A Third Way for Britain's Railways

Britain's railways need more, not less, competition. Entrepreneur and journalist Adrian Quine sets out an alternative to the status quo to see off calls for re-nationalisation. 

  • Efficient infrastructure is the bedrock of a successful economy. For too long Britain has failed to take bold decisions and is lagging behind fast-growing economies such as China and India. The lack of new towns, airport runways, modern power stations and high speed internet is hampering UK growth.
     
  • The UK rail network is no exception and is a prime example of where investment is urgently needed. However it also needs a fundamental change in its structure too. The industry is facing crisis; public confidence is at an all-time low with growing calls for re-nationalisation worryingly gaining momentum.
     
  • Passengers are fed up with the status quo but nationalisation is not the answer.
     
  • Privatisation was supposed to bring about competition however this has not been achieved. British Rail (BR), a state run monopoly, has simply been replaced with largely non-competing privately-run franchises delivering the same uncompetitive model as was the case under BR.
     
  • The Department for Transport (DfT) stipulates exactly what a franchised train company can offer: dictating timetables, frequency, stopping patterns and even minor details such as whether a train has a catering trolley or not. Under the current model Train Operating Companies (TOCs) have very little room or incentive to show flair or innovation. What is needed is less central control, not more while protecting core services.
     
  • The current ‘one size fits all’ franchise model needs to be replaced with a system that is agile and best reflects the diverse needs of the passengers it serves. The railway must be competitive to encourage innovation, improve standards and drive down fares. 
     
  • Different railway routes serve different markets. The new structure needs to better reflect the specific needs of passenger types on each route – whether they be commuters, business or leisure travellers. There needs to be a better distinction between the commercial and social railway and to create bespoke models that best serve the passenger, communities, businesses, and taxpayer.
     
  • Flexible long distance train fares are some of the most expensive in the world. It is often cheaper to fly twice the distance. The current privatised railway model is largely immune from the basic principle of competition as each franchise is, in effect a monopoly in its own right.
     
  • This paper advocates a new, fresh and dynamic approach to running Britain’s passenger train services that best reflects the markets they serve while also driving down costs and improving the service for the end user. By creating choice, fares will be lowered, service standards will be raised and costs can be reduced proving a ‘win win’ for both passenger and taxpayer.

Read the full paper

Only Capitalism Can Solve The Housing Crisis

The housing crisis of ever rising prices and unaffordability can only be ended by a capitalist revolution in housing, argues leading architect Patrik Schumacher in a thinkpiece for the Adam Smith Institute.

Executive Summary:

  • Restrictive planning laws have led to enormous growth in London’s rental and house price to earnings ratios

  • Housing crisis is a failure of politics not markets and is the result of restrictive planning laws.

  • Government should resist calls to impose rent controls or mandatory long-term tenancies as they reduce supply and hamper labour mobility

  • Sadiq Khan’s plan to mandate that up to 50% of developments be “affordable” will discourage development and push up prices elsewhere

  • Micromanaging land uses creates high price distortions in our cities and should be abolished

To read the full essay, click here.

Prices not points: A post-Brexit immigration solution

  • As the UK prepares to leave the European Union in 2019, the government must create a new policy for immigrants from EU-member nations. It should also rethink its policies regarding non-EU immigrants as well. 
     
  • In recent years, UK immigration policy toward non-EU migrants has prioritised highly skilled workers. Free-movement migrants from within the EU have generally held low- or semi-skilled jobs and had strong labour force attachment. 
     
  • UK immigrants have higher education levels than natives, on average, and while the largest economic gains typically come from highly skilled immigrants, less-skilled immigrant workers make economic contributions as well. 
     
  • The empirical evidence indicates that immigration has had a negligible overall effect on natives’ employment, unemployment, and wages in the UK. However, a few studies conclude that the labour market prospects of less-skilled native-born workers have been harmed by immigration.
     
  • Reducing immigrant inflows, particularly of highly skilled immigrants, would create considerable economic costs in the short and long run. Admitting more highly skilled immigrants, from inside or outside the EU, is particularly vital to long-run economic growth. 
     
  • Auctioning employer permits to hire foreign workers would maximise the economic benefits of immigration and increase government revenue. 

Read the full paper

Monetary Policy After The Crash: Lessons Learned

  • Conventional monetary policy has serious flaws and contributed to the 2008 Global Financial Crisis. Since then, emergency monetary policy has been relatively successful but lacks clarity. We should take the opportunity to reform policy such that the same rules apply in good times and bad.
     
  • The Bank of England’s Open Market Operations (OMO) should be reformed to reduce discretion and provide financial markets with greater certainty.
     
  • We should replace the Bank of England’s 2% CPI Inflation target with a nominal income (NGDP) target. Under current policy, the Monetary Policy Committee (MPC) must distinguish between demand shocks and supply shocks. Moving to an NGDP target resolves this problem as nominal income is aggregate demand, reducing the epistemic burden on the MPC.
     
  • Central bank intervention should be restricted purely to managing the money supply.
     
  • Open Market Operations should be as neutral as possible, focusing primarily on gilts. Financial markets should know in advance which margins the Bank of England intends to exploit. 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 can buy policymakers time, but it is unable to solve underlying problems of low productivity. The Bank of England cannot raise the Natural Rate of Interest in the long-term, but free market supply-side reforms should be a priority for government.
     
  • Stress tests, designed to measure the ability of banks to withstand market shocks, are complex. This makes them vulnerable to being gamed and it leads to risks that can be felt across the financial system. Prediction markets provide the best chance we have of avoiding future bailouts by boosting market competition and punishing excessive risk taking.

Read the whole paper

Basic Income around the World: The Unexpected Benefits of Unconditional Cash Transfers

  • Replacing existing welfare systems with a universal basic income has the potential to streamline bureaucracy, eliminate welfare traps, and reduce poverty. 
  • The idea is being trialled by governments across the world including Scotland, United States, Canada, and Finland. These studies contribute to a growing body of evidence on the effects of basic income on employment and poverty.
  • While recently advocated by Labour's John McDonnell, basic income has a rich intellectual heritage on the free market right. Nobel Prize winning economists such as Milton Friedman, F.A. Hayek and George Stigler have advocated replacing existing welfare systems with a negative income tax (a form of basic income).
  • Automation and globalisation will deliver massive benefits for ordinary people, but they also run the risk of creating short-term mass unemployment. Existing welfare systems are ill-suited to handle the transition and mass retraining programmes rarely deliver their promise.
  • There is strong evidence that unconditional cash transfers are incredibly successful at alleviating poverty in the developing world. With studies in Kenya, Namibia, India and Uganda supporting the view that simply giving cash is one of the most effective forms of development aid.

Read the full paper here.

Back in the USSR: What life was like in the Soviet Union

A hundred years ago, the October Revolution brought about the biggest social experiment ever: The Union of Soviet Socialist Republics. Since its demise two decades ago, much has been written about its origin, and its politics, economics, and history more broadly. The field of Sovietology, once highly relevant to interpreting the USSR from the West, is now slowly dying, as its great scholars retire.

Almost everything that can be said about the USSR has already been said. Since the opening of the Soviet archives and the enactment of Glasnost, it has been known that the statistics now available to the world were the same statistics used by the Soviet leadership themselves to plan their economy. Long gone are the days of statistical trickery, common in Stalin’s times.

But there remain some historical questions that are of great interest to a curious reader. This book attempts to highlight some key aspects of the USSR to answer those questions. Some of those questions are probably familiar: How good was life there? Were there queues to buy food? How good were Soviet appliances? How advanced and powerful was their military? How did the USSR industrialise so fast? Was there poverty, unemployment, or inequality?

As mentioned, this book is explicitly not a general survey of the state of the art of Soviet history. While the content itself is state of the art, it is deliberately not general in scope. Each chapter addresses one question and one question only, drawing on every source available to answer it.

This book is accessible without prior knowledge, but it will be better enjoyed if the reader has previously read some introductory material. I recommend Red Plenty by Francis Spufford. While not academic, it does a good job in conveying the bigger picture. Broader in its scope, and extremely detailed, I recommend The Socialist System: The Political Economy of Communism, by János Kornai to understand how a socialist regime, in generic terms, has worked historically.

For textbooks about the history of the Soviet Union in general, I suggest The Rise and Fall of the Soviet Economy (Hanson), and Economic History of the USSR (Nove).

This book is divided into two sections. Section One is dedicated to the (in Marxist parlance) “base” of the USSR: its productive apparatus. Section Two explores some topics about its “superstructure”, such as food consumption or healthcare.

Due to the breadth of the topics covered, it is only possible to provide a relatively brief overview of them, and so some chapters may feel too dense for some readers. At the end of the book is a bibliography, so the interested reader can expand upon the themes explored in the book, and find some claims in their proper context.

The paper also reveals that...

  • In 1976 only two thirds of Soviet families had a refrigerator—the USA hit two thirds in the early 1930s. Soviet families had to wait years to get one, and when they finally got a postcard giving notice they could buy one, they had a fixed one hour slot during which they could pick it up. They lost their chance if they did not arrive in time.
  • In the same period, the USA had nearly 100m passenger cars. The USSR? Five million. People typically had to wait four to six years, and often as long as ten, to get one.
  • There was 30x as much typhoid, 20x as much measles, and cancer detection rates were half as good as in the United States.
  • Life expectancy actually fell in the Soviet Union during the 1960s and 1970s.
  • The USSR had the highest physician-patient ratio in the world, triple the UK rate, but many medical school graduates could not perform basic tasks like reading an electrocardiogram.
  • 15% of the population lived in areas with pollution 10x normal levels.
  • By the US poverty measure, well over half of the Soviet population were poor.
  • Around a quarter could not afford a winter hat or coat, which cost an entire month’s wages on average (the equivalent of £1700 in UK terms).

Read the book here.

Beyond the Call of Duty

  • There is about £7.5 trillion worth of property in the UK, but we tax it in strange and inconsistent ways: residential council tax is regressive and its valuation system hasn’t been updated since 1993; businesses pay at high rates; and homeowners pay rapidly escalating transactions taxes (stamp duty land tax), but private residences are part-exempted from inheritance tax and exempted from capital gains tax.
  • Transactions taxes are widely seen as especially damaging levies by economists: a representative Australian government review found their stamp duty destroyed 75p of wealth per £1 raised.
  • This makes stamp duty land tax around 4x more harmful per pound than income tax and 8x more harmful than VAT; some alternative taxes, like a carbon tax, would have small economic benefits rather than harming efficiency.
  • Taxing housing transactions keeps people in houses that are either too small, too big, or too far away from jobs, which are especially harmful when the housing supply is so tight, as it is in the UK today.
  • In the short term the Treasury should abolish SDLT and replace the lost revenues by reforming council tax – fixing the regressive top end of the system with a more proportional, or even progressive, tax on rental and imputed rental values would bring in the needed revenues easily, with far smaller economic costs.
  • Eventually the UK should rationalise its property taxation system by abolishing SDLT altogether, and then rolling council tax, and business rates into one system, with everyone paying the same rate, set at roughly 20% of imputed rental income, comparable to extending VAT to property services. This would be roughly fiscally neutral on a static analysis, but may lead to large increases in revenue over time, which should be used to reduce other taxes.
  • The UK should consider decentralising property taxation, but this is a separate step which does not need to be considered simultaneously. Abolishing SDLT is attractive whether or not the overall local taxation and governance system is reformed.

Read the whole paper.

Making​ ​Sense​ ​of​ ​the​ ​NHS

Exactly how much the Treasury should provide the NHS is a political decision, based on the state of the UK economy, international comparatives, the coherence of NHS strategy and the competing demands for support. But there is wide agreement that exactly how those funds should be allocated should not be a political decision.

The cross-party convention proposed by Norman Lamb, or the Royal Commission proposed by Lord Saatchi, could help create this division of responsibilities. They should consider five major NHS structural changes to realise its potential:

  • NHS England is too big to manage. It needs to be split into six autonomous NHS Regions—run as independent public corporations like the Bank of England or BBC, not by a vast central Whitehall staff.

  • The limits of NHS provision—at present open-ended—must be identified. Only then can resources be focused on their most urgent uses.

  • Patient co-payments, common in almost every other healthcare system (and already current in NHS dentistry and prescriptions), needs to be extended, with care, to reduce marginal and unnecessary demand on NHS services.

  • Our ageing population means that the number of GPs and geriatricians must be increased, particularly geriatricians, whose numbers are outstripped by demand.

  • The 12% of the UK population with mental health issues need greater prioritisation and specialist resource.

The benefits of this clearer, more manageable strategy include:

  • Improved morale, recruitment and retention of a workforce that feels more valued and able to achieve identified aims, rather than having to deal with continual crisis.

  • Localised autonomy to innovate, reduce waste and learn from others.               

  • Better balance of NHS resources with demand, which is outstripping supply because (a) they are free, (b) an older population needs more geriatrician care, (c) mental health needs more specialists and (d) a wealthier population demands more healthcare in general.

  • Improving the quality of healthcare and balancing the books by focusing money, personnel and equipment on their most cost-effective uses. More skills need to be pushed down the line: consultants to primary care, GPs to nurses and pharmacists.

Read the full paper here.

No Stress III: The flaws in the bank of England's 2016 stress tests

  • The Bank of England uses its stress tests to reassure the public that the UK banking system is safe. However, the Bank’s reassurances lack credibility and are contradicted by the evidence.

  • Rightly interpreted, the stress tests demonstrate the opposite of what the Bank claims they do: they demonstrate that UK banks are still financially weak and far from resilient. The UK banking system is an accident waiting to happen.

  • The conclusion that UK banks are weak is confirmed by an analysis of their capital positions and is further confirmed by banks’ market values being less than their book values. Low market values indicate problems with the banks that the stress tests did not pick up.

  • The Bank made a number of mistakes in its stress tests. Among these: it relied on book values instead of market values, relied on unreliable metrics such as risk-weighted assets and Tier 1 capital, relief on a single stress scenario and used insufficiently demanding pass standards. The Bank’s stress model also produced implausibly low projected losses and so failed a basic reality check.

  • More generally, the stress tests are based on a series of imprudent judgments that led the Bank to miss obvious problems with UK banks.

  • Regulatory stress testing is a highly imperfect tool with a track record of repeated failure in other countries, is compromised by conflicting objectives and by the Bank’s poor forecasting record. It is also compromised by basic Public Choice economics, i.e., that public agencies act in accordance with their own interest.

  • It also creates invisible systemic risks by pressuring banks to standardise their risk management practices to conform to the Bank’s view of the risks they face.

  • Far from providing a credible assurance that the banking system is safe, the stress tests are worse than useless because they provide false comfort, suggesting that the UK banking system is safe when it is clearly not. In this sense, the stress tests are like a ship’s radar system that cannot detect an iceberg in plain view.

  • The stress test programme is therefore dangerous and should be scrapped.

Read the full paper here.

The Millennial Manifesto

Several analysts have pointed to what they perceive as unfair treatment of young people in the UK relative to how the population in general is treated. The feeling that insufficient attention is paid to the problems and difficulties they face is reportedly widespread among young people themselves. Some opinion polls have suggested that dissatisfaction among young voters was one of the reasons why the government lost ground in the 2017 General Election, instead of improving their position as they had been widely predicted to do.

Commentators point to the triple lock that state pensioners enjoy, with the promise that their pensions will rise with inflation as measured by the Retail Price Index, or with the growth in average wages, or at 2.5 percent, whichever of these three values is the greatest. They contrast this with the sluggish growth since the Financial Crisis is the wages that non-pensioners have to live on. Indeed, some groups of workers have seen their spending power decline as wage increases have been outstripped by inflation’s price increases.

It has been regarded as a truism by politicians that the older age groups are more likely to vote than their younger counterparts, and that there are also more of them. This has given older people more political clout than that exercised by young people, and is reckoned by some to have caused politicians to pay more attention to the problems and needs of the old than to those of the young.

It is a common complain that ‘the young are being heavily taxed to provide benefits for the old.’ And it is true that tax-supported services are in general used more by the old than by the young. Pensioners receive free travel passes and a winter fuel allowance; the young do not. While young people under 25 can buy a railcard to cut their train costs by a third, senior citizens can enjoy the same privilege, often for a longer period. Institutions that offer discounts to young patrons usually offer similar discounts to senior citizens.

It really does seem to young people that any perks and privileges available to them pale into insignificance compared to those on offer to the elderly. Many of those who say they speak for the young claim that society is tilted against them.

Read the whole paper.