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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

No, let's not expand the remit of the Low Pay Commission

Written by Tim Worstall | Friday 14 March 2014

Fundamental reform of the minimum wage is needed to keep the system that was introduced 15 years ago up to speed with the changing world of work, according to one of the policy’s key architects. Professor Sir George Bain helped formulate the scheme to tackle poor wages as founding chairman of the Low Pay Commission, the independent body which recommends pay levels to government. But he now wants the body to take on a wider remit, with greater powers. Prof Bain has worked with the Resolution Foundation think tank towards today’s(Thurs)) release of More Than A Minimum, a review of the minimum wage which recommends new ways to keep the commission relevant, now and into the future. Prof Bain said: “When I helped set the UK’s first minimum wage in 1999, it felt like an embattled experiment. Now the policy has the support of all parties and a powerful academic consensus shows it has raised wages without costing jobs.”

No, let's not do this. Quite apart from anything else that final sentence is blatantly wrong. The Low Pay Commission itself has pointed out that the level of the minimum wage of some years ago probably caused 30,000 job losses.

It simply isn't true that a minimum wage does not cause job losses: what matters is the rate of the wage and the significance of those losses. A minimum wage at £1 an hour would have no job losses because no one at all gets paid that rate. One at £15 an hour would have horrendous job losses. So no, I really don't think we want to have a quango cooked up and expanded by someone willing to deny the most basic point about the area under discussion.

But there's another much more important point here about bureaucracy. It's possible that the Low Pay Commission is indeed irrelevant. At which point we should abolish it of course, not attempt to expand its remit so as to give it something to do. And anyone looking at whether the LPC should expand, contract or continue should have had as part of their field of consideration the null hypothesis. Which isn't something that's going to come from the bloke whose baby it is.

This is all, I'm afraid, straight C. Northcoate Parkinson. We must constantly be on guard against bureaucracy being simply a bureaucracy: existing so as to gain budget and powers. And, I would very gently suggest, we should therefore assume at the beginning of all such evaluation exercises as this one, that the correct response is elimination. Only if extremely strong reasons for continued existence can be found should continuance be allowed. Sometimes this will be fairly easy: Royal Navy? Yup. At others times similarly so. Arts Council? Abolish, simples. But as I say, when the conclusion is that the remit should expand so as to make a bureaucracy more relevant then this is, of course, equivalent to stating that it currently has no relevance. Thus abolish.

If we're not brutal in this manner then we'll never get rid of any of them.

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The NHS is meant to be for patients, not staff

Written by Sam Bowman | Thursday 13 March 2014

Jeremy Hunt has annoyed people today by refusing to give NHS workers a blanket 1% pay rise on top of the incremental pay rise they were already supposed getting. That’s hardly a surprise: the NHS is a religion, and Hunt’s decision is the equivalent of giving the finger to the Pope. But he’s got a point.

According to the BBC’s Nick Triggle, “all NHS staff will be getting at least a 1% pay rise. Just over half receive incremental pay rises each year - determined by their length of service and performance. Those whose incremental increase is less will have their pay rise made up to 1%, but many will get more. Last year, the average incremental pay rise was 3.5%.”

In other words, today’s announcement means that NHS staff won’t be getting an additional 1% pay rise over their existing agreed pay increases. That’s a real terms drop, but lots of the coverage I’ve seen has suggested that this means that nurses won’t be getting any rise at all.

Remember that real private sector wages have fallen every year since 2010. Public sector workers already have greater job security than private sector workers, so it's difficult to see why they should be regarded as being automatically entitled to pay rises that most private sector workers aren’t getting.

Obviously, there’s no ex-ante reason NHS staff should get a pay rise. The point of the NHS is to provide care for patients, not to provide welfare to NHS staff. Since the NHS's budget is limited, a pay rise to staff means foregone spending elsewhere.

It’s worth noting that, at least according to the government, this pay rise would be equivalent to 6,000 nurses. Now, I don’t know how the NHS should spend its money – it may well be the case that NHS patients are better served by additional staff or more investment in medical equipment than they would be by this wage increase. Maybe a pay rise is the best way to improve patients’ outcomes, maybe not.

I’m left wondering why NHS pay should be a political issue at all. In the end, this story just underlines the need for devolution of pay bargaining to NHS trusts. National pay bargaining makes little sense given differing labour markets and patient needs across the country. In other words, a pay rise that makes sense for patients in Suffolk may not make sense for patients in Sunderland. We don’t want Whitehall to determine supplies of medical equipment or the allocation of labour hours between staff. Why should pay negotiations be any different?

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This is why the nef is known as not economics frankly*

Written by Tim Worstall | Thursday 13 March 2014

There is good reason to wonder about the new economics foundation, nef, and they've given another one of the interesting data points today. They're arguing that climate change forecasts are more accurate than the economic forecasts that we use to try to plan the economy.

In fact, climate forecasts are actually outperforming many of the key economic forecasts cited by government departments and journalists. Looking at a selection of key long-term forecasts – population, debt-to-GDP and oil price – we can see that not only do many of the actual observations fall well outside the forecast range, the expected trend was way off the mark as well. But have you ever heard these measures condemned as “mumbo jumbo” in the media? Common sense tells us that public policy decisions must be based on the information and tools we have available. What our new paper makes clear is that climate change forecasts offer just as much, if not more certainty as long-term economic forecasts. The argument that climate science is just too uncertain to inform long-term spending decisions can no longer be used as intellectual cover.

Let us leave aside one little problem, which is that they seem to have forgotten (OK, that assumes they ever knew) that the IPCC climate papers are based upoon a foundation of economic forecasts. Which they must be of course. The SRES, that set of recasts, is needed because we need to have the number of people, how wealthy they are and what energy generation technologies they're using to be able to calculate what emissions are going to be. So, any accuracy concerning the IPCC reports on such matters is in fact because of the accuracy of the earlier economic forecasts.

But let us, as I say, leave this aside. Let us instead consider what they think that they're telling us.

We have distinct problems in coming up with sensible plans for dealing with climate change even though that information and those forecasts are better then the usual economic ones. So, where does this leave the usual nef idea that we should be planning our economy? Presumably wandering around in hte dark of insufficient information to be able to plan anything at all.

Which does, I'm afraid to have to point out, seem to put the total kibosh on everything else the nef has ever said about anything ever.

 

*Originally coined by Giles Wilkes who is currently buried in the anonymity of SpAdism.

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Regulation seems to cause bank crises, not prevent them

Written by Sam Bowman | Wednesday 12 March 2014

City AM's Pete Spence (formerly of this parish) reminded me of Mark Carney's claims in January that free banking systems are more unstable than regulated ones. I'm not so sure. Take a look at these two charts from George Selgin's Are Banking Crises Free-Market Phenomena?, which mark an x for every instance of a banking panic. The first chart is for unfree systems, the second for free systems:

In this case at least, it looks like the evidence is against Mark Carney.

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In which I have to explain something to George Monbiot. Again

Written by Tim Worstall | Wednesday 12 March 2014

Unfortunately it's sometimes necessary, with certain people, to explain things again and again so that they finally get it. So it is with George Monbiot and the upcoming US/EU trade treaty. Here he is whining again that there will be a clause insisting that governments must obey their own laws:

But this is not all that democracy must give so that corporations can take. The most dangerous aspect of the talks is the insistence on both sides on a mechanism called investor-state dispute settlement (ISDS). ISDS allows corporations to sue governments at offshore arbitration panels of corporate lawyers, bypassing domestic courts. Inserted into other trade treaties, it has been used by big business to strike down laws that impinge on its profits: the plain packaging of cigarettes; tougher financial rules; stronger standards on water pollution and public health; attempts to leave fossil fuels in the ground. At first, De Gucht told us there was nothing to see here. But in January the man who doesn't do give and take performed a handbrake turn and promised that there would be a three-month public consultation on ISDS, beginning in "early March". The transatlantic talks resumed on Monday. So far there's no sign of the consultation. And still there remains that howling absence: a credible explanation of why ISDS is necessary. As Kenneth Clarke, the British minister promoting the TTIP, admits: "It was designed to support businesses investing in countries where the rule of law is unpredictable, to say the least." So what is it doing in a US-EU treaty? A report commissioned by the UK government found that ISDS "is highly unlikely to encourage investment" and is "likely to provide the UK with few or no benefits". But it could allow corporations on both sides of the ocean to sue the living daylights out of governments that stand in their way.

That it's not going to do much of any importance in the UK is true. But this is because the UK Government generally obeys the laws that it itself has passed. And this is not true of all and every government in all and every country around the world: not even, sadly, true of each and every government of each and every country here inside the EU.

And this is indeed very much the point of this sort of arbitration. It is, quite simply, to make sure that a government keeps its word. That it does not, after someone has made an investment into the country being governed, change the rules so as to, say, confiscate some part of that investment. And the way we do that is by making sure that the court which decides whether the rules, the law, the agreement, has been broken is not under the control of the same government accused of breaking the rules, the law or whatever agreement there has been. And that's all it is about too.

Any government can still go off and, say, nationalise anything it wants, whoever owns it. That's a legitimate, if stupid, use of State power. But the insistence that it is someone outside the country that determines the price that must be paid to the original owners seems sensible. And for an example of what happens when this is not the case we only have to look back to, as I've mentioned before, the Greek bond haircut.

If you were an investor in Greek government bonds that were issued under Greek law then you get shafted. For the Greek government changed the law after the issue of the bonds on what was needed for the collective action clauses to be valid. That is, when the borrower is obviously bust (as Greece indeed was) then clearly there's going to be a restructuring of those bonds and or loans. The creditors are just going to have to take a haircut. However, there are usually clauses which detail the level of agreement that is necessary between creditors and the debtor before this can happen. The general rule is that 90% of the creditors have to agree to the level of the haircut. The Greek government unilaterally changed this to 75% and this made their cramming of a deep deep haircut onto the creditors easier.

If you had Greek government bonds issued under English law you didn't in fact get that haircut: they were repaid in full. Because the Greek government didn't have the power to get the English law changed in that manner. It's a good example of why you would like to have legal matters dealt with by people who aren't the government that you might end up having the argument with. And that is, again, why the whole idea of offshore arbitration exists. Simply to keep governments on the straight and narrow about obeying the law of their own land.

And to be honest, I can't actually think of a reason why this might be a bad idea. Shouldn't governments credibly commit to obeying their own law of the land?

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No, I won't make the obvious joke about Ed Balls' latest idea but it's ____s

Written by Tim Worstall | Tuesday 11 March 2014

This latest idea from Mr. Yvette Cooper rather fails I'm afraid:

People earning more than £150,000 would get only 20 per cent tax relief on pension contributions, instead of the 45 per cent they receive now. Ed Balls, the shadow chancellor, will set out plans to pay for its Compulsory Jobs Guarantee, the centrepiece of the party’s welfare plans. Every young person jobless for more than 12 months will be given a “starter job” which they will have to take or lose benefits.

Leave aside, for a moment, what the money is to be spent upon. I've no real objection to the idea that it should be welfare and work, not welfare and no work. Look instead at what the tax proposal is.

To tax people who are saving for their old age. And there really is a problem in this, for we don't actually not tax people who save for their old age. What we do is delay the tax that must be paid by people saving for their old age.

We do this by not taxing them on the money that they put into their pension pots. And then we tax them on the pensions they receive when they retire. At, it should be noted, entirely the normal income tax rates.

So, what is being suggested now is that people should be taxed on the money they put into their pensions: and then be taxed again, in the normal manner, on the money they get paid in pensions in decades to come. This is, and I'm afraid that I am indeed the first to point this out, double taxation of the most wincingly bad kind. Because, unlikely though it may seem, we rather like people saving for their old age.

The Guardian puts a different spin on the same story:

Ed Balls, the shadow chancellor, will say on Monday that Labour will move to end the plight of "young people stuck on the dole" when he says that the party's compulsory jobs guarantee, to be funded by a tax on bankers' bonuses, will last the whole parliament.

These are the bonuses that the European Union has just slashed to the bone and which are, including national insurance, already taxed at rates of 60% or so?

That's going to raise a lot of money then, isn't it?

Immoral double taxation or a pittance in revenue raising. This hasn't been thought through as yet, has it?

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Does the GOP need a new stool?

Written by Charlotte Bowyer | Monday 10 March 2014

"Does the GOP need a new stool?"

This is the question that upcoming TNG guest Tim Stanley's been asking in a recent blogpost for the Daily Telegraph. To give a bit of context:

"..the Republican stool is at risk of losing its balance. As William F Buckley once argued, support for the GOP historically rests on three conservative legs: free market libertarians, social conservatives and foreign policy hawks." 

However, in the absence of a strong anti-communist message American politics has drifted leftwards, whilst the GOP's 'Middle American' unity has been replaced with a "discordant alliance between wealthy grey technocrats and populist crazies". The legs of the Republican stool now look wobbly and unbalanced, leading to some uneasy and often contradictory politics. As a consequence, the Republicans fail to provide a convincing or consistent alternative to the liberals and Obamanomics. 

So, what's the solution? Tim suggests that it lies in a 'rugged constitutionalism', where politics is conducted at a state level, individual freedom carries real significance, and Republican governments promise to largely get out of the way. Certainly, this has real appeal to libertarian-leaning conservatives both in America & the UK, but what's the likelihood of it actually becoming an election strategy?

Fortunately, under 30s are invited to ponder this question further at the TNG with Dr Stanley on this very subject tomorrow.

The event starts at 6pm in the ASI offices, and RSVP either on Facebook or to events@adamsmith.org.

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Disqus or Wordpress for comments? Let us know

Written by Sam Bowman | Monday 10 March 2014

We're going to be moving over to a new, Wordpress-based site shortly. One of the things we're trying to decide is whether to keep Disqus for comments, or to use a native Wordpress-based comments system.

As I see it, the issues are this:

  1. Wordpress is simpler, requiring no login or registration. Disqus does allow guest comments but it can be quite fiddly.
  2. Disqus allows users to upvote their favourite comments and downvote others.
  3. All our current comments are kept on Disqus, though I'm not sure if we'll be able to bring these over in any case.
  4. Some users find Disqus to be extremely annoying to use; whether this is a specific Disqus problem or a more general problem I don't know.

Since ASI writers very seldom comment on the site, preferring to allow readers to discus among themselves (maybe that should change?), I thought the best thing to do would be to open it up to you — do you like Disqus? Hate it? Which would make you happier — the status quo, or a Wordpress-powered comment system? Let us know in the comments. Of course, the fact that those comments are currently powered by Disqus may skew the results...

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The surprisingly Hayekian Charles Koch

Written by Tim Worstall | Monday 10 March 2014

This is an interesting interview with Charles Koch. Yes, he of Koch Industries, according to some the antithesis of all that is democratic (and certainly Democratic) in the US economy. He's very Hayekian for example:

The expansion seems like a vote of confidence in Wichita when other large companies — Boeing, Coleman’s corporate headquarters — are moving away. What makes Wichita a good fit for Koch Industries? How’s that worked for them? People underestimate the tacit knowledge, the local knowledge that people ... it’s the way people think about government, “The Fatal Conceit,” that a few geniuses are telling everybody what to do — it doesn’t work that way. The people who make it go are the people doing the work who have the hands-on knowledge. And all you can do at the top is set a vision and standards and try to hire the right people. And then they make it happen. That’s what so many companies are missing and what I think we’re missing in the country in a big way.

That is of course a direct reference to Hayek there but I have a very strong feeling that there's more to it than just having read the book. 47 years as a CEO is likely to give you some opinions on how business and companies really work over and above what one might have read in an academic study.

And this is lovely:

I think one of the biggest problems we have in the country is this rampant cronyism where all these large companies are into smash-and-grab, short-term profits, (saying) how do I get a regulation, we don’t want to export natural gas because of my raw materials ... well, you say you believe in free markets, but by your actions you obviously don’t. You believe in cronyism. And that’s true even at the local level. I mean, how does somebody get started if you have to pay $100,000 or $300,000 to get a medallion to drive a taxi cab? You have to go to school for two years to be a hairdresser. You name it, in every industry we have this. The successful companies try to keep the new entrants down. Now that’s great for a company like ours. We make more money that way because we have less competition and less innovation. But for the country as a whole, it’s horrible.

And for disadvantaged people trying to get started, it’s unconscionable in my view. I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism. As you all have heard me say, the role of business is to create products that make people's lives better while using less resources to do it and making more resources available to satisfy other needs. When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — get regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most. We end up with a two-tier system. Those that have, have welfare for the rich. The poor, OK, you have welfare, but you’ve condemned them to a lifetime of dependency and hopelessness.

Not that I tend to get offered the chance to have a beer with a billionaire but I can imagine that if it did happen we'd bore each other stupid by agreeing with every word the other said.

For that is indeed exactly the point. Large companies just love regulation because it prevents the upstarts from disrupting their comfy businesses. Being anti-regulation is therefore determinedly pro-poor: not that you'll ever get one of the Statists to believe or admit it.

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Yes Polly, training the untrained is indeed expensive

Written by Tim Worstall | Sunday 09 March 2014

Polly Toynbee tells of us of a marvellous scheme by which the young and untrained get trained and thus gain decent employment. However, the real message of this story is not quite what Polly thinks it is I fear:

The shadow work and pensions secretary, Rachel Reeves, and Stephen Timms, the shadow employment minister, were in Cardiff this week to study it, as they plan their own similar job guarantee scheme. They visited Sapiens, an international software company that has taken on 12 trainees from Jobs Growth Wales. All these young IT graduates were lost temping in part-time, low-level jobs. One had been stuck working part-time in a bingo hall for a year, others in shops and pubs, each applying for hundreds of jobs without getting interviews: "Everyone wanted people with experience. If you haven't any, you've no hope," said one. The company said it would never have hired these 12 without the programme, because training raw recruits costs so much more than taking on experienced staff. But with Jobs Growth Wales covering six months of intensive training, Sapiens ended up keeping 11 of them permanently.

You can indeed read it the way that Polly does, the Glorious State taking over and making things better where the market simply bumbles ineffectually.

Or one could try to look a little deeper. For example, all of these "young IT graduates" had been in compulsory education for 11 years of their lives, presumably an additional two to get into university and then three once there. So what the hell is our State run education system managing to do over those 16 years if it cannot prepare them for an entry level job opportunity?

The second and more major point is that yes indeed, it does cost money to train people. And the cost of that training can indeed mean that people would prefer to hire the already trained. Which is why it is so stupid to put a minimum price on untrained labour. For that pushes the total costs of untrained labour, wages and training costs, above the costs of hiring someone who already has their act together.

That is, a minimum wage will, if it is high enough to actually matter at all, will by definition be crippling to the employment prospects of the young and untrained.

As Britmouse so graphically points out here.

Perhaps instead of adding another layer of State interference we sould undo the cause of the original problem?

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