Hands up for school choice

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schoolA few years ago, relatives of mine in India mentioned that they were profiting from investing in new private schools. Contrasted with the bureaucratic nightmare that is Britain's school system, this came as something of a surprise.

The Conservatives plan to adopt Swedish-style school reform would enable exactly the sort of innovation that is rapidly improving Indian schools, but was yesterday attacked by The Independent. They claim that the improvements in Sweden were only due to the fact that school choice was totally non-existent beforehand. The UK, with its 'extensive school choice' (for those who lie about their religion, or have the money to move to a new catchment area/pay privately) would see minimal improvements.

The fact that choice and competition amongst UK schools are really at the embryonic stage was missed by the great minds at The Independent. Failing schools are still insulated from the effects of poor performance and are accountable, not to parents, but to government bureaucrats who dole out the money. In the Swedish school system, the parents control the money and hold schools to account.

The Independent argues that some parents would not be as effective as customers because they "[lack the] personal resources to access and understand information about school quality". If they can distinguish this from Sir Humphrey Appleby's claims that the intellectual superiority of civil servants makes them better at choosing schools than parents, I'd welcome their rebuttal. However, they will also have to explain why the most enthusiastic supporters of school voucher programs in America live in deprived inner city neighbourhoods.

Similarly, the authors argue that teachers and head-teachers are against the plan. What they go on to say is that the National Union of Teachers is against it, which is not exactly the same thing. This is an opportunity. Only teachers who aren't competent have anything to fear.

However, it is hardly surprising that teachers unions are not too keen on the school choice program. Their counterparts in the USA persuaded President Obama to abandon it in Washington DC. Of course Obama had the means to educate his children privately. The unions' line appears to be that competitive education is good for the wealthy but not the poor. The ASI's line is much more egalitarian.

Eamonn Butler: Top Political Influencer

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totalpoliticsTotal Politics magazine has named the ASI's Dr Eamonn Butler as one of the UK's top 50 political influencers. In the latest issue the magazine publishes a list those with the most political sway. Excluding MPs and Lords from the equation (well, it's not like they achieve much anyway), they looked at 'who the key players in 2010 might be, and who will be shaping the political ideas that dominate the election.' Leapfrogging over the likes of the Jeremy Clarkson, Bob Crowe and the Archbishop of York, Eamonn and the work of the ASI are recognized at number 30.

As Total Politics comments, the sources of political influence are becoming increasingly diverse. Nowadays political pressure comes from a variety of sources: the church, the unions, the media, and even outspoken celebrities' opinions. With years of experience and achievement behind us, the ASI is fantastically placed to influence the debate on public policy in the coming months, and will continue to put forward the groundbreaking ideas and solutions needed for Britain's problems. We're pleased to see that Total Politics recognises that!

Bank bonuses – We win, you lose

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February is the banks’ reporting season – and the inevitable controversy about bankers’ bonuses. This year has been no exception.

The bonus culture in principle can be defended, especially in risky commercial sectors. During the good times, you prosper; during the bad times, you don’t.

However, the vast sums of public money used to save the banks from collapse raises the question as to whether any sizeable bonuses should be paid – and especially for staff at RBS which has received close to £45 billion of public money.

Not surprisingly, politicians have focused on the 84% state-owned RBS and, to a lesser extent, on Lloyds in which the Government now has a 41% stake. For HSBC, however, which has received no direct financial support from the Government, different criteria should arguably apply.

The difficulty for the Government is its wish to maximise its returns from eventually selling its stakes in RBS and Lloyds. In the former’s case, its share price is little over 30p and its best staff, who drive the profits’ line, are obvious recruitment targets for rival banks.

Contrast the understandable antipathy towards bankers’ bonuses with the far less controversial salaries of top Premier League footballers, such as Messrs. Rooney, Terry and Gerrard, who currently take home over £100,000 per week each.

If a wage cap of say £30,000 per week were prescribed, the majority of the Premier League’s best footballers would presumably play overseas.

The difference is that, if the Premier League then collapsed, the whole UK economy would not shudder. But with the banks – and especially the appalling plight of RBS – this was not the case. Hence, the unprecedented Government support.

In truth, the top banks will eventually need to be separated into retail and investment operations – with the latter’s staff being well remunerated but without a safety net if they fail.

An act for liberty

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Saakashvili

On Wednesday night the ASI played host to Mikheil Saakashvili, the President of Georgia. In his speech, Saakashvili explained how Georgia went from an economic basket-case crippled by corruption to the World Bank's 'Number One Reformer': through a programme of privatization, deregulation and tackling the black economy, Georgia shot up from 112th to 11th in the ease of doing business index in just a few years.

However, the main function of the evening was for the President to outline plans for one of the most sensible pieces of legislation enacted since the United States' Constitution: The Liberty Act. This seeks to constitutionally enshrine the economic reforms pursued since the Rose revolution, by imposing a strict cap on the remit and size of any future government. Under the Act, government spending is not permitted to exceed 30% of GDP, while the budget deficit is capped at 3% and public debt at 60%. Price controls and state ownership of financial institutions are banned, and no new taxes or increase in tax rates can be imposed without a referendum.

The questions from the packed floor covered a wide range of topics, from Georgia's relationship with Russia and the EU, to monetary policy and the firing of bureaucrats (hear, hear!). One question in particular elicited a marvelous response. When asked why he was seeking to bind his successors, the President promptly replied, "I don't trust any government, including my own". British politicians, please take note!

A timely way to dismantle the pensions pyramid

Nikhil Arora argues that we need to radically reform the state pension, moving from the current pay-as-you-go model to a funded system based on personal pension accounts. Basing his proposals on a plan developed for the American Social Security system by the Cato Institute, Arora suggests allowing people to divert their employee National Insurance Contributions into private accounts (surrending their right to a state pension in the process), while employer National Insurance Contributions continue to be paid in order to finance the state pensions of current retirees.

An obvious choice, denied to voters

Imagine you were forced to pick between two options: Option one – you give me £10 today for me to safeguard for you, but there is a very high likelihood that tomorrow, when you wish to claim, I will default. Option two – you give me £5 today, and can invest your remaining £5 on your own, again with the assumption being that I will likely default tomorrow.

Whilst it’s hardly a wonderful choice you would surely choose option two, to minimise your losses. However, when it comes to National Insurance Contributions (NICs), the government only gives you option one, and then pretends that you’re safe.

What about if the government offered people both options?

Either; Every employee pays 11%, to be paired with a contribution of 12.8% from their employer. When the employee retires, provided there is enough cash in the National Insurance Fund, they receive a state pension, just as they would have under the existing system.

Or; Every employee keeps their 11% share as income to be invested into a private pension arrangement, and the employer continues to pay a 12.8% stake towards national insurance. The employee waives their right to a state pension, but receives a ‘recognition bond’ that entitles them to slightly less than the value of their employee contribution to the National Insurance Fund to date.

The choice is thus open for every individual to make, and logic dictates that the choices will be made rationally, relative to each individual’s age and circumstances. Most young people, and in particular those who have just started working will certainly be better off taking the private route, even if this means they will not get any personal benefit from the contribution of their employers. Older people, and in particular those close to retirement, who have been contributing to the fund over a lifetime’s work will be much more likely to stay with the national insurance scheme.

Of course, the need for this choice is largely depending on my initial analogy – it assumes that the government is likely to default at some point in the future.

A true national debt worse than Zimbabwe

Unfortunately, this is hardly an unreasonable assumption. The National Insurance Fund is nominally hypothecated for specific expenditure, including pensions. Whilst this means it cannot be easily raided by unscrupulous government departments, it also makes it easier to calculate the black hole in the financing. At the moment there exists a surplus; the amount being paid into the fund is greater than the amount being paid out in any given year. However, because the funds are essentially being spent as soon as they are paid in, and are not invested productively to secure future wealth, the fund is reliant on a young, working population to finance the lives of retirees. This simply isn’t sustainable. The ‘support ratio’ – that of young workers to old retirees is decreasing in most industrialised nations, and ours is certainly no exception.

Particularly once the baby boomers retire, there will be an unfunded liability that simply cannot be fixed by tax rises alone. A report by Nick Silver from the Institute of Economic Affairs demonstrated that, if the same accounting practices that private companies have to use were applied to the government, the national debt would have to include the pensions liability. This would leave Britain in more debt than Zimbabwe, as a proportion of GDP. Claiming it can be neutralised through taxing future generations is unbelievably dishonest – even by government standards. National insurance contributions already amount to a sizable proportion of salary, with knock-on effects for job creation and the wider health of the economy. There are no more pips left to squeak.

A model for reform from across the Atlantic

In the USA, the Federal Insurance Contributions amount to 6.2 % from both the employee and the employer. The Cato Institute proposed allowing the employee to keep and invest their 6.2% privately, whilst using the 6.2% employer’s contribution to fund existing retirees and disability benefit.

This is a higher percentage than other plans have suggested, including the one proposed and then mangled by the George W Bush administration. It is also, not coincidentally, the most effective at securing peoples retirements, and at reducing the burden on taxpayers.

When two US Congressmen introduced a Bill based on the Cato plan, the Social Security Administration (SSA) concluded that it certainly provided the best bang for the buck, and would halve the cost of meeting the government’s liabilities.

The Transition Costs issue

The main difficulty with any reform of government pensions is one of distributing the transition costs. It is frequently argued that one generation needs to pay twice; both for their own retirement, and that of the previous generation.

Whilst it is politically attractive to postpone these costs, to postpone indefinitely is simply impossible. The debt burden created will continue expanding, meaning that the problem compounds over the generations.

Both the Chilean privatised scheme, now considered an almost unmitigated success, and the American plan, as scored by the SSA, create costs as younger generations stop paying into the government scheme, but older generations continue drawing money out from it. In Chile, these shortfalls were met by the sale of government assets – a solution that is no longer available in the UK context. The Cato plan notes that some will be ‘recaptured’ by the increased corporate tax revenue as a result of the use of private pension money in the capital markets. However, the fact that the employers will still be paying NICs is of most help in meeting the shortfall.

Furthermore, it is important to note that the sudden increase in the shortfall within the first 10 to 20 years predicted under the American plan is largely the result of people claiming on their ‘recognition bonds’. This cannot be called a new loss for the State, for two reasons.

Firstly, this represents money that was already owed. The only difference is that the government under this reformed scheme is choosing to be more honest about it, and so is settling it upfront, rather than pretending it doesn’t exist, which ultimately will cost twice as much – The SSA in America estimates costs of $6.5trillion as opposed to $12.8 trillion if the problem is left to fester.

Secondly, the recognition bonds don’t have to represent the full value of the employee’s contributions to incentivise them enough to switch onto the private scheme. People will generally prefer a guaranteed, tradable bond in their name, to an I.O.U from the government that is potentially payable at a later date. Also, this reflects the fact that the government has incurred the opportunity costs of not having that money in the National Insurance Fund, where it can finance government borrowing until the employee retires – this cost can reasonably be passed on to the individual who has acquired their money sooner than expected.

Greater Returns for the people

The benefits of pension privatisation are undeniable. The Chileans are certainly richer as a result of their privatisation scheme. This is despite heavy regulation that accompanied the scheme in the early years, which forbade, for example investment in foreign equities. As Chile’s economy has developed, more opportunities have arisen, and even greater returns can be realised with less regulation being necessary. The plans from America have highlighted this trend too. The projections are much more favourable when regulation is looser, for example allowing a greater percentage of peoples’ money to be invested in stocks, as opposed to bonds. Nonetheless, even with a 50/50 split between bonds and stocks, the SSA scoring looked favourably on the financial returns of the Cato plan.

Those who invested in private pensions have comfortably produced returns more than three times greater than state pensions, because of the efficiency with which they are invested. It is because of this that most people will be better off, even if they have to sacrifice the share of NICs paid by their employers. Furthermore, Michael Tanner of Cato noted that notwithstanding the fall in the value of the stock market over the last year or two, an employee who started investing 40 years ago would still have done much better had they invested privately than had they relied on Social Security – had they been given a choice. This plan is a sustainable way to give them that choice.

To be a name, not a number

However, the benefits of this plan extend beyond the greater financial gains possible for employees to provide for their retirement. It actually redistributes the power to control their retirement from Whitehall to the people. Those who benefit most are clearly the poorer members of society who are far less likely to have built up other retirement assets. This plan presents a great opportunity for people who otherwise wouldn’t have done so to build up real wealth, not merely an allowance from the government to keep them alive in their old age. Crucially, this is accumulated in peoples’ own names – not in the form of a nameless I.O.U from the government tied only to a national insurance number. This represents a way for people to build up tangible property of real value.

Conclusion

Rather than trying to sweep the problem under the carpet, as Bernie Madoff did with his Ponzi scheme, government must cut the Gordion Knot, and dismantle the pensions pyramid with direct action, before it is too late. The best form for that to take is by offering employees a choice, and allowing them to invest a sizeable portion of their NICs privately. However, this still leaves current retirees, and those soon to retire, protected by a State scheme that is adequately funded. Furthermore, the burden for extricating ourselves from an unsustainable scheme is borne relatively evenly through the generations.

National Free Enterprise Award event

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Next Tuesday we will be holding an event to celebrate the fact that Dr Madsen Pirie and Dr Eamonn Butler will recieve the National Free Enterprise Award. The evening will feature short speeches by Andrew Neil (BBC) and Terence Kealey (Vice Chancellor, Buckingham University):

23rd February 2010
Queenborough Room, St Stephen’s Club, 34 Queen Anne's Gate, London, SW1H 9AB
6.00pm – 7.30pm; Drinks & Canapés
Dress code: Jacket & Tie
RSVP: events@old.adamsmith.org

The National Free Enterprise Award is presented annually by a panel of 14 independent expert judges under the auspices of the Institute of Economic Affairs. Previous winners include Lord Lawson, Richard Branson, Lord King, Baroness Thatcher, Lord Forte and Sir Freddie Laker. Winners receive a handsome custom-made silver presentation trophy.

Burning down the house

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fire1We like to do things back to front down here in Australia. The Australian Government has successfully taken Bastiat's broken window and applied it in reverse. As part of their stimulus response to the GFC, the Rudd government initiated a billion dollar program to provide millions of Australian homes with government-subsidized ceiling insulation. The massive influx of easy money has ballooned an industry that pre-stimulus numbered only a few hundred employees to one that now contains over 7000 employees and operators.

Despite being warned over 15 times by various other government agencies and industry groups that this plan would result in untrained workers and dodgy operators, and that poorly installed insulation would pose serious safety risks, the minister responsible went ahead with the plan. Since then numerous houses have burned down due to insulation being installed over light fittings, and 4 deaths have occurred due to untrained workers putting staples through live electric wires. The opposition is calling for the minister's resignation, and there is now a new industry being created in going back through all the affected houses, trying to find the expected 1000 homes that have been turned into potential death traps.

So although Bastiat proved breaking windows won't stimulate the economy, we Aussies have proved that stimulating the economy might just cause your house to burn down.

Do shut up, Big Brother

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I'm not at all surprised to hear that government spending on advertising and marketing has risen by nearly 40 percent in the last year, to £253m. As someone who regularly goes to the cinema and watches a fair amount of television, I have to sit through a lot of this rubbish – and every time I do it irritates me.

In the last year I've been treated to adverts telling me not to speed, not to drink and drive, to give up smoking and to avoid saturated fats. I have been advised to 'talk to Frank' about my drug use. I've been told to cut my energy use and recycle. I've been informed that studying maths is fun and that there is nothing more rewarding than teaching in a rough inner-city school. I've been warned countless times about how to avoid swine flu and how to spot someone having a stroke. I've been told by the TV licensing authority that "London is in our database" and "Evaders will pay". The Department of Work and Pensions has told me that they are spying on benefit cheats, while the DVLA has said my car will be confiscated and crushed if I don't pay my road tax on time. And then there's that curiously (and presumably unintentionally) erotic advert where the breathy-voiced woman says "sexually transmitted diseases are spreading fast" as, on screen, lots of attractive people grope each other.

This stuff is simply infuriating – I don't want to be bombarded by messages from our crypto-fascist overlords while I'm trying to relax and have a good time. Nor do I want them wasting my money on a pointless exercise in Soviet-style self-promotion. Or as Mike Gannat, a former head of the Government Information Service, put it, "of course, it's a gross waste of public money".

A couple of recent ad campaigns really take the biscuit though. The first, which involves a TV advert and posters all over London's public transport, essentially tells people that it's there fault if they become victims of theft, because they clearly weren't being careful enough with their property. The other is the advert below, which employs lots of celebrities to convince us that direct.gov.uk is "the nation's official website". Please excuse me while I throw up.

How big is a billion?

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A billion is a hard number so let's get some perspective. A billion seconds ago it was 1959. A billion minutes ago Jesus was alive. A billion hours ago was the Stone Age. A billion days ago no-one walked on the earth on two feet. A billion Pounds ago was only 13 hours and 12 minutes... - at the rate our government is spending it. Thanks Gordon!

H/T Stuart Barrow (ASI alumnus)