their university education. When people can buy something for much less than it actually costs, they tend to buy too much of it. Since 1980 the proportion of people going to university has more than doubled. Many students have gone to university but gained degrees which will not increase their future income; at the same time they have spent three years out of the job market losing a small fortune in forgone wages. A ‘double-cost’ for the students and taxpayers.

Replacing student fees and loans with a graduate tax goes too far in the opposite direction. If the tax is implemented as simply as possible, an individual will pay an additional flat rate (say 3 to 5%) on top of their income tax if they go to university. A tax like this would distort the higher education market by encouraging people not to go to university and so avoid the tax altogether. This could impact especially badly on school leavers from poorer backgrounds.

When university-leavers go into graduate jobs the tax would encourage them to work less hard so they pay less in tax. UCU estimates that a graduate tax of 5% would leave the average secondary school teacher about £46,000 worse-off over 25 years. People could end up paying much more than the value of their university education in graduate taxes over their lifetime, discouraging them from going to university. This would mean too few people go to university, decreasing their future earnings and holding back economic growth.

Additionally, people may go to university, enter high-paying jobs and then emigrate to avoid paying the tax. The Student Loans Company has had a tough time getting loan-repayments from emigres so enforcing a graduate tax internationally will be difficult at best. The result would be a state which pays for most of the university education of high-earning emigres, but which cannot recoup the money and whose policies (by causing the emigration of high-earners) decrease future economic growth.

A more complex graduate tax could be implemented, one where different percentages of income are paid according to university attended, degree taken and income earned. This might lead to a better- targeted tax but it would have much higher administrative costs and would cause even more distortion in the higher-education and job markets.

In fact, the idea of a graduate tax needs to be scrapped and instead Willetts should enact James Stanfield's proposals set out in The Broken University.

According to a commission set up by the Scottish Labour Party, in order to reduce alcohol consumption, a “floor price” for alcohol should be introduced together with a levy on alcohol retailers. Its report also suggests a limit on the number of licences available for retailers and a halt to the sponsorship of sporting events. However, under scrutiny these suggestions may be ineffective.

A minimum price for alcohol aims to raise the price of the “loss leaders”, i.e. drinks that are priced below cost (in order to attract customers), hence the minimum price will be set at/below the market price. Therefore a minimum price will not reduce the actual alcohol consumption, since it will only reduce the excessive demand for alcohol. Moreover, retailers will just switch the “loss leaders” to drinks that cost more than the minimum price, and price these drinks less than their costs while still charging more than the minimum price.

Even if levies and minimum pricing do manage to raise the price of alcohol, they will hit sensible drinkers as well as binge drinkers. Although binge drinkers are more sensitive to price changes, it will be the sensible, drinkers who will have to reduce their consumption. For binge drinkers, alcohol is an every-day necessity with few or no substitute, a Giffen good, to put it in economic jargon. A rise in the price of alcohol will mean that alcoholics will have to reduce the consumption of other goods in order to maintain their budget for alcohol, and as a result their alcohol consumption will not decrease. In contrast, alcohol is a normal good for sensible drinkers, and a rise in the price of alcoholic drinks will reduce their ability to purchase. Hence levies and minimum pricing would not be an effective or fair solution.

Limiting the number of licences will reduce the availability of alcoholic drinks, making them more expensive and harder to buy. Again this will hit sensible drinkers the hardest, for the reasons stated above. It may well encourage black markets to grow, increasing the cost of policing without reducing alcohol consumption.

There's been a recent revival of the discussions about the hypothecation of tax revenues and as I never tire of telling people, it's a bad idea. For there is no logical connection between how much you can raise from taxing an item or activity and how much you might want to spend on that or any other problem, whether related or not. Another reason it's a bad idea pops up here:

One-sixth of all the national lottery money earmarked for good causes is being spent on bureaucracy, including one quango that has more staff than the Treasury.

New figures reveal that more than £200m a year is being swallowed up in administration and staffing costs at lottery distributors – up to six times the proportion spent on overheads by some leading charities.

The connection is that these groups (like the Big Lottery Fund) have in effect hypothecated funds. They get a set proportion of the money raised but do not have any pressure on them from outside to increase their efficiency. Given that their finds come from that tax on stupidity (if you prefer, ignorance of odds) that is the lottery, they don't have to compete for the cash. Given their entire insulation from the market there is also no pressure from elsewhere. Now that is so far true of all bureaucracies, but with hypothecated funds it is worse. For at least if the money is being doled out of the Treasury's one big bucket then there is a certain amount of pressure from the same Treasury for accountability and economy in the administration. Not much, I agree, but at least some, even if it is only from the covetous glances of others hoping to be fed from the big bucket.

With hypothecation there is a complette absence of this pressure and thus anything funded in this manner, accountable to no one and competing with no one, is bound to become increasingly inefficient.

My history knowledge is woefully incomplete but I do dimly recall that we fought a fairly bloody internal war a few centuries ago and that one of the triggers was Parliament's insistence that the Monarch had to be dependent upon said Solons for money and to account to them for how it was spent. And that if it were ill spent that no more would be forthcoming. As with the Monarch, why not so with a bureaucracy?

The current chaos in the world economy is not a crisis of capitalism, but of governance. Few people like economic downturns, especially the politicians who are blamed for the economic stagnation and job losses, and are punished accordingly. Monetary authorities at the behest of governments have played fast and loose with money and credit in order to smooth economic troughs.  

The result has been a long period of continuous growth, but one achieved by flooding the markets with cheap money and easy credit. It accumulated, sending false signals which led to asset bubbles such as that in housing, and to credit so easy that people became careless about their ability to repay. Markets did not behave recklessly because they lacked proper regulation; they acted on false information which monetary authorities sent into them. The regulation was certainly inappropriate, in that it reassured people that inherently risky activities and investments were safer than they were in fact.

Quantitative easing is now hailed as a solution, which it is not. We are to respond to the excess of easy credit by printing more money, sending more false signals into the markets about the level of real demand. The result will be to build levels of inflation into the economy which will be difficult to take out. We are told this will prevent the ten years of deflation which the Japanese economy suffered, but there is little sign of that deflation, and ominous signs that expectation of inflation are creeping in. Inflation-protected bonds are up 8 percent in the last few months, but the regular ones show no change.

Nobody likes unemployment, but economic downturns do weed out businesses using capital inefficiently and predicting demand incorrectly, and replace them by ones which do not. They improve the overall health of the economy, whereas lifelines to sustain ailing firms do not, despite their popularity with politicians.

Amid much smoke and spin the G20 achieved little not already announced or in process.  We should be thankful it failed to endorse the massive new fiscal stimulus that some proposed. This has been a cyclical downturn, and a bad one because previous ones were held at bay by political manipulation. Yet recovery will come.  For some countries it will be this year, and for most others it will happen next year. Future growth will be achieved by capitalism and free trade, not by government demand management and micro-tuning; they are not clever enough and do not know enough.

The staggering levels of government debt and liabilities can be cleared eventually by economic growth, but the huge monetary growth already built in, with more promised, will continue to distort the economy for years to come, and will retard and confuse the recovery instead of aiding it.
 

Free societies are those in which government minimizes its intrusion into the lives of its citizens, intervening only to protect individual liberty. Such government makes no effort to use the force of law to impose upon individuals whatever system of values or concepts of morality it may happen to espouse. The British public is generally accepting of this doctrine of non-interventionism, most perceptibly in areas of civil liberties; the swarm of criticism of the recent French law restricting the Islamic niqab, along with Damian Green’s prompt rejection of such an “un-British” law in the United Kingdom, is merely one example of the persistent acceptance of diversity of belief and expression in this nation.

Yet even in the United Kingdom, such tolerance has stiff limits. It does not extend to economic freedoms, as the government regularly pushes us to live our lives in a manner more amenable to the opinions and beliefs of the majority. The British government accomplish this sly form of paternalistic regulation through the imposition of a number of sumptuary taxes that seek to discourage the purchase and consumption of goods that society considers to be undesirable, such as alcohol and tobacco products. The taxes are a popular way to raise revenue, as they are targeted at behaviour considered either unhealthy or otherwise disapproved of by the majority of the public.

While the ability to raise revenue and simultaneously achieve some communal goal such as improved public health may be appealing, sin taxes must be recognized as the social engineering projects that they are. Governments should not seek to discourage or encourage any activity, save for those activities that interfere with the rights of other individuals. If an individual voluntarily chooses to engage in a non-offensive activity, such as enjoying a glass of wine, the government should respect their preferences and refrain from “nudging” (or, after Alistair Darling’s 2008 dramatic sin tax hike, “shoving”) the individual to make a decision desired by the state. Writing a tax code that discourages the consumption of a particular good based on the sole virtue that one is considered “undesirable” is a dangerous step for any society to take, as it imposes communal values upon the individual. In the United States, for example, the discussion of sin taxes has gradually extended from alcohol and tobacco to dietary habits and pornography.

It would be quite controversial for the government to levy a special tax on the sale of the niqab, in order to discourage its use. Similar resistance to behavioural revision should be applied to sumptuary taxes on alcohol and tobacco, as well.

I was really rather shocked to see this statement for it's such an inversion of the truth.

It is beyond question that every industry should be aiming for a workforce that is inclusive, non-discriminatory and accurately reflects the demographics of its market. As many companies are quick to acknowledge, this doesn't just make moral sense, it makes business sense.

It's an entire mockery of the most basic economic explanation of how wealth is created. Which is, as Our Adam pointed out, through the division and specialisation of labour and the trade in the resultant production. The implication of this is that far from our wanting the workforce of any particular industry to reflect the demographics of its market we want said workforce to be entirely different from the customers.

The point is most obvious at the extremes: we don't get babies to make nappies nor the crippled elderly install chairlifts. And it would be a very odd prostitute indeed who reflected the gender characteristics of her customer base (his, perhaps, her, no).

But when we abandon such extremes we're still in fact trying to do precisely the opposite of making the workforce the same as or reflect the characteristics of the customer base. Bakers employ people who both can and are willing to bake bread: bread is purchased from bakers by those who either cannot or do not wish to bake bread. And I'm certainly entirely happy that those who make airplanes are not as cackhanded as I am.

So it isn't just that we shouldn't worry about the demographics of the workforce, something that the impersonal activities of the market allow us to ignore. It's that the very functioning of the market, the very division and specialisation of labour that brings the market into existence as a means of distributing production, insists that far from wanting the workforce to be the same as the customers we're actually insisting that they must be different.

It's entirely true that certain forms of difference are not important: skin colour never, genitalia in only very specific circumstances and so on. But the idea that the workforce must reflect the customers is simply arrant, absolute, nonsense. For the entire point of the whole enterprise is that the skills, needs and desires of the two groups are different.

The Keynesian and Austrian schools of economics may differ most starkly in their policy recommendations but, as Steve Horwitz reminds us, their differences are based in a fundamentally different view of how economics should be done. Keynesians, wishing to treat economics with the same tools as the natural sciences, aggregate economic activity into broad categories. The Austrian view is that this aggregation conceals the real things that we should be examining:

Hayek wrote: “Mr. Keynes’ aggregates conceal the most fundamental mechanisms of change.” That Austrian macroeconomics rests firmly on the microeconomic “mechanisms of change” that ultimately comprise economic activity remains a crucial reason why that insight can better explain both the mistakes of the boom and the way out of the bust.

The Austrian insight is relevant to both capital and labor.  In standard Keynesian models (as well as most other macroeconomic models), capital is understood as an undifferentiated mass.  The Keynesian model also assumes that interest rates do not equilibrate the supply of savings and the demand for investment funds.  Thus when people save more, there’s no signal transmitted to investors that they should build more for the future.  As a result, the decline in consumption that accompanies the increase in savings causes firms to invest less as their inventories pile up without any offsetting increase in investment elsewhere due to the lower interest rate.

In the Austrian view investment cannot be treated at this high a level of aggregation.  The production process that leads to consumption goods comprises a number of stages, starting with the “early” stages of research and development and raw materials, and finishing with the “later” stages, such as wholesaling or inventory management, which are closer to the final consumer purchase.  Looking at the structure of production this way enables Austrians to note that when saving increases and causes interest rates to fall, resources will indeed be drawn away from the late-stage investments in inventory, but they will be drawn toward investment in early stages of production, as the interest lower rate makes longer-term production processes involving more stages relatively less costly.  Over time, savings promotes those longer-term processes, which are more productive and provide us the capital base for economic growth.

By disaggregating investment, the Austrian model also reminds us that different kinds of  capital goods have to “fit together” to be productive.  This is most clear when central banks try to inflate to generate growth.  In this case, the lower interest rates produced by excess money lead to increased investment in those same early stages.  However, unlike the first story, where that increased investment is financed by reduced investment in the later stages, inflation also increases consumption as the lower interest rate reduces savings.  The credit expansion creates no new resources but leads to more investment at both the very late and very early stages of production. This is the boom of the business cycle.

We've written on the Austrian theory of the business cycle at length here, but Horwitz's piece is a timely reminder of how deceptive economic aggregates can be. If, as Austrian schoolers believe, business cycles are based on long-run dislocations between investment and consumption, treating investment as a single mass totally ignores the real problems.

The media is obsessed with GDP figures and the like, but, again, these are of extremely dubious value. A growing GDP isn't a good thing if it's being driven by a credit bubble; conversely, a contraction in GDP isn't itself a bad thing if it reflects the liquidation of that credit bubble. It would be nice if the world's economics pundits would take ten minutes to reflect on the Austrian school's insights: only individuals act, and when you aggregate them into a monolithic single unit, those individuals' motivations are lost.

I know, I know, this is near heresy. But James Hansen, one of the more apocalyptic prophets of climate change, has written an open letter to Barack Obama and I find myself agreeing with one of his major points. It has to be said that I disagree on many others: my longstanding view has been that climate change is not an immediate nor a catastrophic problem, it's a chronic one that we can deal with quite easily as long as we give ourselves the requisite decades to a century to do so. This is the part that I do agree with:

A rising price on carbon emissions is the essential underlying support needed to make all other climate policies work. For example, improved building codes are essential, but full enforcement at all construction and operations is impractical. A rising carbon price is the one practical way to obtain compliance with codes designed to increase energy efficiency. A rising carbon price is essential to "decarbonize" the economy, i.e., to move the nation toward the era beyond fossil fuels. The most effective way to achieve this is a carbon tax (on oil, gas, and coal) at the well-head or port of entry. The tax will then appropriately affect all products and activities that use fossil fuels. The public's near-term, mid-term, and long-term lifestyle choices will be affected by knowledge that the carbon tax rate will be rising.....A carbon tax is honest, clear and effective. It will increase energy prices, but low and middle income people, especially, will find ways to reduce carbon emissions so as to come out ahead. The rate of infrastructure replacement, thus economic activity, can be modulated by how fast the carbon tax rate increases. Effects will permeate society....."Cap and trade" generates special interests, lobbyists, and trading schemes, yielding non productive millionaires, all at public expense. The public is fed up with such business.

I've deliberately left out his proposal that the tax should be returned as a dividend, I don't think it's necessary. Reducing other taxes instead would work just as well: the important point would be revenue neutrality.

But this is I think the correct way to go about things. We don't have to ban anything, like planes or runways, we don't need a "fundamental change in the structure of our society", we don't need to cripple the economy and we certainly don't need vast amounts of central planning. We just need to incorporate the externalities of carbon emissions into the market. Cap and trade does that with too much politics involved so a carbon tax (or as it is called, a Pigou Tax) looks better to me.

Now all we need is to work out what that carbon tax should be? The logic of Pigou taxation is that the tax should equal the harm being done. We have our number for the harm from the Stern Review, that $85 a tonne CO2. Or as Defra (the number is different but the same for technical reasons) has it, around £30 per tonne CO2. Given our total emissions of some 500 million tonnes a year from these islands that means a tax burden of some £15 billion a year and reasonable estimates are that we already pay that amount in emissions taxation.

See, I told you we could deal with this quite easily for we already do have the appropriate tax levels. Problem solved.