Spending on Scotland

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In his Daily Telegraph column yesterday, Simon Heffer stated that, "As far as one can tell... the subsidy from other parts of the Kingdom (ie, England) to Scotland is currently at least £22 billion a year." This is something you often hear English people saying, much to the annoyance of many Scots, who insist it isn't true. Who is right? Well, the truth – as usual – is slightly complicated.

On the one hand, Heffer is right: Scotland does get 22 percent more public spending per head than England. Indeed, it even gets more spending per head than comparatively poorer areas of England, such as the Northeast. Interestingly, this disparity is not explained by higher levels of welfare dependency in Scotland – if you were to exclude spending on 'social protection' then the public spending gap would rise to 28 percent. It is simply a matter of government being bigger and less efficient north of the border.

But on the other hand, if you factor in Scotland's geographic share of North Sea Oil revenues (about 83 percent), then Scotland pays just about as much in tax as it receives in spending. That isn't to say that public spending in Scotland isn't too high (it is) or that it is sensible to base current spending on natural resources revenue (it isn't) – but those are separate issues.

So perhaps Scotland is – just about – pulling its weight at the moment. However, this should not distract from the fact that it won't be able to for much longer. North Sea Oil production peaked in 1999, and is now declining at an increasing rate. Meanwhile, Scotland's public sector wage bill has risen by 55 percent since 1999, with 1 in 4 Scots now directly employed by the state. Public spending has risen from 50 to 56 percent of GDP in the same period, and on current trends is set to reach 67 percent by 2012/13.

According to the Centre of Economic and Business Research, that would make Scotland the third most state dependent country in the world, after Iraq and Cuba. And what a sad accolade that would be for Adam Smith's homeland!

Phasing out the incandescent lightbulb

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Hoarders are reportedly stocking up on 100 watt and pearl lightbulbs as the phased EU-ban on their supply comes into force. Like the plastic bag, filament bulbs are an easy target for governments, since we all use them and politicians can be seen to be doing their bit for carbon reduction. But this is gesture politics at its worst. Domestic lighting (for that is all that the legislation covers) does not represent a major component of the UK's carbon dioxide emissions, but it is a soft target.

Many people have criticised the replacement bulbs, the so-called compact fluorescent lamps, despite their lower energy use and longer life. For one thing they will not fit all existing lights, and for another they give a light which is different in quality from the familiar tungsten light. On top of this, they contain mercury, so bringing more of this toxic element into homes just as it has been phased out from thermometers.

But don't take my word for this. Charles Clover, ex-environment editor of the Telegraph now writes a column for the Times. His latest contribution is called Dim thinking behind the new lightbulb laws.

In this, he comments on the reality that many people simply do not like the new bulbs, despite the fact that the head of Osram's consumer products division claims that nobody can tell the difference. Given the lower energy use, it's pretty clear that consumers would be flocking to use the new bulbs if there was no disadvantage. That politicians have to resort to compulsion and manufacturers have to lie to make the change happen speaks volumes. As Charles Clover and others have pointed out, a much more suitable technology is now viable and should soon be available at a more competitive price: the light-emitting diode or LED.

Encouraging the uptake of good new technology is one thing, but forcing people to use a flawed technology which may soon be obsolete does not reflect well on policy makers. But, in the world of environmental politics, few things do.

Why globalisation is good

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Click here to watch an excellent documentary from Johan Norberg.

Why greed is good

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FSA chief Lord Turner, interviewed recently in Prospect magazine, calls much of the banking industry “socially useless", attacking its “excessive activity and profits." The City’s response to these criticisms has been sensible, but bankers have been afraid to make explicit the crucial counterargument: that making money is, in itself, socially useful.

The argument is so simple as to be trivial: firms, provided they are subject to laws preventing theft and violence, can only gain revenue by selling things that people want; they can only make a profit if they sell these things for more than they cost to produce; and in the process of production they employ people who prefer that job to any other they could find. That is, profit-making firms create wealth (in the broadest sense of the word) for their customers, owners, and employees. They take wealth from no-one.

Turner talks vaguely of the banks failing to be ‘socially useful’. The truth is this: any industry that makes money is ‘socially useful’, in the very concrete sense that it makes all those involved better off. Banks made enormous amounts of money over the last decade because they promised something extremely useful: the efficient distribution of capital and risk. The wealth they created was found in the share prices and dividends of banks, the welfare of their customers, the pockets of their employees, and the coffers of the exchequer.

This is not to say that the usefulness of an activity should be judged solely by the profit it makes, nor that people never behave recklessly and make costly mistakes. It’s true that bankers’ remuneration packages were ill-designed, some financial instruments were poorly understood, and the financial sector grew larger than proved to be viable. But the problem with the banks was not that they sought income, nor that they made profits, but that they made poor decisions, and eventually suffered huge losses. In regulating the banks, the government will make a huge mistake if it sees profits as the enemy rather than the goal. The government should ignore Turner’s suggestion to “reduce the size of [the banking] sector or apply special taxes to its pre-remuneration profit," and instead allow it to seek profit, through intelligent regulation, disposal of nationalised firms, and minimal taxation.

The desire to generate profit has long driven men and women to find mutually beneficial trades, to innovate, to compete, to generate wealth and to better the lot of society. We must harness this desire, not constrain it. “The point is," in the memorable words of Gordon Gekko, “that greed -- for lack of a better word -- is good." This fact lies at the heart of capitalist society, its truth is evidenced by our prosperity, and we must not shy away from defending it in these difficult times.

Regulating pay: A step backwards

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With the recent economic recession many governments have taken it upon themselves to rescue private businesses, pumping them full of taxpayer money. Governments around the world have decided that it would be best to save companies that could not survive in a free market system and in so doing they have intensified the economic uncertainty in the market. Almost immediately, the government starting capping CEO pay, and regulating bonuses, to protect taxpayer’s money that should not have been there to begin with.

The problem is that without incentives to perform, a high-quality CEO will leave to a company that can afford to pay him more. If a failing business is not able to attract superior management to itself by paying more then it will most certainly continue on its path towards complete failure. The government should mind a lesson practiced regularly in the world of sports.

According to Sports Business Daily the average annual salary for a football coach in the National Football League in America was just under $3 million with only 13 coaches making less than the average. The interesting point is that of the 13 coaches that make less than the average only 1 has ever made it to the Superbowl. In college sports the story is not much different; according to the NCAA the average salary for football coaches has increased to over $1 a year and bonuses for winning a single game can reach as high as $450,000. No one would argue the fact that coaches indeed make a difference on how well a team performs, and clearly the best coaches are paid the most. The government doesn’t attempt to cap coaches’ salaries in publicly funded universities because they understand that a coach that can win will fill the stadiums and gain a profit for the University. The same is true in the world of business.

According to an article published in the Journal of Managerial Finance titled CEO Pay and Company Performance authors Kevin J. Sigler and Joseph P. Haley found, “a positive and significant connection between the pay of CEOs and the performance of their respective firms."  They further stated, “From our results it appears that CEO pay is used to align the interests of shareholders with company CEOs, reducing agency costs within the firm." Those in charge of determining CEO pay are those that have the most to lose, the shareholders. Deciding how much to pay a CEO is a simple matter of economic trade-off between compensation and expected performance.

Just as I assume the lowest paid coach will likely not have a good season, I also assume a low paid CEO will not bring in a large profit margin. Incentives to perform need not be tampered with if the government would keep out of private business. Let any company pay its CEO however much they desire, and if it doesn’t work out then let the company go under. The best way to regulate CEO pay is to allow the free market to punish and reward decisions by shareholders on the matter.

Spencer Aland joins the ASI

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I am delighted to become a part of an institution as prestigious as the Adam Smith Institute. As a student of both Economics and Political Science at Brigham Young University I have gained great respect for the man whose name this great institution bears and also for the timeless principles he introduced to us so long ago. Adam Smith left us with more than a new way of looking at the world; he left us the key to understanding the remarkable order of things in what was previously seen as chaos.

The problem that many politicians and institutions find themselves in today is that they feel as if they have progressed ahead of classical economic theory. They act as if the laws that have governed economic principles since the dawn of man no longer apply to them. Is this a result of arrogance or of simply ignorance? I would argue for the later. The laws of economics are being ignored in this generation and we can see the punishment that the invisible hand can deal to us if disregarded or coerced. The economic future of the world depends on the ability of our leaders to back off the free markets, and yet they insistently continue to attempt to micromanage in a loosing battle. The market has indeed turned to chaos, but we are the cause and not traditional economic thought.

I a big fan of American Football and enjoy a good round of golf when the weather is right. I enjoy travelling and being around friends and family as often as possible.

Credit crunch reality

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America will beat this crisis and emerge as an economic powerhouse once more. Politicians and policy-makers will rush to claim credit. But the US recovery, when it comes, will be driven by the grit, talent and hard work of ordinary American people. It will happen in spite of, not because of, the actions of Bernanke and his ilk.

– Liam Halligan, 'Four more years of Bernanke is a problem, not a solution' Telegraph.co.uk

Keep your eyes on the road

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The end of privacy...

At last, a truly sensible idea for legislative reform!

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Now this idea is originally aimed at those who have banned incandescent light bulbs but I think it could usefully be deployed further:

Here's my modest proposal to determine whether the legislation actually serves people. Satisfy the proposed power limits in all public buildings, from museums, houses of worship and hospitals to the White House and the homes of all elected officials. Of course, this will include replacing all incandescents with CFLs. At the end of 18 months, we would check to be certain that the former lighting had not been reinstalled, and survey all users to determine satisfaction with the resulting lighting. Based on the data collected, the Energy Independence and Security Act and energy legislation still in Congress would be amended to conform to the results of the test.

Yes, I like it, I like it a lot. Let legislators pay higher taxes for 18 months before the rest of us have our money taken from us. Insist that the SNP does without sealskin sporrans for a year and half before we have to. If fuel duty is to rise then let them pay it before we do: perhaps using some complicated voucher scheme at each and every petrol station so we can identify the scoundrels and thus pelt them.

If children are to be randomly assigned to schools by lottery, then all the children of the educational bureaucracy will be so assigned in the test period: that's every civil servant at the centre, of every councillor enacting it, every child of even a cleaner for a Local Education Authority and most definitely the young Cooper/Balls.

If climate change requires less use of cars and more of public transport then Ministers should be the first: abolish their cars and drivers perk.

Finally, if everything is to be powered by windmills then insist that the entire governmental apparatus do so first for 18 months. What with their chilblains, incipient pneumonia and the sputtering candles they'll have to work by that'll be a year and a half when we are entirely free from their bright ideas and ministrations.

Yes, an excellent idea and I thoroughly recommend it to the House.

Reform the ONS

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Having spent the last week trying to come up with accurate statistics on the public sector, I can confidently state that the online information available from the Office for National Statistics (ONS) is a mess.

Information is hidden in tables that cannot be easily found and when it is finally dug up it is not in a logical format and incomplete without explanation of why this is so. It should not take hours to get access to the number of people employed in the public sector. Upon my inability to find some bssic statistics on public sector pay I sent them an email; despite the prompt reply it was to a page that did not work. I have put in another request and have yet to hear back from them; even if they do get back to me, I don’t expect much help from them.

This failure to provide information in a digestible form is a long way from the model of open government that politicians are so keen to promote. The lack of maneuverability on the website is indicative of all government despite its obsession and waste on new technology. We do not need the policy analysis present in the ONS publications, just the statistics with background information on their collection. Outsiders can do the policy analysis.

Apart from the core functions – measuring the National Accounts, the census, Consumer Prices index (CPI) and the Retail Prices Index (RPI) – most of the statistics are not useful. The ONS needs fundamental reform in order to meet the informational demands of the 21st century. We deserve value for the £1.2 billion we are spending from 2007 to 2012.

The statistics need to be available in easily searchable and comparable formats. The US are doing slightly better with www.usaspending.gov, but it is perversely obsessed with graphics and performance metrics and is remarkably costly. Instead we just need clear and consistent facts.

Perhaps though this is all too much to ask. After all, an understanding of public choice theory suggests that it is not in the government’s interest: “crafty governments use artful marketing to create fiscal illusion--a false picture--to hide from taxpayers how much they pay, where the money goes and what the true long-term costs will be."