Monopoly empowers unions

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One of the merits of competition is that it limits the power of producers. Most people focus on how firms have to compete with each other if consumers have a choice, but competition also limits the power of organized labour. The degree to which it can impose uneconomic terms on employers is severely limited if customers can move elsewhere and cause their employer to go under. Where competition is introduced into a state monopoly, it also limits the power of the unions to put political pressure on government by interrupting the service.

When the UK featured many state-owned monopolies, strikes were a common feature as unions exploited the power which monopoly gave them. But it was not only privatization and the competition which usually accompanied it which undermined their power; technology played an important role. The Post Office provides a classic example.

The fax machine (if anyone remembers it!) spread rapidly because the monopoly post service could not be relied upon. Motor and pedal cycle couriers spread through our cities to exploit a loophole that allowed expensive alternatives to the Royal Mail. What unions do not seem to grasp is that it is their exploitation and abuse of monopoly power that speeds the adoption of alternative technologies. If the service were reliable and good value, many of these technologies would develop more slowly or not at all.

It is easy to predict the consequences of yet another impending postal strike. People will rapidly get into the habit of using technological alternatives to the Royal Mail, and will not return when the service resumes. They will use such alternative methods of conveyance as are allowed, and many will not return from those, either. The Royal Mail itself will find its business diminished and will need to cut its cost further… At the bottom of that vortex is a plug-hole.

Meanwhile, Lord Mandelson could earn a load of brownie points by empowering the Boy Scouts to deliver Christmas mail, and allowing charitable organizations to oversee its collection, transport and distribution…

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Tory nudging

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Richard Thaler, co-author of the book Nudge will be joining Camp Cameron as an adviser on regulation. Should the Conservatives form the next government, he will sit in a regulatory “star chamber" designed to analyse the impact and effect of proposed regulation.

Thaler is an American behavioural economist whose work has long been popular with the Conservatives. He argues that the concept of humans as fully rational and logical is wrong; instead, we often react instinctively, affected by emotion or acting in ignorance. In essence, Thaler doesn’t believe that we are entirely capable of making our own decisions. Instead he suggests that the government should create social nudges that encourage and influence us to make the ‘best’, socially useful decision. Examples include presumed consent for organ donation, and the proposed Tory policy of comparing a household’s energy expenditure with their neighbours on the bottom of gas and electricity bills.

Thaler calls such ideas examples of “libertarian paternalism"; they are deemed libertarian because they do not force anyone to change their habits, yet they are paternalistic because they assume that the governments’ desired outcome is the most correct. A major problem is that this work is based upon an individual’s unconscious and psychological reactions to the situations before them. ‘Nudging’ people to act in a certain way requires the manipulation of these reactions, such as our ‘herd instinct’, encouraging people to 'make the right choice'. As Lib Dem MP Danny Alexander claims: “There's something worryingly illiberal about all this Nudge stuff. If governments wanting to change our behaviour don't need to explain what they're trying to do, how they're trying to do it, or what outcome they're after, then they are ignoring what voters want."

The influence of economists like Thaler add to the creation of our Nannying State, where citizens are perceived as too ignorant and base to rely on their own desires and morals. It is difficult to see how principled views such as a reluctance to donate organs can be ob ‘wrong’, even if we do make rash and impulsive decisions in day-to-day life.

One hopes that we have enough awareness not to be nudged. However, if we are as susceptible as Thaler claims it is a serious cause for concern. Perhaps it is better to be shoved than nudged; at least then you can retaliate in self-defence.

My risk not yours

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Your average man, woman or child on the street partakes of risk on a daily basis. It's life. Ninety nine percent of us accept this and glibly stroll into the road safe in the knowledge that having looked both ways there's no traffic. What of that other one percent? Mainly the ones that work for the Health & Safety Executive.

In their bureaucratic fantasy land of the anaesthetised office, cleverly covered in bubble wrap (the office not the desk jockey), including the paper, can't be too careful with that stuff might take your hand off) they dream up more rules and regulations. Attempting to ensure that during any day in Great Britain no one will so much as have a hair on their head bent out of shape. And, no, you can't order everyone to lie in bed all day (yet) as that's cheating, and don't forget bedsores are a risk. For them risk is everywhere: from standing in the shower, to putting on socks, to walking, eating, using your car, your phone...etc. Yet, the majority of us decide not to put our socks on in the shower while attempting to drill through a wall. Why? Because someone else attempted this and managed to pass through the bottom of the bath to the other side.

Anything could happen to anyone at anytime. It doesn't mean that we need an HSE officer standing over us with a clipboard loudly and sharply inhaling every time we raise the level risk. Risk belongs to us. We gather information in the hope of limiting risk. If we choose to ram a knife into the live toaster, then we accept that as we have raised the chances of removing ourselves from the gene pool. Deserving the consequences should the toaster shockingly reject the unwanted metallic intrusion. This is natural selection, not an opportunity for some faceless office wonk to call for a ban of toasters, knives, bread and electricity.

All of which is comparable to asking the police force not to take any risks while protecting the public. Yes, they have.

The fifty percent fiction

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Despite George Osborne's assertion that the next Conservative government will retain Labour's 50 percent top tax rate on incomes over £150,000, it is highly probable that this will not happen. It is not that Mr Osborne was misleading the Tory Conference, merely that events will change and force with them a change in policy.

In the first instance Mr Osborne has underestimated the opposition to this tax in both the City and within his own party. City people are united in a hostility to it that borders on contempt. They already have no respect for the government that introduced it, and will have none for a government that sustains it. The pressure of their opinion will cause the Shadow Chancellor to re-visit his plans. Nor have I met a single Conservative MP or candidate who supports the tax; and as their opinions are expressed privately to Mr Osborne, this, too, will influence his thinking.

The chief thing to change opinion will be the increasing chorus of expert opinion that this tax, far from raising additional revenue, will cost the nation dear and leave a big hole in the finances unless it is abandoned. Already the Adam Smith Institute and the Institute for Fiscal Studies, both using a dynamic interactive model of the economy, have concluded that a 50 percent rate will raise less than the current 40 percent rate as incentives decline and people choose to seek more tax-friendly regimes in which to base their activities. By the time this tax change takes effect in April, the scale of the exodus will be becoming clear, as will the loss to the Revenue caused by the departures.

Mr Osborne's point that the tax should stay in place throughout a public sector pay freeze is not a valid one. What he should have stressed is the importance of getting the rich to pay their fair share. In fact the proportion of tax paid by the rich declines when rates go up, and increases when they are lowered. Faced with united anger from the City, zero support among his backbenchers, and the evident fact of a loss in revenue, the 50 percent tax will be allowed a decent but hasty burial. On its grave they might inscribe "2010 – 2010. Killed by reality."

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Hammond’s way

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Shadow Chancellor, George Osborne, has made a start in announcing some headline-grabbing public expenditure cuts, including a one-year freeze of many public sector salaries. But Shadow Chief Secretary, Philip Hammond, has apparently been charged with finding other cost savings.His priority should be delivering material cuts within a four-year time horizon, something that the raising of the pension age does not address.

The real risk is that a succession of failed gilt auctions to fund the staggering annual issuance requirement, perhaps accompanied – or even caused – by a downgrading of UK sovereign debt, pushes up borrowing costs substantially. Where should Hammond start? Instead of cherry-picking individual programmes, there is a strong case for imposing ongoing across-the-board real cuts averaging 3% per year – with a few exceptions.

Clearly, social security, with an expected £165 billion out-turn this year, is an obvious target. Reducing both individual payments or limiting eligibility are sensible starting-points. With an annual budget of over £100 billion, the NHS should not be exempt. Given its massive work-force, there must be potential for cost savings away from the front-line. Local Authority expenditure has seldom been properly controlled. Now is the time to clamp down on excessive local government expenditure, both in terms of job numbers and salaries.

Bearing down on some profligate Conservative-led local authorities would be a useful start - along with adopting Wandsworth Council as the Tory template. Furthermore, finding large savings within the MOD’s notorious procurement division should not be difficult, especially from the aircraft purchasing programme. In terms of capital expenditure savings, scrapping Crossrail would be a sensible decision. Given its vast cost, is there really a compelling case for Crossrail at a time of acute financial stringency?

If Philip Hammond adopted these policies, the Treasury numbers would stack up nicely and the PSBR would plummet. But how strong is the political will?