Blog RSS

The Pin Factory Blog

"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

Saint Mark

Written by Jan Boucek | Friday 30 November 2012

Canada’s motto of “peace, order and good government” may not stir the blood as America’s “life, liberty and the pursuit of happiness” or France’s “liberté, égalité, fraternité” but, all things considered, the country’s not in a bad place compared with other advanced economies. The banking system is solid, government debt and borrowing manageable and growth and inflation about as good as could be expected from a major trading nation.

The UK government now hopes that Mark Carney, the current governor of the Bank of Canada, can sprinkle a bit of that Canadian angel dust over here as the next governor of the Bank of England. Mr Carney certainly fits the bill of everyone’s image of the ideal Canadian – modest, polite, no-nonsense – someone you can have a perfectly pleasant dinner with.

To get a sense of the man, check out two major interviews earlier this year on YouTube – BBC’s HARDtalk in August and Reuters TV in January.

Saviours seldom meet  mass expectations for salvation, especially when the sins have been so egregious and widespread. Mr Carney is no messiah, thankfully, but does know what the problems are, what it will take to fix them and what any central bank can actually do. That realism is what’s most needed now.

When asked his general view of the global economic situation, Mr Carney said:  “We’re going through a period of de-leveraging across the advanced economies. There has been a three-decade increase in the amount of debt of governments and households and in some cases corporations across the advanced economies, notably the US, the UK and some parts of Europe…There’s going to be a multi-year process, really measured in decades, of reducing that leverage.”

So, no quick fixes, Cameron & Osborne, Miliband & Balls, and don’t pretend otherwise.

What’s a central bank to do then? “Central banks cannot solve this crisis. Central banks have to focus on, first, delivering price stability. It’s absolutely in no one’s interest to have deflation or runaway inflation…Secondly, we have to do our bit, and it’s not  in its entirety, but our bit to keep the financial system functioning…Central banks can do all of that but just that…will not be sufficient to produce the growth and employment that people want. Other steps have to be taken by national governments.”

So, don’t go to your local central bank to cover the failings of your governments.

And what about Paul Krugman’s belief that central banks are too obsessed with controlling inflation and that a bit of inflation would be a good thing? “I think we’re appropriately obsessed with price stability. The risk in the UK has been deflation. And what the BOE did … (was provide)… additional stimulus through bond purchases - quantitative easing - in order to ensure that… there is not deflation in the UK. That price stability goes both ways…In order for (Krugman’s extra inflation) to make a difference …you have to get ahead of the bond market. You have to have a very large surprise, very quickly in order for it to make a difference on the fiscal side and it won’t work. “

How very Canadian – a sympathetic understanding of quantitative easing but no illusions about fooling financial markets on the dangers of inflation. Clearly a man who understands markets.

As a fellow countryman, I wish Mr Carney all the best and look forward to seeing this cool, calm and collected Canadian cope with Britain’s jumped-up politicians, hyper-active journalists and depressive citizenry.

View comments

A good man for an impossible job

Written by Sam Bowman | Friday 30 November 2012

Madsen comments on the new Governor of the Bank of England, Mark Carney. He is, says Madsen,

probably the best candidate to perform an impossible job.  He had a good record in Canada, which weathered the financial storm better than most.  He has sound views on controlling inflation, and on controlling public spending rather than distributing a largesse of newly printed and borrowed money.

His basic problem remains that the system of centralized control of a monopoly fiat currency may not be up to the task of servicing a modern economy without the wild swings induced by political oversight.  Competing currencies, some commodity-backed, and with market interest rates, might be a better model.  Carney would indeed go down in legend if he were able peacefully to transform the one system into the other.

To that I would add that Carney has been remarkably open-minded about both Austrian and NGDP-focused stories about the crisis. He certainly seems like a good appointment, but the task required of a central banker is a godlike one: to avoid disequilibrium between savings and borrowing, he must be omniscient about people's money demand and plans for the future. However able Carney might be, I'm not sure if that's a job that anyone can do.

View comments

Don't let newspapers become the lapdogs of the political class

Written by Dr Eamonn Butler | Friday 30 November 2012

My old friend John Whittingdale MP, Chairman of the House of Commons Media Committee, says that if the press become regulated in the same way that the broadcast media are, our newspapers will turn out just as bland and boring. Mind you, it is interesting no note that even all the regulation that we do have on broadcast media does not stop it messing up big time – I cite the Newsnight Savile and McAlpine fiascos in evidence.

Three sorts of people in particular would like to see press regulation in Britain. The first is innocent members of the public who have been humiliated or distressed by press stories. They include people who have had their phones hacked. And people who may have a (greater or lesser) public persona but still believe their personal affairs should remain private.

The second group who would like to see press regulation are the Left. That is because most print newspapers take a right-of-centre stance. Some are indeed owned by people of overtly right-of-centre views and make no bones about promoting such views. Inconveniencing these papers and their owners would make certain folk on the Left quiver with delight.

The third group is of course the politicians of all parties. What you have to remember is that politicians think themselves honourable people with good ideas that will improve the way we live (even though these ideas conflict with the ideas of other politicians). The last thing they want is that beneficial process thwarted by self-opinionated journalists who can say what they like without having to face an election every five years. Or to have their authority undermined by campaigns such as exposing just what they claim on expenses, pursued by journalists who are not worthy to lick the shoes of them and their honourable colleagues.

Regarding the first group, I'm not sure if phone hacking is actually against the law, but there is a simple remedy, which is to make it so explicitly. And the limits on press intrusion into people's privacy, while it is always going to be debatable, is something that we already have rules on, that work tolerably well.

On the second, is it acceptable that rich folks can buy newspapers and use them to promote whatever views they want? Well yes, pretty much. We are supposed to believe in free speech, and if we don't agree with what our newspapers are trying to push on us, we don't have to buy them. I resent much more the BBC, which (if you want to own a TV at all), you have to pay for even if you hate it.

As for the third group, I wouldn't let them touch the press with mint surgical tweezers. Editors have been telling us what an impossible position they will be in if they have to check with some quango before they can print a story. But that is not how it works. Everybody knows that a statutory regulator has the power to close a paper down with fines, inquiries and judgements. Gradually, over the years, editors will get used to reining themselves in here or there, to stay on the regulator's good side. And over the years, the regulator's staff will find more and more jobs for themselves to do, and intrude themselves more and more into the affairs of the papers. We have seen the same thing in other industries. Soon, the papers will become mere lapdogs of the political class. And we have seen from other countries where that leads to.

View comments

Is the Foreign Office fit for purpose?

Written by Tim Ambler | Thursday 29 November 2012

Six years ago Keith Boyfield and I wrote a report for this Institute showing that both the EU options then under discussion, exit or accepting the EU as it then was, were sub-optimal.  Since then both those options have worsened.  We called the paper “EUtopia” and painted a picture of an EU that would be better for the members as a whole, better for the UK and, at least in our view, achievable over a longish process of charm, leadership and negotiation. The report was well received especially by the man who is now our Foreign Secretary.

While the report was still in draft, we had a meeting with the then chief of EU matters at the FCO.  The person concerned was, as one would expect, both charming and intelligent.  We asked about the FCO’s vision for the EU and the UK’s place within it and about the strategy for achieving that ideal.  This was greeted with astonishment. The FCO, we were told, had not such forward plan, indeed no planning of any such sort, and should not be expected to operate in that way.  The FCO, and the government on the FCO’s advice, purely reacted to events.

We pointed out that the French strategised their goals and worked purposefully towards them.  That was why the EU worked so well for France.  That cut no ice and the meeting broke up.

Talking with senior politicians, albeit not FCO civil servants, it seems little has changed.  Indeed it may have got worse as the UK’s room for manoeuvre has reduced and we are more and more seen as sulking in a corner.  Apparently, the FCO today thanks that no strategy for the EU is required because it is more or less right as it is.  The FCO, after all wrote many of the rules including the Lisbon Treaty.  For “FCO” today read “Brussels Fifth COlumn”.

Lib Dems apart, few others take that view: not politicians, not business people, and not the electorate.  Doubtless the FCO justify their lofty view by claiming to be better informed than the common people.  The reality is that these civil servants have forgotten the meaning of the word “servant” and that we pay their salaries.

We need an FCO that can visualise an EU that is best for the EU as a whole, best for the UK and achievable and then create a plan to achieve it.  The UK has plenty of potential allies.  Most member states should applaud a reduction in governance costs and accounts that auditors can approve.  French peasant farmers could be brought back to the barricades to fight against EU farm subsidies going to the huge agri-corporations, not the small farmers.  The biggest sufferers from the idiotic EU fish policies are the fishermen themselves. The German on the Hauptstraβe likes being a main contributor to the EU budget as much as we do.

Contrast that with sitting on the sidelines and being isolated as Mr Grumpy.  The Eurovision song contest tells us all we need to know about how many votes the UK attracts in the modern Europe.  Using the veto merely adds to the antipathy.

In short, the Foreign Office is not up to the job. We would probably be better off if we did not have one at all but that is not realistic.  It should be replaced by an FCO that understands what the UK needs and wants and can create the charm offensive needed to achieve it.

View comments

70 years on, it's time to dismantle the welfare state

Written by Whig | Thursday 29 November 2012

This week sees the 70th anniversary of the Report of the Inter-Departmental Committee on Social Insurance and Allied Services, commonly known as the Beveridge Report, which is often credited as the underpinning of the welfare state in the UK (and several other countries which emulated the UK approach). To some extent this is an exaggeration as several aspects of the welfare state existed before 1942, especially in the area of education. Thus Beveridge represents a major expansion of an already existing shift away from private and philanthropic welfare and towards state provision.

It is salutary to note the timing - in 1942 Britain was in the midst of the greatest expansion of state activity it has ever witnessed. Government reached into and controlled nearly every aspect of socio-economic activity, allocating and planning resources, prices and labour to a minute degree. This philosophy, which proved highly successful for fighting a total war, was retained in peace time and employed as a mechanism for providing goods and services which had hitherto been privately provided. Many industries were nationalised and those areas of the economy which were left 'private' were heavily controlled. It was this state of affairs which promoted Hayek to publish The Road to Serfdom in 1943.

Without tracing the history of the past 70 years, it is clear that whilst some aspects of the World War II legacy have been rolled back - for instance the denationalisation of many industries during the 1980s - much of the philosophy of the Beveridge Report remains essentially intact. Whilst the nature of the welfare state has evolved, the mechanisms for provision are broadly identical to those introduced in 1945. For instance, the NHS remains a 'free-at-the-point-of-delivery' system in contrast to the Netherlands which dropped this approach and switched to a 'Bismarckian' one (nonetheless retaining the third-party payer problems inherent in all major health systems including the US one).

Readers of this website will hopefully already be convinced that the Beveridge inspired welfare state has been an unmitigated disaster for the provision of welfare in the UK, so I won't rehearse the arguments and the evidence. For those wanting a good introduction, James Bartholomew's classic The Welfare State We're In is a sensible place to start. Suffice to say, and despite the pernicious prejudice of many statists, Classical Liberals like myself care deeply for the plight of the poor, sick and needy. However, instead of clinging to failed and bankrupt systems which do far more harm than good to both recipients of welfare and society as a whole and especially to those at the bottom of society, we seek a different approach. Of course, those opposed to the status quo adopt a variety of positions: from those who argue for different modes of provision (school vouchers for instance); to those who desire a much smaller welfare state which only offers aid to the very poorest in society; to those who wish to do away with state welfare altogether

On the one hand, it is quite clear that opponents of the welfare state have - for the most part - utterly failed to convince the majority of the case for radical reform and retrenchment. Some tentative steps have been made in the field of school and higher education reform but healthcare, pensions and social protection remain largely untouched and any genuine and far-reaching attempts to do so would be political suicide. The forces of vested interests so clearly described in Public Choice Theory indicate why this is so - nonetheless the only means to overcome the barrier of vested interests is via the dissemination of ideas and ideological support so we must continue this effort. Moreover, recent years have seen the resurgence of the regulatory and license state - an activity which grew popular with the denationalisations of the 1980s and has been compounded with the recent Banking Crisis into a widespread belief that markets cannot function properly without state intervention. Many of these interventions are logically underpinned by the existence of state welfare provision; e.g. alcoholism is creating a burden on the NHS so should be prevented. Strike at the welfare state and we strike at the root of this approach as well.

On the other hand, we must continue to propose sensible mechanisms for moving from the status quo and towards private provision. As I have argued before, this is probably best done piecemeal. Given that opposition to the welfare state spans a spectrum of opinion, it is also sensible to move from reform of provision towards much greater privatisation and then ask the question of whether we need any state provision of welfare at all. One major area to target would be universality. This was one of the key principles of Beveridge and is one of the most unnecessary and expensive aspects of welfare provision - witness pensioners donating their winter fuel payments to charity. Universality was also introduced in order to engender support for the welfare state amongst the better off, remove it and that plank may also disappear.

Reformers must be careful, however. I would argue that the creation of so-called 'internal markets' and use of private providers in such areas as PPI and the NHS may actually be harmful to the cause of privatisation. Government is a poor customer and its size means it prefers to deal with large, equally bureaucratic companies such as Capita and Serco rather than SMEs - this assists large companies in dominating market sectors and leads to monopolistic outcomes. Bad privatisations such as the railways lead to the discrediting of privatisation in general. Failures discredit attempts to privatise properly as the many PPI scandals and the G4S scandal show. Pseudo-markets are likely to lead to exploitation of consumers by entrenched market-occupants protected by state regulation and intervention - witness the energy market or banking.

Even if everyone suddenly saw sense and decided to tear down the features of the welfare state, it would still take many years of consistent reform to return to private provision in order to build up the necessary markets and charitable endowments which the original government interventions so comprehensively destroyed. There would also have to be sweeping reforms in other areas: radical reform of planning laws to allow housing to become more affordable, large scale tax cuts and endowments funded by sell-offs of state property and - perhaps most critically - a return to sound money to allow people to save sufficiently for their futures instead of being impoverished by government inflationism. The welfare state has taken 70 years to build into its present appalling and oppressive form and it may well take 70 years or more to repair the damage, even if that were the general consensus. Still, there is no time like the present... 

View comments

What is wrong with tax avoidance?

Written by Dr Madsen Pirie | Wednesday 28 November 2012

I was on Channel Four News commenting on so-called tax avoidance yesterday evening, putting across some points that I think are important to the recent discussion.

I take the view that nothing requires people or firms to voluntarily pay more in taxation than the law requires.  Indeed, most try to minimize their taxes by offsetting their allowable expenses.  Firms have a duty to their shareholders to operate efficiently, and this includes paying no more tax than the law specifies.  This is tax minimization, not tax avoidance.

A firm like Amazon follows the rules of both the EU and the UK, choosing to locate in Luxembourg to take advantage of its benign tax rates.  The EU single market not only allows firms to do this, it encourages it by preventing other governments from imposing extra taxes on such firms.  Google similarly chooses to locate in the Republic of Ireland.  Locating in one EU member state and paying its taxes gives access to markets in all of them.  The single market was designed to ensure that.

Firms should not be blamed for minimizing their taxes.  The people who should be blamed are the politicians who maintain tax laws so intricate and complicated that firms have to employ expensive teams of lawyers and accountants to navigate them.  Taxes should be so low and so simple that people will neither seek nor need complex shelters.  That would bring in more revenue, if done right, as well as making tax liability more transparent. 

There is no level of tax that is somehow more 'fair' or more 'moral' than that stipulated by the law.  It should be the laws interpreted by judges that decide what is right, rather than the opinion of media commentators and politicians.  If law-makers do not like the present levels of taxes that are paid, they have the power to change the law, just as any firms that found the new levels too punitive would have the power to move elsewhere.

The whole discussion of so-called tax avoidance tackles the wrong agenda, in that the aim of it is to have government take in more taxation.  Instead of trying to increase what government siphons off from the economy, we should be looking at ways of reducing it in order to create the conditions for growth.  The whole debate is misconceived, pandering to envy of success, and can only harm the country's economic prospects instead of helping them.

View comments

Six reasons to reject minimum alcohol pricing

Written by Chris Snowdon | Wednesday 28 November 2012

The government will announce today the launch of its public consultation into minimum pricing. These consultations tend to be something of a charade—the Home Office has already said “We will introduce a minimum unit price for alcohol”—but in case you should wish to respond, here is a non-exhaustive list of reasons why minimum pricing is a terrible idea.

It is regressive

All indirect taxation is regressive, but minimum pricing is carefully calibrated to be as regressive as possible by targeting drinks that are disproportionately consumed by people on low incomes. Doctors on six figure salaries can rest assured that the champagne at the British Medical Association Christmas dinner will not be affected and the House of Commons bar will continue to be subsidised. Cheers!

Evidence is non-existent

As we reported on Monday, the excitable predictions about how many lives will be ‘saved’ by minimum pricing are based on a single computer model which uses dubious methods and false assumptions to come to a preordained conclusion. The truth is that nobody has any idea whether the policy will reduce alcohol-related harm. The only certainty is the majority of ordinary people will be out of pocket.

It’s just the start

Even minimum pricing’s most optimistic proponents admit that ratcheting up the price of drink is not a ‘silver bullet’.  What they mean is that minimum pricing will merely be the start of a sustained temperance campaign in the mould of the anti-smoking crusade. If the medical lobby is allowed to get its hands on one of the key levers of competition (price), we can expect endless demands for the minimum unit price to move upwards. David Cameron has proposed a 40p unit price but the British Medical Association are already demanding 50p. Others want it to be 60p. Whether alcohol consumption goes up or down, you can be sure that the ‘next logical step’ will be to have a minimum price escalator. Think of the children!

And why not? The same dodgy evidence can always be used to justify higher prices. The Sheffield computer model predicts that a 40p unit price will reduce the number of alcohol-related deaths by 10 per cent. At 70p, it claims the number of alcohol-related deaths will fall by more than 60 per cent! The model doesn’t go beyond 70p, alas, but presumably once it gets to 90p all alcohol harm is abolished and at 95p the dead begin to rise from the grave. What are we waiting for?

The moral panic is bogus

Since 2004, Britain has seen the sharpest and most sustained decline in alcohol consumption since the Second World War. The statistics are striking—less than half of 16-24 year olds have had even one drink each week; the proportion of young men who ‘binge-drink’ has fallen by more than 50 per cent; overall alcohol consumption is only slightly higher than it was in 1980. These facts are rather inconvenient for nanny-staters and so they have ignored them and pressed on with a narrative of ‘booze Britain’ that makes for better headlines. Trebles all round!

It is illegal

It’s rare to find the words ‘good news’ and ‘European Union’ in the same sentence, but the good news is that minimum pricing is illegal under European Union law. Previous attempts to limit the free market in this way have been rejected by the European Courts, such as in this judgement from 1978. Referring specifically to proposals to introduce minimum pricing in the UK, the European Commission has said that they “have a problem with the compatibility of the minimum pricing plans under Community law” and that it “causes problems with the compatibility with the EU Treaty”. Several wine-growing countries have already complained that minimum pricing is anti-competitive and, although David Cameron has vowed to fight the European Commission for his right to pick our pockets, if the EU does not stand for free trade between member states it stands for nothing at all.

It won’t help pubs

Winston Churchill said that "an appeaser is one who feeds the crocodile hoping it will eat him last." A few of the pub chains have formed an unlikely, unseemly and unholy alliance with the forces of temperance in the hope that higher off trade prices will drag in some of the punters that the smoking ban drove out. This is a desperate gambit. Minimum pricing will not make beer any cheaper in pubs. It will merely make everybody a little bit poorer so they have less money to spend in pubs. On this occasion, Wetherspoons’ boss Tim Martin has called it right, saying that minimum pricing is “utter bollocks, basically.

View comments

Video: Adam Darwin - Emergent order in biology and economics, by Matt Ridley

Written by Sam Bowman | Tuesday 27 November 2012

View comments

A 30-month agenda

Written by Blog Editor | Monday 26 November 2012

Madsen sets out on his own site what should be the agenda for the second half of this coalition government.  In a speech to York University Conservatives he lists a programme that might reasonably be implemented by the coalition. It's radical stuff, starting with combining income tax and National insurance and moving on to allowing profit-making free schools and privatized universities, with a dash for gas along the way, and the removal of the cap on skilled immigration:

The first half has been dominated by the need to rescue the nation’s finances from the disastrous black hole into which Gordon Brown and his Labour government had sucked them.  The second half should stress essential reforms and a pro-growth agenda.  I set out a programme that might just fall within the range of what the coalition might be able to put through.

You can read the whole thing here (and it's quite short).

View comments

The minimal evidence for minimum pricing

Written by John C. Duffy and Christopher Snowdon | Monday 26 November 2012

In a new Adam Smith Institute report released today, statistician John C. Duffy and ASI fellow Christopher Snowdon assess the Sheffield Alcohol Policy Model, the basis for minimum alcohol pricing policy. Their findings are summarized here:

1. The Conservative Party and the Scottish National Party have both stated their intention of introducing a minimum floor price for alcohol, levied at around 50p per unit. Advocates of minimum pricing claim that the policy will significantly reduce alcohol consumption and the problems associated with hazardous drinking.

2. Estimates of how minimum pricing will affect health outcomes have overwhelmingly come from a single computer model—the Sheffield Alcohol Policy Model. This paper argues that the model is based on unreasonable assumptions which render its figures meaningless.

3. Amongst the problems with the Sheffield model is its false assumption that heavy drinkers are more likely to reduce their consumption of alcohol as a result of a price rise. Its calculations are based on controversial beliefs about the relationship between per capita alcohol consumption and rates of alcoholrelated harm. Its assumptions about the relationship between price and consumption have frequently been refuted by real world evidence.

4. The Sheffield model provides figures without estimates of error and ignores statistical error in the alcohol-harm relationship. Data is drawn from different populations and applied to England and Scotland as if patterns of consumption and harm are the same in all countries. When data is not available, the model resorts to what is essentially numerology. Insufficient data is provided for the model to be recreated and tested by third parties.

5. The model ignores the likely effects of minimum pricing on the illicit alcohol trade, it disregards the health benefits of moderate drinking and fails to take account of the secondary poverty created by regressive price rises. The decline in alcohol consumption seen in Britain in recent years has not led to the outcomes predicted by the model.

6. We conclude that predictions based on the Sheffield Alcohol Policy Model are entirely speculative and do not deserve the exalted status they have been afforded in the policy debate.

Download the report.

View comments


About the Institute

The Adam Smith Institute is the UK’s leading libertarian think tank...

Read more