The Pin Factory Blog

The Wall Street Journal picks up on the quite fascinatingly stupid imposition by the current government of a minimum price on carbon permits. This could only have been done by people entirely ignorant of how a cap and trade system works: not a wholly desirable attribute in those supposedly running a cap and trade system.

The European Parliament's rejection this week of the Commision's proposed carbon-permit price-fixing scheme is good news for economies across Europe—except for the U.K.'s, which is likely to suffer from the lower carbon-emissions prices that result...........The carbon price floor, which came into effect April 1, was supposed to increase investment in "green" energy projects in the U.K. by ensuring that carbon-permit prices could not fall below a certain level—starting at £16 per ton of carbon this year and rising to £30 per ton in 2020............The European Commission's idea for shoring up the price of carbon permits—withholding the supply of permits from the market—was voted down this week by the Parliament, and the permit price only fell farther. As of Thursday is stood at €2.80 (£2.40) a ton—just 15% of the Cameron government's floor.

I know, I know, many of you are more sensible than I am when it comes to this climate change thing. I'm still under the delusion that it's a problem we should do something about. But at least I do understand the role of price in a cap and trade system. In a carbon tax system, the other viable alternative action, it is the tax, the price of carbon emissions, that reduces them. In a cap and trade system it is instead the number of permits issued which reduces emissions. The price for such a permit is simply telling you how tough it is to meet that cap. Thus, the lower the price of the permit the better for all. It shows that reducing emissions is actually quite simple and quite cheap.

In this case, we're seeing that eliminating the marginal emissions necessary to stay under the cap costs less than £2.40 a tonne. Quite why the British government insists that everyone should pay £16 a tonne for it is known only to the more frenzied minds within it. In a cap and trade system a low price for permits is a good idea, a welcome sign that it's all less of a problem than we had thought.

As I say I do indeed think that carbon emissions are a problem that we ought to do something about. But I do also think that we should not use this as an excuse to do fascinatingly stupid things: like artificially raising a price that we are gloriously grateful about being low. The cost of reducing emissions that is.

I have taught A-Level Economics for twenty-five years. The economic crisis has pushed macroeconomics into the spotlight. Non-teaching friends often say that it must be a really interesting time to teach Economics. They are right, it is. However, it is also a frustrating time to be an A-Level Economics teacher. The source of my frustration pertains to the Keynesian bias that exists within the A-Level Economics specification, examination papers and marks schemes.  

Keynesian economists were unable to foresee the economic crisis that erupted in 2008. This view is not controversial. Unsurprisingly, Keynesian demand-side policy remedies have been unsuccessful. Despite fiscal stimulus and ultra-loose monetary policy, UK national income remains lower than what it was before the crisis. The Keynesian paradigm is under pressure. Unfortunately, students across the country are being taught this failing paradigm. 

Continue reading.

6. The ASI supports the decriminalization of narcotics.  The Left should be pleased that the ASI has many times called for the decriminalization of drugs and for drug-addiction to be treated as a medical rather than a criminal problem.

The ASI has expressed the view that the criminalization of narcotics causes much more harm than would result from decriminalization.  Because narcotics are illegal they are in the hands of a worldwide criminal network.  Their illegality makes dealing a risky operation and results in very high prices for drugs, out of all proportion to the actual cost of producing them.  Those high prices result in turf wars between drug gangs and make murder a commonplace.  Addicts often resort to crime to fund the cost of their habit, making innocent people victims of mugging, burglary and theft. 

The ASI has called for most drugs to be medicalized, meaning they would be available at high street clinics manned by doctors and nurses, to be consumed on the premises.  In return for undergoing medical examination and receiving advice, addicts would receive free supplies to consume within the clinic.  While this would work for most hard drugs, no-one would want to consume recreational drugs such as ecstasy and cocaine in such clinical conditions. The ASI suggests that these should be legalized since they do no harm to anyone but the user.

The effect of these reforms would be to cut drug crime to near zero, and to exercise control over the quality of narcotics.  There would be fewer deaths from overdoses or adulterated supplies, and most addicts would come within the scrutiny of doctors and nurses equipped to help them. 

In yesterday's City AM I responded to Vince Cable's condemnation of the boyband One Direction's £25m earnings. The point that Cable missed, I argued, was that income is a reflection of value created for other people: 

Earnings are not a reflection of moral worth, they’re a product of how much other people are willing to pay for your work. If a lot of people are willing to pay you just a little, you can make a lot of money.

To understand how high pay can be fair, the philosopher Robert Nozick suggested a thought experiment. Imagine a society where wealth was distributed equally. Now suppose a great basketball player, like the legendary US player Wilt Chamberlain, comes along. Everyone wants to see Chamberlain play, and his team charges fans an extra 25 cents to see him.

After the first season, 1m people have paid to see Chamberlain’s games. His income for that season is $250,000 – much more than anyone started off with. Is there an injustice here? Chamberlain is happy and his fans are happy. They could have spent their money on something else, but seeing him added enough value to their lives to be worth that extra 25 cents.

Would anyone say that these earnings were “grossly immoral”? Adding a little bit of value to a lot of people’s lives is a good thing, and if people are willing to pay for that, good for the Chamberlains of this world. Some may prefer Beethoven to Harry Styles, but One Direction’s fans disagree.

It hasn't propelled me to international pop-stardom, as I'd hoped, but you might still want to read the whole thing.

There’s a broad mismatch between educational and broader societal progress that’s puzzling. How is it that schools are organised and education supplied today in basically the same way as they were a hundred years ago? The main difference between education and other sectors is the lack of incentives at work to raise performance.

The theory sounds simple: allow competition through choice, and the rest will follow. Of course, reality is not that simple. Choice operates within broader institutional structures that either support or undermine it. So system design, with attention to how to incentivise improvement, is key if we are going to see any genuine transformation in education.

In Incentivising excellence, I discuss how choice serves as a catalyst for improved quality, and propose reforms to this end. The proposals are underpinned by a comprehensive review of the international evidence that takes into account the methodological strengths and weaknesses of studies, while at the same time paying attention to the competitive incentives of different education systems.

The cross-national research, which focuses on long-term effects, finds that independent-school competition is positive for achievement in PISA, the OECD’s educational ranking system. Competition also reduces costs. The total efficiency gains are striking. This contrasts with PISA’s official report, which fails to note any benefits from competition. This report, however, is not an academic study and it is likely that methodological weaknesses are responsible for the results. There is consequently no reason to disregard the proper academic research on the subject.

In terms of national and smaller-scale programmes, the evidence is mixed. Studies either note positive or neutral impacts. The results showing negative effects of choice are few and far between, while some studies display large gains in various countries.

A key lesson is that most attempts by governments around the work to introduce choice have been flawed.  Many regulate in such a way as to prevent strong supply-side dynamics from arising (often partly because the profit motive is absent), don’t allow schools enough autonomy, and prop up failing schools by giving them additional funds. Such constraints work against true competition.

The English school choice model suffers from these same shortcomings. With proximity as the main tie-break device, rich parents move closer to good schools, thus increasing residential segregation, leaving poor parents with few options. In England, therefore, choice has to a large extent been a chimera.

There is a role for the government in education. The benefits of education for society as a whole, and parents’ need for information that might not be in the interests of suppliers to provide, mean there is a case for government involvement in funding and information provision. But this is far from the prescriptive and dominating role the state currently plays.

Transforming the education system into an education market requires more than just the right to choose schools: it requires careful system-wide reform to a change the incentive structure fundamentally. Only then can we expect a revolution that increases productivity significantly.

Gabriel H. Sahlgren is the Director of Research at The Centre for Market Reform of Education. Incentivising excellence: school choice and education quality was published last week. The author’s policy recommendations for the English education system are given in a discussion paper, available to download from www.cmre.org.uk/publications

5. The ASI opposes official surveillance and secret powers.  The Left should welcome the ASI's opposition to snooping and surveillance by authority and its support for an open rule of law.

It is not a legitimate exercise of authority for a state to spy on its subjects.  If they go about their peaceful business, their activities are no concern of government, and government has no right to intrude into them. Government is our servant, not our master, put in place by the people to protect them and to safeguard their liberties.  Using the excuse of monitoring possible terrorist acts, government has resorted to quite illegitimate surveillance measures into the lives of its law-abiding citizens.  The ASI has opposed the extension of these powers, and the use of CCTV cameras by local authorities in quite trivial cases such as improper parking, putting out rubbish for collection at the wrong times, or to monitor whether parents live at the addresses claimed in their school applications.

The cry that "only the guilty have anything to fear" has been used to justify the oppressive intrusion of tyrants throughout history.  In fact the innocent have a great deal to fear from governments which demand the right to read their mails, to eavesdrop on their conversations, to record them on camera, and to monitor their movements.  These things are no legitimate concern of governments. 

The ASI supports the rule of law, done openly and subject to public scrutiny.  It opposes secret courts and secret powers, and supports the right of accused persons to trial by jury and full public scrutiny of the judicial process.  Where there is legitimate cause for concern about public safety, and surveillance is indicated, there should be separate application each time, judged on its merits by a magistrate, rather than an automatic and general right to conduct it.

When economists speak of “zombie banks” or “zombie companies”, they mean outfits so overwhelmed by debt that they cannot turn to the future. So too the current generation of UK politicians, with a zombie coalition and a zombie opposition. The poor beggars are weighed down not just by debt but also by duff ideas from the past, just like the man down the hole who hasn’t worked out that first he needs to stop digging.

Eventually, however, debt gets paid off or (more likely) inflated away. At least as important, moreover, new ideas emerge. This is the first of a series of blogs drawing attention to straws in the wind along these lines: ideas on the turn and their policy implications. Now for opinion-formers and policy-makers to recognise these changes in the intellectual climate for what they are and to get up the gumption to turn from “keep digging” to reform and resolution.

When Tony Blair signed up for Kyoto, it was a cost-free policy for the UK as it coincided with the “dash for gas” which he inherited. But our adherence to Kyoto targets isn’t cost-free any more. Now we are subsidising wind-farms, solar energy etc so that the UK average energy bill has risen by 18% for this reason alone.

On 8 February, Ed Hawkins of the University of Reading posted a graph, subsequently globally anthologised, drawing attention to the mismatch between climate change models and some seventeen years without measurable climate warming. To be fair, the meaning of the graph is contested, with diehard proponents of classical “Anthropogenic Global Warming” (AGW) spluttering that it is premature to make much of the statistical meaning of the recent  figures; or that the warming is taking place under the sea where we can’t measure it.

This is weak stuff: contrary to the campaigners the science turns out to be far from settled; indeed by the tests climate practitioners have set themselves their predictions are falling apart. Honest scientists are now revisiting their theories and models.

So let the Prime Minister launch a Royal Commission to revisit the evidence, modelling and consequent policy. The composition of such a Commission would have to be carefully chosen to ensure balance. The public interest needs statisticians and scientists from outside the hermetic world of “climate science” to challenge insiders robustly and in full view. Also in the interests of transparency, the DPP should seize data such as papers from the Climate Research Unit of the University of East Anglia for examination by forensic statisticians. The Commission should be given ample time to get it right - five years at least.

Over the period of its review the Government should suspend surcharges on energy bills, subsidies to energy suppliers or technologies, and generally the obligations of the Secretary of State for Energy under the Climate Change Act (2008).

We may expect the Liberal Democrats to object, but they may not want to stand in the way of a good-faith re-examination of the evidence. If they do, they have handed the Tories a priceless wedge issue for 2015.

The left-wing commentariat seems to be using the argumentum ad nauseam against the Thatcher record.  This consists of repeating an allegation, no matter how much evidence is produced against it, or how many times it has been shown to be false.  In City AM Allister Heath dealt with some of these assertions, but that has not stopped the anti-Thatcher brigade from repeating them.  Here are ten claims they make which are not supported by the facts.

1.  She destroyed UK's manufacturing base. No. Manufacturing output was 7.5% higher when she left office than when she began.  It did decline as a proportion of the total economy, but only because other sectors, especially services and finance, expanded more rapidly as the economy changed.  This happened in other advanced economies at about the same time as part of a general trend.  It is true that three major industries, shipbuilding, steel and coal, did decline as they proved unable to compete with other countries in these areas, but other industries, such as advanced manufacturing, expanded.

2. She destroyed the Unions' power to protect workers. Her reforms empowered union members rather than union leaders.  Previous Conservative and Labour governments had tried and failed to bring unions under the law.  The UK's strike record, the worst in Europe, did not help workers.  The Thatcher reforms gave union members the right to vote for their leaders in secret postal ballots, and gave them the right to be balloted ahead of possible strike action.  These resulted in more moderate union leadership and greatly reduced industrial unrest.

3. She lowered income tax so that the rich paid less. She did change income tax, but the rich not only paid more, but paid a higher share of the total.  Her governments steadily lowered the top rate from 83% (or 98% on investment income) down to 40%, and cut the basic rate to 25%.  The low rates raised more revenue than the high ones had done as business boomed and the tax base expanded.  The top 10% who had been paying 35% of total income tax saw this rise to 48% (from just over a third to just under a half of the total).

4. She turned vital state industries into private monopolies. Wrong.  The privatization programme turned ailing state monopolies into competitive and successful private ones.  Her government took care when it privatized to build in competition by whatever means it could.  BT faced a competitor called Mercury, with periodic reviews that allowed more competitors.  Most of the utilities were exposed to world competition as well as national competitors.  An important key was to separate the infrastructure from the supply, so that different producers competed to send their products down the pipes or cables to consumers.  Where this was impractical, suppliers had to bid competitively to win the franchise for a limited time frame.  Loss-making state monopolies were replaced by competitive and profitable private companies.

5. She destroyed Britain's coal industry. Britain's coal industry had been in decline for decades.  Many more pits were closed under Harold Wilson's Labour governments than under Margaret Thatcher's Conservative ones.  One reason was the rise of oil and then gas and nuclear as cleaner alternative sources of power.  Another was the decline of heavy industries that depended on coal.  Domestic heating moved away from coal, and North Sea gas replaced coal gas.  Added to this was lower cost foreign coal.  All of these ultimately doomed loss-making subsidized coal mines, and the year-long miners' strike helped reinforce the case for alternatives.

6. She did not really cut taxes. Critics point to a slight increase in the government tax take over her 11 years as proof that her tax cuts were illusory.  There were initial increases, especially of VAT, but under her there were major cuts in income tax and corporation tax that generated substantial economic growth.  After the initial years of dealing with the financial mess and the inflation that had been left, the government took less of GDP.  Tax Freedom Day, calculated by the ASI as the day of the year when people have paid off the government share, for 10 years after that either came earlier or stayed the same.

7. She unleashed the regulation that led to today's crisis. As Philip Booth at the IEA points out:

"the 1980s was not a period of financial deregulation. Insider trading was made illegal in 1980. The life insurance industry, which had been almost free of regulation for over 100 years from 1870, was re-regulated from 1980 to 1982. Bank deposit insurance was introduced in 1979. The sale of investment and insurance products came under statutory regulation from 1986. Further, the first ever regulation of UK bank capital took place under Basel I, agreed while Thatcher was Prime Minister."

The 'Big Bang' did allow more types of firm to trade in financial instruments, but it essentially replaced private regulation with public accountability.

8. She committed a war crime by the sinking of the Belgrano. The UK was in a war situation over Argentina's illegal seizure of the Falklands.  The South Atlantic area was a war zone in which hostilities were under way.  The 200 mile exclusion zone did not restrict fighting to within its limits.  It was a warning to neutral ships to avoid it.  The Argentine cruiser Belgrano was not a neutral ship and was on a zig-zag course, posing a menace to the British task force, and was sunk as an act of war, one that Argentine commanders accepted as legitimate.

9. Hers was a deeply unpopular and divisive government. She led the Conservatives to victory in three elections in a row, all with substantial majorities.  She did not win over 50% of the vote, which no party has done since World War II, but she did win a higher share in 1979 than Tony Blair did in 1997, and more in her subsequent two victories than he gained in his.  Her governments shunned the post-war consensus that had presided over Britain's decline to an economic basket case, and thus divided opinion.  More to the point, socialists had hoped that their ideology might one day rule, but the Thatcher governments ended that hope within the UK and helped to end it on a world scale.  The Left cannot forgive her governments for taking that future from them.

10. Her cuts slashed the public services. In fact public spending increased by 17.6% over the course of her governments.  There were cuts to proposed increases, but core service spending expanded.  Because the economy boomed under Thatcher governments, the total state share of GDP diminished as a proportion of the total.  It declined from 45.1% when she came in to 39.4% when she left. She increased expenditure on health, education and social spending, but by less than the growth in the private economy.

I thought this was an interesting piece of polemic from Ken Linvingstone:

Thatcher was sustained only by one extraordinary piece of luck. Almost the moment she stepped over the threshold of Downing Street the economy was engulfed in an oil bonanza. During her time in office, government oil receipts amounted to 16% of GDP. But instead of using this windfall to boost investment for longer-term prosperity, it was used for tax cuts. Public investment was slashed. By the end of her time in office the military budget vastly exceeded net public investment.

A quick read of that (or an ignorance of economics of course) would lead you to think that it was 16% of GDP each year. When of course it wasn't: it was 16% of one year of GDP spread over the 11 years of her term. Or 1.5% or so of GDP in any one year. It did bounce around quite a bit but that's what that government revenue actually was. To put that into context in today's money that's a bit more than we get from fags and booze combined, a little less than we get from fuel duty.

Strangely, we don't get told that those must be used to boost investment, do we? Which is odd, given that they're really about the same amounts of money.

It's also true that another thing gets missed: if the receipts had been 16% of GDP then we'd have needed to have a sovereign wealth fund. The point of which is not to invest in the future of the economy but to make damn certain that the cash does not enter the domestic economy in any manner at all. That would cause Dutch Disease and is the reason why Norway's fund is not allowed to invest in the Norwegian economy. It all sits offshore and is meant to stay there. And this is generally true of all resource windfalls. Either they're a nice bit of extra cash which can be used domestically or they're vast great gobs of it that must be kept offshore. There's not really any middle ground: enough to rebuild society will be too much to use domestically.

One more point: yes, of course public investment fell over those years. At the beginning the nationalised companies were nationalised. At the end of the 11 years they were private sector ones. Thus whatever investing they were doing moved from the public sector balance sheet or P&L to the private sector one.