Taking welfare economics seriously


Arthur Pigou was pretty much the founder of welfare economics and it is from him that we get the idea of Pigou taxation (you can see that the branding company had to work overtime there, can't you?). The essentials of which are that where there is an externality we should either tax or subsidise it. By definition, externalities are not things contained within market prices. Thus if there is a negative externality (that is, a cost which is carried by someone not included in the market price) then there will be too much of that activity. Many forms of pollution are examples here. We reduce the excess amount of pollution by taxing it and thus incorporating it into those market prices: we thus get the socially optimal amount of pollution.

What few seem to recognise is that we use the opposite argument all the time: why should the taxpayer pay for the education of children? Because there is an externality, a benefit this time, in being part of a literate and numerate society (it's the lack of that numeracy and literacy which is the usual complaint about governments and education, not the taxes). Thus the society as a whole subsidises said education. Basic scientific research, there are innumerable things whose subsidy is justified in the same terms (public goods for example). Positive externalities should be subsidised.

Which brings us to the concept of bequests: should they be taxed or should they be subsidised? Is there a positive externality there or a negative one? It's appallingly difficult to see that someone getting Uncle Stan's money is a negative externality but is there a positive one there? Yes, according to this new paper, there is.

Uncle Stan, as his motivation to make the bequest, has only that warm glow from knowing that his nephew will be provided for. What is external to his decision is the very warm glow indeed that his nephew gets from being provided for. Thus we have an externality: Stan's decision is motivated purely by his utility, while there is a large utility gain to others not contained in the motives that lead to his decision. And as we've already said, positive externalities should be subsidised, not taxed.

Thus the truth is that far from inheritance tax being raised, or even existing, there should be a subsidy to add to each and every inheritance received.

Zero Base Policy


In our latest report Zero Base Policy, Dr Madsen Pirie argues that minor changes to existing policies is no longer an option, given Britain's dire economic and social fabric. Instead the need is for "zero base" policies to provide new and effective ways of achieving policy objectives.

Topping the agenda is economic change. Dr Pirie has set out measures to turn Britain from a high tax, high debt economy into one on the virtuous circle of low taxes and increasing growth and revenues. The Treasury's 'static' model of the economy needs to be rejected in favour of a 'dynamic' one, which factors in the growth impact of lower taxes.

As in previous reports we propose to lift the low paid out of income tax by raising its starting threshold to £12,000 p.a., corresponding to the minimum wage, or about half the average wage. This eliminates the need for vast welfare transfers to low earners by letting them instead keep what they earn. At the top end the ASI proposes to expand the tax base by successively raising the threshold for the 40% rate until no-one pays it. Local finance needs overhauling, replacing Council Tax by local sales taxes as in the USA, and setting business rates locally. Local budgets should require popular vote approval before coming into effect.

A one-year judicial commission should be set up to review civil liberties and make recommendations. Public body CCTV surveillance needs to be limited to police and security services, and for anti-terror powers must be restricted to cases of suspected terrorism. Also, government policy on drugs has proved a failure, and need a total rethink. Most narcotics should be made available at medical centres, and the production and sale of recreational drugs legalized under controlled conditions.

The biggest opportunity for reform is in education. Parents should of course be permitted to use their child's education allowance at any school which is non-selective and requires no additional top-up fees. Regulation can be addressed through the use of 'sunset' clauses under which regulations expire unless specifically renewed, and for regulation to be implemented by case law, with the findings of tribunals and juries filling in the details of broad statutes.

Zero Base Policy contains 33 radical objectives including the abolition of regional tiers of government and agencies, and the phasing out of most capital taxes.

Norman Borlaug has died


On Saturday, Norman Borlaug died aged 95. The man who saved more lives than any other person who ever lived.

The green revolution that Mr Borlaug initiated irradiated the temperamental humanitarian "ship-to-mouth" sustenance for much of humanity. A consummate entrepreneur, his life is proof of the wondrous contribution one individual can have on the course of human history.

Beloved by many in the countries whose lives he saved, the Nobel Peace Prize winner lost favor among many in the West as politics trumped science and the environmental cause turned in on itself. It is beyond a travesty that so many environmentalists have retarded the progress that technology offers for feeding the world. Their lobbying of the Ford Foundation and World Bank to shun Mr Borlaug's work is a stain upon the environmentalist movement.

Mr Borlaug never gave in to their questionable priorities, and these and other institutions could learn a great deal from his courage and commitment to the evidence. In a rare reply to the armchair environmentalists who criticized his work, he retorted:

They've never experienced the physical sensation of hunger. If they lived just one month amid the misery of the developing world, as I have for 50 years, they'd be crying out for tractors and fertilizer and irrigation canals, and be outraged that fashionable elitists were trying to deny them these things.

Here’s a selection of obituaries to the great man:

The Times of India 'Norman Borlaug, India's 'annadaata', dies at 95'.

The Times 'Norman Borlaug, scientist who 'saved 245m lives', dies aged 95'.

The Telegraph:'Norman Borlaug'.

It’s time for a U-turn on drugs

Dr Madsen Pirie suggests that he government should rethink its policy on drugs, calling for greater liberalisation, and a change in the state’s view of addicts, from criminals to people in need of medical help.

UK drug policy is a spectacular failure. Decriminalisation is the only way forward

The Adam Smith Institute today urges the next government to rethink policy from first principles. Its book, Zero Base Policy, will nowhere be more controversial than on narcotics. It suggests that Britain’s drug policy is “one of the most spectacular failures in history. Dozens of initiatives spread over many decades have left Britain with more addiction, more drug use, more drug-related crime, and more drug-induced health problems.”

Dealing with drugs costs money. The Department of Health and the Strategy Unit put the costs of drug use at £15bn-£20bn per year. Although ministers and police officers have uttered tough phrases such as “zero tolerance”, drug crime has steadily increased, not diminished. When a policy achieves the opposite of what was intended, rarely is more of it needed.

The ASI urges a different approach, recognising that addicts need medical help, not punishment. Many who could be helped medically avoid seeking it because drug-taking is illegal. When drugs were decriminalised in Portugal, drug addicts chose to undertake treatment.

Drug addiction should be viewed as a medical problem. Doctors and nurses, rather than police, should handle it. There should be high-street clinics, staffed by medical personnel, where addicts can receive supplies to be consumed on the premises. Subject to medical examination and counselling, they should receive a free supply to use within the building. The medical examination required as a condition of supply would enable monitoring of their health, and counselling could help dependent users to better control the adverse physical effects of drug use.

Such a policy would eliminate the crime associated with hard drugs such as heroin. Users who currently fund their habit by criminal behaviour would not need to, since the supply would be free, costing the state very little.

This would work for some narcotics, but not recreational drugs. Addicts might take their fix of heroin in a clinic, but not social users of recreational drugs. Few people would want to enter a high-street clinic to take an ecstasy tablet – this is something used in clubs. Similarly, few people would want to snort a line of cocaine in clinical and antiseptic conditions. Neither would people want to smoke cannabis in a clinic. They would shun the medical conditions envisaged for supervised use. The cafes in the Netherlands in which cannabis use is tolerated are rather more social and relaxed than medical clinics.

The policy that could succeed would be to medicalise hard drugs, and to legalise the production and sale of recreational drugs such as ecstasy, cocaine and cannabis. They would no more be without controls than alcohol and tobacco are without controls, but no longer criminal.

The street price would collapse without the need for illegal supply. Quality could be controlled and subject to regulation and labelling. Advice could be given on packages warning of associated dangers, and alerting users to the early signs of adverse health effects.

Would their use increase? Many people choose not to smoke, even though they could. They rate the costs and health hazards of smoking higher than any pleasure it brings, and most people are moderate drinkers, even though binge drinking is legal. The same could be true of drugs.

Drugs are currently out of control and widely available. Without illegality, the criminal culture they sustain would disappear, creating a far preferable situation.

Published on guardian.co.uk here.

Voters in favour of spending cuts


A Sunday Times/YouGov poll (always one of the most accurate) has found that voters are hugely in favour of spending cuts rather than tax rises to close the growing gap between what the Treasury spends and what it receives in revenue. Sixty percent of people want the government to cut spending, taxes, and borrowing. Just 21% would like to see taxes rising to cover the borrowing gap.

One of them, of course is Derek Simpson, head of the Unite trade union. In an interview with the Daily Mirror he opined, in fine Old Labour style:

If you want to go down the New Labour route it is suicide.... New Labour is dead. It's like the parrot in Monty Python. Anybody who is going to take over and lead us down that path is taking us to certain defeat. But if you could convince me there is somebody who could take over and go down the Old Labour route without hesitation I'd share the view that if Gordon [Brown] is not prepared to do it he should stand aside and let that person do it.

I'd love to be a fly on the wall on Tuesday, when the Prime Minister makes a speech to the TUC Conference in Brighton, saying that there must be 'tough choices' (ie cuts) in public spending. But I think it is Gordon who is more likely to get swatted.

Getting out of this mess


Both Ambrose and Burning Our Money have bad news for us: it isn't going to be easy to get out from underneath this debt burden. Thus endeth the period of spending like drunken sailors perhaps and here's to the new world where our taxes are subject to the purser's ever rising demands. Either one of those two, or we try to inflate the debt away and hope no one notices (for if they do we can't).

Not exactly the most appealing set of alternatives that anyone's ever been faced with. So are those the only three available? Well, actually, there's a fourth, the one that no one is talking about yet. That's to grow our way out of this mess: if we can grow the size of the economy then clearly the debt to GDP ratio becomes lower.

So what do we know about how to make an economy grow faster? No, not the Keynesian idea of simply throwing money at it, something much more sensible: it's time for the revival of the supply side approach. This isn't, as some caricatures would have it, just a matter of lowering marginal tax rates. It's all about the reform of the supply side of the economy. Our problem today isn't that too much of industry is owned and run (badly) by the State: it's that all industry, all productive activity is groaning under the weight of regulations imposed by that State. Strip some or all (according to ambition) of those away and we'll increase the growth rate.

Just as an example, the EU Commissioner responsible has told us that EU regulations cost business around €600 billion a year. The UK is around and about 10% of the EU economy (assuming £ to € parity, just for ease) so our share of that is some £60 billion, or again roughly, about 5% of our entire economy. Rip that burden away, take off the further nonsenses that we impose ourselves (11 million people are going to have to be checked so that they can take the neighbour's kids to footy practice? Seriously?) and we could pull at least 10% out of the unproductive cost base of our society and use the time, effort and resources to do something productive. And from that added value (which is, by definition, the same as a rise in GDP) we'll have a huge great chunk of tax money with which to pay off debt: without having to raise tax rates or slash those few valuable services that government does in fact offer us.

As an individual when you're up to your eyeballs in debt you can at least try to earn more money to pay it off. As an economy we can do the same and the best way to do that is to get the pencil pushers and the jobsworth's out of our way as we do so. Time to carry on with Maggie's Revolution: we need to burn more of those regulations.

Measuring poverty


Financial secretary to the Treasury, Stephen Timms, has said that both parents should work in order to lift children out of poverty.

This is in reaction to Lesley Ward, president of the Association of Teachers and Lecturers (ATL), stating that many children face levels of deprivation, which "mirror the times of Dickens". Of course, Mrs Ward’s analogy is  entirely incorrect as far as the way most people understand poverty. In fact, in the details of what she says it is clear that she in not concerned about income at all but manners and lifestyle.

As has been pointed out on this blog and elsewhere, the government has it wrong defining child poverty as children living in families earning less than 60% of the median income. They are not measuring poverty but equality, patently not the same things. Also, any fall or rise in the median income will of course influence the measurement of poverty, despite no change in the actual conditions of the poor.

Mr Timms argues his case based on the fact that children are less likely to be in a family earning less than 60% of the median wage if both parents are working. But this tells us precisely nothing about the lives of children in these households. After all, both parents working is not going to solve Mrs Ward’s claims that many children attend schools without being toilet-trained, unable to dress themselves or use a knife and fork. It could in fact make things worse.

It is hard to measure poverty and any system is open to complexities and irregularities. Yet if poverty is to be measured, the principal test of its usefulness should be that it captures poverty as an absolute condition, not as a relative one. A good place to start would be to look at the work of the philanthropist Charles Boothe, the founding father of measuring poverty. Although clearly not the last word on the issue, the maps he produced in the late 19th century were – though far from politically correct – a clear snapshot on the areas and nature of poverty at this time. Something that the current way of measuring poverty fails to do.

The council housing debate


Wednesday saw both a government promise to build 2,000 new council houses across England, and a critical report from the Audit Commission explaining that there has been too much focus on building council houses, at the cost of maintaining the existing stock.

The response from the main parties has been one of predictable point-scoring, with the Government declaring that they, “reject any claims that there is too much emphasis on new house building," while the Conservatives were sure that, “there is a powerful case for renovating rather than demolishing rundown housing stock," and the Lib Dems complained that Labour was, “denying councils the money they desperately need to improve local housing."

Bickering over how best to provide housing, no-one pointed out the obvious: that no government, however well-intentioned, well-managed and well-resourced, can possibly hope to run something so complicated as the provision of housing for two million people. The political parties don’t send out press releases telling us how they think it’s best to provide bananas, or cars, or holidays, so why do they think they know what to do with houses?

The moment that government realises the arrogance and the folly of Soviet-style central administration of low-cost housing, is the moment the lives of those stuck in council houses will start to improve. Council houses should be sold off and the government should build no more.

So what instead? In the long-term, we should abandon the failed welfare, education and economic policies that generate state dependency, but in the short-term we should look to the system of housing allowances which give the consumer the choice of where they want to live, and leave provision to the market.