Profit-making Free Schools: Unlocking the Potential of England's Proprietorial Schools Sector

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In this groundbreaking report, James Croft argues that the crisis of school places can only be met by giving true freedom to Free Schools and allowing profit-making schools to operate within the Free Schools programme. In his study of profit-making school outcomes, he shows that schools charging fees on a par with the average state expenditure per pupil equal or exceed the performance of average state schools. As the report shows, unlocking the power of profit within the Free Schools programme would be a revolution in schooling in England.

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The alternative to bailouts

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Greece was bailed out, then Ireland was bailed out, and now Portugal has been bailed out. All of these countries were made to agree fairly stringent deficit and debt reduction packages. All three face years of fiscal tightness, reduced services and living standards, and low economic growth. It is by no means certain that the populations of these democracies will tolerate this for the length of time it will require to put their affairs to rights.

There is an alternative. It is to let these countries default, offering a percentage of the debts' face value as settlement. There would be turmoil. Some bondholders, including European banks, would lose substantial sums. But at the end of it confidence would return and economies start to grow again without that burden of debt.

The decision was made to protect small depositors, bondholders and to some extent bank shareholders, at the expense of taxpayers. It was an unwise decision, both morally and from the point of view of efficiency. One could argue that small depositors were not a party to the causes of the crisis, and should not be made to bear its burdens. Bondholders and shareholders, however, should have known better.

The main argument in favour of default is that it will be effective in putting a line under the crisis. Instead of limping along for years with lacklustre economies struggling to meet debt repayments, the over-indebted countries can get it over with and turn the page.

It looks very much as if the bailout option has been taken to protect the euro and European banks, but it would not be the end of the world if a few countries that should never have been in the single currency have to leave it. And if a few European banks had to restructure, recapitalize or be taken over, this, too, could be survived. Allowing the euro to lose momentum might be a setback to European political union, but this would be no bad thing.

The bailout strategy might keep things going for a while, with more patches to counter the recurring crises. Or we could take the hit now, accept the consequences of folly, and start to rebuild on firmer foundations. It looks increasingly like the better option, especially if there's a bigger storm on the way… 

Another argument for tax simplification

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Will Wilkinson points to an American behavioural economist's hypothesis that the US's compex tax code might be contributing to people living beyond their means:

What are the consequences of knowing our gross yearly income and not much else? I think it causes us to feel richer than we really are and spend accordingly. Why would this be the case? There’s a phenomenon we call the “illusion of money,” which is the idea that we typically pay attention to nominal amounts of money rather than real amounts. For example, the illusion of money means that if inflation is 8%, and you get a 10% raise, you would feel better than if there was no inflation and you got a 3-4% raise. The basic idea is that we pay attention to the nominal amount rather than the purchasing power, and don’t realize what our money is really worth.In terms of our tax code, this suggests that in the US we focus on our gross yearly income, feel richer than we really are, and consequently end up spending more money.

I wouldn't be surprised if a similar phenomenon existed in the UK, thanks to the vagaries of national insurance, inflation and other stealth taxes, albeit to a lesser extent than in the US. This isn't helped by things like the tax credit system, which make things even more confusing and difficult to navigate. PwC says that household debt stands at around 110% of GDP, compared to around 63% of GDP in 1987.

I don't want to overstate the case – I'm sure historically-low interest rates and successive bubbles have a lot to do with this – but it seems likely to me that the complexity of the tax system might have contributed here, especially in terms of high-interest credit card debt, which a lot of people use to tide themselves over to the next pay day.

So, another argument for tax simplification. Maybe not the most important, compared with the disincentive to work that marginal taxation changes create and the cost of compliance that face firms, but it might resonate more with people concerned about the high household debt levels in this country. I'd like to see how household debt breaks down by socioeconomic group – I suspect that groups at the bottom of the pile tend to have a disproportionate amount of high-interest credit card debt. That would be a bad thing, and if it's partially caused by a confusing tax system, it's one that we could fix quite handily.

Think piece: What does AV mean for fiscal policy?

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Many claims are made about the impact of voting systems on government fiscal policies, but what does the international evidence say? In this think piece, James Paton assesses the impact of coalition government and systems of proportional representation on government fiscal policies in five different countries, and discusses the implication of his findings for the US.

Perhaps the strongest argument for FPTP is that the likelihood of forming a single party government is much higher than under proportional representation (PR). Single party overall majority governments are widely seen as being more stable than coalitions. As a single party has a majority within the legislature, a government should be able to push the legislative agenda through. The thinking goes that this should keep faith with credit markets due to the lower chance of the government collapsing, and tighter fiscal policy as the bargaining process involved in coalition formation leads to higher taxes and higher government spending. (In order to buy the support of the various interest groups the negotiating parties rely on.) This has been an area that has not been discussed in detail during the debate around Britain’s possibility of changing the electoral system.

In this think piece, I will examine whether PR is more likely to produce coalitions, and if so, whether coalition governments produce more fiscally profligate governments, in terms of fiscal policy. This will be kept within the years of 1987-2007 before the financial crisis. I will examine five western parliamentary democracies that have systems based on PR to see whether there is evidence suggesting that fiscal policy is looser than in the UK: Greece, Ireland, The Netherlands, New Zealand and Germany.

This of course is not an absolute science as there are a myriad of variables that affect fiscal policy. However the evidence that I explore shows a mixed picture from around the world. From it I will consider what PR could mean for the UK. [Whole piece]

Monarchy or republic?

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Camden Council has effectively banned a street party planned by republicans to coincide with the royal wedding. This is a shame, since those opposed to the monarchic principle should be allowed to express their views. It is not as if they were trying to occupy part of a public space in perpetuity; it was just a day's party they planned.

It does highlight the debate between those who support our constitutional monarchy and those who favour replacing it by a republic with an elected head of state. To those of a libertarian bent, what matters is not how democratic or representative is either form of government, but how friendly they are to liberty.

On an empirical level, constitutional monarchies have been quite friendly to liberty. A monarch who inherits the office feels no popular mandate to impose their views on everyone else. They did not have to claw their way to the top, but simply inherited it, and are conscious of the limitations this implies.

Our constitutional monarch occupies the top slots, not only as head of state, but as head of the armed forces and the judiciary. As such, they deny these posts to ambitious self-seekers who might wish to use them to promote an agenda. A monarch who simply inherits the position can act as a focus for the nation more easily than someone elected as head of state via partisan politics.

Many, if not most, of the theoretical arguments would win the case against a head of state who came from a family that had emerged by the blood and chance of history to occupy that position from birth alone. Yet in practice the record of modern constitutional monarchies has been a good one for tolerance, for the rights of dissenting minorities to do their own thing, and for upholding the rule of law and the rights of free speech.

I am reminded of President Reagan's remark to his economic advisors: "Yes, gentlemen, that is fine in practice, but how would it work in theory?" On the whole, in constitutional monarchy I think the practice has it.

Wise words from Bill Bonner

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Borrowing is a lot easier than taxing or cutting. So, that's what they'll do. Forget the grandstanding, forget the agit-prop theatre, they'll either borrow or they balance the budget. And they're not going to balance the budget – because too many voters expect to get more from the government than they have paid for. That was the unstated promise of modern, social welfare governments: "Let us control your lives. We will give you more in benefits than you pay for." How can you give people more than they pay for? Only by taking the money from someone else. But governments have learned that taxing the rich heavily actually reduces the GDP and the amount that can be given to voters. So, they turned to taxing the next generation. After all, they don't vote.

Bill Bonner in MoneyWeek

The richer we get the more markets we need

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There's an idea out there I regard as pernicious. Roughly stated, it's that the economy is now so complex that we've got to guide it. Plan it, let the Wise Men in Whitehall decide where investment should go, get them to pick winners to the benefit of us all. Brink Lindsey has a paper out which argues against this case. Worth reading in full but here's the nub of the argument.

We can regard economic grwoth as coming in two forms. There's catch up growth, such as what China is doing now and Japan did 50 years ago. What to do is largely known, for there are the examples of the richer, more advanced, economies that can be followed. To an extent it's as simple as pulling people out of low productivity agriculture and into high productivity industry, raising the education levels and increasing participation in the formal economy. But the important point is, in Lindsey's view, that it is at least feasible for a government to work this out and to manage the process. Clearly not all do for not all have followed this path but it is at least possible that some will.

However, once a place has got rich the problem changes. Catch up growth is no longer possible, for there's no one to catch up with. The economy has arrived at the technological frontier so there's no one to copy. Any further growth is going to come from innovation, new ways of doing things, rather than mobilising extant resources to simply do more. At which point governments can't do that planning and directing thing.

For, as Hayek pointed out, the only information system we've got to calculate what the economy should do next in such a situation is that very economy. It simply isn't possible for a central planner to decide whether capital should be allocated to gluten free bread, discounts on golfing holidays, weird metals extraction, wedding photography or software for computer based gambling (to mention only a few businesses extant among the readers of my blog). It is only that great calculating engine of the entire economy, with that interplay of supply and demand determining prices, which can possibly give us the information necessary to direct where to go next. For none of us know what's going to be the next big thing, all we can do is experiment and find out, the experiment being the means by which we find out.

All of which means that it's the very complexity of the modern economy, it's pushing up against the technological frontier, which means that planning, the State direction of industry, cannot work and that we need to be ever more free market in our approach if we are to continue to grow.

No alternative to cutting spending

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It is a bit frustrating to keep being asked about whether the ‘cuts’ are a good idea, and whether we should be looking at alternatives. Frankly, that debate is a good couple of years out of date. Given the state of the public finances, there really is no alternative.

It is worth restating the bald facts. Our budget deficit this year is just under £150bn. That means that the government is borrowing almost £20m per hour, every hour, throughout the year, just to finance its ongoing expenses. And we’re already spending £120m per day paying the interest on debt we’ve already built up. Without spending cuts, Britain would be facing the same kind of fiscal meltdown that has already hit Greece, Ireland, and Portugal.

We also need to remember that the coalition’s spending plans are not that radical. Adjusting for inflation, they are only set to reduce total spending by a few percent over the next five years. To put it another way, we’re going back to 2008 levels of spending. It’s hardly the public service apocalypse some people suggest.

And what of the so-called alternatives? Well, Some people say that rather than cutting public spending, we should just have higher taxes – especially on the rich. But high taxes constrain growth, they discourage wealth creation, they force profitable businesses overseas, and they deter investment. This is precisely what you don’t want after a recession, and also means that high taxes don’t bring in much (if any) extra revenue. Raising taxes now would be utterly counter-productive.

Then there are people who say that rather than cutting public spending, we should crack down on tax avoidance. But as Tim Worstall has shown, many of these tax avoidance claims are based on a misguided idea: that any multinational operating here should pay UK tax on any money they make, anywhere in the world. This is absurd – taxes should be paid in the jurisdiction where the profits are made, plain and simple. Adopting the protestors’ preferred approach would decimate the economy, and cost countless jobs.

There are also those who argue that we’re in this mess because of the banks, so we should just punish them rather than cutting spending. Well, I opposed the bank bailouts too – propping up failure just isn’t what capitalism is about. But this has nothing to do with the budget deficit, and nothing to do with the urgent need to reduce public spending. The last government raised public spending by 60 percent in real terms, and borrowed huge sums of money even when the economy was booming. The public sector grew unsustainably large as a result, and now its excesses have to be reined in. Banker bashing does nothing whatsoever to deal with the actual problem.

Finally, there are some people saying we should increase public spending in order to boost the economy. But I’m amazed people still cling to this idea of ‘fiscal stimulus’. The evidence suggests that stimulus spending has no impact on growth in countries with open economies, floating exchange rates and high levels of accumulated debt. Countries like Britain, that is. And it’s hardly surprising, given that the whole concept is illogical – the government can’t inject a single penny into the economy without first taking it out. What it gives with one hand, it has to take away with the other. Or as Milton Friedman would put it, “there’s no such thing as a free lunch.”

So there you have it: we have to have spending cuts, and we have to have them now. There are no sensible alternatives. If anything, we should be going further and faster. But that’s a topic for another day.

Means and ends

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In the latest of a never-ending stream of moans about UK government budget “cuts”, the Royal College of Nursing warns of looming reductions in front-line staff with the inevitable but unproven danger of a “catastrophic” effect on care.

This is a knee-jerk defence used by all vested interests which confuse the way something is produced with the purpose of the production. The purpose of the NHS is not to maintain a set level of employment; it is to improve the health of its patients.

Progress is meeting a demand for better quality goods and services at lower cost. Throughout history, that has usually meant less labour.

In ancient Egypt, tens of thousands toiled for generations to erect the pyramids but now it only takes a couple of years for a few hundred tradesmen to build the Shard skyscraper, complete with lights, elevators and air conditioning. A single farmer today feeds hundreds whereas a century or so ago his entire (large) family was often barely able to feed itself. A modern factory uses a fraction of the labour now to produce cars that are cleaner, safer and more comfortable than ever.

There’s nothing to suggest that the various government services now on offer shouldn’t be subject to the same historical forces.

The case for NGDP targeting – lessons from the Great Recession

The Adam Smith Institute’s latest report, The Case for NGDP Targeting by US economist Scott Sumner, argues that that the Bank of England’s inflation targeting regime was proved inadequate by the Great Recession, and should be replaced. Instead of targeting inflation, the Bank of England should target nominal gross domestic product (NGDP). This is sometimes referred to as nominal income targeting.

Read this report.