An accountable monarchy?

It will be interesting to see how the decision to order government to publish confidential letters between Prince Charles and seven Whitehall departments under freedom of information law pans out. A blanket ban on all royal correspondence being disclosed in this way was imposed last year following pressure from the royal family meaning that this will be the last time such information will be publicly available. The monarchy and the Cabinet Office are also fighting the demand by the courts for Whitehall to publish guidance on when to consult the Queen or Prince on changes to the law that may affect their private interests. The secrecy surrounding royal involvement in political affairs does nothing to help a commonly held public perception that they are undeserving of their tax-funded benefits and power.

Let me start by saying that I have nothing against having a monarchy in this country. The burden on the taxpayer is minimal compared with the US Department of State and in return they placate a widespread desire for traditionalism and serve to promote relations both at home and abroad in a way that short-term, partisan politicians could not hope to replicate. Similarly, I have nothing against royal involvement in politics, which is in general a very passive role, but only on the condition that whatever involvement they do have is made public. The monarchy is heralded as being an essential part of limited government, holding back the self-interest of politicians from a non-partisan and impartial perspective. This does beg the question as to why their opinions are such closely guarded secrets. The protective veil over communication regarding policy rightly serves to generate a mistrust of the royal family and fuels the fires of anti-royalists who claim that they are an outdated relic, extravagantly funded by the taxpayer with no right to meddle in public affairs. This will only be ignited further if it is revealed that the Prince has been a significant influence within Whitehall. In order for the monarchy to be legitimised in the eyes of the people, they cannot conceal their influence on issues that are in the public interest.

One could counter by saying that being only two individuals representing the monarchy, the Queen’s and the Prince’s views will necessarily be constricted to a few areas of interest, making it impossible for them to be impartial. To protect limited government therefore, their views would have to kept secret. Yet, a democratic government must be accountable for its actions and this includes the head of state. If they are truly above politics, they should only get involved in order to protect the public from political corruption and damaging, election-seeking policies.

At the other end of the spectrum, it can be argued that the royals are not qualified to get involved in politics at all. The Queen has a wealth of experience, being the longest serving Head of State in the world, but there are some who would argue that she is nonetheless in a position of inherited power. Frank Gardner’s comments on the BBC that the Queen had told him she ‘couldn’t understand why [there was no way to arrest Abu Hamza]- surely there was some law that he had broken’ reveals an emotional reaction as opposed to logical neutrality. Similarly, Prince Charles’ dislike of certain forms of architecture has lead him to intervene in a number of planning developments he has found distasteful, and has lobbied on issues such as the ‘perceived evils of genetically modified crops’ and foxhunting. This is fine and the royals have just as much right to voice their opinion as everyone else, but in return for their inflated influence above the rest of us, they must also be held accountable for their views.

The unique nature of an unelected head of state within a democratic system means that the royal family cannot hope to maintain their legitimacy without disclosing their political correspondence or details of their veto power within the legal process. They are in a privileged position of having the capacity to influence policy in a much more direct way than the electorate and in return should accept that their impartiality must remain accountable.

On knowing economics before criticising economics

So we've another of these fellahs trying to tell us that economics has got it all wrong. You know the sort of thing: economics doesn't consider pollution or other externalities. When half the subject in recent decades seems to have been about that very point. Or that it doesn't consider value to people properly, only thinks of what can be counted in lucre. When the very definition of economic value is the value to people, both monetary and non-monetary. Here's we've the wallah from the Institute for New Economic Thinking over in the US insisting that we've got to change economics once again:

But what happens when economists' implicit value assumptions break down? Take, for example, the so-called "Easterlin paradox," which teaches that when a person's income rises beyond what's necessary to meet their basic needs it does not increase their happiness. This doesn't match the standard capitalist economic assumption that rising personal wealth leads to increased individual fulfillment. Yet it's been proven time and again. And economics ignores this. Our textbook models remain unchanged.

There's two slight problems to this interesting little thesis. The first being that no one at all ignores the Easterlin Paradox. M'Lord Layard (as an LSE Professor and Labour Peer, ignoring the Old Etonian and Head of Pop bit, about as establishment a figure as it is possible to be) has based much of his happiness economics on this very point. The Spirit Level depends upon it and it's most certainly taught in an undergraduate degree in the subject. So to say that economics ignores this thus we must think again is a little odd. Almost as if the writer doesn't know that standard economics already incorporates what he says it does not.

The second little problem is of course that the Easterlin Paradox is in fact wrong. There is most assuredly a declining marginal utility to money. That last £10 of a £1,000 a day income brings less joy than the first £10 of a £10 a day one most certainly. This on its own leaves room for taxation, moving that £10 from a lower utility use to a higher one if that's what you're looking for. But declining marginal utility, a truth, is not the same as zero marginal utility, the claim. We actually find that there is indeed something of a break point, but that extra joy is still there, it just rises with the log of income rather than the amount.

So perhaps we should rethink economics and root out all of those conclusions that rely upon the Paradox being true after all.

My own assumption about what is really going on in the Paradox is that it isn't actually the level of income at all that makes the difference. It's the growth or not in it. In an economy that's humming along at the standard frontiers of technology pace of 2-3% then people are about as happy as economic growth is going to make them. Zero growth makes people less happy than this optimal rate: and a shrinking economy makes people very unhappy indeed as can be seen all over Southern Europe right now (note that if Easterlin were actually correct then falling incomes above that basic needs level would not make people unhappy. Not something I think we're currently seeing really). Happiness is thus correlated with the rate and direction of change of income, not the level of it.

But as I say, that's an assumption of mine, not something I'd really like to have to prove.

Grand designs?

The Government's recent announcements on changes to planning are to be welcomed, but they represent a very half-hearted attempt to reduce the disincentives to construction (it's a shame that they also came with dollops of more spending as well). Contra the Local Government Association's propaganda, it is quite clear  that it is the planning system which is the principal contributor to Britain's dire shortage of housing. As I recently pointed out, it is this shortage which explains the lack of affordability of housing - both for purchase and rentals, not to mention the vast economic distortions which this constrained supply creates. These initiatives - where they are not entirely misdirected - are tiny compared to the scale of the problems.

But what government giveth, government also taketh away. This take away is in the form of the Communities Infrastructure Levy, which was introduced in 2010 (stemming from the Labour Government's 2008 Planning Act) and is gradually being implemented. The CIL permits local councils to levy an infrastructure charge on developers in order to fund the demand for new infrastructure created by their development. Unfortunately, CIL does not replace the pre-existing Section 106 Agreements under the Town and Country Planning Act (1990) - often used to subsidise 'affordable housing' - but instead is supplementary. The Section 106 Agreements were rather arbitrary whereas the CIL will at least have the benefit of transparency as it is simply levied on a pre-determined rate per m2.

According to the Department of Communities and Local Government's information: 'Under the system of planning obligations only 6 per cent of all planning permissions brought any contribution to the cost of supporting infrastructure, when even small developments can create a need for new services. The levy creates a fairer system, with all but the smallest building projects making a contribution towards additional infrastructure that is needed as a result of their development.' Immediately we should observe an issue; if the CIL intends to increase the amount of contributions derived from developers then this can only represent a further disincentive to developers to build housing. Whilst there is great stress laid upon the need for Councils to balance the CIL - the rate of which is determined by the individual Councils themselves - with the economic viability of development, this effectively means that Councils can determine how much profit any developer can make. The CIL is expected to derive an extra £1billion p.a. by 2016 for spending on infrastructure - which must represent an additional tax of £1billion on development. This hardly seems likely to encourage something that is in short supply and seems to run contrary to the Government's own stated policy aims.

There are also some rather more unforeseen and pernicious effects of the CIL, as recently reported in the Sunday Times [Homes section 2/9/2012]. Firstly, certain councils appear to be using the CIL and Section 106 to raise revenues in the face of tightening from central government and the decline of the volume of housebuilding, especially as the rates are discretionary.  However, like most regulation and taxation the CIL will hit the small man the hardest - in this case, self-builders. As the CIL is levied on any building over 100m2 it may render many self-builds financially unviable according to the postcode lottery of charges. In the worst instance Wandsworth has set rates at over £500/m2 - given that the average self-build is 200m2 the additional costs are hugely disproportionate to the infrastructure demands of any one household. Again, encouraging self-build was encouraged by the Government, particularly by out-going Housing Minister Grant Shapps. Whilst self-builds account for less than 10% of UK house build, disincentivising them is hardly going to help our dire housing situation.

Of course, there is much more that could be said here regarding the distortionary impacts of government control of infrastructure and planning on the housing market and the resultant difficulties the UK experiences in providing sufficient supply of housing. In this limited space it is sufficient to say that this is an ill-conceived policy that should have been scrapped by the incoming Coalition Government. Instead, it is being turned into a means of making up the shortfalls in council funding at the expense of further residential construction. What we have here is a classic but all-too-typical case of Governments advocating and attempting to stimulate via spending a desired behaviour in one area whilst at the same time Government is disincentivising the very same behaviour by another method. Additional infrastructure construction - if it must come from Government - should instead come from existing budgets by eliminating the vast amount of wasteful spending that local Government currently engages in.  

Laffer Curve spotted in the wild again

It always surprises me when people claim that there's no such thing as the Laffer Curve. For the existence of it is simply a mathematical truism, an identity. I'm a little less surprised when people say that OK, there is, but it's got nothing to do with our current tax rates. Surprises me less, but it's still wrong to say so:

This year's budget and increase in stamp duty to 7% above £2m is another example of the folly. Transactions in this price segment have plummeted 50% and the amount of stamp duty realised has actually fallen! Higher rates have produced less. Wealthy people have not been affected one iota. They have either stayed put or bought property outside of the UK. The real victims have been those who will now suffer less government spending because there is less revenue to go around. Where is the social justice in that?

The recent vast increase in cigarette taxes in New York City has also led to falling revenue: not because of falling smoking rates but because of smuggling from other States.

Just as it isn't true that a reduction in tax rates always increases revenue it also isn't true to state that an increase in rates always increases revenue. It really does depend where we are on that curve.

Which leads us to the question of where we are on that curve. The political pressure, that public choice theory thing about tax rates, is that we're always likely to be slightly over the peak of the curve. Politicians are, after all, by definition there so that they can take more of our stuff to do as they wish not as we wish. That's the point of standing for election. They'll continue to push up tax rates until they find that doing so any more doesn't produce any more revenue. Thus the likelihood is that in any mature political system we're going to be just over the peak of that curve: tax rates will have been pushed above that revenue maximising rate.

It's been claimed by very serious people who actually know these things that the current CGT rate of 28% is at that curve peak. Further, that the 45% income tax rate is. I'm not insisting that they are, only that we would expect them to be above it given the incentives to politicians

Which leads us to the really interesting question. For those who say that we should just raise more tax revenue to solve all our problems. Umm, where from? If we're at the Laffer peak then there isn't anywhere we can get more tax revenue from. It's simply not possible. If we're over it then we need to cut tax rates to increase revenue.

Which leads us to the real point. There's some limit to the amount of tax revenue that you can suck out of any given population. When you've got to that point, as I suspect we have, then calling for more tax is not just the usual political silliness, it's actually impossible. Which rather changes the political convsersation, doesn't it?

Zero base tempts Labour

Three years ago I published a book entitled "Zero Base Policy," proposing that the UK needs to examine not just how institutions and practices might be improved, but what their purpose is, and what policies might achieve that purpose.  I wrote:

Government usually continues to do what it has previously done, even in areas where the current policy has visibly failed to succeed.  Sometimes there is tinkering, with government promising "a fresh approach," but in reality offering little more than minor adjustments at the margins.  There ought to be a "zero base policy," under which government would ask in each area what it was trying to achieve, what would count as success, and what policies might conceivably help to achieve that success.

I went through areas such as education, health, the police, drugs, civil liberties and taxation, asking the fundamental question and suggesting policy avenues that could lead to more success than current ones.

It is very refreshing to see front-benchers from the Labour Opposition starting to endorse this radical approach.  First Stella Creasy, and now Ian Murray have given interviews in which the 'Zero Base' approach has featured prominently. 

This is excellent news, and it is just what opposition parties should be doing - using their time out of government to look with fresh eyes at the nation's problems and come up with radical solutions.  All too often governments ask "What is being done and how can we tweak it to improve it?"  A more fundamental question is "What should government be doing, and what policies might enable it to do that successfully?"

Britain faces serious problems, and it is plain to impartial observers that in some areas policy has simply not worked.  The fresh approach of 'zero base' promises new and radical solutions, and its endorsement by some on the Labour front bench is to be welcomed.
 

Why we really do want a carbon tax

I know, I know, climate change isn't happening, it's all been made up. OK, so, for the next few paragraphs let's just assume that it is, we're causing it and also that we need to do something about it. And here's yet another example of what we want and need to do about it is a simple and straightforward carbon tax:

Scottish Renewables said that although the review had reduced connection costs for generators based on the mainland, estimated projected annual connection charges for the Pentland Firth and Orkney Waters area have almost doubled – from £56 million last year to £107m in 2020. Had the affected projects been built in the UK's other Marine Energy Park, in the south-west of England, they would instead receive an annual subsidy amounting to around £2m.

The point here being that connecting the Orkney Islands to the national grid is bloody expensive. Connecting Cornwall to the grid isn't (even if connecting it to the 21 st century still has some way to go). Thus, assuming that we actually want tide and wave power to be used to run washing machines in London we should be connecting up Cornwall and not the Orkneys. This is what prices do for us, give us the information we need to make decisions.

In addition, the increasing capacity of renewable electricity due to be generated in the Orkney waters from wave and tidal projects will require a new, larger grid cable at additional cost. The Government has the power under the Energy Act, as amended by the Climate Change and Sustainable Energy Act, to adjust transmission charges for renewable electricity generators in a specified area in the UK. Stuart called on the Government to use this power, which can be exercised if renewable development in a particular area is likely to be deterred or hindered to a "material" extent by the level of transmission charges that would otherwise apply, for the benefit of projects in the Orkney Islands. "We would like to see the Secretary of State for Energy and Climate Change use his powers to adjust the transmission charges and ensure costs do not deter renewable energy generation in the north of Scotland, home of the world's leading wave and tidal sector," he said.

And there's our problem with the current system. Having given the Sec of State the power to intervene then the political pressure is on the Sec to intervene and ignore prices. And make our solution to climate change ever more expensive for political reasons.

Oh, did I mention that the constituency is the longest held Liberal/Lib Dem seat in the country? The same party as the relevant Sec of State?

As at the top, assume that climate change is happening, it's a problem, we're causing it and we must do something. What we must do is therefore change just one thing, the price of carbon. Instead of this appalling mish mash of regulation and political favouritism that we currently have. For we can see that when politicians have the power to pick and choose they're always urged to pick and choose the method that picks our pockets even more. What's worse, they often agree to do so.

The wrong question

The Liberal Democrats are the latest ones to come up with the wrong answer by asking the wrong question.  They announce (but are unlikely to get) a mansion tax, taxes on wealth, and an additional 100 tax inspectors to scrutinize the returns of "the rich."  They think the question is "How do we get well-off people to pay more taxes?" 

Others have tried to blur in the public mind the important distinction between ordering one's affairs to minimize tax liability, using the provisions the state has allowed for doing so, and not declaring one's income honestly in order to escape paying taxes on it.  The former is tax avoidance and is legal, the latter is tax evasion and is not.

The aim of the people who advocate these things is to raise taxation by having high earners pay more.  Rather than simply raising the rates, as some argue for, the additional aim seems to be one of having HMRC aggressively re-interpret the rules so as to gain more revenue from the existing rates.

The whole question is misconceived.  Instead of asking, "How do we get well-off people to pay more taxes?" we should be asking, "How do we get talented and creative people to generate more business, more growth, and more jobs?"  If they do that, they will broaden the tax base and generate more revenue for the Exchequer, although it will be a smaller proportion of the total economy.

Several studies have shown that government wastes billions of pounds every year on things it does badly and things it should not be doing at all.  Instead of trying to extract more money from successful people to fund this wastage, they should be trying to prevent it happening in the first place.

New attacks on successful people are likely to drive some of them abroad, and to prevent others like them from setting up business in the UK.  We should not be trying to squeeze more revenue from them for government spending, we should be lowering the taxes and regulations that act as disincentives for business development and expansion.  It comes as no surprise that when people ask the wrong question they end up with the wrong answer.

Junk statistics on the carrier bag charge

I was intrigued by an interview on Sky News last week with Tamsin Omond, an environmental campaigner from Climate Rush. A keen supporter of levying a 5p charge on plastic carrier bags, she claimed that in Wales—where such a law has been in force since October 2011—“use of these bags has fallen by 95 per cent.”

This is a remarkable and barely believable statistic and the Sky presenter looked suitably sceptical (see video below from 3 minutes in). “It fell by 95 per cent?!? Over how long a period?” Osmond replied that “because it’s only been in place for a quarter of the year, use fell by 22 per cent over the last quarter...” “So you extrapolate that through?” “Exactly.”

Hmm. That’s quite an extrapolation. If we look at the figures, we can see that the average number of plastic bags used in Wales fell from 9.7 per person in 2010 to 7.6 per person in 2011. This, indeed, is a drop of 22 per cent. Such declines are not unprecedented. Plastic bag use fell by 22.5% in England in 2008, for example (presumably because of the credit crunch), but since Wales was the only part of the union to record a significant fall in use in 2011, it is reasonable to assume that the plastic bag charge played a role.

But does this equate to a 95 per cent reduction overall? To reach this figure, the campaigners have assumed that there was no decline in plastic bag use until the 5p charge came in on October 1st. If so, the annual rate could only have fallen by 22 per cent if the last quarter saw plastic bag use plummet by 95 per cent. They further assume that plastic bag use will remain at a five per cent of the pre-levy rate throughout 2012 and forevermore.

This logic does not stand up to scrutiny. Firstly, the basic maths is wrong. If the levy introduced in the final quarter was responsible for the entirety of the 2011 drop, it would mean an 88 per cent decline in that quarter, not 95 per cent. This would be nit-picking if the other assumptions were sound, but they are not. There is no reason to believe that plastic bag use was not already declining in the previous quarters. In the months running up to the 5p levy, the government, shops and the supermarkets informed the public that the charge was about to be introduced and it is fair to assume that people were already being weaned off free carrier bags to some extent before October 1st.

Moreover, the last quarter of the year is not a typical retail period. The pre-Christmas period is the food and retail sector’s busiest time (see graph below from the Office for National Statistics)  and, therefore, it is the period in which a disproportionately large number of plastic bags are consumed. Doubtless, the plastic bag levy led to fewer bags being used between October and December, but it is wrong to assume that the decline in the absolute number of bags used will continue during quieter shopping months when fewer bags are used overall. That, however, is exactly what campaigners have done.

Looking at the survey data, it seems clear that the 5p levy did not lead to a 95 per cent reduction in plastic bag use, nor anything close to it. Figures from the British Retail Consortium show that “the number of shoppers [in Wales] who said they had used their own bags on their last supermarket trip rose from 61% in September 2011 to 82% by April 2012.”  In other words, the number of people who didn’t use their own bags in supermarkets fell by half. This is all well and good, but it is some distance from 95 per cent. Research from Cardiff University found that “the number of people who always take their own bags when shopping rose in Wales from 27% (42% in supermarkets) before the introduction of the charge to 43% (64% in supermarkets) afterwards”. This is an increase of about 50 per cent and many would applaud it, but it is not congruent with the claimed 95 per cent drop in plastic bag use.

None of this is intended to suggest that the Welsh policy is necessarily misguided. Clearly, there has been a marked decline in plastic bag use which many would welcome. Equally, we know that such laws have unintended consequences, such as the tenfold increase in the sale of black bin bags in Ireland after similar legislation was introduced in 2002. The point is that policy should be based on sound evidence rather than hyperbolic claims from special interest groups. It is easy to bandy impressive figures around, but when one digs a little deeper, they often turn out to be built on weak foundations. Time will tell what effect the Welsh levy has had, but the available evidence suggests that the 95 per cent figure is a junk statistic based on dodgy mathematics and unsound assumptions which should not be taken seriously.

We're all poorer than we need to be: because government

It's one of those definitional little things that causes such problems when you start to unravel it. How do we measure the influence of government spending upon GDP?

The problem is that it's exceedingly difficult to really measure the value of some to all of the things that government does. Thus we simply assume that the effect on GDP of government spending is the amount of that government spending. This is one reason why the Keynesian prescription that the way to raise GDP is to increase government spending "works". Because that's how we've defined it at the start.

However, there are, as we've all noted, certain inefficiencies in having things carried out by the men with clipboards. The accretion of stultifying bureaucracies that market based systems would sweep away. How big is that inefficiency? An interesting paper from the World Bank:

There are obviously glaring differences in the efficiency with which governments spend money on health care, education, roads etc., not only over time in a country, but also among countries. Therefore, as absenteeism of teachers and health workers, overruns in costs of building roads, and other aspects are not taken into account, directly comparing the government part of GDP -- and thus total GDP -- among countries may be misleading. Generous wage raises in the public sector may even be straightly counted as increases in productivity.Grigoli and Ley conducted an interesting exercise. Using indicators of government expenditure inefficiency ("waste") in health and education for a group of 24 countries, and using one of them (Singapore) as a benchmark for best practice, they corrected the other GDPs accordingly to gauge how misleading it is to compare figures obtained through conventional methodologies. On average, meaningful GDP figures should be 4.1 percent lower, with the loss associated with wasted public resources reaching 7.8 percent in Portugal.

4% of GDP is a pretty large number. Near £60 billion: we're collectively poorer by that much here in the UK because we let government run the health and education sectors. Which indicates that it's pretty much a free lunch in getting them to be more market orientated, isn't it?

Yes, I know, there is no such thing as a free lunch: but this is only true when we do not have inefficiency in the system. The eradication of inefficiency is in fact  that free lunch which does not exist.

Cable's business bank is a terrible idea

Business Secretary Vince Cable wants to establish a state business bank to lend to small and medium-sized enterprises. This idea will do business no good, will mess up the finance market, and saddle taxpayers with yet more cost.

There are three reasons why businesses are not borrowing. First, having found themselves overstretched when the crisis hit, they are now doing the right thing and – unlike Mr Cable's government – reducing their debt. The existence of a state business bank is not going to change that.

Second, times remain very uncertain and many firms cannot see many good projects to invest in, so are not actively seeking finance. A state business bank is not going to change that either – though a growth policy of major cuts in regulation and business taxes might.

Third, some SMEs that would like to borrow cannot get credit because the government has told their banks not to take so many risks – and SMEs are inherently risky enterprises. A business bank would simply pass these risks to the taxpayer. And taxpayers have already paid enough.

It is astonishing that Mr Cable believes that he and his civil servants know what SMEs have viable business plans that deserve finance better than professional lenders and investors who live by making these decisions every hour of every day. The only result will be the establishment of a vast new state organisation with all the efficiency of the Post Office, and more bureaucratic control and regulation of the capital markets on which economic growth depends.