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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

Housing benefit changes would only plaster over the cracks in government policy

Written by Pete Spence | Monday 25 June 2012

It is encouraging to see that the Coalition is looking into welfare and changes to improve how the state treats the poor. After all, a lower welfare bill means the stress on the poor through taxation can be reduced. Proposed measures to scrap housing benefit for under-25s however, are poorly thought out.

Many claimants of housing benefit do so in order to subsidise low wages. Some 93% of households who made claims in the last year included at least one employed adult. Rather than seeking to subsidise the low wages of the employed, we should be seeking to reduce the taxes they pay.

Lifting those on minimum wages out of tax altogether would be a good way of achieving this, effectively securing a ‘living wage’ for all who are employed. Having a greater post-tax income is preferable to an equivalent in-kind benefit for housing, most clearly because it gives the poor more choices in alleviating their own poverty. Present arrangements give offspring financial incentives to live apart from their parents. In reality the young poor may be better served with money for transport than by an in-kind benefit for housing. These people are better placed to determine what they need than government.

The reasons for needing housing benefit in the first place are largely driven by state failure. Prime among these are examples of urban planning, which so often fail to actually meet the needs of the poor. Instead these projects serve to generate political capital as governments can be seen to care about regeneration. Similarly, the middle classes are often able to use planning law to protect the value of their own property. This in turn limits the ability of property developers to generate new stock, bringing about high prices in this sector. Steps to liberalise planning law and to reduce the size of the green belt would reduce property prices and help to reduce rents.

Many have already pointed to alarmingly high youth unemployment figures for reasons as to why it is wrong to specifically target under-25s. They are right to note this, but it is not through benefits that these problems can be solved. Rather, legislation such as minimum wage and employment law serves to reduce the number of employment opportunities open to young people. Government’s fetishisation of Higher Education has served to further distort employment markets.

This policy would create new problems by further complicating an overly complex system of benefits, while not properly addressing the real issues with welfare and housing that currently harm not just the taxpayer, but most importantly the young poor themselves. A sincere attempt to reform would have the state get out of the way of young people and allow them to help themselves.

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Michael Gove's exam board monopoly is a step backwards

Written by Anton Howes | Tuesday 26 June 2012

Michael Gove's proposals for education are certainly an upheaval, but scrapping competing exam boards for the new O-levels may be a big mistake. The reasoning behind the proposal, espoused by supporters like Liz Truss MP, is that competition causes a 'race to the bottom', with teachers and schools self-interestedly choosing the easiest qualifications for any given subject in order to boost their rankings in the league tables. The argument goes that this has been one of the chief causes of 'dumbing down' in school qualifications.

Irrespective of whether this is true or not, it doesn't necessarily mean that we should throw the competition baby out with the bathwater. As Dale Bassett of Reform points out, competition has generated some excellent curricula in response to the demand for higher quality, like International GCSEs, the International Baccalaureate (vested interest: I took it), and the Cambridge Pre-U. It is not clear how far the new proposals will limit the ability of schools to deviate from the GCSE/O-Level path in order to choose these alternatives, though the scrapping of the National Curriculum suggests that school freedom will be extended rather than curtailed.

But beyond competing curricula, a plethora of different and competing exam boards within a particular qualification gives us the opportunity to discriminate more effectively when figuring out individual kids' ability and knowledge. For example, English from Exam Board X may be superior to English from Exam Board Y, but despite the fact the 'buyers' of exam boards are schools and teachers, they have had to conform to government-sanctioned rankings and league tables that treat competing qualifications as equivalent. Employers and universities have suffered from the illusion that this lack of distinction makes too.

The proposals to limit exam board competition to monopolies for every subject (or duopolies between O-levels and CSEs) would therefore exacerbate the problem by limiting healthy academic discrimination even further. With only one exam board to be lobbied for each subject, we would face a system where every self-interested education minister could easily ‘dumb down’ the system even further, no matter how much an overhaul could raise standards in the immediate short term.

Free-marketeer MPs like Liz Truss should be more wary of the dangers of this proposed exam board monopoly. Rather than abolishing competition, the real solution to grade inflation may lie in more accurate and discriminating government league tables, or even their replacement with a competing system of tables by universities, employers, and other private groups. The abolition of the National Curriculum may well free schools from the shackles of clumsy government league tables too, but we will have to wait and see for more detailed proposals.

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Religion as a bulwark against big government

Written by Jesse Harrington | Wednesday 27 June 2012

The ongoing debate in the United States over Obamacare recalls the value of religion in the debate on liberty.  Key to the religious perspective on the debate are efforts by the US Department of Health and Human Services (HHS) to require Catholic organisations to provide contraceptive, abortifacient and sterilisation services to their employees as part of their health insurance programmes; an attempt which the Catholic Church has staunchly resisted as infringing on matters of conscience.

The opposition from the Catholic Church of course hinges on religious freedoms guaranteed under the First Amendment, but galvanises awareness among religious groups of the broader personal freedoms at stake under the other Obamacare mandate, requiring all Americans to purchase health insurance on pain of a fine.  Indeed, a Gallup poll now shows that a majority of Americans regardless of political persuasion view the mandate central to the health reform package as unconstitutional.

In some ways, the circumstances resemble the manner in which the first New Deal was brought down by provisions which violated the kosher practices of Jewish butchers, as recounted in an article in The Freeman this month.  In that case, the butchers’ challenge did not rest on First Amendment grounds, but it was motivated by religion and ultimately resulted in the economic regulation being struck down by the Supreme Court.

As the religiously-minded classical liberals of the 19th-century wrote, religion was valuable in a free society because it reminded the people that their sole duty was not to the state, and could thus serve as a means of protecting civil liberties from encroaching government.  As historian Ralph Raico says of Alexis de Tocqueville, who penned Democracy in America in 1835, the Frenchman believed that religious sentiment:

“...sets up barriers to the heedless trampling on individual rights. It is ultimately because of these influences, he holds, that ‘no one in the United States has dared to advance the maxim that everything is permissible for the interests of society, an impious adage which seems to have been invented in an age of freedom to shelter all future tyrants.’ ” (p. 99)

Whatever the Supreme Court may decide this week – whether it overturns or upholds the individual mandate which affects all citizens, or the HHS contraceptive mandate which affects employers – the religious dimension of this debate will hopefully sharpen awareness of individual liberties in future political discourse.  Many secular libertarians today, like their 19th-century forerunners, suspect authority including religious authority.  Rather, it is coercive authority which is to be suspect.  Ultimately, the first protection in upholding the rule of law in a free society is not the court or legislature, but the sentiment of the people, wherein religious sentiment can perform a valuable role.

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Forget competitive exam boards, we should abolish O-Levels altogether

Written by Anton Howes | Wednesday 27 June 2012

Michael Gove’s proposal to abolish competing exam boards for his new O-levels has sparked an important debate within the free-market movement. On the one hand, Liz Truss MP leads the approving side, while Dale Bassett of Reform, James Croft of the Centre for Market Reform of Education, and I, have all cautioned against the dangers of establishing subject-by-subject exam board monopolies.

Liz Truss’ main response to our criticism has been that competitive exam boards represent a “pseudo market” where government determines content, and that we have misunderstood the proposed structure: it is to be a franchise system rather than a monopoly. Similarly, she cites successful genuine free market qualifications like that of the Chartered Institute of Management Accountants (CIMA), who don’t have competing exam boards within their structure.

However, a franchising system is nothing more than a temporary monopoly. There may well be fierce competition for each contract, but it can only serve to restrict the hitherto limited number of competitors even further, as some fail to land contracts and go out of business. This sort of limited competition is also even more conducive to succumbing to the pressures of lobbyists and thus grade inflation as the ‘buying’ is done by a single body rather than by each individual school. As James Croft has pointed out, centralisation also concentrates risk, making it less likely for qualifications to gain and sustain confidence in their standards. Overall, the points made against monopolies still stand.

Nevertheless, the real problem is the persistence of a state-run and state-designed qualification. Comparing CIMA and O-levels is to compare apples to oranges: one is private, and one is not. Where politicians have control, centralisation must be avoided at all costs. The proposed abolition of the National Curriculum suggests that schools will no longer be bound to use O-levels, and will have more freedom to choose from an abundance of existing and potential alternative qualifications. But O-levels’ very existence as a state-run and state-sponsored qualification will necessarily crowd out the competition, leaving it in a dominant position.

Instead, perhaps both sides of the debate could agree to abolish O-levels (and A-levels) altogether. Superior private alternatives already exist, and would welcome the prospect of a more level playing field without government distortions. Even better, existing institutions’ experience of setting exams and designing syllabuses should be used, perhaps by encouraging the currently competing exam board companies to set up their own, entirely separate qualifications. This increased competition could also produce a variety of qualifications that meet employers’ and universities’ demands by including them in syllabus-setting processes. Rather than debating the design of a government qualification, we must be truly radical and propose its abolition.

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New at AdamSmith.org: Tax Avoidance, Boon or Bane?

Written by Geoff Cook | Thursday 28 June 2012

Geoff Cook, CEO of Jersey Capital, defends tax avoidance and argues that we need tax havens.

The recent Times series on tax avoidance has triggered a huge spike in coverage of the tax affairs of the rich and famous.

David Cameron’s condemnation of Jimmy Carr’s tax arrangement as ‘morally wrong’, presumably based on newspaper headlines, was arguably unwise, and may well come back to haunt him as open season is declared by the press on Tory donors tax planning arrangements.

Rather ironically, in the same week he welcomed the news of the introduction of a 75% tax for high earners in France;

“If the French go ahead with a 75% top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they will pay taxes in Britain and that will pay for our health service, and our schools and everything else.”

A more sure-footed Ed Milliband made the following observations when responding to Cameron’s comments.

"I'm not in favour of tax avoidance obviously, but I don't think it is for politicians to lecture people about morality.

"I think what the politicians need to do is - if the wrong thing is happening - change the law to prevent that tax avoidance happening and I think that is the right course the Government should take.”

However, the mood music of popular opinion can sometimes be irresistible for politicians. The same Ed Milliband last year pronounced that:

“The bankers who took millions while destroying people's savings: greedy, selfish, and immoral; the MPs who fiddled their expenses: greedy, selfish, and immoral; the people who hacked phones at the expense of victims: greedy, selfish and immoral.”

The next Prime Minister's Questions with the two UK leaders could be quite interesting!

Whilst few will have much sympathy with Jimmy Carr, given his TV antics lampooning tax avoidance, Mr Milliband is right. Individual judgement of personal tax affairs is a matter for tax administrations and not the court of public opinion.

Read this article.

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We need more competition to break the banking oligopoly

Written by Dr Eamonn Butler | Thursday 28 June 2012

I've defended bankers pretty robustly over the last few years. The popular view is that their greed and recklessness sunk the whole financial system, taking us with it. Oh yeah? Well, what about the greed and recklessness of the politicians and monetary authorities, who engineered a fake fifteen-year boom built on artificially cheap credit, paper money and government debt? Or the greed and recklessness of the public who saw house prices spiralling upwards and took out 125% mortgages so they could make as much money out of the bubble as possible? Or for that matter the ineptness of the financial regulators, who had a whole kitbag full of regulatory tools, but who didn't actually see that there was a problem that needed fixing.

It's not surprising that bank business-getters were paid huge amounts to take more risks and do more deals – because in this fantasy boomland, every risk paid off and every deal worked. Until over-indebted governments and householders could no longer afford to keep the boom going, of course.

But nobody can defend bankers on their cynical manipulation of inter-bank 'Libor' rates. It might be an arcane sort of thing to 99.9% of the general public, but the rate at which banks lend to each other is a crucial signal about the state of financial markets. It is the rate that famously soared five years ago when banks discovered that they couldn't actually be sure that other banks were as deeply polluted by toxic debts as they were. They couldn't trust their colleagues to repay, any more than they could repay loans themselves.

As the Nobel Economist F A Hayek pointed out so well, prices are an essential signalling system. They reveal the state of supply and demand. They tell people where to invest their money to generate the greatest return and, in the process, create the greatest good for the whole population of customers, merchants and manufacturers. If prices are manipulated – by a business with lots of market power or by politicians imposing wage and price controls or unleashing inflation – they cannot perform their vital economic function. So investors and consumers starts to make mistakes and pretty soon the whole structure gets out of kilter. Like an over-moist piece of clay on the potter's wheel, it soon becomes distorted and then spins apart.

So when you have a bank that, using its market power, deliberately manipulates the price of interbank credit in order simply to make itself look good, that is indefensible. You need to clamp down, and fast. No doubt other banks have been up to exactly the same thing. This story will run and run. And it won't make the banking sector look any prettier.

The response from the politicians and the papers is dismally predictable. They will call for more controls over bank practices, new regulations to prevent similar manipulation from re-occurring, new teams of watchdogs to look over the shoulder of traders and see what they are up to.

All a complete waste of time and money, at a moment when the last thing our economy needs is more regulation and higher taxes to pay for it. There is only one way to make sure that such things do not re-occur, and that is to make sure that firms do not in fact have the market power to sustain it. We have far too little competition in banking in the UK, far too small a number of banks. Indeed, even fewer since Gordon Brown, bizarrely, forced through the merger of Lloyds and HBOS. Banking is an oligopoly in which the players each have far too much scale and therefore far too much power over  the financial markets – including the power to manipulate them and indeed mess them up.

The right solution is not to call for yet more regulation – the regulators' toolkits are already bursting at the seams with regulations that either don't work or are counter-productive – but to increase bank competition. Regulation and compliance is fabulously expensive: banks have to be huge because only huge banks can carry its cost. We actually need simpler – and less – regulation to encourage new market entrants and give the existing oligarchs a dose of competitive market discipline. I think we would be astonished by the beneficial result.

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It's time to privatize the capsule if you dare

Written by Adam Kirby | Friday 29 June 2012

Four thousand tonnes – a cathedral-sized force, but upwards. An earthquake in your ears, a thunder rolling and heaving against the windows twenty miles away, and rattling the walls of Politburos even farther afield. You might not want the life of Hamlet or Kennedy, but we can all agree that Government can supply drama.

In a few gloriously unsustainable years the world trembled closer to 1970, a new mission completed every few months. Taxes paid for technology that both threatened Armageddon in hours – and delivered a truer type of shock and awe. Afterwards, we never thought the same way again.

But nor will people ever think the way they did in 1969. Russia’s Soyuz system has been in service for 50 years; will these aging designs still be competitive in ten more? China’s space programme can flex its muscles, still growing in scale and ambition; but ultimately this type of propaganda will run its course, the same way as any subsidised state airline. Profits can beat political will.

The once-mighty NASA are replacing the Space Shuttle with competitive bidding. A cornucopia of companies and imaginative designs are more than filling these contracts, but that’s just the beginning. True private space travel is now a reality.

The old order is rapidly fading – and this is no mad prophecy; you’ll watch it on TV very soon. Now, as in so many other fields, space exploration is re-stocking with both cash and glamour without burdening taxpayers. Last month, Virgin Galactic’s Space Ship II was approved for powered test flights to sub-orbital space, with fare-paying passengers expected within a year. Where Paris Hilton and Steven Hawking go, others will want to follow.

Nobody expects these projects will ever compare to a Saturn V. Probably none will ever use millions of dollars of fuel each second, never cost 1% of GDP, and I sincerely hope they will never cost lives. That’s progress.

In the United Kingdom, besides the poetry there’s the maths: an industry currently generating £5.9 billion in turnover a year and supporting 68,000 jobs. If our government can’t lend a hand it should decisively and consistently get out the way. Not every company will be a success, but in terms of outcomes, the question is no longer ‘if’ or even ‘when’ – but more like ‘how soon?’

And how far. While orbital space tourism already exists, the Isle of Man, out in favour of business, hosts Excalibur Almaz Limited, who hope to fly missions to the Moon before the end of the decade.

As a particularly collaborative and international industry, success will rely as much as ever on the environment where good business always thrives: free trade, free movement and free minds.

How often do you use GPS, satellite TV, or weather forecasts? Putting people up there is just another step, but an important one because it offers a very obvious comparison with government projects; this will be demonstrably cheaper, more inclusive and less polluting.

While the UK squabbles over runways and tax codes other countries are looking to the future. But we have the brains, the finance and the existing technology. In this arena we are, for once, well placed. Let’s light the fuse and stand well back.

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Inequality hasn't really risen in the US

Written by Tim Worstall | Saturday 30 June 2012

You'll be aware that the shocking rise in inequality in the US is being used as the justification for all sorts of nonsense: from something must be done all the way to this is something therefore let's do this. The problem is with the initial statement: that inequality has risen. For it isn't actually obvious that it has. The reason being one of those little points that I bang on about so often: the results of your measurements depend entirely upon what it is that you're measuring.

It is true that inequality as measured by market incomes has increased in the US. It is also true that consumption inequality hasn't changed very much at all. How can we reconcile these two views? Well, that's after we answer the more important question, which inequality should we care about? How much people get in their paycheques or how much people get to eat? Personally I go for the latter but agree that it is possible to be both righteous here and differ. The reason is, in large part:

Studies of income alone often exclude things like Social Security, Medicare, and food stamps.

Well, sorta, but yes and no. Social Security, being a cash payment, is included in market incomes. But the EITC (our tax credits) Section 8 housing vouchers (our housing benefit), SNAP (food stamps) and Medicaid (health care for the poor) are not included in those market incomes. And the US spends some $400 billion a year I think on those programmes (Medicaid being the largest, the EITC near $100 billion perhaps, SNAP is over $50 billion, these are serious sums) on poverty alleviation through these schemes. When we're measuring consumption inequality we are including the effects of these transfers. When we're measuring market income inequality we're not: because, as in kind and through the tax system transfers these things are deliberately and specifically excluded from the incomes of the poor.

There's one more thing. Since the mid 1970s the US poverty alleviation system has been deliberately moving from cash transfers to these in kind and through the tax system transfers. This is also about the time that the recorded increase in market inequality happened.

Which leads to an interesting conclusion. We see that consumption inequality hasn't changed very much at all. Yet market income inequality has, substantially. At least some part of this difference is simply the way that the US measures incomes: by deliberately and specifically not including all of the money they swap around to reduce income inequality.

Something that is, I think you'll agree, a rather strange thing to do but that is what they do do. A goodly part of the US rise in market income inequality is simply down to the way that they measure it, not to any actual increasing consumption inequality.

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Memo to The Guardian: could you make your minds up please?

Written by Tim Worstall | Sunday 01 July 2012

Assuming, of course, that there actually is an intelligence somewhere in the Guardian that has a mind that can be made up, could they try and give it a go on this when we all get to die thing?

But the next campaign for better public health is in a different league. Alcohol and obesity – what we eat and how much we drink – these are the stuff of our very souls.

You see, I can just about get the anti-smoking thing: of course the science being used is nonsensical hysteria and even if it weren't the correct solution is to allow patrons to decide whether to patronise smoking or non-smoking establishments. But it is at least theoretically possible that there is an externality here that needs to be dealt with. There just isn't with food or alcohol.

I can also see, and disagree with, the idea that people should be able to get a doctor to kill them if they want to die. I agree that everyone has the right to commit suicide if they want to die though. But I simply cannot understand your, opposite, reasoning.

Which is, as far as I can see, that people have a right to die when they want to and how they want to but only if you approve of that method? It's OK if they die of doctors, indeed the law must be changed to allow that, but it's not alright if they die of doughnuts and the law must be changed to ban that? Even if both are the choice of the person who has to do the dying?

It's not just that this doesn't sound very logical, it's that it sounds extraordinarily illiberal.

Either people should be allowed to choose the method of their death or not. And if the answer is that they should then I cannot see any reason at all why it should be righteous that they can do so at the wrong end of an injection but not through their own free ingestion of booze, baccy and burgers.

So I do wish you would make up your mind over this: should the State aid people in killing themselves or ban it?

Or are we using one of those irregular verbs: I believe liberal is people get to do what they want, you belive liberal is that people get to do what you want?

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No Ms. Orr, we really have already done this experiment

Written by Tim Worstall | Monday 02 July 2012

I have to admit to never really having been a great fan of the PFI idea. I can recall conversations in the early 90s as it first arrived and thinking, no, come on, it's not going to work out that way. I thought that the combination of people who write contracts for a living interacting with civil servants would lead to some, umm, negotiating inequality. Further, allowing politicians to get now something that the next lot woud have to pay for after the election was going to end in tears.

However, that PFI wasn't that great doesn't mean that Ms. Orr isn't spouting nonsense here:

Essentially, PFI is a way of introducing an artificial profit motive into public projects, to entice the private sector to get involved. Where does this profit come from? It is provided by taxpayers. PFI can only "work" for the taxpayer if the profit handed to the private sector is equal to the saving made by involving them in the first place.

No, the idea of PFI, or privatisation, of private provision, of contracting out, of any and every method that isn't direct supply of goods or services by government itself, is that the efficiencies to be made from organisations subject to competitive pressure will be greater than the profits they will earn.

This might sound like an odd idea but we've actually had an experiment which tested this thesis very nicely. Called the 20th century.

Efficiency is, over time, improvements in total factor productivity. That's just the fancy name for either getting more output with the same inputs or getting the same output with fewer inputs. In that gloriously planned economy that was the Soviet Union, according to Bob Solow at least, it appears that there was no increase in tfp at all. Nada, zip, from 1917 to 1991. Whereas 80% of the growth in the market economies over that same short century came from tfp improvements.

I would call that evidence that Ms. Orr's contention is provably wrong. 

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