Mutually Assured Prosperity

Following David Davis' speech this morning where he called on European Union partners and member states to agree mutual recognition on the basis of trust the Adam Smith Institute says that the government's Brexit secretary is speaking sense. Matt Kilcoyne, Head of Communications at the ASI, said:

"When talking about trade we often hear of the importance of rule makers and rule takers. Most countries though know that in some things they make the rules, in others they take them. It will be the same for Britain as we leave the EU. In insurance, in banking, in legal contracts and many commodities it is British rules that are the basis of global trade. In goods we've worked for four decades with European partners to set global standards. 

"The Adam Smith Institute has argued in favour of mutual recognition before and it makes sense that we'll seek to mutually recognise the work of institutions that we've helped to build. Use of a single set of approvals boosts trade by removing barriers and time costs. 

"But it mustn't stop at the borders of Europe. The safety of medical devices in the USA, Switzerland, and Canada are just as good as those found on the continent. Cars from Japan are just as safe as those sold by German manufacturers. At the heart of this issue is trust. Governments should trust each other, just as multinational companies do in their supply chains. If we want a globally facing Britain we'd do well to support further mutual recognition and trust between our allies."

For further comment or to arrange an interview please contact Matt Kilcoyne (07584778207, 02072224995, matt@adamsmith.org).

Scrap the Bank of England's Inflation Target

New Report calls on Bank of England’s remit to be reformed to move from CPI Inflation rate targeting to a nominal income target and remove discretion over Quantitative Easing. 

  • Government should replace the Bank’s 2% CPI Inflation target with a nominal income (NDGP) target
  • By moving to NGDP targeting, the Bank of England can credibly maintain a single target in good times and bad
  • Forward guidance must be clear and credible, ambiguity creates uncertainty and reduces the effectiveness of monetary policy.
  • Clear and consistent action by central banks allows effective financial market reaction and reduces spillover effects in the wider economy 
  • Prediction markets, allowing people to trade on bank’s solvency, would punish excessive risk taking and create a more sustainable financial sector 

Ten years on from the financial crisis, a new report by the Adam Smith Institute urges the government to scrap the Bank of England’s 2% inflation target and move to a new system that targets nominal income. 

Conventional monetary policy by central banks used interest rates control inflation, but since the financial crisis a decade ago, the central bank has used emergency asset purchases (i.e quantitative easing). A move to nominal income (NGDP) targeting would mean more accurate and responsive decisions made by the Monetary Policy Committee (MPC) by allowing a single focus on aggregate demand.

The price system is meant to reflect real scarcities – and so supply shocks should be reflected in inflation data with policymakers trained to ‘see through’ them. The central bank itself is described as being the primary cause of demand shocks. As nominal income is demand, NGDP targeting avoids requiring ratesetters to distinguish between supply and demand shocks and increases stability.

Decisions on asset purchases by the MPC at present are discretionary and arbitrary. While forward guidance has been issued, it is sometimes seen as publicly committing the bank to future actions and sometimes seen merely as a forecast of where the economy is headed. Instead the Bank of England should move to a rules-based system, the report argues. The MPC should clearly set out the amounts and types of assets the Bank will hold in each scenario. For example, if the Bank of England owns more than a certain percentage of gilts of a specified maturity, they then extend asset purchases to a pre-announced basket of investment-grade bonds.

Monetary policy since the crisis, including consistently near-zero interest rates have prompted destabilising capital flows and driven large swings in emerging market currencies, increased the costs of pension provision, and encouraged speculation in commodities. With open market operations limited in scope, and financial markets knowing in advance which margins the Bank of England intends to exploit, these spillover effects could be limited.

By being clearer with markets about the intention of monetary policy, the Bank of England’s actions would have stronger intended effects, the paper argues. 

Ten years on from the financial crisis, it’s time to look again at whether we regulate lenders and financial markets correctly. The cat and mouse charade of complex banking regulation, setting banks up against government regulators presumed to know all, is destined to fail, the paper says. Referencing Andrew Haldane’s 2012 speech at Jackson Hole, the paper argues that clear, simple and consistent rules based regulation has a better effect than increasing complication as “you do not fight fire with fire, you do not fight complexity with complexity.”

By replacing bank stress tests that straight-jacket bank behaviour with prediction markets, the Bank of England could also help taxpayers avoid future bailouts. Questions could be posed relating to the banks objectives which could be traded on, the paper argues, and so provide real time probabilities of risks that are transparent to all markets. These markets would end up boosting competition and punishing excessive risk taking efficiently and effectively, more effectively than current regulation allows and far better than that a decade ago. 

Anthony J. Evans, author of the report and Professor of economics at ESCP Europe Business School, said:

“Since the financial crisis monetary policy has played a reasonable role in stabilising the economy, but only because it has strayed from its conventional remit. Given the damage caused by that remit in the first place, the Bank of England should take the opportunity to adopt a new approach. Reforming open market operations and adopting a Nominal GDP target is effective in good times and bad, and provides a coherent, rule-based framework for monetary stability.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Monetary policy should be stable, predictable, and rules-based. The extraordinary policy measures the Bank of England took in response to the financial crisis increasingly relied on the discretion and wisdom of policymakers. Now, nearly ten years since the start of the Great Recession, we should take the opportunity to change the Bank of England’s mandate and reform open market operations.”

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report ‘Monetary Policy After The Crash: Lessons Learned?’ is available here.

Corbyn onto a loser with renationalisation plans

With John McDonnell and Jeremy Corbyn saying a Labour government would renationalise energy companies, Matt Kilcoyne says that Labour are onto a loser picking the state just when dynamic markets are what the world needs to go green.

"Labour is right about one thing. The future of energy provision is decentralised, flexible and diverse. But their plans for renationalisation would threaten this by going in the exact opposite direction.

"The state is bad at picking winners, more often it subsidises losers. It is the trial and error of the private sector that will decarbonise our energy supply. Rigid state monopolies rarely innovate, but private sector competition is already driving down solar and wind costs. The freedom to experiment with new business models including dynamic pricing and home battery storage could be key to cutting emissions, but only the market can deliver it.

"The hidden cost of renationalisation is billions of foregone investment, just what's needed to turn our energy production green. Their ideological stance threatens not just our wallets and our ability to keep the lights on, but also how we deal with climate change."

For further comment, or to arrange an interview please contact Matt Kilcoyne (mobile: 07584778207, email: matt@adamsmith.org).

Crack-downs on social media risks competition as well as free speech

In reaction to the moves by the Prime Minister at her speech in Manchester to announce a consultation for a new offence against online abuse Matt Kilcoyne, Head of Communications at the Adam Smith Institute, called out the dangers of doing so:

"Publish and be damned were the watchwords of our free press, it should be for individuals on social media too. We have laws that govern threats of violence and death threats, we have laws that can punish libelous and slanderous claims. We should be enforcing these existing laws better, not creating a new offence of abuse – an ambiguous term that could easily be used to shut down criticism in the name of being offended.

"This is something that the Lords’ Communications Committee confirmed when they, last year, said they were not persuaded it was necessary to create a new set of offences specifically for acts committed on social media. It is worrying the Prime Minister wants to override this advice in creating a new law to restrict free speech online. 

"Social media companies that provide a platform should not held accountable for what users on their sites post, no more so than the Royal Parks are for the views of those at Speakers’ Corner. Facebook, Google and Twitter might be able to afford thousands of staff and millions of pounds to police their users' views to swiftly take down content, but such requirements create a significant barrier to entry and risks hurting disruptive start-ups. Treating platforms as publishers risks stifling innovation and competition as well as free speech."

To contact us to arrange an interview or further comment please do so via either email (matt@adamsmith.org) or phone (mobile: 07584778207; office: 02072224995). 

Transition should allow Britain to shape its place in the world

After David Davis spoke in Middlesbrough this afternoon and demanded that during transition the UK be able to draft and sign new trade deals, Matt Kilcoyne says this is both eminently sensible and a good demand for the EU to accept:

"David Davis is right to demand that the UK should be able to sign new trade deals during any transition period after Brexit. The common commercial policy of the EU is designed for members in it for the long haul, but the UK is very much on the way out. Transition is good for both the UK and EU, providing certainty for business and citizens. But if we're unable to shape our future place in the world during this period then it is time wasted and the EU risks a no deal scenario. 

"Britons need to start seeing the dividends of Brexit and that means more trade with our friends and allies across the world–a more global Britain, with a new outward focus. Deals show how that can happen. If the EU wants a friendly and close relationship with its largest trading partner, it will need to trust the UK to act in good faith in negotiations with third countries. This is a mature and friendly proposal by David Davis, the EU would be wise to heed it."

For further comment, or to arrange an interview please contact Matt Kilcoyne via phone (mobile 07584778207, office 02072224995) or email (matt@adamsmith.org)

Oxfam's inequality mistake

Every year Oxfam releases a report criticising the wealth of the richest in the world while ignoring the growth in welfare of the poor. This is a mistake. Sam Dumitriu, Head of Research at the Adam Smith Institute said this means the report is, as ever, exceptionally misleading and misses the point:

"Oxfam’s annual eye-catching wealth inequality stats always paint the wrong picture. In reality, global inequality has fallen massively over the past few decades. As China, India and Vietnam embraced neoliberal reforms that enforce property rights, reduce regulations and increase competition, the world’s poorest have received a massive pay rise leading to a more equal global income distribution.

"Oxfam’s mistake is to see wealth as a fixed pie. More wealth for Zuckerberg and Bezos does not mean less wealth for you or me. In fact it’s the opposite, in a free market individuals can only amass wealth by fulfilling the wants and needs of others. Work and trade does pay out for everyone involved. 

"But we don’t really care about inequality, we care about poverty. Every day for the past 25 years 138,000 people have been lifted out of extreme poverty. It's the countries that rejected free markets that have bucked the trend. In Venezuela, the move to socialism under Chavez and Maduro has meant that more than 75% of the population now live in poverty with many unable to afford basic necessities like food and medicine, despite having the world's largest proven oil reserves.

"What we should care about is the welfare of the poor, not the wealth of the rich."

But if it is inequality that we're really concerned with then we have to understand how the figures have come about. 

"There is one aspect of the recent rise in wealth inequality that we should be concerned about. Matthew Rognlie, Assistant Prof at Northwestern University, found that recent rises in wealth inequality were driven by housing. As land-use regulations have prevented construction of new homes creating artificial scarcity, housing has become increasingly unaffordable. Reforming planning and zoning law would likely be an effective way of reducing wealth inequality."

For further comment please get in contact with Matt Kilcoyne, Head of Communications at the Adam Smith Institute, via phone (office: 02072224995; mobile: 07584778207) or email (matt@adamsmith.org) 

 

Rising evidence for universal basic income

 

New report suggests a Universal Basic Income (UBI) is the answer to large-scale change from globalisation and automation

  • New trials in countries such as Canada, Finland, Uganda and Kenya highlight growing interest in Universal Basic Income across the world
  • Automation, the gig economy and global trade could deliver massive improvements in standards of living but also risk populist backlash from those hit by creative destruction
  • Luddite regulation and protectionist tariffs, backed by Trump and Corbyn, risk economic stagnation. Basic Income could deliver popular consent for globalisation and technological change
  • Ahead of Davos, the ASI calls on the world's policy makers to back free trade and innovation, and urges more governments to conduct experiments on Basic Income

Current welfare systems are ill-suited to adapt to the challenges presented by automation and globalisation. That's the view of a new paper from the Adam Smith Institute ahead of the World Economic Forum meeting in Davos next week. Governments should look to Universal Basic Income experiments around the world as they seek to address the risks posed by large-scale changes to the labour market while retaining the benefits of trade and technological progress.

While politicians like Trump and Corbyn might suggest a move to more interventionist and protectionist policies, the paper argues that economic theory and empirical evidence show there are good reasons to believe that a “hands-off” approach would produce superior outcomes.

Fresh experiments are being carried out in several countries to test Basic Income feasibility and how it could be implemented successfully. In Ontario, Canada, the local government is trialling payments to 2,500 people that ensure a minimum income level of at least C$1,320 a month, regardless of employment status. In Finland, 2,000 unemployed people across the country are being trialled with an universal basic income of €560 a month for two years, with expansion to a further 1,000 for 2-3 years if initial results suggest success. In Silicon Valley, Y Combinator (early backers of AirBnb and Dropbox) are funding a long-term study of 2 to 3 years which will ultimately include up to 3,000 individuals. 

Yet UBIs are not just limited to rich western countries, small non-means tested payments systems have been trialled in the developing world. In Uganda, the Belgian charity Eight are funding a two-year project in Fort Portal with payments to 50 households of $18.25 per adult and $9.13 per child each month. While in Kenya, GiveDirectly (backed by Facebook co-founder Dustin Moskowitz) is aiming to pay 6,000 people the equivalent of £18 a month over a 12-year period; while at present the scheme reaches just under 100 people it promises to be the largest Basic Income experiment in history.

The paper says countries should see large scale automation not as a threat but as an opportunity, a chance that with Basic Income would ensure that ‘capitalism and efficient redistribution can be vindicated in equal measure’.

The idea of a Universal Basic Income is not a new one. First touted as far back as 1792 by Thomas Paine, the idea is that government provides a regular modest income without any means-testing. Support comes from across the political spectrum. Thinkers like Hayek and Friedman, Martin Luther King and tech superstars Elon Musk and Mark Zuckerberg have all advocated the policy, and even Labour's John McDonnell supports the principle.

Organisations in the UK such as the Buchanan Institute, the Citizen’s Income Trust and Royal Society for the Encouragement of Arts, have called for the idea to be put into practice.

Technological advances, such as driverless trucks, could disrupt the haulage industry but also reduce emissions, road accidents and prices for ordinary people. Basic Income is both politically feasible and financially sustainable, the report argues, smoothing the transition for workers displaced by automation. Short-termist regulations designed to protect jobs from competition risk economic stagnation and mass retraining schemes rarely live up to their lofty promises. 

Basic Income could help secure popular support for the changes that automation and globalisation will bring, while cash transfers allow the unemployed and retain the dignity of personal choice. More experiments in how to provide it could help secure the gains of growth for the decades to come.  


Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“New developments in machine learning, from driverless cars to AI medical diagnostics, will change the way we live, work, and play for the better. But they also risk disrupting traditional professions and career paths, from lorry drivers to lawyers. To avoid a populist backlash, we need to design policies for those left-behind by creative destruction. Attempts to protect jobs through luddite regulation will backfire and mass retraining schemes have a shaky track record. Cash transfers are our best bet at ensuring the benefits from coming technological change are felt by everyone.

“We now need to experiment with different ways of doing it – should we tweak the tax credits system, should we introduce a ‘Negative Income Tax’, or is a Universal Basic Income the best approach? And, if we’ve decided on the best way of doing things, what should things like the withdrawal rate be? This paper is a welcome contribution to the debate around welfare reform in the UK and puts evidence at the front and centre of improving policy, just as it should be.”

Otto Lehto, author of the paper, said:

"The theoretical case for unconditional cash transfers over command and control solutions has been strong ever since the birth of welfare economics. Now we have increasing empirical evidence from global field studies to corroborate the desirability of granting people a modest, universal income floor.

"A UBI streamlines the provision of welfare services and improves the autonomy and incentives of individuals. Allowing poor people to spend their money as they see fit stimulates bottom-up market solutions and cuts down on bureaucratic red tape. All this pulls resources away from wasteful rent-seeking into wealth creation."

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report "Basic Income Around the World’’ is available here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Rave on!

With the announcement today by Sajid Javid that the government will adopt as policy John Spellar's private members bill Agent of Change, the Adam Smith Institute says it's great news for the night-time economy and potentially those looking for new developments too.

Daniel Pryor, Head of Programmes at the Adam Smith Institute, welcomed the move saying:

"Today’s announcement that housing developers, not music venues, will now be responsible for addressing noise issues is fantastic news for the night-time economy.

"Our music venues provide entertainment for millions and contribute £4.4 billion to the economy, but current rules damage the success of this vibrant industry by imposing unfair compliance costs on noise reduction. The Agent of Change reforms, brought to the House by Labour MP John Spellar and announced to be government policy today by Sajid Javid, are eminently reasonable and show bipartisanship at its best. If you want to develop near a long-standing music venue, you should be the one to address potential noise issues.

"It will also benefit those struggling to pay rent, and potentially those looking to get on the housing ladder. Easing the burden on music venues will also encourage them to support development in local areas, since they no longer have to bare the cost of noise reduction or threats of closure. This will give a boost to housing supply at a time when it’s sorely needed."

If you'd like to arrange an interview please get in contact with Matt Kilcoyne (via email matt@adamsmith.org) or phone (07584778207). 

Outrage over executive pay is overegged

Following the High Pay Centre and CIPD's annual report on executive pay Sam Dumitriu, Head of Research at the Adam Smith Institute, finds little reason for outrage in the figures:

“It is a mistake to fret about executive pay packets. In fact, given how important the decisions a CEO makes are to the success of a firm, it would be shocking if they were not extremely well paid. When Burberry’s CEO Angela Ahrendts announced her departure, it wiped £536m off Burberry’s value. Similarly, when Steve Ballmer resigned as Microsoft CEO, the firm’s value jumped by £20bn. Is it any wonder that firms invest heavily in attracting top talent?

“The long-term trend suggests that CEOs are more valuable to firms now than ever before. Unexpected CEO departures are leading to ever bigger share price movements. If shareholders, and that includes anyone with a private pension, want a return on their investments then hiring the right chief executive is essential.

“The High Pay Centre are wrong to link high pay at the top with low pay at the bottom. Poorly performing CEOs are bad for shareholders but worse for workers. Microsoft’s failure to invest big in smartphones not only reduced profits, it also meant they created fewer jobs. Politicians should be careful, bashing CEO pay may sound good on the stump but if British businesses lose out on top talent to the US and Europe, British workers and savers will pay the price.”

If you would like to arrange further comment or an interview please do get in contact with Matt Kilcoyne via email (matt@adamsmith.org) or phone (mobile: 07584778207, office: 02072224995).

We must resist Lord Bew's moves to curb free speech and innovation

Sam Dumitriu, research economist at the Adam Smith Institute, reacts to Lord Bew's recommendations that would see social media platforms become liable for content posted by their users. 

"Punishing Twitter and Facebook for what their users post will reduce competition, deter innovation, and threaten the free flow of ideas online. The risk of being fined or prosecuted will lead to even more over-enforcement and have a chilling effect on free speech. Accounts with politically unpopular opinions could end up being incorrectly reported for abuse and banned by risk averse social media companies afraid of being fined."

"This move would entrench major tech companies and stifle competition by burdening innovative start-ups with massive entry costs. It is hard to imagine the next Facebook, Twitter, or YouTube receiving early stage investment when the potential liability from letting users freely exchange information online is astronomical."

"Lord Bew's proposal is illegal under EU law. If Britain is to succeed outside the European Union, it needs to preserve an innovation-friendly regulatory environment. Imposing even more regulation than the EU will make it unlikely the next big tech firm will be founded in the UK."

To arrange an interview with a member of the institute or further comment please contact Matt Kilcoyne via email (matt@adamsmith.org) or phone (office: 02072224995 and mobile: 07584778207).