How much charity giving is just a subsidy to advertising?

One of us has been rather surprised, after perhaps a decade of not paying attention to the medium, to find that the Americans can actually make reasonably good TV shows. The resultant binge watching has led to exposure to the standard British advertising associated with such habits. A bit of which raises an interesting question.

How much of the government subsidy to charitable giving actually just ends up as a subsidy to such advertising? 

As we understand it this is not about gift aid, the return of tax that has been paid upon money that is then donated. Rather, upon the advertisements (from the likes of Save the Children, Action Aid and so on) there is a claim that, up to a certain amount, the government will 100% match donations made. So, when a viewer texts in with a £2 a month donation there is a match to that from public funds.

Well, OK. More taxpayer money goes to those organisations which, by their actions, people think should have more money. That's better than some committee somewhere deciding upon the allocation. And yet, and yet.....

Standard theory tells us that some amount of this matching money will end up not as an increase in the amount spent upon alleviating famine, plague and destitution, but as an increase in the advertising being done and thus a subsidy to the TV stations.

Imagine, sans subsidy, a charity pays 50 pence (purely made up numbers) in order to gain a £2 donation. That's £1.50 more to be spent upon alleviation. Now add in that subsidy. It makes sense for the charity to be paying up to £3.50 on advertising in order to gain that £2 donation plus the matching £2. For the net effect upon their funds is still that £1.50 increase in resources.

Theory tells us that some of this will almost certainly happen. Over time that it certainly will. What theory doesn't tell us is how much of this will happen. It is possible that it will be a little tiny bit at the margin and that the net effect is a substantial increase in the funds allocated to famine, plague and destitution relief. It is also possible that the arms race to advertise to gain donations will swallow up all of that matching funding, in fact theory tells us that net funding allocated to famine etc could actually fall.

Note the similarity here to the tax incidence argument - who pays the cheque isn't necessarily the same as who bears the economic burden. We are discussing much the same thing here. That more cash is nominally allocated to plague relief doesn't mean that more gets there - it's entirely possible that it ends up instead in larger advertising budgets and thus in the coffers of the TV stations. 

We don't know the answer here but we insist that it's an interesting question. How much of that matching charitable donations by government actually ends up as a subsidy to advertising to gain donations? Theoretical answers range from fractionally above 0% to over 100%. But what does reality say? And shouldn't we find out given that it is we taxpayers coughing up for this?

What an amusing demand - the rules of a private organisation must be turned into the law

Or perhaps not so amusing given the mindset it reveals:

The #MeToo and #TimesUp movements have enabled women to speak up about sexual harassment and abuse, so it’s cheering to see the Producers Guild of America taking the situation seriously by publishing new guidelines to combat sexual harassment on film sets. Post-Harvey Weinstein, action, as opposed to just words, is needed in the industry. It’s a good sign that Wonder Woman 2, the sequel to the female-helmed blockbuster, has already signed up to the guidelines, and hopefully this will encourage other forthcoming productions to do the same.

But, while it’s a step in the right direction, it may not effect much radical change. First, membership of the PGA is voluntary, so film producers can opt out of joining or leave the organisation if they aren’t keen on adhering to the new standards. Second, the guidelines are not legally constraining, so the 7,500 members of the PGA are bound only by “best practice” suggestions: their membership would not necessarily be threatened if they did not integrate them into their productions.

Sexual harassment may be considered discrimination, in legal terms, but without a legal requirement to put the PGA guidelines into practice, it is possible that many producers may not bother.

Leave aside the background here, the entire MeToo story. Look at the actual demand there. Membership of the PGA is voluntary. Anyone can make a film without being a member. It's simply a private club, a part of those little platoons which make up society. 

But those rules of that private club must be turned into law which apply to everyone, club member or not. This is to demand that the rules of the Boy Scouts, the Labour Party, the Derwentwater Bowls Club, be turned into the law of the land.

Not, perhaps, all that amusing in fact. Rather, a betrayal of a complete lack of understanding of what civil society actually is.

Policy Priorities in 2018: Practical Liberalism

Beyond increasing productivity and incentivising innovation, we advance the cause of individual liberty by promoting practical, evidence-based, liberal solutions to pressing social issues. Regulatory prohibitions often restrict liberty, and can also backfire creating dangerous black markets. We will make the evidence-based case for expanding consumer choice, ending counterproductive prohibitions, and reducing harm. Innovation, not greater regulation, can improve public health as consumers demand healthier, safer products.

The UK has become a world-leader in tobacco harm reduction. Smoking rates are falling as smokers switch to safer e-cigarettes. Fears that e-cigarettes would increase tobacco use by making smoking ‘cool’ were unfounded; in fact, the recent decline in smoking has been strongest among 18-24 year olds. But we can do better. European regulation is slowing take-up. Manufacturers and public health campaigners are restricted from advertising the fact that e-cigarettes are safer. This is a huge problem when 19% of smokers haven’t tried an e-cigarette because they were concerned about safety. Worse still, regulating tank sizes, nicotine strength and bottle sizes may make e-cigarettes less desirable for some users. This is a serious problem as evidence suggests bans on e-cigarette flavours led to higher smoking rates. The sheer number of lives that could be saved if smokers switched to e-cigarettes is staggering. This is why we are prioritising harm reduction in 2018. Repealing EU vaping restrictions, stopping indoor vaping bans in public buildings (the ASI now allows considerate vaping in the office), and making it easier to bring the next generation of e-cigarettes to market will all be key in saving lives by expanding choice.

We may be leading the way on e-cigarettes, but we’re falling behind on cannabis. By July 1st, Canada will have legalised cannabis nationwide. Rising evidence from across the US has proven doomsday predictions of cannabis legalisation have fallen flat. The case for cannabis legalisation is powerful. Criminalisation has increased organised crime, created stronger strains, and led to undesirable street dealing. Drug dealers don’t check for ID and they don’t label the strength of their products. It’s led to a nationwide street lottery where strains vary massively in strength and safety. More of the same simply won’t work. We can stamp out street cannabis by taking supply out of the control of criminals and creating a legal, regulated market. In 2018, we will ensure evidence, not hyperbole, guides the debate around cannabis legalisation.

When prices are artificially capped, shortages occur. This is not only the case for housing. Every year hundreds die waiting for a kidney transplant, while thousands sit on dialysis spending nearly 12 hours a week in a hospital. The situation for bone marrow is similar – 140 patients fail to find a donor each year, with the situation especially bad for ethnic minorities. Financial incentives can solve this problem. Compensation for blood and plasma donors in the US has effectively ended the seasonal shortages that affect other countries, with fears about exploitation or safety being unfounded. As a result of campaigning by think tanks, ethicists and economists, compensation for bone marrow donors is now allowed in the USA as of last year. In New Zealand, new laws will compensate organ donors for lost wages. Both parties recognise there’s a problem, with Theresa May announcing an opt-out system for organ donation. That will help, but not solve, the problem. And it’s not a long-term solution. Autonomous vehicles will save lives, but leave fewer organs available for donation. Financial incentives provide our best bet to cut waiting lists and save lives, and in 2018 we will team up with international think tanks to make the case.

Criminalization fuels violence in illegal drug markets, and the same is true for sex work. The UK’s current approach to regulating sex work is failing, putting the safety and wellbeing of over 70,000 (predominantly female) sex workers at risk. Street sex workers face fines and criminal records at the moment rather than access to social and healthcare interventions or protection against client violence, while indoor sex workers must break the law if they want to band together for safety. Some advocates believe that adopting the Nordic Model, which criminalizes clients alone, is the way forward, but a wealth of evidence shows that attempting to ‘end demand’ harms sex workers in a myriad of different ways. The best solution is full decriminalization, which has been the policy of New Zealand since 2003. Research shows that this liberal approach will reduce violence against sex workers, improve relations with police (assisting in anti-trafficking efforts), give them the best chance to assert their legal rights, and assist public health efforts to combat HIV/AIDS. As well as advocating for full decriminalization, we’ll be debunking flawed arguments in favour of the Nordic Model and encouraging local authorities to experiment with managed street sex work zones.

This is the third part of our Policy Priorities in 2018 series. Check out how we're tackling Britain's productivity crisis and encourage permissionless innovation. 

Addendum: Oh, and we'll also continue to make the best memes of any think-tank.

Image credit: Vaping360.com

Policy Priorities in 2018: Innovation without permission

Reforming the tax system, planning law, and facilitating immigration is essential to raising living standards in the UK. However, with a few exceptions these policies only raise the level of GDP. It is only by removing the regulatory barriers that prevent new technologies from being adopted that we can increase the trend rate of growth. Even relatively small increases in the trend rate of growth (0.1pp) can lead to very large increases in living standards over a few decades. This highlights the importance of getting innovation policy right.

To advance in innovation in the UK we will focus on three key areas in 2018.

Emerging technologies such as drones, autonomous vehicles, and consumer genetics could save lives, cut pollution and save money for millions of consumers. But the rate of innovation of depends on the speed at which entrepreneurs can bring new products to market. While centrally planned rollouts often backfire (e.g. smart meters), government can play a role. By proactively deregulating in favour of emerging technologies, they can create the space for entrepreneurs to experiment with new technologies.

Britain is a world-leader in FinTech as a result of the Financial Conduct Authority’s regulatory sandbox. The FCA’s sandbox allows start-ups to trial new products without going through extensive regulatory approval processes. This reduces risk for investors as firms are able to demonstrate business models before getting full regulatory approval. This is particularly useful to start-ups who both cannot afford legal counsel to navigate the regulatory process and cannot attract investment without demonstrating their business model is viable. We should apply the FCA’s regulatory sandbox approach to other emerging technologies such as driverless vehicles, consumer genetics, and commercial drones.

It is also important that regulation does not deter innovative business models. Ridesharing firms such as Uber have expanded flexible employment and delivered a cheaper, faster service. To ensure the sector remains competitive and to avoid a chilling effect on innovation, central government should restrict the ability of local authorities to unfairly crack down on disruptive firms.

Competition policy should protect competition, not competitors. But in recent years, innovative tech giants including Amazon, Facebook and Google have come under attack for being too large by the so-called ‘hipster antitrust’ movement. There is a risk that we return to a naïve ‘big is bad’ policy. The European Commission’s intervention against Google highlights the risk posed to innovative businesses. Even though there was little evidence that Google harmed consumers, the Commission forced Google to restructure its Shopping business. They risk deterring innovation and harming consumers. Recent attacks on Google, Facebook and Amazon rely on overhyped theory (network effects) when evidence suggests that platforms can still face intense competition (e.g. the fall of Myspace). There is a risk that firms face restrictive data requirements deterring innovation in AI. Others call for burdening Facebook and Google by treating them as publishers. Both policies would be a step backwards: they will reduce investment and make consumers worse off. If we’re to keep our economy innovative, competition policy must be guided by consumer welfare.

As we live more of our lives online, the importance of cybersecurity is increasing. However, government intervention risks making us less safe. Attempts to prevent terrorism by undermining encryption through backdoors, make us more vulnerable to cybercrime. At the same time, attempts to prevent children from accessing online pornography may put adults at risk of fraud and leave sensitive data unprotected.

We should also ensure that reducing the risk of terrorist cyber-attacks using driverless vehicles and drones does not create restrictive standards that impede innovation and create lengthy regulatory approvals processes.

This is the second part of our Policy Priorities in 2018 series. Check out how we will boost productivity and how we'll support the return of practical liberalism in British politics. 

Policy Priorities in 2018: Boosting Productivity

Across the Western World, there is a growing sentiment that capitalism isn’t working. Productivity growth has stalled and inflation has outpaced wages. This has led to voters backing protectionists (Trump) and socialists (Sanders and Corbyn). In response, conservatives are becoming more interventionist, backing counterproductive policies such as price caps and curbs on executive pay. Worse still, sluggish growth hurts the government’s fiscal position making important reforms harder to implement.

Public consent for free market capitalism relies on rising wages and living standards. If the pie isn’t growing, then it’s only natural that politicians will win by promising to slice it up more evenly. To mount a robust defence of free-market capitalism, it is essential to develop policies that raise average income growth to, at the very least, historical norms and address rising living costs.

Our key policy priority for 2018 will be to address the housing crisis through planning reform. It is a real testament to the work of Sam Bowman and Ben Southwood that the housing crisis is now the key issue in politics today, and that it is widely accepted (at least on the centre-right) that the cause is restrictive planning laws.

High housing costs not only eat in into pay packets (that in many cases haven’t kept pace with inflation) but they also create barriers to mobility. By making it more expensive to where the best paying jobs are (productive cities like London, Oxford and Cambridge), they lead to people staying put in lower paid work elsewhere. Research by Hsieh and Moretti finds that this effect is responsible for a 13% reduction in GDP in the US and there’s reason to believe that this effect would be even greater in the UK.

It is also important for our limited housing supply to be allocated as efficiently as possible. This is why we will continue to advocate in favour of abolishing stamp duty, which prevents people from moving.

The rise in house prices driven by supply-side constraints is to blame for the rise in wealth inequality identified by Piketty. Importantly, the focus must be on increasing affordability: not just ownership. It is a mistake to state (as many commentators and politicians have) that one must own capital to support capitalism. If capitalism only benefited the owners of capital, then we would be socialists. As a result, we will continue to oppose demand-side interventions such as Help to Buy which fail to address the underlying supply-side problem.

The only way to resolve the housing affordability crisis is by increasing supply through planning reform. Building on our work last year with John Myers, we will work hard on developing politically feasible policies to radically boost housing supply.

Another priority will be removing barriers to investment within the tax system. Over the past seven years, reducing the corporate tax rate has made the UK an attractive destination for overseas investment. However, the corporate tax rate cuts were partially funded by reducing the value of deductions for machines and industrial buildings, making domestic investment less attractive. This effectively increased the marginal tax rate on some investments and blunted the potential of the rate cut to boost domestic investment.

Evidence from the UK (Maffini, Devereux and Xing) and US (Ohrn) found that shortening depreciation schedules or allowing for immediate deductibility can significantly increase investment leading to higher wages and employment levels. Moving to a system of full instant deductibility, where businesses can deduct the costs of capital investment immediately, would be a strong move to sustainably boost wages. Furthermore, this could be funded in part by removing the deduction for corporate debt interest. This would not only boost investment but would also end the bias of debt over equity.

Business Rates present another barrier to investment as they are calculated on the value of the property rather than the underlying land value. Firms that invest in building improvements increase the rateable value of their property. Business Rates are, on average, one of the less harmful taxes, as the incidence falls primarily on the landowner, because planning constraints limit the ability of owners to invest in their property. Still, shifting the burden solely to the landowner by replacing business rates with a tax on imputed land rents would be a pro-investment change.

Immigration reform will be another key factor in ensuring productivity growth remains high. Remaining open to foreign talent as Britain leaves the European Union is essential. The effect of high-skilled immigration on wages, revenue and investment is unambiguously positive, but the process for hiring skilled workers is bureaucratic and prevents many talented individuals from coming to the UK. Furthermore, the economic impact of EU migrants is, on net, positive. Freedom of movement may have lowered wages in the short term for unskilled workers (by about a penny an hour), but for the vast majority of workers it has boosted incomes. This minor harm is far outweighed by the positive contribution EU migrants make to the public finances; while the average Brit in the decade up to 2011 was a net drain on the public finances, EU migrants paid in £1.5bn a year more than they took out.

To keep Britain open throughout the Brexit process, we will work with The Entrepreneur’s Network to set out a liberal immigration agenda. We will make the case for ending the skilled migration cap, ending the net migration target, and ensuring that international students are not penalised in attempts to control migration. We will advocate maintaining open to migration from the EU, expanding migration from CANZUK nations and streamlining non-EU migration by investigating visa auctions to ensure market demand (and not central planning) determine who comes to the UK.

We won’t stop there though. Housing, Tax and Migration may be our top priorities, but we’ll also work to boost productivity through a number of other policy channels.

• Energy: All major political parties are committed to cutting carbon emissions, but disagree on the most cost-effective way to achieve it. The Helm Review on the Cost of Energy found that there were 13 different interventions in the energy market, including guaranteed pricing contracts, that rely on notoriously unreliable projections. The free-market solution is to simply tax carbon and let individuals and firms figure out the best way to cut back.

• Infrastructure: Investments in transport (commuter-rail, roads, and airports) will contribute to faster growth and reduce pressure on housing. But, infrastructure funding is currently biased towards London and the South-East. Devolving infrastructure and allowing local government to use land value capture to fund it could deliver massive benefits.

• Road Pricing: Congestion imposes significant costs on individuals. By underpricing roads, we encourage overuse. Politicians mistakenly call for expensive road-building projects, but they regularly fail to cut commute times as the number of road users increases proportionately. The only solution is to dynamically price the externality of congestion. London’s Congestion Charge was a step in the right direction but it’s priced too low, fails to shift journeys away from peak times, and fails to distinguish between a day driving in central London with a single trip.

• Broadband: Another aspect of infrastructure is broadband. Many rural communities are still not connected. This problem is exacerbated by the EU’s Net Neutrality regulations which ban ISPs from charging edge providers for priority access to digital fast lanes. This deters ISPs from investing, leading to marginal investments (in rural communities) being cut. Rather than spending money or imposing a Universal Service Obligation, scrapping internet regulations outside the EU will boost access to broadband.

• Agriculture: Direct payments to farmers raise food prices and lead to higher taxes. Leaving the European Union is an opportunity to rethink this harmful policy. Similarly, tariffs protect British farmers from competition, raising prices and encouraging environmentally harmful farming. We should follow New Zealand’s lead in embracing free trade and eliminating subsidies. Some support to farmers should continue for the provision of environmental services, but payment must be by results.

This is the first part of our Policy Priorities in 2018 series. Next we'll be tackling permissionless innovation and the ways we can support practical liberalism. 

Happy Australia Day!

Happy Australia Day! 

While it’s not a day that most Brits will notice, it is one we should. For the ties that bind us to our Antipodean cousins are strong, with around 1.2 million Britons living in Australia and over 100,000 Australians living in the UK. But this number has been in decline for some time now, accelerating in the past decade. Not because it’s becoming less popular to move here and for us to move there but because it has become harder. Government is getting in the way. 

The British crackdown is part of the government’s insane target of getting net migration down to the tens of thousands. With the EU exempt from any measures, Theresa May’s crackdowns fall on the rest of the world: including those countries whose citizens share our language and share our monarch. It’s odd to think the Prime Minister is happy to share intelligence with CANZUK states unimpeded, but finds the idea of their citizens having a choice to move here unacceptable. 

The Adam Smith Institute and our friends have a long and proud history of championing liberal immigration policy. Immigration makes us richer, increases our productivity and wages, reinforces our soft power and helps us tackle global poverty. Personally I prefer a more liberal system that looks to open borders as far as possible. But I recognise that it’s taken a beating in public debate in the past two decades and that to turn the tide, it makes sense to start where it’s popular. That’s how we’ll build the case for immigration again.

And it is politically popular. CANZUK International’s (who push for free movement between Canada, Australia, New Zealand and the UK) online petition has over 200,000 signatories calling on governments to open their borders. In a poll of 2,000 people in each state conducted in 2017, they found that a vast majority of those polled were in favour of free movement within the CANZUK countries. 64% supported it in the UK, 72% in Australia, 77% in Canada and 81% in New Zealand. 

It’s an idea whose time has come. It makes economic sense, it expands freedom and it will be an easy sell for politicians. So on this Australia Day I say: open the borders. 
 

Sorry to tell you this but Angus Deaton has gone horribly wrong on US poverty

Fighting words from mere policy wonks to a Nobel Laureate of course but we're afraid it's true, Angus Deaton is going badly wrong in his analysis of US poverty. The claim is that there are those in the US suffering the sort of poverty, that $1.90 a day type, we more normally associate with what Donald Trump described as "shitholes."

This is not true. What is true is that there have been a number of reports, books, screeds, making the assertion but they don't stand up to analysis.

The first that Deaton mentions is Philip Alston's UN report on the subject. One of us corresponded with him to discuss his report and we didn't get any useful answers, just "gosh this measuring poverty thing is difficult, isn't it?" Or, as one of us put it elsewhere:

Just to emphasize this when they talk about child poverty (para 25) we’re told that 18 percent of children live in poverty, 13.3 million. Then in paragraph 29, we’re told that food stamps (SNAP) lift 5 million out of poverty, the EITC another 5 million.

So, the number of children “living in poverty” is not 13.3 million, is it — it’s 3.3 million. That comes out to just 4.5 percent of children “living in poverty,” after the effects of just two of the things we do to reduce poverty.

In their own report, the U.N. is detailing how their claims of the number in poverty in the U.S. are entirely wrong – codswallop in fact.

The measurement of poverty being used is how much poverty would there be if government wasn't doing something. This is not a good measurement of how much poverty there is after government has done its - no doubt wasteful, not very effective but still extant - work.

Deaton also references the Edin and Shaefer work. Our opinion is that this was deliberately constructed to be misleading. For they look at cash income only. Our $1.90 a day figure is consumption, not cash income. Not only does the E&S "work" not include what government does to alleviate poverty, as above, but it also fails to account for consumption from savings. 

Imagine, for example, that you were laid off from a job this Friday, start the next one in 10 days on the Monday but one and don't claim unemployment in the meantime. By their measurement system you are on less than $2 a day cash income over that period and thus absolutely poor. 

This is a nonsensical method of measuring poverty - except, of course, if you were more interested in a polemic which showed there was absolute poverty in the US. 

We thus return to our long articulated insistence. In terms of that $1.90 a day absolute poverty defined by the World Bank there is no such poverty in the US today. It simply does not exist. Any policy based upon the idea that it does is therefore going to be wrong. 

Just one numerical example. The average, among those who receive anything at all from the program, food stamp allocation is $29 per week per person. 45 million people receive this slightly more than $4 a day. Food stamps are not included in either of the above two mentioned poverty calculations, neither the UN one nor the Edin and Shaefer. There is no $1.90 a day poverty in the US.

EU trade commissioner should bring her message home

Today at the World Economic Forum in Davos (don’t worry I’m not there, just watching from a safe distance) the EU trade commissioner Cecilia Malmström said that she had “some grave concerns on China [which is] massively subsidising state-owned companies.” 

She’s right to have these concerns, but just as charity begins at home so does tough-love. While we’re looking at reforming China, she might want to have a quick word with some EU member states. 

Finland is a particularly bad example of this. According to OECD data for 2014, the Finnish State was, in 2012, an owner in companies and unincorporated state enterprises with a combined value of approximately 53 per cent in relation to GDP. These include internationally trading companies such as steel producer Outokumpu (where the government owns 27.3%), aerospace engineers Patria (50.1% state owned), and energy producers Fortum (52.43%). Finland’s government is even going backward, purchasing stakes in companies Gasum and Fingrid that will bring them back under majority state control (50.1%). France is not much better with the state maintaining stakes in international companies such as Areva (where they control 86.52%), Air France-KLM (17.58%), and Airbus Group (10.94%). 

That last one is particularly interesting. One of the largest and most troubling of the internationally subsidised industries is aircraft. Government subsidy and intervention on behalf of aerospace giants has left them dependent and left us all at risk of escalation into broader trade wars. So it was in the dispute between Bombardier and Boeing, and so it is with Airbus. In 2011 the WTO ruled that Airbus had received $18 billion of illegal subsidies. In 2016 the WTO found that not only had they failed to deal with action against $17 billion worth of those subsidies provided to Airbus, but that an additional $5 billion in illegal launch aid had subsequently been provided to support the building of the A350. 

This is billions of taxpayer money from across Spain, France, Germany and elsewhere in the EU. Taxpayers are coerced into gambling on the success of subsidized commercial projects (like the A380 whose production is currently being pared down). And this kind of intervention only leads to rent-seeking in order to obtain more and more subsidy, while disguising the full cost of goods and services. 

So far, so academic. But one of the key reasons to get governments out of the industry worldwide comes from a new entrant and another government entering the fray. In May of last year the C919, a new jetliner produced by China’s state-owned COMAC, saw its first flight. Now it is fully commercial it will be in competition with aerospace producers in the US and EU. With subsidies being provided by the EU it will be hard to argue with a straight face that the Chinese state shouldn’t be able to use its political clout to force through contracts, that it shouldn’t use public funds to prop up the company or unduly support the company. In other words, even more rent seeking, and capital tied up beyond what’s needed in the jet manufacturing industry 

But shouldn’t we support these ‘strategically important sectors’? Well, whenever money is lent, there is a risk it won’t be paid back. Government money is either crowding out the private sector or it is supporting lending that private-sector lenders judge too risky. There is one good thing I can say about foreign subsidy. That is, that it is keeping our import costs low on the back of their taxpayers. Unfortunately, as talk of trade wars at Davos shows, they encourage what my old colleague Sam Bowman described as a form of a kind of subsidy alcoholism, where our own government and lobbies move to protect industry after industry from pernicious foreign actions. That is where the real rot sets in. And that is why it is so important to stamp out the practice early on where we can. 

The EU’s trade commissioner works across borders, with a mandate to free-up trade and secure efficient markets. It’s her job to ensure the EU is on a level playing field. That has to start at home. She should tell member states to cease their subsidies. 
 

FYI on PFI

The collapse of Carillion—the mega-company used by the British government to build and operate things like schools and hospitals under the Private Finance Initiative (PFI)—leaves me conflicted.

The collapse has led to demands from folk like the Opposition leader Jeremy Corbyn that public infrastructure should be built and run by public (i.e. government) employees. And the debate on the subject has also revealed that some of the PFI deals turn out to be a very expensive way of financing such projects.

I’m conflicted because colleagues and I at the Adam Smith Institute had a lot to do with the origination and design of PFI in its early years. But through the 1980s and beyond, the scheme has been a complete dog’s breakfast, and very poor value for money. But let’s not throw the good idea out with the bad prosecution.

The original idea of PFI was this. Public building works were very slow, and therefore costly. In the UK it took an average of 11 years to build a prison that private companies in Australia were building in 11 months. The counter argument was that governments could always borrow more cheaply than private companies, as there was less risk premium with governments. But that was always nonsense. Even if you borrow more cheaply, tying money up for 11 years while a building project lumbers on is clearly going to cost you more. Also, if you are relying on public sector workers, there is no competition to keep down costs and bid up quality and efficiency.

Another thought behind the PFI idea was that the government could pass some risk on to the private sector and encourage market-style decision-making in what infrastructure should be provided. For example, a new motorway could be financed by tolls paid to the builder/operator—who would then have an incentive to keep the road running smoothly and in good repair, and provide any other facility that made road users happier. And it would also encourage firms to come forward with ideas, pointing out where a new road, or new hospital or school, say, was most urgently needed.

But there were three snags. Firstly, the public sector turned out to be very bad purchasers of this kind of deal. Whitehall officials, with very little experience in business negotiation, got totally done over by private companies who negotiated contracts every working day. Is that a failure of the PFI idea? It’s more a failure in the customer. And it is one that could and should have been addressed, but wasn’t.

Secondly, government officials love big stuff. So they looked for big companies who could deliver big projects. Before long, just a few firms like Carillion were completely dominating PFI projects. It’s like the banks—too little competition means companies get too big to be fail without a lot of political fallout. Many of the projects undertaken by Carillion should have been split into smaller contracts with several suppliers, so spreading the risk.

And (thirdly) many of them should not have happened at all. When Gordon Brown came into office, he removed any last vestige of the original idea. Instead, he turned it into a giant mortgage scheme. He could take the credit for getting lots of new schools and hospitals built (regardless of whether the locals thought they were needed) without raising the taxes to pay for them. He simply got private companies like Carillion to put up the cash. Even better for him, that did not even appear as borrowing in the public accounts. But in fact it was merely a disguised form of borrowing. And it would be paid for, not by current taxpayers, but by future taxpayers. That’s a very attractive prospect for politicians, who know they won’t be in office for ever, and paying stuff back will be their successors’ problems.

Most st of the current PFI contracts were signed off by Gordon Brown, a man not known as a radical free-marketeer. That is who we should blame for the dismal outcome.

So I’m against PFI in its present form. It’s a mortgage scheme, not a way of embracing private-sector initiative, talent and finance. And thanks to Whitehall ineptitude, it has turned out a very bad mortgage deal at that. It’s a mortgage deal that we are locked into for a generation, and that future taxpayers will have to continue to finance. 

Could we get back to the idea of private, competitive enterprises financing, building and operating public services? Yes, we could. After all, the government buys its paperclips and computers from private companies. It may not be a very businesslike purchaser, but it could be made a lot better, and contracts could be kept small enough that competition was encouraged. And if we actually got PFI Mark 2 right, it could be very much better value for money than the present mess—and very, very much better value than nationalising everything.

10 things to love about the economy of the 1980s

The 1980s were a better decade for fashion than the 1970s, and produced a plethora of brilliant movies. They were also noted in the UK for a turn-around in the economy that took Britain from being the basket-case of Europe into the top rank.

1. Under Margaret Thatcher the trade unions were brought under the law. It was done steadily, step by step, instead of in the wholesale reform attempted unsuccessfully by her predecessors. Instead of confiscating union power, she devolved it from the leaders to the members. Members were given the right to elect leaders by secret ballot, and to be balloted before strike action. This resulted in more moderate leaders and more moderate behaviour.

2. Secondary picketing was banned, and unions could be sued and assets confiscated if they broke the law. The UK went from having the highest strike rate in the EU to become the country with the lowest. The lack of industrial unrest created a better environment for business success and economic growth.

3. Exchange controls were abolished, allowing investment in overseas assets as well as allowing travellers to take currency abroad. Pension funds could now include foreign equities and foreign bonds in their portfolios, allowing alternative counter-cyclical investments to UK equities and bonds. They were able to grow substantially as a result.

4. Many of the state monopolies were broken. When Telecoms were privatized, a competitor called Mercury was allowed alongside it, and later reviews added more competitors. The result was to put Britain among the most competitive telecommunications markets in the world.

The state energy companies were privatized and opened up to competition. Ones that had previous been thought of as natural monopolies were made competitive by the separation of the networks from the suppliers, so that customers had a choice as to who they wanted to supply down that network.

5. Inflation was brought down by control of the money supply and fiscal prudence. The double-digit rates disappeared. Businesses were able to plan ahead for the investment and sales in the confidence that spiralling inflation would not make a nonsense of their plans.

6. The mass privatizations under Margaret Thatcher turned loss-making state enterprises into profitable private ones that paid taxes instead of receiving subsidies. Many of the newly privatized companies were able to compete on world markets, contributing to economic growth in the UK.

7. Personal taxes were brought down. The top rate went down in stages, first to 60% and then to 40%, and the basic rate was lowered to 25%. The result was that revenues were raised, and the top 10%, who had paid 35% of total income tax, now paid 48%. This made work much more attractive and raised living standards.

8. Business taxes were lowered. Small profit Corporation Tax was lowered to 25%, and its standard rate gradually brought down to 34%. These were substantial reductions, hugely beneficial to business and the economy, and contributing to the economic growth that characterized the 1980s.

9. After state services were privatized and exposed to competition, they improved their quality output in order to attract and retain customers. They were further able to make investments based on expectations of future custom, rather than on what government felt it could afford. The result was that services improved dramatically in both quality and consumer responsiveness.

10. Once state production was transformed into private companies, there were substantial improvements in the quality of its products. Ships, trucks, aircraft, cars and other things climbed up in quality. This was partly due to better management in the private sector, partly to competition, and partly due to investment in new technology. It was also down to the fact that in a competitive environment, quality matters, and successful firms recognize that and monitor it to maintain it, whereas the state did not.