School choice for Scotland

Nevada has become the first state in the US to enact a law making school choice universal. This is a groundbreaking example for other countries mildly experimenting with school choice. Adopting something similar in the UK context is an especially interesting idea. It works through an education savings account (ESA) in which the state deposits what it would averagely expend educating a child under the state system. Parents can use this fund for everything from school fees to private tuition – the choice offered in educational services being as wide-ranging and high-quality as individuals demand. And the catchment allocation of pupils to schools they don’t want to attend is a thing of the past.

Notably, families can roll over unused funds from year to year, a feature that makes this approach particularly attractive. It is the only choice model to date that puts downward pressure on prices. Parents consider not only the quality of education service they receive, but the cost, since they can save unused funds for future education expenses.

Scotland, with roughly double the population size of Nevada and a completely devolved education system, could technically do something similar. Not least because it's an idea that people of all political ideologies seem to be supportive of (see my previous post), but there is no freedom of movement in the education system – something that is neither fair on those trapped in the postcode of poorer schools nor an efficient way of driving up standards.

Remarkably many UK private schools at the cheaper end of the spectrum are running at a lower cost than state schools. Take a look at a 2011 paper (pdf) by James Croft that breaks down the cost of state and private sector schools, controlling for expenditures particular to each. Given that profit-making schools can achieve better outcomes for less money, the state handing back the cost of a child's 'free' education would enable people to attend a private school who previously couldn't afford it.

41% operate on fee levels less than, or on a par with, the national average per pupil funding in the state-maintained sector. On average, fees are approximately £7,500 annually. Fees at the more accessible end of the spectrum attract a high proportion of first-time buyers of independent education.

The best education policy currently on offer in Scotland is detailed in the Scottish Conservatives' 2016 Holyrood election manifesto (pdf) which promises school vouchers. But realistically, 60% of Scottish people voting next year are planning to support the SNP. There's just no avoiding for now that Scottish politicians will churn out yet more legislation from our unicameral conveyor belt to undermine independent schools’ autonomy and unintentionally halt our education system's advancement.

Take the Education (Scotland) Bill 2015 (pdf), which I have highlighted in a recent post for an unreasoned section that attempts to outlaw inequality in state schools – if it's successfully implemented teachers not registered with Scotland's General Teaching Council will be barred from teaching.This will massively limit what expert teaching Scottish pupils are exposed to. Meanwhile looms the threat that charitable status, and therefore up to 80% tax relief, will be removed from private schools, affecting hundreds of bursaries for disadvantaged children.

Interference with the better-performing independent schools and misdirected moves in state sector has created an environment in which it is impossible for an education market with school choice and low-cost private schools to emerge. Until we take steps in the right direction, the transience of politics will prove to be either a blessing or a curse.

An alternative ‘Agenda for Hope’

Owen Jones has written a nine-point ‘Agenda for Hope’ that he argues would create a fairer society. Well, maybe. I’m not convinced by many of them. Then again, it would be quite surprising if I was.

But it got me thinking about what my nine-point agenda would be — not quite my 'perfect world' policies, but some fairly bold steps that I could just about imagine happening in the next couple of decades. Unlike Owen’s policies, few of these are likely to win much public support. On the other hand, most of the political elite would think these are just as wacky as Owen's too.

Nine policies to make people richer and freer (and hopefully happier):

1) The removal of political barriers to who can work and reside in the UK. Removing all barriers to trade would increase global GDP by between 0.3% and 4.1%. Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Those GDP benefits would mostly accrue to the poorest people in the world. We can’t remove these barriers everywhere but we can show the rest of the world how it’s done. Any step towards this would be good – I suggest we start by dropping the net migration cap and allowing any accredited educational institution to award an unlimited number of student visas.

2) A strict rule for the Bank of England to target nominal GDP instead of inflation, replacing the discretion of the Monetary Policy Committee. Even more harmful than the primary bust in recessions is what Hayek called the ‘secondary deflation’ that comes about as people, fearing a drop in their future nominal earnings, hold on to more of their money. That reduces the total level of nominal spending in the economy which, since prices and wages are sticky in the short run, leads to unemployment and a fall in economic output. NGDP targeting prevents those ‘secondary deflations’ and would make economic busts much less common and harmful. In the long run, we should scrap the central bank altogether and replace it with competition in currencies (see point 9, below).

3) Significant planning reform that abolished the Town and Country Planning Act (which includes the legislation ‘protecting’ the Green Belt from most development) and decentralised planning decisions to individuals through tradable development rights (TDRs). This would give locals an incentive to allow new developments because they would be compensated by the developers directly, allowing for a reasonably efficient price system to emerge and making new development much, much easier. The extra economic activity from the new home building alone would probably add a couple of points to GDP growth.

4) Legalisation of most recreational drugs and the medicalisation of the most harmful ones. I think Transform’s outline is pretty good: let cannabis be sold like alcohol and tobacco to adults by licensed commercial retailers; MDMA, cocaine and amphetamines sold by pharmacies in limited quantities; and extremely dangerous drugs like heroin sold with prescriptions for use in supervised consumption areas. The sooner this happens, the sooner producers will be answerable to the law and deaths from ‘bad batches’ of drugs like ecstasy will be a thing of the past. Better yet, this would bring an end to drug wars like Mexico's, which has killed around 100,000 people in the past ten years.

5) Reform of the welfare system along the lines of a Negative Income Tax or Basic Income Guarantee. As it is, the welfare system disincentivises work and creates dependency without doing much for the working poor. A Negative Income Tax would only look at people’s incomes (not whether they were in work or not in work), reducing perverse incentives and topping up the wages of the poorest earners. This would strengthen the bargaining position of low-skilled workers and would remove much of the risks to workers associated with employment deregulation. Of course, the first thing we should do is raise the personal allowance and National Insurance threshold to the minimum wage rate to give poor workers a de facto 'Living Wage'.

6) A Singaporean-style healthcare system to replace the NHS. In Singapore, people have both a health savings account and optional catastrophic health insurance. They pay a portion of their earnings into the savings account (poor people receive money from the state for this), which pays for day-to-day trips to the doctor, prescriptions, and so on. The government co-pays for many expenses but the personal cost disincentivises frivolous visits to the doctor. For very expensive treatments, optional catastrophic health insurance kicks in. This is far from being a pure free market system but it is miles better (cheaper and with better health outcomes) than the NHS. (By the way, if you really like the NHS we could still call this an ‘NHS’ and still get the superior system.)

7) A school voucher system and significant reform of the state education and free schools sectors. This would include the abolition of catchement areas and proximity-based admission, simplification of the free schools application process, and expansion of the free schools programme to allow profit making firms to operate free schools. These reforms, outlined in more detail in two ASI reports, would increase the number of places available to children and increase competition among schools to drive up standards.

8) Intellectual property reform. As both Alex Tabarrok and Matt Ridley have pointed out, our IP (patent and copyright) law is too restrictive and seems to be stifling new innovation. Firms use patents as barriers to entry, suing new rivals whose products are too similar to their own. In industries where development costs are high but imitation costs are low, like pharmaceuticals, patents may be necessary to incentivise innovation, but in industries like software development where development can be cheaper than imitation, patents can be a terrible drag on progress. Tabarrok recommends that we try to tailor patent length in accordance with these differences; as a sceptic about our ability to know, well, anything, I’d prefer to leave it to private contracts and common law courts to discover.

9) Last but not least, the removal of the thicket of financial regulation and the promise of bailouts for insolvent banks. Known as ‘free banking’, this system of laissez-faire finance has an extremely strong record of stability – though bank panics still occurred in free banking systems, they were much less severe and rarely systemic. Only once the government started to intervene in the financial system to provide complete stability did things really begin to go wrong: deposit insurance, branch-banking restrictions, and other prudent-seeming regulations led to extremely bad unforeseen consequences. The financial crisis of 2008 probably owes more to asset requirements like the Basel accords, which heavily incentivised banks to hold ‘safe’ mortgage debt over ‘risky’ business debt, than anything else. Incidentally, the idea that having a large number of local banks is somehow better than having a few large banks is totally wrong: during the Great Depression, 9,000 of America's small, local banks failed; at the same time not one of Canada’s large banks failed. The small banks were more vulnerable because, unlike the big banks, they were undiversified.

Now, if only there was a think tank to try and make these dreams a reality.

Milton Friedman on the Negative Income Tax

Milton Friedman was born 101 years ago today. The video above isn't as snappy as many of the great Friedman videos online, but I like it because it shows the kind of libertarian Friedman was. Instead of dismissing any policy that fell short of abolishing the state as 'socialism', he came up with innovative and practicable steps towards a freer and richer world. His policy proposals are still relevant and fresh (unlike many of FA Hayek's, for instance) — as a replacement for existing welfare, a Negative Income Tax today could liberate people from the benefits trap. Daniel Hannan's piece on Friedman and school vouchers — another idea as fresh and important today as it was when he first proposed it — is well worth reading too.