IEA Blog

Mark Thompson’s vigorous defence of the BBC’s role and contribution to broadcasting marks the first skirmish in the build up to re-evaluating the licence fee and the role of the corporation. It’s a fight that comes round every few years and which the BBC usually wins. This time, however, things could be different – and they certainly should be.

The amazing transformation in broadcasting technology and output in recent years makes it increasingly impossible to intellectually defend the BBC’s extraordinarily privileged position. The explicit aim should be to radically reduce the BBC’s broadcasting remit with the intention of abolishing the licence fee altogether in the not too distant future.

Read the rest of the article on the ConservativeHome website

I am inclined to agree with the view of The Times that the government should not get bogged down in the argument about the impact of the June budget on the poor. The IFS is probably correct in its analysis suggesting that this was not really a “progressive” budget in the technical sense – although the IFS analysis is also limited in that it does not model second-order consequences as people adapt to tax and benefit changes. This argument could run and run and detracts from the whole point of the budget – to get a grip on our huge fiscal deficit. It’s basically a party-political argument and the government should politely but decisively move the agenda on.

Slightly more problematic is yesterday’s statement from the Equality and Human Rights Commission that it may have to consider “appropriate enforcement action” against the Treasury for not conducting a rigorous analysis of the impact of the budget on “vulnerable groups” – women, ethnic minorities, the disabled and the elderly. The Commission, recently castigated for wasteful spending (its budget is well over £50 million a year), has long been subject to mission creep, but has not previously sought a veto on fiscal policy. The apparent enforcement powers were one by-product of the dogs-dinner Equality Act 2010, which I have previously criticised.

The whole future of the EHRC needs looking at closely, particularly given its poor management and its odd relationship with the Government Equalities Office. The issue of “Equality” should be detached from “Human Rights” as there is no logical connection between them. But the legislation itself also needs fundamental revision – even if the EHRC stays its hand, the feminist campaigning group the Fawcett Society has already announced it is seeking judicial review of the budget for neglecting to assess whether it has a disproportionate effect on women.

The impact of budgets on individuals is very difficult fully to understand, let alone model: I was once, many years ago, working in this field and I know this only too well. If the courts are to judge whether or not an analysis is adequate we are in big trouble. Forget Jarndyce v Jarndyce: Any Aggrieved Pressure Group v. The Treasury could keep lawyers in clover for decades.

And any cuts in public expenditure are bound to have an impact on one or more allegedly vulnerable groups. Together the allegedly vulnerable groups account for about two-thirds of the population. Only white males under 60 seem not to present any problems to our Equality watchdogs.

“When John Maynard Keynes talked of persistent under-employment, he did not mean that, following a big shock, economies stay frozen at one unchanging level of depressed activity. But he did think that, without external stimulus, recovery from the lowest point would be slow, uncertain, weak, and liable to relapse. His ‘under-employment equilibrium’ is a form of gravitational pull rather than a fixed condition.”

Or so it is argued by Robert Skidelsky in a recent article. He contrasts his Keynesian views with this.

“Contrary to Keynes, orthodox economists believe that, after a big shock, economies will ‘naturally’ return to their previous rate of growth, provided that governments balance their budgets and stop stealing resources from the private sector.”

These orthodox economists, according to Skidelsky again, base their reasoning not on business fears of government bankruptcy. Rather, what they are worried about is the “governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders.”

I agree with Skidelsky in thinking these “orthodox” economists – if that is what they believe – are so far off beam that they will never get it straight. The notion that economies are being held back because business people have taken on board and are reacting to macroeconomic forecasts of harder times ahead, that they are cutting back production today because of the forecasts they have themselves made, is about as ridiculous an economic theory as it is possible to conceive.

Business people do not react to the total economy; they react to their own order books. What is causing the slow, painful recoveries we see everywhere is that governments have diverted immense parts of our productive effort into useless non-value-adding forms of production. Demand for output will not rise because we are not producing goods and services from which real increases in incomes can be earned. Without such real increases in our ability to buy, we cannot purchase what others have produced. Demand, as was once understood, is constituted by value adding supply.

I therefore completely agree with Skidelsky where he writes:

“The trouble is that the current crisis finds governments intellectually disabled, because their theory of the economy is a mess.”

It is just that he and I disagree about which aspects of the prevailing theory actually are in a mess. Since governments did more or less what Skidelsky recommended back in 2009, he should have a good hard look at the theory he is still trying to peddle. More debt and wasteful spending is not the answer. Most people, looking at the damage that such policies have caused, are beginning to understand this for themselves.

Unfortunately, they, along with their governments, have no active theories to help them find their way out of the phenomenal mess we are in. Still, they are working it out as they finally begin to cut back on expenditure and work their way towards more market-based solutions.

But this can clearly be said: wherever the answers are, they are not to be found in any of the Keynesian instruction manuals now in use.

The drug policy of the UK has, for years, taken the line of being ‘hard on drugs’, aiming to stamp out use and drug related crime through ever tougher laws and regulations. It means that simply for possessing a class B drug such as cannabis, a person can be sent to prison for up to 5 years. For a Class A drug like ecstasy this is 7 years and intent to supply could lead to life imprisonment.

Despite these increasingly harsh measures, levels of drug use in Britain have remained among the highest in Europe. A 2007 report by the UK Drug Policy Commission showed that Britain had the second highest number of drug related deaths in Europe and the highest addiction rates and rates of multi-drug use.

Is the solution, then, to impose even harsher punishments on drug use? The same report concluded that while jail sentences had increased, drug use had become more common. The harsher sentences were seemingly having little or no effect.

This is where, it seems, Britain can learn from the change of direction that Portugal has taken. In July 2001, Portugal declared a mass decriminalisation of all drugs. Decriminalisation, in this case, means an individual is permitted to possess enough of a substance for personal use and while the drugs still technically remain illegal, possession and use is considered an administrative infraction rather than an actual criminal offence.

So what has this led to in practice for the drug issue in Portugal? One of the most common fears of such a move is that it will lead to an increase in use, especially amongst the young, based on the perception that the government is giving its approval to the practice. It seems this is not the case. The prevalence of drug use in Portugal among young people has declined for almost all substances, as shown in the figures below.

The potential for an increase in drug tourism was another concern. However, it appears to have been largely unfounded. Around 95% of drug offenses in Portugal are committed by Portuguese citizens compared with close to zero by citizens from other EU countries.

According to media reports, the European Commission is planning to introduce taxes on commodities as part of the new EU 2020 strategy, the successor of the failed Lisbon Strategy for Growth and Jobs. The taxes may be imposed on fossil fuels and metals, as well as renewable commodities such as timber and water.

Interestingly, the main argument to justify a commodity tax is not environmental protection. The European Commission apparently wants to ensure commodities are used more efficiently, arguing countries that use commodities efficiently will be competitive in times of rising prices and strong competition for resources. The underlying rationale behind these arguments is at least plausible.

Special taxes on commodities are not, however, a suitable way of achieving this objective. They would imply that the European Commission exactly knows how every commodity can be used most efficiently. Moreover, in a changing market environment, the tax rates would need to be adjusted constantly for maximum efficiency. The proposals therefore presume that officials can obtain sufficient knowledge to set the “correct” tax rate – in other words, they reflect a belief in central planning.

Instead, the European Commission should believe in markets. Only markets are able to provide the information for the highest efficiency. This information is the market price, which signals to all market participants the scarcity of a good. If prices increase, innovators will find new techniques or machines to use commodities more efficiently. As F. A. Hayek stated in his article “The Use of Knowledge in Society”, “The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction.”

Every distortion of prices, such as a tax, will distort the allocation of commodities. Free and competitive markets do the best job of ensuring efficient resource consumption.

I very much agree with Mark Littlewood’s blog yesterday on the proposed ending of default retirement. While as an employee I may welcome the opportunity to work longer, as someone involved in employing people I can also see the downside. 

Evidence I have looked at from Canada and the United States suggests that abandoning mandatory retirement at 65 will have a smallish but still significant impact across the economy, with an increase of maybe a couple of percentage points in those continuing work beyond 65 (which 10% of men and around 5% of women do already).

However, in some fields the increase could be rather larger and it may be interesting to see why. One area with which I am very familiar is employment of university academics. Academic work still has high levels of autonomy, a lot of flexibility and few physical demands. Academic staff have greater than average life expectancy and enjoy their work. Already many staff ask to stay on, even though they know that such permission is given sparingly and only for a limited period. I suspect that we could now see quite an upsurge in those working later.

In the USA, when the mandatory retirement age was raised from 65 to 70 in 1982, 40% of academics chose to work beyond 65. When mandatory retirement was dropped in 1994, one study suggested that around 15% of academics would work beyond 70. Professors in their 70s and even 80s are now common in American universities.

If something similar happens in the UK, I can see a number of problems. Older academics are paid a lot more than junior academics – even though they are doing essentially the same job – because of the various grades through which they are promoted, and increments within those grades. So the wage bill will rise. In particular narrow fields of the sort which proliferate in universities, bed-blocking academics will prevent newer recruits: if there are only five or ten posts in Persian in the country you will be able to forget about entering that field any time soon. University restructuring will become more difficult as natural wastage declines: universities will have to spend a lot of money – as in the USA – in buying out elderly professors in areas of declining demand.

Communication with young students may become more difficult. And it is no use pretending that older staff who are no longer performing competently can be eased out. Any competence tests would have to be applied to all staff, or else this would clearly be age discrimination. Tests for all (presumably on an annual basis) would be costly – and likely inconclusive, as strong unions already make it extraordinarily difficult to remove anyone unless for theft, fraud or sexual misbehaviour.

To abandon mandatory retirement without also freeing up labour contracts – needed in universities as elsewhere – may create more problems for employers than the breezy Ed Davey imagines.

The coalition government is considering scrapping the fixed retirement age and Minister for Employment Relations, Ed Davey, is promoting the policy on the grounds of choice – You don’t have to work beyond your 65th birthday, but you can if you choose to. The stark reality of an ageing population and the clever spin of the new policy being about improving flexibility and ending arbitrary laws makes the announcement a public relations success.

Sadly though, the policy in isolation will be bad for employment and particularly for the elderly. I’m all in favour of the state extinguishing a vast number of employment statutes and regulations, but it’s a leap in the wrong direction to effectively extend employees’ rights whilst continuing to undermine the discretion exercised by the employer.

As far as practicable – and certainly a lot further than permitted in 2010 Britain – we should allow workers and businesses to negotiate their own contracts. So remove statutory provisions about retirement ages by all means, but replace them with the discretion to write into an employment contract that any retirement date can be agreed. This might be 65. Or it might be 35. It could be a ten or twenty year deal from the employee’s start date. Or, rather like some football managers, some employees might have a rolling contract renewed on a year-to-year basis. If the coalition’s proposals are going to remove the dead hand of Whitehall regulation and replace it with this sort of discretion, then that would be a welcome move.

Unfortunately, this doesn’t seem to be the case. From an employer’s perspective, offering a contract of employment could be seen as close to offering a deal for life. Assertions that people can be “performance managed” out of jobs towards the end of their careers are of little comfort. Workforce planning becomes very difficult and costs to the employer are certain to rise. Neither of these is conducive to boosting employment.

Indeed, recruitment decisions may start to go against the interests of those in their 50s and 60s. A young person at the start of their professional career, taking a role as a stepping stone on their long career journey, might stay in post for a few years before moving on elsewhere to a more senior position. But someone in their late 50s, possibly taking on their last employed role, is far less likely to depart willingly. And the employer’s commitment is open ended – how do they know whether the employee is planning on retiring at 60, 65, 70 or 75? Or maybe later still. If the employer has concerns that due to the onset of age or declining health, they might find themselves with a long-term staff appointment with diminishing productivity, they are likely to lean towards younger recruits.

 A flexible and dynamic labour market will tend to thrive as statutes and regulations are repealed, but only if combined with much greater discretion in terms of freedom of contract. Getting only half this equation right could prove to be a retrograde step.

Vince Cable suggested on Sunday that the payment of bank bonuses and dividends should be linked to whether or not they lent more to businesses. It is not clear exactly what he meant and there was no substantive mention of this idea in the Green Paper that has now been published. He seems to be all at sea and one wonders whether his ambition is to promote another financial crisis.

A few years ago, the IEA published a very good book, Fifty Economic Fallacies Exposed. I am beginning to wonder if Vince Cable should be the subject of the next edition. At the current rate, his fallacies could fill a whole book within the year…

Read the rest of the article on Conservative Home.

The way in which government funding of universities has corrupted our thinking is illustrated very well by David Willetts’ comments about the awarding of the title “University College” to BPP. David Willetts suggested (Telegraph 26th July) that BPP will only be the second private university – the first being Buckingham University. If the minister for universities is confused about this matter, we have a problem.

What David Willetts really means is that BPP will be the second university to be independent of government. All our universities are private. Indeed, they are more private than the company which owns BPP, in which the public can buy shares. Most of our universities have governance and ownership structures that are impenetrable to the outside world – unlike BPP. The problem with universities is not their ownership but the way in which their priorities and procedures are distorted by government funding. They are private but largely dependent on government.

Some universities are a good deal more independent than others, but an urgent priority in the review of undergraduate funding must be to ensure that all universities become independent as far as teaching is concerned. There should then be a review of research funding. The end results should be that, if the state does provide funding, it is directed through students and the support of research endowment funds. This might make institutional independence a reality in higher education once again.

If J.R.R. Tolkien’s classic The Lord of the Rings was re-made into a seasonable film today, it would probably look like this: The Dark Lord Sauron would be replaced by Sir Terry Leahy, while Tesco would take the place of Sauron’s dark empire Mordor. The threatened idyll of the Shire, where lovely Hobbits form a small-is-beautiful barter economy, would be replaced by a pastoral Merry England of some distant past. The titanic clash between the evil wizard Saruman and the wise wizard Gandalf could be replaced by the recent showdown between Tim Montgomerie who dubbed Terry Leahy a ‘champion of the poor’, and Guardian journalist Alex Renton, who thinks that “Sir Terry has done more damage to the fabric of British life than any other businessman in modern times”.

But let’s put the ‘culture war’ aside for a moment and look at the economic arguments. Renton does not dispute Montgomerie’s point that the spread of big discount supermarkets like Tesco has made essential goods such as food cheaper. But he believes that “Tesco and the other chains lowered prices because they never paid the real costs of what they sold”.

Those ‘real costs’ include, first of all, the revenue loss suffered by high-street shops and farmers, and their knock-on effects. Secondly, Renton argues, customers have often used the cost savings they realised through switching to discounters to purchase other things. This has increased consumption, and hence environmental damage.

Heads I win, tails you lose. Suppose that by switching from high-street shops to discounters, inhabitants of the Shire could save five gold coins per month. Now there are two options. They could bury their coins in their gardens, in which case Renton might accuse the discounter of being a jobkiller. Or they could use the five gold coins to, say, take out a gym membership, so that the gym would have to hire new trainers and receptionists. In this case, Renton would probably accuse the discounter of fuelling consumption, and thereby damaging the environment. Burying the gold coins creates a negative externality because revenue streams have been taken away from other shops and not spent on anything else. Spending the gold coins creates a negative externality because consumption is bad for the environment.

This assumes, of course, that Renton is serious about his economic analysis, which is doubtful. Let’s assume a scenario: the farmers of Inverness (a town which Renton considers part of Tesco’s blood trail) relaunch the local farmers’ market. Through some innovative strategy, they manage to reclaim a sizeable market share from Tesco, which then has to downsize and sack staff.

Would Renton then argue that the job losses at Tesco constitute a negative externality, and accuse the farmers of not paying the ‘real cost’ of what they do? Or does Renton define a market failure as a mismatch between the preferences of the average consumer and himself?

It just doesn’t make sense to hide a paternalistic agenda behind bogus economics. If you want to make an economic case, make an economic case. If you want to tell other people what to do, say that you want to tell other people what to do.