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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Free school meals aren't as tasty as they sound

Written by Sam Bowman | Wednesday 18 September 2013

All children at infant schools will be given free school meals from 2014, Nick Clegg has announced, at a cost to the taxpayer of £600m.

On the face of it, the policy is extremely bad. Children of parents earning less than £16,190 and/or receiving income support or other kinds of welfare are already entitled to free school meals, so, other than children whose parents are unaware that they are eligible, the main beneficiaries of this policy will be the children of middle-income families.

That’s the wrong kind of redistribution. There is a decent case for helping the children of poor families who simply cannot afford to give their kids a decent packed lunch, but extending that to all children requires pretty big (and probably wrong) assumptions about parental fecklessness and state effectiveness.

But there is a complication. Trials that tested universal free school meals in schools across three local authorities between 2009 and 2011 found that extending meals to some students didn’t do much, but making them universal correlated with 1.9% and 4% improvements in literacy at Key Stages 1 and 2 respectively and 2.2% and 5.5% improvements in maths at Key Stages 1 and 2. (pp 143-144)

If those numbers really were caused by making free school meals universally available (and they were more cost-effective than alternative ways of spending that money), there would seem to be a strong case for the policy. However, the authors of the government’s impact report point out that, basically, they don’t understand why this relationship exists. Neither attendance nor behaviour were affected, so they assume that free school meals led to greater classroom ‘productivity’.

What if they’re missing something and the free school meals aren’t the causal factor? Or what if nationwide implementation has bad unintended consequences we can’t foresee?

That’s exactly what happened when California rolled out a state-wide class-size reduction programme, an example given by Nancy Cartwright. Despite doing well in randomized controlled trials in Tennessee, in California the programme had no real effect on outcomes. The sudden need for lots of new teachers meant that more bad teachers were hired; and not all of the factors that made smaller classes helpful in Tennessee were present in California. Evidence isn’t always as transferrable as we’d like it to be.

That’s not really a good reason to think the policy will fail, but it should temper our enthusiasm for rolling it out nationwide. What works in Wolverhampton might not work in West Sussex. Indeed, what works in a particular school in Durham might not work in another school across the county. In some schools, universal free school meals might be just what the doctor ordered. In others, headmasters might think that fixing their school’s dodgy central heating would be a much better use of the money.

Ultimately, it boils down to the principle we go on about again and again here at the ASI: devolving choice down to the most basic units possible. The available evidence does suggest that “universal free school meals” are a good policy, but that evidence is quite limited. The complexity of these things means that rolling it out nationwide might not achieve what we’d hope.

Better to give schools the money and the information and let them decide what to do with it. That way, instead of basing a national policy on the results of a few randomized controlled trials, the process of experimentation and discovery can be ongoing across the country.

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Heavens to Betsy, Robert Reich almost gets one right

Written by Tim Worstall | Wednesday 18 September 2013

Unfortunately Robert Reich is not a perfect guide on what not to do as he sometimes almost manages to get things right:

These rules don’t exist in nature; they are human creations. Governments don’t “intrude” on free markets; governments organize and maintain them. Markets aren’t “free” of rules; the rules define them. The interesting question is what the rules should seek to achieve. They can be designed to maximize efficiency (given the current distribution of resources), or growth (depending on what we’re willing to sacrifice to obtain that growth), or fairness (depending on our ideas about a decent society). Or some combination of all three — which aren’t necessarily in competition with one another.

Markets do indeed exist in nature: the male bower bird building a shelter in return for a legover is and exchange in a competitive market whatever else it might be as well. But yes, it is true that the rules define the markets and we can indeed play with the rules to push one or more of those ends. But it's not quite any mixture will do:

Evidence suggests, for example, that if prosperity were more widely shared, we’d have faster growth.

Not really, no. For it would depend upon how we made that properity more widely shared. Higher taxes and more redistribution could well have higher deadweight costs than whatever greater growth more widely shared prosperity might putatively provide us.

But then of course Reich goes so horribly wrong:

Instead, the rules are being made mainly by those with the power and resources to buy the politicians, regulatory heads, and even the courts (and the lawyers who appear before them). As income and wealth have concentrated at the top, so has political clout. And the most important clout is determining the rules of the game. Not incidentally, these are the same people who want you and most others to believe in the fiction of an immutable “free market.” If we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.”

Those things described, the buying of influence at the political court, are not free market. Indeed, the solution to those things is to have a free market: one not influenced by politics and thus one in wihch purchasing politicians gains one no advantages. That is, Reich is reliably wrong again in the actions he calls for, for free marketry is the solution for exactly what he is complaining about.

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Bleeding heart libertarianism and British politics

Written by Sam Bowman | Tuesday 17 September 2013

I have a chapter in a new publication by Liberal Reform, the classical liberal movement within the Lib Dems, in which I make the case that non-libertarians and libertarians may find a surprising amount of common ground if they put their differences of opinion about wealth and income redistribution aside. (Unfortunately, you have to sign up to Liberal Reform's mailing list to read that piece. You use my email address to login instead: sam at adamsmith dot org)

Basically, the chapter is an attempt to sketch out a British political economy of Bleeding Heart Libertarianism, the movement that has sprung up around American philosophers like Matt Zwolinski. The main areas I identify are immigration reform, drugs legalization and 'modern mercantilism' (a broad term for corporate and middle-class welfare).

I do think there's a lot of common ground between libertarians and people on the left, but for a serious dialogue to work I propose that libertarians shift their focus from opposition to wealth and income redistribution to a single-minded focus on the regulatory apparatus of the state: 

I suggest that libertarians concerned with the plight of the poor should abandon their opposition to wealth redistribution in practice and focus instead on the regulatory state, where we have a much greater degree of certainty about the harm caused. For libertarians who wonder if they are BHLs, the question might be: If libertarian institutions existed and serious, significant poverty persisted, would state action be justified in acting to relieve at least some of that suffering, if we had a pretty good reason for thinking that that action would work?

I think that it would, and if you have a serious commitment to welfare so should you. The only problem should be an empirical one, which I cannot say is strong enough to reject all wealth redistribution. While I am extremely confident about the benefits of liberalising planning to allow new homes to be constructed in the UK, I feel less confident about saying that all redistribution is harmful.

So I propose a compromise: a ‘libertarian welfarism’. This might see us reform tax credits and the welfare system into a combination of universal basic income and a ’negative income tax’ that acts as a top-up to people’s wages, adjusted to give a little more to people in low-income jobs and the unemployed. The details of this approach to income redistribution are not important for now: what matters is the idea of a simple, cash-based redistributive mechanism. I find myself very comfortable with this kind of redistribution; other libertarians will be less so. But perhaps they could accept it as the cost they have to pay to persuade others about the other, much more important, things they have to say.

I expect many people to find this kind of thinking quite outrageous, but to me the really strong arguments for libertarianism are based on our beliefs about ignorance and incentives, not justice, so they should only preclude redistribution of wealth as a matter of pragmatism. There's no intrinsic reason you can't combine those ideas with "left-wing" beliefs about what a good world looks like any less than they can be combined with "right-wing" beliefs about the kind of world we watnt. I don't know if libertarians will ever be able to have the same influence on the left that we've had on the right, but it's worth a try.

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Chart of the week: US balance sheets contract

Written by Gabriel Stein | Tuesday 17 September 2013

Summary: US banks’ falling holdings of risk assets could mean trouble

What the chart shows: The chart shows US commercial banks’ holdings of Treasury and Agency securities

Why is the chart important: Two common themes in the aftermath of the Great Recession have been politicians attempting to make banks safer by mandating higher capital ratios; and also attempting to make banks lend more. These are generally mutually contradictory. Current US developments are a case in point. US banks have in the past stocked up on ‘safe’ assets in the form of Treasury and Agency bonds. But, recently, their bond holdings have shrunk, partly because of higher interest rates, which push down the value of bonds. At the same time, banks have been discouraged from buying ‘risk’ assets. Instead, the Fed’s QE enabled banks to pile into cash. But now the Fed is poised to turn off the cash tap. This could threaten current healthy broad money growth; and potentially derail the US recovery.

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Why would shares go up in value when someone's trying to sell them?

Written by Tim Worstall | Tuesday 17 September 2013

Answer: because the sale might allow someone to rebuild a cartel.

Part of the story is here but I'll give you the simple version. Potash is one of those minerals vital to civilisation: it's a major ingredient in fertilisers. It's also cheap ($300 a tonne or a little more) and has very large capital costs in its production. Hundreds of million to billions to get a mine going. Marginal costs of production are near trivial.

So, it's a prime candidate for the cartelisation of the industry. Anyone looks like opening a new mine the current incumbents will gently remind them that they'll have all that capital at risk for years while everyone else can drop to marginal production prices and bankrupt them. This barrier to entry through collusion then keeps prices high for those incumbents.

And this is indeed what has been happening. The Belarussian and the Russian producers, between them some 40% of the world market, have been deliberately restricting their output in order to gain higher prices: monopoly pricing in effect, or at least partial monopoly pricing (when prices are at that sort of $300 a tonne for something then transport costs become very important. So local monopolies are certainly possible).

Then, because such cartels are always fragile to the possibility of defection, The Russians accuse the Belarussians of selling some stuff on the side and then they decide to break the cartel themselves. The price of potash falls on world markets.  At which point the Belarussians arrest the CEO, the Russians decide to truly give up and sell their stock in the Russian producer.

At which point the shares in that Russian producer rise: just as someone's looking to offload them. Eh? And the global potash prices rises too? Yes, because the Russians selling out could be a prelude to a re-establishment of the cartel.

Which is, I thjink, an interesting little example of the extra profits that can be made by cartels/monopolies. And since those extra profits must come out of the pockets of consumers, why we don't want to allow people to generate cartels and or monopolies. But apparently they do things differently over in Russia and Belarus.

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Banning the burqa would be illiberal and un-British

Written by Daniel Pryor | Monday 16 September 2013

The tabling of Philip Hollobone MP’s Face Coverings (Prohibition) bill — which aims to ban the burqa in public places — has reginited the debate surrounding this controversial issue. Commenting on similar bans in Belgium and France, Thomas Hammarberg (the Council of Europe's commissioner for human rights) has described such legislation as “capitulation to the prejudices of xenophobes”. It is indeed arguable that the burqa issue has been used as an ideological weapon with which to criticise immigration and associated issues.

It's worth examining the tangible consequences of such a ban in other countries, rather than the motivations behind those who advocate it here. In the case of France, banning the burqa was followed by a wave of verbal and violent attacks on Muslims: some estimates suggest that physical attacks on women wearing the niqab increased by as much as 34% after the introduction of the ban. Such vehement hatred of Muslim custom doesn’t seem to be as prevalent in the UK, but state-sanctioned discrimination would likely encourage similar hate crimes. Tensions in France spilled over on the Muslim side too, with riots in Trappes earlier this year sparked by a scuffle concerning the removal of a face veil.

Proponents of the ban say that gender equality is the goal of such legislation. Yet, by banning the burqa, women pressured into wearing full-face veils by their religious leaders or husbands will be placed under virtual house arrest, whilst those who actively want to wear them in everyday life will be prevented from doing so. This is hardly in keeping with British values of individual liberty and tolerance, as Mohammed Shafiq, chief executive of the Ramadhan Foundation has said: “We take great pride in the United Kingdom's values of individual freedom and freedom of religion and any attempt by illiberal male politicians to dictate to Muslim women what they should wear will be challenged."

The truly liberal approach is the moderate one, taking both property rights and individual choices into account. One section of the Face Coverings (Prohibition) bill goes some way to acknowledging this sentiment:

"…where members of the public are licensed to access private premises for the purposes of the giving or receiving of goods or services, it shall not be an offence for the owner...to request that a person wearing a garment or other object intended to obscure the face remove such garment or object; or to require that a person refusing a request...leave the premises."

If the ‘burqa ban’ were simply the above recognition of the rights of property owners to exercise their own discretion – undeniably beneficial in the case of banks and airports – then it would not be a problem. But to use the blunt instrument of a universal public ban would be fundamentally illiberal, and profoundly un-British.

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Diamond cuts to the chase

Written by Tim Ambler | Monday 16 September 2013

The FT reports that Bob Diamond is giving his support to our long and oft expressed view that bank regulation should be global, not national or EU.  See for example “Saving the City”, March 2013.  Big banks now operate in a global market and a single market requires a single set of regulations.  Any more, or any fewer, in the major banking countries distorts competition.  A major bank failing in one country may well bring down others and at the very least have knock-on effects.  This is one of the most important lessons from 2008.

The EU is a particular worry as each member state seeks to impose handicaps on the others in order to enhance its own financial services industry.  Furthermore, Brussels seeks to take over all financial regulation from member states. These politicians fail to see that such shenanigans can only damage not just London but the EU financial services industry as a whole.

Basel III has its faults, not least in loading up capital requirements at the wrong time.  Higher capital requirements may have been a good idea pre-2008 but introducing them now inhibits the very lending to SMEs that is essential to growth.  Likewise moves to downsize banks or introduce new Chinese walls may be a good idea in due course but not just now.  Yes, of course we need to get away from banks, or any other financial institutions, being too big to fail but they are not about to do so.  Financial crashes come around every 50 years or so, so on that metric the next one is not due for 45 years.

Faulty or otherwise, Basel is the only global financial regulatory structure we have and we need to work with it and improve it. The fact that we do not have an imminent crisis makes this the ideal time to introduce the radical revolution we need.  The EU and national governments should turn over all financial market regulation to Basel. Who should monitor and supervise those global regulations is a more difficult problem but in the short term it will have to be by nation state, in the UK by the Bank of England.

But let us not get caught up in that.  First things first means that banking regulation needs to go global now.

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Does the Dental Regulator know the meaning of quality care?

Written by Tim Ambler | Monday 16 September 2013

My dental surgery presented me with a two page medical history questionnaire to complete before being allowed to see the dentist.  You know the form. As nothing had changed since the last one, I offered to sign and date a copy.  That was not an option because (a) their technology didn’t not permit extracts or copies (a likely tale) and (b) completing a new form was a legal requirement.  They meant it was a Care Quality Commission (CQC) requirement.  “May I see at least last year’s as a prompt?  At my age, memory is imperfect: I cannot remember my medications when the tablets are at home.”  “No.  You have to complete the form unaided.”

The Adam Smith Institute has long drawn attention to regulators failing because they descend into box-ticking.  The financial crash of 2008 was one example. The CQC is a new regulator but this descent is already apparent.  Ensuring primary care achieves and maintains high standards is clearly important and was given impetus by the Harold Shipman tragedy.  But that is my point: whilst Shipman was good at the paperwork and complying with regulations, he was also killing his patients.  The Mid Staffs Hospital is not a primary care unit but the issue is the same: they could have been ticking all the boxes and still killing their patients.

The CQC’s 2nd Annual Report sets out five criteria for establishing dental care quality:
(a) Do the dentists treat their patients with respect and discuss their proposed treatments?
(b) Do they fully assess patients’ needs and deliver the care and treatment they need?
(c) Do they protect patients from the risk of abuse and treat them in a clean surgery without risk of infection?
(d) Do they recruit staff effectively and conduct thorough checks on them?
(e) Are patients’ records up to date and kept safe and confidential?

Incidentally, there is nothing here banning the use of copies of prior records. Item (c), however, is responsible for the new ban on coffee in dental surgeries.  According to my dentist, the CQC claims that this could give rise to cross contamination with medications even though there is no evidence that such a thing has ever happened. Harold Shipman would have passed these five criteria with flying colours.  

Patients visit dentists to retain their teeth as long as possible and, when that fails, have false teeth fitted, all in as agreeable and painless a manner as possible.  We want our teeth to look good too. The word “teeth” does not even appear in the CQC criteria and nor does the patient experience. “Quality”, in this context, means that we have teeth that work, avoid pain and look good. It would not be difficult to develop scales for these quality indicators.  Adjusted tooth loss rates could be measured in a similar fashion to Professor Sir Brian Jarman’s adjusted mortality rates for hospitals. The CQC does interrogate some patients but their conclusions rely mostly on what they glean from dental surgeries.  This is the wrong balance: patient experience, and especially the pain endured, is only known by the patients themselves.  When the care quality of each surgery, relative to equivalent surgeries, is established, its patients should be informed.  The aggregate scores in the CQC annual reports, all around 90%, tell us nothing.

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An example of why Greece has such problems

Written by Tim Worstall | Monday 16 September 2013

So there was guidance that people who work at computer screens should have breaks from using computer screens:

"According to the European regulation, those using a computer should take a 15-minute break every two hours," the general secretary Ermolaos Kasses said.

This dates from the 1980s and seems fair enough given the computer screens of the 1980s. They might indeed have an effect upon your vision for example. But then what happened?

"It is not easy to have all those breaks during the day, so it was decided back then that it should be given as a day off every two months."

Facepalm.

Talk about entirely and totally missing the point. So, the upshot of this workplace safety regulation was that:

Greek civil servants stand to lose the six extra days of paid vacation they get each year—just for using a computer—after the government moved Friday to rescind a privilege that has been around for more than two decades.

It's also true that modern screens don't pose the same health risks. But imagine an economy riddled with these sorts of practices and you'll begin to understand why Greece is in such a mess.

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So why are the Chinese saving so much?

Written by Tim Worstall | Sunday 15 September 2013

I think we all know that China, or perhaps the Chinese, havs/have a mindbogglingly high savings rate. Something around 50% of GP as compared to our own few paltry percent. Don Boudreaux does a wonderful little piece of intellectual judo in explaining the implication of this:

If Haltom’s claim is correct, the high household savings in China today is evidence that government provision of welfare substitutes to some extent not only for private provision generally, but also for provision at the level of the household. People are neither as personally irresponsible nor as incapable of planning for and providing individually for their own needs as many today – “Progressives” and some conservatives alike – presume them to be.

Just to lay this out again in all its elegant simplicity.

We currently have a welfare system that provides unemployment pay, health care, pensions and so on. We also have a very low savings rate. That's fine, it just is that way. But when the cold hearted and callous like myself suggest that perhaps we might want to reduce some aspects of that welfare state the cry goes up, but bit, what will people do? There will be no pensions, the old will starve in the streets, there will be no health care, there will be a disaster!

And the answer is that we can actually see what happens when there is not that welfare state. It will be as it is in China. People will, in the absence of a decent welfare system, save their own money in order to provide those highly desirable services to themselves. As, actually, the British working classes did in great numbers through the friendly and provident societies before there was a welfare state.

This is not to say that private savings to provide these things is better than taxation provision of them. Nor that it is worse. And it's entirely possible to argue for a blended system (I certainly would argue for tax financing of catastrophic medical care for example). My point here is simply to show that there really are viable alternative systems: the proof being that such alternative systems do in fact exist.

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