Utility Gains

This paper assesses the various utility sales of telecoms, gas, water and electricity companies during the 1980’s and 1990’s and looks at how government, shareholders and customers fared since the privatisation process. The paper argues that the following benefits occurred for each stakeholder:

For the government – various general benefits accrued, such as a pronounced surge in investment. It benefited financially, both from one-off sales proceeds and from ongoing sizeable Corporation Tax receipts.

For shareholders, like pension funds, have generally done very well, with many privatizations – particularly the 12 RECs – heavily outperforming the FTSE 100. Privatized water stocks, too, have powered ahead. There are a few notable exceptions to this, such as Railtrack, British Energy and British Telecom.

For utility customers the financial benefits have been less tangible – in a period of massively rising wholesale prices there has been little to pass on. But investment has been much higher and much-needed improvements in customer service have been developed. Telecoms prices have actually fallen materially, while domestic gas, water and electricity prices have all risen sharply in real terms. However, domestic energy prices have risen mainly due to much higher wholesale gas costs – not because of private sector ownership.

The paper finds investment in utilities is now much higher than before privatization, especially in the electricity distribution and water sectors. It also argues that the privatisation of utilities also created an innovation spike, specifically in the telecoms sector.

Read the report.

Time for Time Limits

  • The UK’s welfare system is in a parlous state, beset by ineffective policies, a culture of dependency, and an ever-increasing price tag. While well-intentioned, recent reforms such as Universal Credit have done little to change this. We must seek more radical reforms to shore up the UK’s welfare system and boost employment.
  • This in mind, the UK should adopt a 5 year time limit on all out-of-work benefits, with payments withdrawn incrementally to avoid a ‘cliff at the end of the period’.
  • We can look to President Clinton’s reforms of the 1990s for evidence of time limits’ effectiveness. Clinton’s Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) saw a 6–7% fall in unemployment counts, a decrease in benefits caseloads by 96%, an unprecedented increase in female employment, and a reduction in government spending by an estimated $54.2 billion between 1996 and 2002.
  • While they are no panacea, combined with investment in re-training and up-skilling, time limits on welfare would be a significant step towards fixing the UK’s distortional welfare system and breaking the cycle of learned victimhood.

Read the report.

Trial & Error & The Idea of Progress

This book is an analysis of progress – its meaning, its constituent elements, the conditions that favour it, and the methods people use to achieve it. Its central theme is that progress implies a closer approach to nominated goals; there must be a target to make progress towards. Alternative attempts to achieve progress are tested against each other, and new attempts are tested against old ones. The ones which prove better than their rivals at achieving progress towards chosen goals are retained, and inferior alternatives are discarded.

Read the book.

You can buy your copy of Trial and Error here

Abolish the Poor

  • It isn’t greedy employers, but greedy government, that is keeping people in inwork poverty; without tax on low earnings even workers on the 2015 minimum wage would earn a living wage.
  • The government should raise the national insurance contributions (NICs) threshold along with the income tax threshold to let workers keep more of what they earn—without tax 37.5h on the minimum wage would give workers just 32p/h (or £670/year) less than the living wage.
  • Employer-side NICs fall partly on employment and partly on workers’ wages— cutting them should also be a governmental priority.
  • Unconditional benefits paid to those in work are not a subsidy to employers, in fact they may induce employers to offer higher wages; those such as tax credits go mostly through to higher wages. Rothstein (2010) estimated that in the United States 73% of the Earning Income Tax Credit went to the worker.
  • Even if the minimum wage for the over-25s were increased to £9/hour under the current tax system, take home pay will be only 69p/hour above the untaxed level of the 2015 minimum wage. This difference will become even less significant considering planned increases in the minimum wage in the coming 5 years.
  • Instead of imposing a mandatory National Living Wage, the Chancellor would have done better to remove taxes from the lowest paid, giving workers a similar level of post-tax income while forgoing the 60,000 higher unemployment and £1.5 billion lower GDP that the Office for Budget Responsibility predicts will accompany his plans.

Read the report.

No Stress: The flaws in the Bank of England’s stress testing programme

In 2014, the Bank of England commenced a stress testing programme in an effort to test the capital adequacy of major UK-based banks. It concluded that its results demonstrated the resilience of the banking system. No Stress, a report from the Adam Smith Institute, suggests that we should be extremely sceptical of the Bank’s conclusions.

The report sees Kevin Dowd, Senior Fellow of the Adam Smith Institute, professor of finance and economics at Durham University, and author of three books, ten book chapters, and dozens of journal articles on risk modelling, present a powerful and rigorous indictment of the Bank’s stress testing programme.

Dowd makes the case that the stress tests are significantly methodologically flawed and worse than useless, giving policymakers unreliable information about the strength of the UK banking system, providing false risk comfort, and creating systemic instability by forcing banks to converge towards the Bank of England’s models.

For these reasons and more, he concludes that we should end regulatory risk modelling and re-establish strong bank governance systems that make decision-makers personally liable for the risks they take.

Read the paper.

The No Breakfast Fallacy

The depletion of mineral reserves poses no serious threat to society, this new report from the Adam Smith Institute concludes.

The No Breakfast Fallacy: Why the Club of Rome was wrong about us running out of resources argues that outcries over resource availability from environmentalist groups are based on a misinterpretation of numbers and a misunderstanding of what mineral resources actually are.

The monograph, written by Senior Fellow and rare earths expert Tim Worstall, says that groups that have warned about the world running out of rare mineral resources, such as The Club of Rome, have been using the wrong sets of data, mistaking the exhaustion of mineral reserves for the exhaustion of mineralresources.

Mineral reserves, the monograph explains, are simply the minerals that have been prepared for use for the next few decades; they are minerals that can be mined with current technology at current prices. Some reserves are going to run out in the near future, but this is a normal process. Every generation runs out of mineral reserves.

Mineral resources, however, refer to a concentration of minerals of a certain quality and quantity that have shown reasonable prospects for eventual economic extraction. These are much larger than mineral reserves.

Organic farming, for example, may be a useful idea, the monograph asserts, but the idea that it is a necessity because we’re about to run out of inorganic fertilisers is based on a falsehood. The reserves for minerals used in fertilizers may exhaust in the next few hundred years, but the exhaustion of resources is not estimated to occur for 1,400 years for phosphate and 7,300 years for potassium.

The report concludes that efforts to conserve and/or recycle mineral resources are wasteful and often end up being net harms to society, by diverting economic activity from more productive uses.

Read the report.

 

Non-Sense: Examining the arguments and rhetoric around non-dom tax provisions

  • Being a UK resident with non-domiciled status simply means that one does not intend to remain indefinitely. The tax system requires residents to be taxed on their foreign income. Non-doms resident in the UK elect to be taxed on either the arising basis (their worldwide income is taxed automatically) or the remittance basis (they are only taxed on worldwide income if they bring it to the UK). 2008 reforms mean that after 7 years of UK residence, non-doms who choose to be taxed in the latter way must pay a yearly fee of £30,000 (rising to £50,000 after more years of residence).
  • Ed Miliband has claimed that there are 116,000 non-doms but this ignores those of the UK’s 400,000 international students and 6 million foreign-born workers who did not have to file a self-assessment form and those who did file it but did not tick the non-dom box. It is estimated that something like 1 million are not permanent residents, so are by definition non-doms.
  • The rules introduced by Labour (and supported by the Tories) in 2008 ended up only hurting less wealthy non-doms and did nothing to really wealthy ones: electing to be taxed on a remittance basis benefits only those with very high foreign incomes.
  • The UK is far from the only country with an arrangement for taxing foreign incomes. In fact, of the 221 jurisdictions which have some form of personal income tax, a mere 35 tax only local income.
  • There is a substantial literature showing that tax systems are very important in deciding where top talent goes. It tells us that punitive changes to the UK tax system could discourage the most valuable potential immigrants from footballers to inventors.
  • Changing how we determine someone’s domicile is likely to have unintended consequences. First, making it easier to acquire a new domicile might reduce inheritance tax receipts, as UK domiciled residents of foreign countries currently pay UK death duties on their worldwide estates. Second, changes to the concept of domicile would have repercussions in other areas of law, such as matrimonial matters and determining the validity of wills.
  • The ethical justifications for Ed Miliband’s view that it is immoral that non-doms do not pay tax on their foreign income are deeply contentious. There is no principled moral case for taxing more than local income.

Read the report.

The Ties that Bind

  • Social cohesion is the strength of interactions between members of society. These interactions are characterised by a number of norms that include trust, a sense of belonging, and a willingness to participate.
  • Measures of social cohesion include generalised trust, interpersonal trust, civic participation and volunteering.
  • Evidence from the US suggests a strong relationship between rising diversity and lower levels of generalised trust. There is much less evidence for a relationship between diversity and other measures of social cohesion in the US.
  • There are some cultural reasons to suspect that American evidence might not fully apply to Europe and the UK.
  • European evidence at a national level does not suggest a negative relationship between diversity and trust or other social cohesion indicators.
  • Evidence from the UK is mixed. There is some evidence to suggest an association between higher diversity and lower generalised trust – yet there is also conflicting evidence which finds no such association.
  • There is little evidence to suggest a negative relationship between diversity and other measures of social cohesion such as: civic participation, trust in authority, or voluntary work in the UK.

Read the report.

The Real Problem Was Nominal: The Crash of 2008

Prof. Scott Sumner, who inspired the US programme of QE3 and was dubbed ‘the blogger who saved the US economy’ by The Atlantic, explains how central banks—not bankers—caused the 2007-8 crash. He goes on further, showing how the European Central Bank is repeating the mistakes the Fed and the Bank of England made in the dark days. And he argues that they can solve the slump and prevent future crises with a market-based, rule-based, stability-focused monetary policy of targeting the level of nominal GDP.

Read the report.