The Adam Smith Institute Blog

There is more joy in heaven

Mon, 12 May 2008 05:03:00 +0100

Over the one sinner that repenteth etc. Stephen Byers seems finally to have grasped what the people around here have been shouting about for years.

An approach that raises personal allowances and takes more people out of paying tax altogether is the best way of helping the working poor.

Yes, quite, now that even Byers and Polly Toynbee agree that the low paid shouldn't be paying income tax can we just get on with it, raising the tax free allowance to, say, £14,000 a year as has been suggested around here? Although, I have to admit, there's a certain wonder here: have we been able to make this case so effectively that people are now agreeing? Or does the often correct test that if people like this are now agreeing with us we might need to rethink matters ourselves? Fortunately for my own sanity, Byers in his second proposal reverts to type:

Second, much more needs to be done to link tax revenues directly to those areas where the public wants to see its money spent. This will mean a significant increase in the amount of taxation that is hypothecated for a particular purpose.

No, this is profoundly silly and that silliness is exactly why the Treasury has been adamant that we should not have anything but the most limited hypothecation of taxation. The reason is that there is no link, none at all, between how much tax one can raise on a specific activity (or even might want to raise, where the tax is to change behaviour as well as raise revenues) and how much you might want to spend on some other, even if closely related, activity. We can and do raise north of £ 8 billion a year on tobacco taxes, smoking creates direct costs for the NHS of some £1.7 billion. If we were to tax smoking only to cover those direct costs then the sin tax should fall. The original supposedly hypothecated tax was national insurance, to pay for pensions, the NHS and unemployment benefits: the NHS alone now spends more than that tax raises, the rest coming from the general fund. Hypothecation simply doesn't work: you should raise the tax where you can, spending what you need.

Entirely removing my worries about agreeing with the man, Byers then fails in his thrid proposal as well:

If we are serious about making work pay then it has to be unacceptable that we now have nearly 2m people facing marginal deduction rates from household income of more than 60%. Many will be the working poor who will have been hit by the abolition of the 10p rate.

If they decide to work longer hours to make up for their lost income, they will receive only 40p in every £1 earned because as their income goes up benefits and credits are withdrawn. More needs to be done to simplify the benefits and tax credits system to reward hard work.

Yes, indeed, but it would help if he'd noted that by hugely raising the personal allowance we've already solved this problem. As the benefits system and the tax system will (largely) no longer overlap, we've brought down those all important marginal tax rates.

Still it is an advance, don't you think? One out of three ideas from a Labour politician being a good one is better than the recent track record, so things can indeed only get better.

Paying for higher education

Mon, 12 May 2008 05:02:00 +0100

According to Shadow Universities Secretary David Willets, the government's new £165 million package of student support will disproportionately benefit middle-class students and do little to help the poor.

As The Times says, the reforms are meant to encourage more working class students into higher education by providing a "means-tested student maintenance grant, which covers living costs but not fees" and which "will be available to students whose parents earn up to £60,000. Previously the cap was £39,305." Willets says that the most affluent families will gain £150m from the scheme, while those from poorer families will only gain £15m.

I can't say whether Willets' sums are right, but I wouldn't be at all surprised if they were. State-financed universities have always represented a particularly perverse kind of redistribution of wealth – from the working poor to the unproductive offspring of the middle and upper classes. Essentially, people on low incomes who didn't go to university (and whose children probably won't either) pay taxes so that better-off kids can lounge around for three years at someone else's expense. The costs of university do not fall only the beneficiaries of higher education, then, but on taxpayers at large.

I'd like to see British higher education given a substantial overhaul. First of all, universities should be freed from state control and allowed to charge fees as they see fit, but helped (through the tax system) to establish endowment funds to support poorer students.

To meet any gaps in funding, the government-backed student loans system could be expanded, with loans gradually paid back as students become taxpayers. Such a system would ensure that anyone able to go to university could afford to go to university – but knowing they would eventually be footing the bill, young people would be encouraged to work hard and pursue useful degrees that would boost their future earning power. Turning students into paying customers would also make them demand a higher standard of education than they currently settle for.

Introducing these reforms would certainly not be easy, but the benefits would justify the effort.

Want to get high?

Mon, 12 May 2008 05:01:00 +0100

Researchers at Boeing Phantom have predicted that in twenty years it will be entirely normal to travel to work in plane-car hybrids. The hybrid will be able to travel up to 300 miles and, thanks to a computerised 'flight instructor', it will take minimal skill and concentration.

Powered by electricity and or batteries, it will run on relatively clean technology. However, given the freedom and fun that the hybrid will introduce, I'm sure the ecofascists will find a way of criticising the enterprise.

With green extremists still intent on prophesising doomsday visions of future, it is good to see the normally complicit BBC report on how technology can improve the environment. After all, technological innovation has meant that most humans no longer consider dying at thirty to be normal.

Boeing's vision is entirely likely. A Slovenian company, Pipistrel, will be delivering the first commercially produced two-seater electric aircraft, it runs on a lithium-polymer battery which can be recharged in the time it will take as long as a mobile phone.

As the work Positive Environmentalism from the Globalisation Institute clearly argues, technology offers the surest way to protect the environment. Surely it is about time that this was acknowledged by politicians, the media and society at large.

The ASI in Nice

Mon, 12 May 2008 05:00:00 +0100

Some of us went over to Nice to sample the seafood at an ASI dinner. We went to La Maison de Marie and Le Grand Bleu while we discussed the possible agenda of what might be a new UK administration in a couple of years' time. We flew out by easyJet and were honoured to be on the same plane as Stelios himself, the company's founder. His business card describes him as a "serial entrepreneur", which is entirely correct. One of our tasks will be to make sure that the conditions are right to provide space and opportunity for many more like him.

Blog Review 594

Sun, 11 May 2008 12:50:33 +0100

A long but fascinating paper on the changes in inequality in the US in recent decades. Quite the most detailed look at the subject yet done. Something for all sides to argue about in there.

Theory again: recessions and the associated hard times help to make firms more efficient: but they don't have the same effect on public bureaucracies.

Oh dear: our ideological compatriots across the pond have started comparing compassionate conservatism with LBJ's Great Society rhetoric.

Can a university simply up sticks and move if it thinks its endowment is about to be taxed? Should it?

Linux development isn't full of freewheeling vounteers as some thing: might it be better regarded as the Coase's ideas on contracting costs and the firm in action?

What is it that children really want? And would that some of those shouting about the life/work balance would actually listen.

And finally, one of the differences between the two sides of the pond.

The Value of Brands

Sun, 11 May 2008 05:03:00 +0100

Here in the modern world we have the likes of Naomi Klein telling us that brands are simply tools of mind control, the way in which the eeevil multi-nationals brainwash us into buying their over-priced products. And of course the difference between one sugar water advertised with the aid of orthodontically corrected youths playing sport and another with orthodontically corrected youths wishing to teach us to sing is indeed pretty small. But that's not where brands came from in the first place and not why they have value, as this paper shows.

In medieval Europe, manufacturers sold durable goods to anonymous consumers in distant markets, this essay argues, by making products with conspicuous characteristics. Examples of these unique, observable traits included cloth of distinctive colors, fabric with unmistakable weaves, and pewter that resonated at a particular pitch. These attributes identified merchandise because consumers could observe them readily, but counterfeiters could copy them only at great cost, if at all. Conspicuous characteristics fulfilled many of the functions that patents, trademarks, and brand names do today. The words that referred to products with conspicuous characteristics served as brand names in the Middle Ages.

Brands were the market of quality, the mark of the Real Thing (umm, sorry, sugar water again). And as such they acted as a very powerful incentive for producers to regulate the quality of the goods they were selling. In a distant market, after goods had passed through many hands, it was that brand alone which allowed premium prices to be charged: a price that consumers were obviously happy to pay given the assurance of quality that they were getting.

There's no difference between this and the brand of tomato soup, baked beans or of sports shoes that you or others covet today. It's a guarantee of quality: for once that link between the brand and quality is broken it's very difficult to restore, thus great effort is expended in keeping it.

There is of course an amusement to be had from the way in which the book decrying all of this, No Logo, turned Ms. Klein into a brand herself. If only she had paid more attention to the point and value of such brands, she might have avoided the degrading of her own.

Time to scrap the CAP

Sun, 11 May 2008 05:02:00 +0100

A leader in last week's Economist summed up the case against farm subsidies perfectly. It started by noting the absurdity of farmers using world foot shortages – and consequent high prices – as an excuse.

For years the farm lobby have justified their subsidies on the grounds that low food prices meant farmers couldn't make a living and that the countryside would be left to ruin without government money (ignoring that fact that their "subsidized overproduction" was partly responsible for low prices).

But now prices are high, the same farm lobbies say they need subsidies to ensure 'food security'. Which is nonsense. The point of rising prices is to encourage higher production, so that supply catches up with demand. Indeed, as The Economist notes, high food prices present a perfect opportunity for subsidies to be removed – any hardship for rich-world farmers will be far less keenly felt. But it's not going to happen. Franco-German pressure means the EU's common agricultural policy (CAP) is here to stay:

This is bad news for European consumers and taxpayers, who were promised a proper debate on CAP reform later this year. They will have to continue paying (€55 billion last year) for this wasteful and wicked system. It is terrible for poor-country farmers, who have long suffered from being shut out of rich-world markets, and having rich-world products dumped on them. Now they can hear the gates of fortress Europe clanging shut just when world prices should be triggering an export boom. And it is dreadful news for the hungry poor, because restricting trade in food exacerbates shortages.

Frankly, I don't see any real chance of reforming the CAP – EU politics is too dominated by special interests for that. This doesn’t mean we should stop trying, but the UK needs to be ready to take matters into its own hands. If we have to, we should unilaterally abolish agricultural subsidies and tariffs, and withhold part of our EU budget contribution – encouraging other trade-friendly countries to do the same.

Certainly, Old Europe would make a fuss, but what's the worst that could happen?

Quote of the week

Sun, 11 May 2008 05:01:00 +0100

I have little interest in streamlining government or in making it more efficient, for I mean to reduce its size. I do not undertake to promote welfare, for I propose to extend freedom. My aim is not to pass laws, but to repeal them. It is not to inaugurate new programs, but to cancel old ones that do violence to the Constitution, or that have failed in their purpose, or that impose on the people an unwarranted financial burden. I will not attempt to discover whether legislation is 'needed' before I have first determined whether it is constitutionally permissible. And if I should later be attacked for neglecting my constituents' 'interests', I shall reply that I was informed their main interest is liberty and that in that cause I am doing the very best I can.

Barry Goldwater (as seen on Samizdata)

Blog Review 593

Sat, 10 May 2008 13:45:44 +0100

So who is winning? Schumpeter or Galbraith? An introduction to an excecllent essay on the subject.

What an idea: we see the baying for a windfall tax on the oil companies: but farmers too are making massive profits so where is the call for the tax upon them?

What is old is new again: At least one of Adam Smith's truths was known in the Babylonian Talmud.

Netsmith thinks it was Somerset Maugham who said that training to be a doctor was an excellent preparation for being a writer. A certain Dr. Paula Gosling demonstrates that well here.

News just in! Changes in prices do lead to changes in behaviour!

This banning of booze on the tube: not very liberal, is it?

And finally, news from the American election cycle.

Don't They Have Economists at the CBI?

Sat, 10 May 2008 05:03:00 +0100

I'm used to the idea that we'll get economic lunacy from the World Wildlife Fund and the like but when the head of that plus the DG of the CBI and other luminaries get together to argue in favour of the hypothecation of green house taxes I start to despair. The CBI is at least supposed to have economists around the place somewhere. The background is that they've noted that the new cap and trade system for CO2 emissions will raise money, therefore:

But this is still a substantial, additional transfer of funds from business and consumers to government (perhaps £300m-£400m per year from 2008-2012, and several times that in subsequent years). This represents a tremendous opportunity for the government to demonstrate its real commitment by announcing an equivalent-scale investment in securing the transition to a low-carbon economy and in adaptation.

While we accept there may be some technical difficulties in ringfencing the revenue, it should be perfectly possible to announce a similar investment in low-carbon technologies and adaptation equivalent to the revenue raised by auctioning.

There's only four things wrong with this, although they do seem to be four rather important things.

1) The revenues from cap and trade auctions are not supposed to be an increase in taxation. Rather, they are a transfer of such: overall they are supposed to be revenue neutral. One idea might be to do as is done with the landfall tax: the revenues are compensated by a reduction in employers' national insurance charges. But other taxation should be cut in lock step with the new revenue raised: thus there is no pot of money to spend in such a manner.

2) Hypothecation of taxes is a bad idea in principle. There is no link between how much can be raised from the auction of said permits and the amount that we want to spend on low-carbon technologies, just as there is no link between the amount that smokers cost the NHS in direct health care costs and what can be and is raised by the taxation of tobacco. To ring fence such revenues is nonsense: tax where you can and spend where you must rather.

3) The aim of cap and trade isn't in fact to provide revenues to do anything: rather, it's to correct an imperfection in market pricing. Currently we do not include the external costs, cap and trade introduces them. According to theory, that's actually all that we need to do. Once market prices include those costs, we will automatically get the appropriate investment into alternatives, or into mitigation as opposed to adaptation. No further subsidy is required.

4) The weasel part comes in "additional transfer of funds from business and consumer" when it's quite apparent that business (as all will face the same rise in their costs for a certain technology) will be able to pass on all the costs to consumers. But that spending of money on technology and adapatation will be captured by business, not consumers. Consumers pay and business benefits.

Numbers one through three are ones that the CBI should know very well: while Adam Smith warned against businessmen gathering together for the risk of their engaging in a conspiracy against the public, surely the palty sums on offer from reason four are not sufficient to turn their heads?