The Pin Factory Blog

“Senator Jim Bunning’s name is mud these days in Washington,” reports The Irish Times. “Twelve times [last week]... the Senate... attempted to pass a $10 billion emergency, one-month extension of unemployment benefits, healthcare insurance for the unemployed, Medicare funding for the elderly, satellite television for rural America and highway projects. Twelve times, the senator from Kentucky has invoked a unanimity requirement for emergency Bills to block passage.”

While the Washington Post suggests that Senator Bunning is insane, Democrats accuse Bunning of being a typical, obstructive Republican and others speculate that it is all driven by personal animus, the senator himself argues that he is, in his small way, trying to limit America’s ballooning budget deficit. “We cannot keep adding to the debt,” he said. “It’s over $14 trillion and going up fast.” What is more, CNN reports that Bunning “had offered to release his hold on the bill if the Democrat-controlled Senate agreed to pay for the extension using, for example, unspent money from the $787 billion economic stimulus law or closing a tax hoophole (sic.).” Hardly unreasonable, one might think.

The story becomes even more interesting if one looks into the details of the $10 billion bill. It is not all about Medicare and unemployment benefit. Even the Irish Times includes among the list of moral issues “satellite television for rural America” – hardly a life-and-death matter and one that might better be funded by providers and views. BBC Online provides a some more examples of the goodies that were to be paid for by an additional $10 billion of public borrowing: a major bridge connecting Washington DC to the state where many of the senators live; a roundabout in the Virgin Islands; and a new entrance for a national park in California. Does anybody smell riders, here?

What this bill highlights is the mentality of politicians who see it as their job to spend other people’s money. Blind to Bastiat’s dictum that in economics what matters is that which is not seen as much as that which is seen, the senators believe that by building roundabouts in the colonies and bridges linking their homes to their places of work, and by taking the opportunity of the worst recession in a lifetime to spruce up the entrance to Sequoia National Park, they will revitalise the US economy. This is unlikely. Government spending is demonstrably less efficient than private spending (indeed, some argue that it destroys more wealth than it creates). What is more, the very last thing that America needs is a big pile more pork to shove in senatorial barrels.

Eventually the senator capitulated, of course. But even the means of his capitulation highlighted the absurdity of interventionist politics. By proposing an amendment to the bill, he guaranteed that the bill itself would go to a vote, ending his one-man filibuster. And what was that amendment? That the $10 billion package of temporary extensions be offset with the end of a lucrative tax credit for paper companies on a wood by-product. His amendment fell, receiving just 43 votes. So let us be clear: what Senator Bunning’s defeat achieved was not medical aid for the elderly, or unemployment for the needy. His defeat enabled the Government to borrow $10 billion dollars to pay paper manufacturers for producing something they can’t help but make anyway.
 

I was reading, as is my wont, the Daily Mash and came across this example of incisive satire (rough language warning). Yes of course the current government is obsessed with nannying the population, the bureaucracy even worse, but also of course no one, not even them, is going to send grown adults around chip shops advising upon the size of chips. No, not even in the name of obesity and the children. So to have the Food Standards Agency purportedly doing that is a joke, an example of something so mindbogglingly ludicrous that not even our tax money would be spent upon it.

Sadly, Kissinger did get the Nobel Peace Prize and Tom Lehrer is correct, satire is dead. For the story is true.

.....officials from the Food Standards Agency watchdog are encouraging chip shop owners to produce even thicker versions, much like potato wedges.........The FSA scheme will cover Cambridgeshire, Greater Manchester and Northern Ireland by the end of this month. Officials will visit 80 chip shops to examine how much fat is in their chips and offer advice.If the pilot scheme is successful it will be rolled out across the country and last two years. Other small caterers including Indian and Chinese takeaways will be included.

There are two things I take away from this story, one of them minor, one major. The minor point is that those who say there is no room to cut the State are wrong. Clearly and obviously so: the settings on the potato chipper that can be offered to the good citizens of a county, a metropolitian authority and a province can clearly be left to the vagaries of the market, personal taste and how fiddly those settings are. A bureaucracy is not required thus there are certainly some bureaucrats who can be fired. Plus, hopefully, the management that thought this up.

The major point is that this might not be enough. It might be that the fears of my darker days are justified, that there really is only one solution: a violent and bloody revolution. Not just as catharsis but to stop people being so dashed stupid.

Click here to read James Stanfield writing in Times Higher Education on his recently published report for the ASI: The Broken University.

While many lesser commentators are worried about the threat of inflation after the Bank of England's £200 billion Quantitative Easing giveaway (though most of it seems to have been given away to the government), our ASI Fellow Richard Jeffrey says there's actually a real risk of a deflation spiral.

In his latest Cazenove Capital newsletter, he notes that rises in the cost of living (with RPI heading up to 5%) are massively outpacing wage rises (at 1.2% – but just 0.2% in the hard-pressed private sector). Which leaves households pretty skint. Normally the authorities would help out at this stage with a business-boosting cut in interest rates, but they've already taken them down to about as low as you can get. And even these low rates aren't encouraging people to cash in their savings and spend, because in this economic hurricane, they want to keep their rainy-day money to hand.

Sure, business has bounced back a little, as firms who ran their stocks down at the start of the crisis have started producing again. But who has the cash to buy their product? The rising number of unemployed people certainly don't. Neither do those who are in work, since a bloated public sector continues to suck high taxes out of their wage packets (and there's no sign of the public sector, or taxes, being cut anytime soon).

It's a dangerous cocktail, Jeffrey reckons. Consumer confidence remains upbeat, though, so maybe it will work out. But many economists can't see much solid foundation for that confidence. If households too come to believe their hopes are built on sand, well...you don't really want to think about it.

Recent headlines have suggested – rather misleadingly – that an incoming Conservative administration could raise c£70 billion from selling the Government's stakes in RBS and Lloyds. If only this were true.

The reality is that both banks, especially RBS, remain in a parlous state, especially as rising bad loans increasingly exert a malign influence on banks' cash flow.

Assuming a 10% placing discount for any sell-down of the Government's stakes of 84% in RBS and 41% in Lloyds, the total value – based on this week's market capitalisation – would equate to c£29 billion. Compared with the c£45 billion of taxpayers' money already injected into RBS alone, such a return looks pretty meagre.

Remember, too, that RBS's shareholders – due to appalling decisions in the past – are still partly exposed to the £282 billion of 'toxic' assets within the Government's Asset Protection Scheme.

Of course, the share prices of both RBS and Lloyds may rise sharply. If so, in the latter's case, City investors should be canvassed about their response to a part sale of the Government's 41% Lloyds stake.

Significantly, following last October's Initial Public Offering (IPO) in Brazil, Grupo Santander is apparently eyeing a similar arrangement for its expanded UK banking business: any Lloyds offer could be on the coat-tails of this purported deal.

More generally, any plans to resurrect the highly successful privatisation policies of the Thatcher Government should be applauded. And encouraging small shareholders (SIDs) to participate is welcome, even if many privatised companies are keen to remove them from the share register.

For the incoming Government, there are various suitable privatisation candidates, most obviously Royal Mail (without its burgeoning pension fund) and Scottish Water. Sales proceeds, prior to the disposal of any bank shares, could reach £16 billion.

Given the shocking state of UK public finances, aren't privatisation proceeds now more welcome than ever?

With our freedoms increasingly trampled underfoot, the ASI is pleased to announce its 2010 ‘Young Writer on Liberty’ competition.

Open to anyone under the age of 20, entrants are asked to write three short articles on ‘Ways to advance liberty’.The topics are entirely open to you: whether it is adjusting taxation, abolishing ID cards or the decriminalization of drugs, we are open to all views and opinions.

And, because incentives matter, the top prize includes £500 cash, 3 books, all 3 articles published on our blog and the offer of 2 weeks work experience at the Adam Smith Institute. To see all the prizes available, click here.

To enter, you must be under 20 on the entry deadline of April 30th, while each article must be under 400 words long. Simply email your entries, along with contact details and your DOB to charlotte@adamsmith.org.

I am not convinced there are such things as 'good' taxes, although I admit the possibility. I am wholly convinced that there are bad ones, however.

Adam Smith put forward four maxims whose "evident justice and utility" should guide nations in their tax policy. He wanted equity, with people to contribute in proportion to the revenue they enjoy. Note that this implies a flat, rather than a progressive, rate. He sought certainty, with citizens knowing the amount, the manner of payment and the time it fall due. Any arbitrary discretion would open opportunities for corruption. He specified convenience, with taxes levied in ways and at times most convenient to the taxpayer. And he stressed efficiency, with no taxes that were disproportionately costly or damaging to collect.

Smith did not sanction taxes simply designed to punish people for being rich. The forthcoming 50 percent tax rate fails the tests of both equity and efficiency. It unfairly taxes people at a higher rate simply because they are richer, and it is already causing behaviour distortions that will diminish its yield, probably making it negative.

It is probably not the most unpopular tax, however. When asked to name taxes they dislike, many people seem to nominate Council Tax or Inheritance Tax among their least favoured options. This might be because both are taxes on property, and there is no income stream generated by that property out of which the tax can conveniently be paid.

Council Tax falls in many cases on people whose home is their main or only asset. Inheritance Tax is backed by its supporters on the grounds that inheritance represents a 'windfall' which can be taxed opportunistically, and that it is wrong for some people to have the 'unfair' advantage of parents wealthy or prudent enough to make provision for them. Yet Inheritance Tax fails not only the convenience test (with no income stream generated by the property to pay it with), but also the efficiency test, in that people's behaviour is distorted by efforts to avoid it, and by the break-up when it is levied of the capital pools so important to new businesses.

George Osborne and his team are rumoured to be looking at some radical tax changes. They could do worse than undertake a review of all taxes, armed with Adam Smith's four maxims. If they did so, I very much doubt that Council Tax and Inheritance Tax would survive in anything like their present form.

The government must abolish the cap on university tuition fees, according to a new report from think tank the Adam Smith Institute. The Broken University, by academic and education expert James Stanfield, argues that if the UK is to be a world leader in the higher education in the 21st Century, all institutions must be free to sell their services at whatever price they choose.

Reforming higher education funding

In contrast to other recent proposals, Stanfield’s report emphatically rejects the idea of merely raising the cap on tuition fees, arguing that such a policy not only fails to recognize the independence of universities, but also completely overlooks the various malign consequences of the higher education sector not having a functioning price system. According to the report, capping tuition fees: 

· artificially increases the demand for university places

· causes students to value their education less, and therefore choose inappropriate courses or not work as hard

· results in less overall investment in higher education

· encourages universities to be less responsive to student needs

ASI Fellow, James Stanfield said:

There is a lot of talk about the importance of the universities in our new ‘knowledge economy’. But how effectively can any market work when the government is distorting prices to such an extent?

What politicians don’t realize is that tuition fees ought to send important signals about the relative value of different university courses, and help to co-ordinate the interests of students, universities, and future employers. By dictating what fees may be charged, the government is severely retarding the natural development of higher education.

The report goes on to propose reforms to public subsidy of higher education, calling for an end to the taxpayer subsidizing universities directly, with funding instead being channeled directly to students through an expanded student loans programme. Controversially, the report also suggests that loans be targeted at those students most in need of support, with loans to wealthier students limited to a set percentage of their university fees.

Executive Director of the Adam Smith Institute, Tom Clougherty, added:

The funding system outlined in the report would be a huge step forward. Ending the direct subsidy would empower students, because universities would be forced to treat them as paying customers. In the long run, it would also benefit universities since it would help them regain their independence from central government. And it would also benefit the taxpayer, by ensuring their money was used as effectively as possible.

Stanfield, however, is open about his longer term plans for higher education, making it clear that he believes the government’s £14.3bn subsidy ultimately acts as a transfer of income from the poor to the better off – “taxing the poor to help the rich get richer”, as he puts it – with little economic benefit. He recommends that the government adopt a clear 10-15 year timetable for winding down the government’s support of higher education, so as to give ample opportunity for universities to attract philanthropic donations and corporate sponsorship.

Making Britain a world leader in higher education

Stanfield’s report, which runs to more than 100 pages, also goes beyond university funding to look at the broader question of how to make UK higher education – which he regards as one of our most significant service industries for the future – more dynamic, competitive and entrepreneurial. The report stresses a number of key points:

· Firstly, the government must establish full freedom of entry into the higher education sector for fully private providers. This means ending the historic protection of the word ‘university’, as well as the role of the Privy Council in approving new institutions.

· Secondly, the government should extend those tax benefits currently enjoyed by charitable non-profit institutions to for-profit higher education providers.

· Thirdly, and most importantly, the government must restrict itself to a very limited role in higher education, promoting and stimulating competition rather planning or directing the sector, or using it to meet ‘national objectives’.

Stanfield concludes:

It is clear to me that the government’s involvement in higher education is doing far more harm than good. Despite the best intentions, government attempts to subsidize and centrally plan industrial sectors like steel, automobiles and telecommunications all failed miserably. Higher education is no different. It has the potential to become our most successful service industry and provide a vital boost to our economy – but that won’t happen unless the government is prepared to back off.

Click here for the report.

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