The Pin Factory Blog

Greece is in trouble over its debt, particularly after the discovery that its budget deficit was around twice as large as a percentage of GDP as had been expected. The Prime Minister George Papandreou announced a series of significant spending cuts, including a 10% cut in overall government operating budgets and a cut in social security. Despite this, his plans failed to glean credibility with all three international rating agencies. Although the UK has a lower debt as a percentage of GDP at 68.6% compared to Greece's 112.6%, its budget deficit is slightly higher as a percentage, and so far plans for debt reduction come to cuts of only 3.2% a year according to the IFS, far lower and less ambitious than those of Greece.

The credit agencies may be waiting for an expected change of government before they seriously question the UK's treasured AAA rating, but whoever wins the approaching general election will have to do much more than Greece to appease the credit agencies and prevent government borrowing costs spiraling out of control.

The lesson to learn from Greece's experience is that a bold plan is sometimes not sufficient, although unquestionably necessary. Leonard Mlodinow's book "The Drunkard's Walk" cites the psychological effect of providing fuller justifications to alibis in order to bolster their credibility in almost all walks of life: Mr Papandreou announced huge cuts, but failed to explain where exactly they would fall. The UK's Prime Minister in 2010 would have to make absolutely clear what would be cut, as well as by how much if its plan is to attain adequate credibility. Whilst general aspirations to cuts by the Conservatives in all departments except health and international development may be a start, a serious programme involving specifics is urgently needed. A new government would not have very long to appease the agencies, so a plan may have to already be in place.

Workfare is another policy idea whose time finally seems to have come, with both Labour and the Conservatives signed up to its basic principles, which are largely derived from the United States’ welfare reforms of the 1990s. Our 2007 report Working Welfare by Katharine Hirst provides an excellent guide to these reforms, and the lessons the UK can learn from them.

The primary feature of ‘workfare’ is that all unemployed people seeking state support should face immediate work requirements – no work, no benefits. Subsidized jobs and compulsory work experience should be the preferred options, but if no such employment can be found then welfare claimants should have to do community service. Those with severe education deficiencies may undergo training, while claimants with alcohol and drug problems would be expected to undergo treatment. The key here is to make taxpayer support something which must be earned – not something to which one is simply entitled. The point is to prevent dependency becoming pathological, and to get unemployed Britons working again.

The other main feature of workfare is that it involves contracting out welfare provision to competing private and voluntary agencies, who would be paid according to their results. In other words, for each individual claimant they would receive part of their payment only when that claimant has found work and kept a job for a specified period of time. The longer someone had previously been without work, the greater the performance bonus for the provider would be. Thus there would be a strong incentive towards active, individually-tailored welfare provision that focused on re-entry into the labour market.

This much seems to be well-understood among policymakers. There is also an appreciation of the importance of simplifying the benefits system – perhaps replacing the current 50-or-so separate benefits with just two or three basic ones – while paying particular attention to marginal tax rates for those moving from welfare to work, to ensure that work always pays. But one thing which has largely been overlooked, and which played an important role in the success of the American reforms, is decentralization. Since the cost of living varies across the country, so too should benefit levels (and, indeed, the minimum wage, if we must have one). Over time, this ought to become one of the functions of local councils.

As M. Bastiat pointed out all those years ago the difficult part of thinking about economics is the looking for the things which are not seen. As with the recent changes to taxation at the top end of the income scale and more specifically of bankers.

JP Morgan, the giant US investment bank, has warned the Chancellor it may scrap plans to build a £1.5bn flagship European headquarters in Canary Wharf if politicians don't rein in their attacks on the City.

We can sometimes model the effects of tax changes (and of regulations etc.) on the activities that people already undertake. The opposite results of the income and subsitution effects and possibly the balance: maybe even a close approximation to the actual sum.

But it's very much harder, near impossible, to work out what would/could have happened without the new taxes and regulations and what will happen. Instead of who will work less or who will relocate out, who would have worked more, who would have relocated inwards, what new businesses will now not be started?

Just as an example, the new top rate of taxation of 50% is estimated by the Treasury to have net income of around £2 billion a year. Others disagree and think it could be less and even negative in its revenue effects. But if those who would have come but now will not, as with this JP Morgan development, are not going to be paying into the UK taxation pot then we're closer to the tax rise leading to a fall in revenues.

In other words, when we look for the Laffer Curve and its inflection point we need to be looking at not just what can be seen but the potential futures which are not seen.

No, I agree, not what you expect  to see here, a piece praising Will Hutton, he of the government should regulate and intervene everywhere shtick. But sometimes it is neceessary to praise those you disagree with, as I am now doing with Will Hutton.

We are looking disaster in the face. A British version of Fannie Mae and Freddie Mac must be created now. Legislation to create a Gordon Mac should be introduced before the summer recess.

An interesting idea floated on 22 June 2008. Then we had Paul Krugman on July 14 2008 saying that the two FM's were in fact part of the cause of the problems. Specifically that their public/private role was a problem. On July 15 that year, James Hamilton thinks they're a problem. On the 16th, Larry Summers says that "one hopes that we are now witnessing the end of this particular experiment in creative capitalism".

And on Christmas Eve the news was floated out that:

The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.

Yes, that's right, they not only went bust they now have (something which the commercial banks do not have) unlimited taxpayer support. Oh, and their senior management is still getting bonuses: $6 million this year.

Without Will Hutton where would we be? How would we know what not to do if he were not there to guide us?

Thus praise is due to Will Hutton. As with the recent comment about Polly Toynbee from Fraser Nelson: every compass needs its butt end.

The “right to health" is enshrined in several major international treaties, many national constitutions and forms the basis of policy for nearly every major aid agency and humanitarian NGO.

Unfortunately, treating health as an enforceable human right does not work.

Traditional human rights like free speech and the right to peacefully enjoy property have helped restrain the actions of authoritarian governments all over the world.

Since the Second World War, however, international human rights treaties have added positive rights such as health. These require government action, not just restraint.

Positive rights were intended as political aspirations. However, revisions by the UN’s International Covenant on Economic Social and Cultural Rights have made signatory governments legally obliged to “respect, protect and fulfil" the right to health for all individuals.

This new interpretation of the right to health is used as a political tool. The UN’s ideological commissars insist that human rights risk being infringed whenever healthcare is provided through the insurance market or other private means.

Canada’s 2005 Supreme Court decision to overturn Quebec’s ban on private health insurance was criticised by UN experts on the grounds that it interfered with the right to health. The health systems of Korea and Switzerland have similarly been criticised for having too much private involvement, despite delivering high quality services.

Meanwhile Brazil’s constitution recognises the right to health, but shortages are common in state pharmacies. Patients therefore sue the government, creating an intolerable burden on the judicial system. More than 1200 cases of judicial review are sought in the Rio Grande do Sul region alone each month.

The right to health is a blind alley. Traditional rights let people lift themselves out of poverty, giving them the resources to afford clean drinking water, good nutrition and the decent healthcare systems necessary to achieve good health.

Jacob Mchangama is head of legal affairs at the independent Danish thinktank CEPOS. He has written a paper that challenges the widespread acceptance of the existence of a human right to healthcare for IPN. It can be accessed through their website here.

Tim Leunig is right here, it's very rare that economists prefer regulation over prices. But he then claims that climate change makes the difference and we really should be preferring regulations. There are two basic errors I'm afraid.

The first is looking at a carbon tax as a means of changing behaviour: something which if he'd actually understood the Stern Review he claims to support he would know isn't the point at all. As Pigou pointed out way back in 1912 when he first outlined the idea what we want is to internalise the external costs of an action into the market price. So the tax is not set so as to reduce the level of that activity to some target (as Leunig assumes in his example) it is set at the social cost of the action itself. And we know what the social cost of petrol use is, Lord Stern, in that report, told us: 11 p a litre. So scare stories of £18 a gallon are just that, scare stories.

The second is here:

The reality is that prices work very well when supply is able to increase when the price goes up. If demand for clothing goes up, people plant more cotton. But prices don't work very well to ration a given amount of goods.

What? But that's when prices are at their most effective! Substituitability old boy, substituitability! This can come from the supply side (a couple of years back the rise in platinum prices led one chip manufacturer to start plating the pins with niobium instead of platinum) or the consumption side: shank's pony as opposed to a car. But much more important than even this is technological change and the incentives that changing prices give to it.

If the price of carbon emissions goes up as a result of us taxing carbon itself more highly this does not simply limit us to consuming this fixed number of carbon units and rationing them by price. Other technologies which allow us to perform the same tasks (transport, fertilisers, heating, whatever) become more attractive as they are and investigation and investment into further such also become more attractive.

Which is of course what we actually want: not a reduction in transport or fertilisers or heating but a way of having more of them, more cheaply than at present, just without the carbon emissions. And prices are a much better way to get this than regulation is.

And to think, Tim Leunig is teaching at the LSE these days: O Tempora, O Mores.

I am increasingly tempted to start smoking once more. Given the authoritarian stance that the government takes against the partaking of tobacco, it is only a matter of time before lighting up will have the lure, excitement and increased health risks that came with drinking in prohibition America.

The latest in the ongoing war on smokers is the government’s 340,000 quit kits, set to cost the taxpayer in excess of £700,000. Disturbingly, as part of this latest campaign to conincide with New Year, a video once again shamelessly attempts to laden parents with more guilt for smoking. Smokers are increasingly being attacked and ostracised by a government that is more concerned with controlling, than in letting people determine their own lives. If they continue to infantilise the people of this country, any remaining and necessary willpower to quit will be destroyed.

But more than this, the government is undermining the discovery process that customers are undertaking in attempting to quit smoking. By backing certain techniques and technologies in its quit kits, alternative and potentially better solutions for those that wish to stop smoking are being crowded out of the market by  NHS subsidies. It is the company’s that best appeals to its politicised agenda that wins.

A better policy would be one where people were treated as adults, built upon the foundation of the freedom to smoke on any private land with the owner’s permission. Instead of taxing the poor and remarkably inelastic smoker, the governent should instead redesign the health system so that the resulting health costs are borne by the smoker. But this is not likely to happen any time soon, not least because of the £9.9 billion in tax revenues brought in each year to government coffers. Instead of passing on the cost to smokers, as things stand smokers should be getting a rebate from the government. Perhaps one that could allow them to go private to deal with any smoking related diseases free from the underperforming NHS.

I think we're all familiar with the Easterlin Paradox? After all, it's shouted at us from the newspapers and the left often enough. Higher incomes don't make us happier and thus we shouldn't be striving for higher incomes but for more happiness. That more happiness usually to be provided by whatever pet nostrum about equality, sharing and caring or being kind to kiddies whoever is advancing the argument most favours.

However, it seems that the basic contention itself is wrong. Higher incomes do make us happier:

Using recent data on a broader array of countries, we establish a clear positive link between average levels of subjective well-being and GDP per capita across countries, and find no evidence of a satiation point beyond which wealthier countries have no further increases in subjective well-being.....Finally, examining the relationship between changes in subjective well-being and income over time within countries we find economic growth associated with rising happiness. Together these findings indicate a clear role for absolute income and a more limited role for relative income comparisons in determining happiness.

Thus we do want to continue to focus on growing the economy as being richer does make us happier. Full on with capitalism red in tooth and claw then and damn those whining about how we should concentrate on just being nicer to each other.

However, I have a feeling that, on the basis of nothing more than feeling it in my water, it isn't really to do with the level of wealth: it's to do with the growth of it. A country that's been having decentish growth for decades (say, 2 or 3% per capita rises in GDP each year) is one that has appreciable changes in the standard of living over the course of a lifetime. At 2% a year everyone is four times richer at the end of the Biblical three score and ten than they were at the beginning. That's an observable change and one that would, I would argue, engender optimism about the future.

These sorts of growth rates don't particularly mean that today is better than yesterday, nor that tomorrow will be better. But this decade is certainly better than last (note that even the current recession has only taken us back to 2005 standards of living) and the next is highly likely to be better still. We can see that life will be better for us in the future and that it will be better still for our children and on for their. That's the sort of thing which does tend to make people happy: things are better than they were and are still getting better.

The association with rich countries is thus that, well, the rich countries are those places that have been growing at that 2-3% a year for the past couple of centuries. I have a feeling that if growth did halt for a long wnough period of time that our basic assumptions about a better future disappeared then we'd find that high but static wealth did not engender happiness. As I say, this is only a postulate, but I do think that it's the direction of travel that creates the happiness, not the position and the association between happiness and high wealth is simply that the rich happy places have been going in the right direction for many generations now.

Assuming the Conservatives win the upcoming General Election, it looks like Britain will finally get a fully fledged school choice scheme in 2010 – something the Adam Smith Institute has been pushing for ever since it was founded. Under Michael Gove’s planned reforms, parents would be free to choose which school their children attended, with government funding following that choice. Crucially, Gove also aims to liberate the supply-side of education, by allowing charities, companies, groups of parents and so on to set up new schools, which would compete with existing state sector ones.

The policy is not perfect: with the Conservatives saying they would not allow schools to make a profit, how many private companies would get involved in providing education? In Sweden, where a similar school choice scheme was set up in 1994, for-profit companies have been the dominant providers of new school places, and have often been the most innovative and successful market entrants. But regardless, school choice is a great idea that could have a transformative effect on British education. As well as empowering parents (itself a valuable objective), the competition it unleashes will drive up standards as good schools prosper and bad ones go out of business, and will also encourage schools to innovate, specialise, and tailor their services to their pupils.

But it is vital that the Conservatives understand that an effective school system needs more than just parental choice and voucher-style funding arrangements. Schools must also be freed from a whole raft of red-tape if the benefits of competition are really to be felt. Firstly, starting a new school needs to be made much easier – planning laws need to be radically altered, and bureaucratic processes dramatically streamlined. Secondly, schools need to be given far more freedom about how and what they teach – that means getting rid of the national curriculum and compulsory standardized tests, and allowing schools to pick whichever exam system they think best (be it GCSE/A-Level, iGCSE/Pre-U, the IB, or whatever). Thirdly, the teaching profession needs a big shake-up. Teachers should be employed by schools, not the government, and should have individually negotiated contracts, not nationally collective-bargained ones. Just as importantly, the route into the teaching profession should be liberalised, with schools themselves taking greater responsibility for teacher training and certification. Finally, these freedoms should not just be for new schools, but should be extended to schools currently in the state sector, all of which should become independent – perhaps as trusts, perhaps as parent-teacher co-operatives, or perhaps under some other management structure.

Ultimately, what needs to be realized is that school choice involves the wholesale rejection of the comprehensive ideology – that one size, determined by Whitehall, fits all – and the adoption a completely new outlook: let a thousand flowers bloom.
 

This is something I've been banging on about for some time now: that those proposing green taxes don't seem to realise quite the rate at which they should be levied. Quite how low a rate that is. Take the recommendations of the Stern Review for example, as the New York Times editorial does yesterday:

Translated into a gas tax, Mr. Stern’s price tag is about 66 cents per gallon...

Given 3.8 litres to the US gallon and an exchange rate around $1.50 to £1 and we get to the 10 pence to 12 pence range per litre that I said it should be when the Stern Review fisrt came out (in these very pages in fact). So should we be adding another 10 pence to hte fuel duty then?

No, absolutely not, we've already raised fuel duty substantially over the years. The fuel duty escalator was put in place by Ken Clarke to aid us in "meeting our Rio committments". To tax the externality of CO2 coming out of your car's tailpipe in other words. And how much has that escalator increased fuel duty over the years? 23 p by my last count actually.

So we are already double taxing petrol use, taxing it twice as much as we should be in order to get the best of all worlds as laid out in the Stern Review. Please note that this is not an attempt to deny that climate change is happening, nor that we shouldn't do anything about it. It is rather, taking the arguments being put forward seriously and looking at their implications. And one of those is that the British Government's own report states that we already tax petrol too highly for climate change reasons. So we most certainly shouldn't let them use that report as an argument for raising petrol taxes even further.

For further fun and games try this paper from Richard Tol (and please do note that he's one of the economists within the IPCC). We in Europe have already got in place just about everything we need to do to deal with climate change. We're done: we've just got to wait for the changes in incentives to work their way through the economy. Which is rather good news at the end of the year, isn't it?