The EU: reform or redundancy

With UKIP set to increase further their share of the vote in the upcoming European elections, and Farage’s triumph over Nick Clegg in the televised debate late last month, the issue of EU membership is as heated and controversial as ever.  We are once more reminded of the strengths and limitations of a Common Market, and the anxieties the union has bred here in Britain. At its best, the European Union has the capacity to foster more harmonious economic relations, encouraging stronger trade, greater efficiency and stimulating investment. When one considers that 100 years ago, Europe was descending into four years of bloody warfare, the change couldn’t be starker. Indeed, regional development funds have been particularly positive, providing countries in Eastern Europe, Southern Italy and the Mediterranean with funds for infrastructure projects and capital spending. Meanwhile, promoting the principle of trade liberalisation has assisted in creating millions of jobs, and has allowed the Ricardian principle of ‘comparative advantage’ to flourish.

For Britain, the Union has provided a huge market for exports, with 500 million customers demanding goods and services on our doorstep. As is often cited by pro-Europeans, 50% of British exports are destined to the European Union. While, undoubtedly some of our trade with non-EU countries is diverted by European tariffs, the opportunities available to UK exporters from membership have been strong. According to some measures this trade supports between 3.5 and 4 million jobs in the UK. However, all is not well in the European Union.

Here in Britain, there are frustrations over the lethargy with which the EU has shown itself able to reform and adapt. A large and bureaucratic European budget, to which Britain is a net contributor, is increasingly becoming a source of resentment.

The more mercantile aspects of the European Union are a concern too. By promoting positive discrimination between member countries – through subsidies and external tariffs – the EU is effectively excluding non-member countries, particularly those in the developing world. The Common Agricultural Policy is perhaps the most tired aspect of the EU in this regard. Many of the subsidies made available through the CAP are directed towards wealthy landowners, who can buy entitlements. These landowners do not even have to farm the land to receive the subsidy.

Moreover, the global inequalities created by protectionism are shocking. The developed world injects around $300 billion every year into protecting agriculture, which is roughly six times the amount it spent on foreign aid in 2003. If we scrapped subsidies and tariffs on food, then the subsequent expansion of world trade would do much to raise living standards for developing world. This would be a sustainable way to alleviate suffering, cut food prices, and reduce trade distortion.

If the European Union does not adapt to the challenges it faces then the prospects going forward appear bleak. Reform must be guided by the principles of trade liberalisation, rolling back bureaucracy where it has become wasteful and meaningless, and driving competitiveness through higher investment and capital spending. These were principles upon which the union was first established, and must not be neglected or forgotten.

A very clever way of proving Lord Stern wrong

The particularly controversial part, from an economic point of view, of the Stern Review into climate change was the use of a very low (near zero) discount rate. The discount rate you use of course being vitally important as you try to translate possible future damages into current numbers so that you can compare them with hte current costs of trying to avoid those damages.

The argument was and is that we know that humans are subject to hyperbolic discounting. Given our lifespans we tend not to think about the far future as much as we perhaps should. Thus market interest rates are fine as a guide to events in coming decades but not to things in centuries.

There's now been a very clever piece of new research which measures how we do actually discount for events in that far future. English property law allows for both freehold land and leasehold: and those leases can be from a century to near a millennium long. Looking at the price difference between the two it is possible to work out that discount rate that we actually do apply:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

This discount rate is rather higher than the one Stern used in his report. And the implication of that is that if we use this new and improved discount rate then our proposed carbon tax should be lower, we should be expending less effort in attempting to avert future climate change.

We could, of course, stamp our pretty little feet and insist that humans should not value the future in this manner. That all of us should value things as Stern says we should. But the fact is that we do not: and it's rather better to try to run the world taking account of the way we all are rather than as certain dreamers would have us be. And the simple truth seems to be that we value damages to people in a century or two rather less than the costs of averting them. So, we should do less to avert them.

UKTI—overseas or drowning?

Other blogs and reports on UKTI have mainly focused on the UK but what about UKTI operations overseas?  The National Audit Office reported, with its customary discretion, that our diplomatic posts were not commercially oriented and the linkages with the UKTI personnel embedded within them were poor.  Roles were confused and, by inference, the UK was not getting value for the “£420M spent by the FCO and UKTI on supporting UK business overseas 2012-13”.  The FCO promised to reform but they have been promising that for nigh on 100 years.

Visit the UKTI overseas websites and part of the problem becomes clear.  They are mostly the standard bromides about the role of UKTI.  The events to which they refer are not in the country in question but back in the UK, mostly foreign language courses.  The overall message in each one is about helping the nationals of that country export TO the UK.  “Business partnerships” is a term much used but they have it the wrong way round: UKTI is supposed to be building the UK economy through, inter alia, exports, not weakening our balance of payments through encouraging imports, still less weakening our manufacturers through increased competition.

The Morocco and Algeria UKTI websites make an interesting comparison.  The Morocco one names three UKTI representatives, with contact details and their specialist areas of expertise.  Exemplary.  The Algeria one just has the details of the British Embassy.  Maybe the switchboard there will find someone to take your call, maybe not.  My source in Algeria tells me that our last two ambassadors there found no one from UKTI up to the job and had to bring in two of their own FCO people to cover trade matters.  Obviously the ambassadors would be too diplomatic to confirm that.

So Morocco is well UKTI staffed and, given the size of its economy, possibly overstaffed, whereas Algeria, whose economy is twice the size of Morocco’s and has far more opportunities for British business, is barely staffed at all.

The coalition government has decided more exports would be good and therefore more money should be awarded to UKTI.  This is simplistic.  UKTI is drowning in its own bureaucracy.  They need to learn how to swim.

Economic Counter-Terrorism: Legalising the export of pharmaceutical-grade opium from Afghanistan

Vishal is the winner of the Adam Smith Institute’s 'Young Writer on Liberty' competition. The subject of the competition was '3 Policy Choices to make the UK a Freer Country', and below is one of Vishal's three submissions.

Although only 12% of Afghanistan’s land is arable, 70% of the population rely on agriculture for their subsistence and the country is the world’s largest producer of illicit opium (~90% of total global output). There has been discussion of granting farmers licenses to cultivate opium but we should also consider it as a potential method of covert, economic counter-insurgency. This would reduce the need for troops on the ground, alleviate poverty and deal with the NHS’ shortage of opioid drugs (this shortage has meant that people are literally dying of pain).

Many corporations (such as GlaxoSmithKline, Mallinckrodt, Abbott Laboratories and Johnson & Johnson) already legally import from India, Turkey and New Zealand. Why not add Afghanistan to the list and kill several birds with one stone?

Prior to the 2001 invasion, the Taliban declared opium ‘haram’ (sinful) and they sharply reduced opium output in Afghanistan during this crackdown. However, in a hypocritical move intended to help fund its insurgency, they have been earning money from opium farmers, smugglers, etc. – being the ‘middleman’ generates some serious revenue for the Taliban.

Legalisation would eliminate the need for middlemen by allowing farmers to directly supply to pharmaceutical companies instead. Farmers receive a fraction (<25%) of the profits. The rest goes to kingpins and warlords. One can easily see why the opium farmers would subsequently have a disincentive to fund any operations by the Taliban against those who are responsible for their livelihood and newfound wealth. How many producers could seriously be interested in killing off their customers?

Many young men have benefitted from the opium trade (becoming the ‘new rich’). So, supposing that the Taliban were to try to wrest control of cultivation or extort from the cultivating communities, they would be causing discontent amongst the same people whom they physically require to fight.

The Taliban pay up to $200/month for men to fight for them (versus the $70/month offered to join the national police force) – legalisation would give those youth some alternative, lucrative sources of employment. Fewer able, young Afghans willing to fight means that we wouldn’t require as many troops to be stationed there and that the Taliban’s grip over certain provinces would naturally loosen.

These self-reinforcing socioeconomic mechanisms, amongst others, would naturally undermine the Taliban both socially and financially.

 Legalisation can be a means of economic counter-terrorism that enables double-sided welfare gains and getting troops out sooner rather than later.

Mark Andreessen's half a good idea

Mark Andreessen has half a good idea here. He points out that while everyone's trying to create more Silicon Valleys that's not actually what we need. SV is the global agglomeration of the world's computing nerds and their necessary support services. That's what makes the place work. However, what we would rather like to have is similar global agglomerations of the world's materials processing nerds, of the geeks who get organic chemistry and so on. For this is the way that industries manage to develop: building themselves where people already grasp the basics. It's still true, for example, that if you'rte going to set up in non-ferrous metals in the UK you'll do it around Sheffield or Rotherham, if in pottery in the Potteries, chlorine chemistry is Tyne- and Tees- side.

So, politicians who would like a development cluster should look to what areas already have some footing in and then attempt to build upon them. That's sensible and that's the half the good idea. However, we then get to the other half:

Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on. There’s a key difference from the if-you-build-it-they-will-come argument of yore. Here, the focus is more on driving regulatory competition between city, state and national governments. There are many new categories of innovation out there and entrepreneurs eager to go after opportunities within each of them. Rethinking the regulatory barriers in specific industries would better draw the startups, researchers and divisions of big companies that want to innovate in the vanguard of a particular domain—while also exploring and addressing many of the difficult regulatory issues along the way.

Selectively reduce the regulatory state in various areas and see what happens. But this doesn't go far enough: as we saw with the Urban Development Corporations of St. Maggie's era. For if reduced regulation is going to increase growth, and we are already assuming that, then why would we reduce regulation in only one geographic area?

Once we've accepted the basic argument, reduce regulation so as to encourage innovation, then our answer should be to reduce regulation everywheree.

Politicians Without Borders: A proposal to abolish the nationality requirement to run for election

Vishal is the winner of the Adam Smith Institute’s 'Young Writer on Liberty' competition. The subject of the competition was '3 Policy Choices to make the UK a Freer Country', and below is one of Vishal's three submissions.

If representative democracy is characterised by the citizens voting for those who they think will represent their interests most accurately – why is this choice restricted? I am referring specifically to the nationality requirement to run for election in all nation-states.

Interestingly, European Parliament elections do not require candidates to be of the same nationality as the citizens of the constituency they hope to represent. For example, Anita Pollack was an Australian who represented a UK constituency, Maurice Duverger was a Frenchman representing Italians, Ari Vatanen was a Finn who represented the French and Monica Frassoni was an Italian who represented Belgians. Why, then, should we be denied such choice when electing individuals to national parliaments?

One may argue that the right must be deprived due to security concerns and because ‘foreigners may not have the country’s best interests at heart’. However, we could say the same for domestic politicians – this is not sufficient. Furthermore, when we consider that there are many humanitarian projects in various countries that involve people of different nationalities, sometimes it might just be reasonable to believe thatpeople actually want to help others, regardless of their nationality!

Currently, all mainstream parties in all countries are nationalist and abolishing the nationality requirement would pave the way for non-nationalist alternatives (at the very least) which may actually help preserve peaceful relations with other countries by providing a voice to those who do not believe in a potentially dangerous, exclusionary nationalist agenda.

Furthermore, the extra competition from foreign nationals might make the transmission of public policy ideas and implementation of public policy more effective. Voters could essentially call for certain foreign politicians to run and ‘import’ politicians whose policies they think they would help the country more than their domestic alternatives (people might prefer, for example, some Scandinavian, German or American MPs). Essentially, domestic politicians would have to increase their performance in response to foreign competition and this would improve overall political performance over time.

After all, if George Osborne can legitimately appoint Mark Carney, a Canadian national, to control the country’s money supply on the grounds of competence, why should the British public not be able to directly elect the foreign politicians whom they would like to see governing the UK? Simply abolishing the nationality requirement and thereby increasing choice for voters would ultimately lead to a net gain in welfare for British society.

Don't cry for Argentina

The usual suspects are complaining loudly that Argentina will have to pay back some of the money that it borrowed. Better, they seem to think, that the law should be flouted by a government than that capitalists should get their money back. However, Argentina had a choice a decade ago. And they made one that benefited them then and has done so for the past decade: it's only now that the other part of that choice is becoming apparent.

Yet, the implications of this ruling go far beyond Argentina's borders. The New York court decision is a precedent that prioritises the profits of financial speculators above the rights of a nation to make economical decisions and protect the interests of its people. It dramatically increases the risk and potential impact of future debt crises, removing any incentive for creditors to participate in debt restructuring for countries facing debt distress – why take the hit when you can stop everyone else from getting paid by holding out?

The clue is in that "New York court decision". Why on earth is a New York court interfering between a soverign government and the people that lent that government money? We wouldn't expect a New York court to have any power over the issuance of UK gilts for example. And the reason is that investors don't trust the Argentine courts. Thus if the bonds had been issued under Argentine law the interest rate to be paid on those bonds would have been higher than those that were actually issued under Now York law. so, Argentina has been benefiting all along from lower interest rates (both before and after default in fact) as a result of issuance in somewhere where court decisions get decided according to the law rather than as a result of a telephone call from the Presidential Palace.

And do not think this does not happen: some Argentine bonds have interest rates set against the Argentine inflation rate (logically, as they're local currency bonds). And the Argentine government has been threatening to jail economists recording the inflation rate as they keep coming up with numbers rather higher than the official announcements which are used to calculate that interest rate.

Another way to put this is that if a government flouts the rule of law so egregiously as to have to borrow money outside its own legal jurisdiction (something that is very different from having to borrow from foreigners, as you can issue foreign bonds under domestic law or that of some other jurisdiction) then it really shouldn't come as all that much of a surprise when some of those foreigners use that foreign law to stop you flouting said rule of law. For, of course, that's why it's all been set up this way in the first place.

Allow student loans to be spent abroad!

Vishal is the winner of the Adam Smith Institute’s 'Young Writer on Liberty' competition. The subject of the competition was '3 Policy Choices to make the UK a Freer Country', and below is one of Vishal's three submissions.

If the objective of providing student loans is to ensure that everyone has access to higher education, why do we stipulate that its use be restricted to British universities? Why not grant all prospective university students the freedom to use their loan money on foreign universities?

 Simply expanding university places in the name of ‘widening participation’ doesn’t change the fact that people from disadvantaged socioeconomic backgrounds are disproportionately well represented in the lower-tier universities (where graduate unemployment rates are the highest). Furthermore, the prospect of graduating with up to £37,725 of debt (for a 3-year course; £9000/year for tuition + £3575 maintenance loan) is far more daunting for people from lower-income households (bursaries and grants are limited, after all).

Allowing students to spend their student loans on foreign universities would ease the pressure on British universities whilst simultaneously encouraging them to be more competitive with the services they offer - most importantly though, students would have more choice (and often cheaper alternatives).

Many middle-income and upper middle-income families (whose children hold the lion’s share of places at the best universities, currently) may find that the resultant change in the marginal cost of sending their children where fees are relatively more expensive (to the USA, Canada and Australia, for example) would actually make this option financially feasible – thereby freeing domestic places.

Furthermore, if students chose to study in Europe (as many would, seeing as it is closer), many European countries do not even have tuition fees (and, if they do, it’s a fraction of what we pay for our universities) – this means that they’d only really need a maintenance loan, if at all! There are no tuition fees charged in Austria, Denmark, Finland and Sweden. Norway charge about 40EUR/semester (no, I’ve not omitted any zeroes), German universities can charge a maximum of 1000EUR/year, the French public universities charge between 250-650EUR/year, the Dutch 1835EUR/year, the Spanish between 525-1280EUR/year and the Swiss up to 3000EUR/year. That means massive savings for the taxpayer and many happier British graduates with a lot less debt.

Also, for those students who are adventurous and/or enterprising enough to want to get their foot in the door of certain emerging markets sooner rather than later, they could study in the BRICS countries (again, for a fraction of the cost).

If the objective of student loans is to educate, let students spend it on the education they would prefer!

Don't take this new estimate of poverty all that seriously

A new report out insisting that poverty has climbed over the past few decades. Not a report to take all that seriously really:

The number of British households falling below minimum living standards has more than doubled in the past 30 years, despite the size of the economy increasing twofold, a study on poverty and deprivation in the UK claims . According to the study, 33% of households endure below-par living standards – defined as going without three or more "basic necessities of life", such as being able to adequately feed and clothe themselves and their children, and to heat and insure their homes. In the early 1980s, the comparable figure was 14%.

The actual research itself isn't quite as bad as the write up of it (although that's last year's version, this year's is not published as yet). Not as bad as long as we recall the limitations to it.

The number of people falling below the minimum standards of the day has doubled since 1983

The important part is that "standards of the day".

It's a good measure of poverty for all that. Very similar to the way the Rowntree people calculate the Living Wage and we at the ASI have several times insisted that we support that method of measurement. It's Adam Smith's linen shirt all over again. Not being able to afford a linen shirt does not make you poor. But if you live in a society where not having enough to be able to afford a linen shirt means you are regarded as poor then in that society you are indeed poor. Thus the Rowntree surveys of what people ought to be able to do without being regarded as poor in this society.

But that makes this a survey of relative poverty, not absolute. For as society becomes generally richer then the list of things you should be able to do without being regarded as poor expands. For example:

Specifically, one in three people could not afford to adequately heat their homes last winter and 29% had to turn the heating down or off or only heat part of their homes.

I very much doubt that anyone at all expected to be able to heat all of their house the entire winter back in 1980. Perhaps the very richest: but partial heating of a house was entirely the norm even in a thoroughly middle class upbringing like my own. Yes, the report does talk about this but the standard of "fully heated" has changed markedly over these decades.

The interesting way to read this report is actually to look at the advances that have been made. The general standard of living has risen sufficiently that what used to be considered being reasonably well to do is now regarded as being in poverty. At which point three cheers for free market capitalism: the only socio-economic system that has ever actually managed this feat.

The NHS is terminally ill—we need a new Healthcare system

Tom won second place in the Adam Smith Institute’s 'Young Writer on Liberty' competition. The theme of the competition was '3 Policy Choices to make the UK a Freer Country', and the following is one of Tom's policy suggestions. 

The NHS is bloated, overweight and obese.  In 2012/13, its annual budget was over £100 billion.  A staggering sum.  For that sort of money we must be getting world-beating healthcare, right?  Well…not quite.  A Bloomberg study put us behind Libya in terms of efficiency!  While our healthcare costs per capita are the 15th highest in the world, our infant mortality rate is only the 30th best.  Life expectancy is no better.  For the huge costs to the taxpayer, the NHS isn’t good enough.

Why is this?  The NHS is increasingly filled with bureaucrats.  2008-9, the management staff numbers increased 12%, while the nurse numbers increased 2%.  Much money is being spent on middle management; not enough on frontline service.  Without the profit motive that exists in private business, the NHS has no incentive to cut costs, or drive efficiency improvements.  Consequently, the NHS budget has spiralled from just over 5% of GDP in 2000 to about 10% now.  A doubling in little more than a decade.  Moreover, the ‘free at point of use’ system is flawed.  Doctors’ valuable time is wasted;  88% said they spend time dealing with minor medical problems that patients could manage themselves.  If healthcare is provided free, of course people will misuse it; that’s how the incentives are aligned.  But is there an alternative?

Singapore’s healthcare system should be adopted immediately.  Bloomberg ranked it second in terms of efficiency; per capita healthcare costs are roughly half ours.  They also manage to deliver superlative healthcare outcomes.  They consistently rank near the top for life expectancy.  It is no surprise that they have the lowest infant mortality rate in the world.  How do they do it?  Healthcare spending is 68% market based.  Individuals control their own health savings account.  For low-income earners, this is topped up so they can afford their healthcare needs.  It also means people aren’t frivolous; they shop around, look for value.  Competition ensures that costs are driven down as healthcare providers fight for customers.  People also have catastrophic medical insurance so nobody is left to die because they couldn’t afford the surgery needed following a horrific accident.

This market-based system maintains fairness - everyone has access to healthcare - drives efficiency and increases consumer choice.  Roughly, the UK could save about £50 billion by increasing efficiency to Singaporean levels.  This is a policy to make society freer, richer and happier.