As the Edinburgh schools show, PFI is a rather good idea

There're most certainly possible arguments to make against the Private Finance Initiative: there's more than a suspicion that it was used to allow large amounts of spending without having to trouble the government books with it for example. And yet there's still an obvious value to it:

Edinburgh council is refusing to pay the latest private finance initiative charges for the 17 schools shut down because of safety fears in a sharp escalation of the controversy over the potentially dangerous buildings.

With thousands of schoolchildren and teachers facing weeks of further disruption, council officials said on Wednesday they were withholding the latest £1.5m instalment of the private finance charge, invoking their legal rights under the PFI contract.

“We will not be paying them that this month,” a council spokesman said. “We’re applying all the contractual terms, and those include deductions for non-availability [of the schools].”

Someone, somewhere along the line, messed up. We're not really au fait with technical building terms but from what we've seen we assume that it was builders not being very good builders. And of course not very good builders not building very well is not a great advertisement for any scheme let alone the PFI.

However, we do need to consider that most important part of capitalism: bankruptcy. One of the reasons the system is so vibrant is that when the inevitable mistakes are made the mess is rapidly cleaned up. Your idea didn't work out? Oh dear. So, shift those potentially productive assets, the buildings, machinery and labour over to somewhere, someone, else who may be able to use them to add value.

That is, one of the joys of the system is how it springs into action when things go wrong. As here with the schools: those financially responsible for providing school buildings are now going to lose money for not providing school buildings. 

Good.

Proper enforcement of that contract is going to lead to people being very much more careful in future: exactly what we would like to happen.

The advantage of the PFI is therefore that we have clarity of responsibility.

The IMF's Misdiagnosis

The International Monetary Fund has downgraded its world growth forecast for this year by 0.2 percentage points to 3.2%. That is the fourth cut in a year, and not much more than the 3% rate that the IMF has previously regarded as a ‘technical recession’.

So why the downgrade – particularly when the IMF is predicting slightly higher than forecast grown in China, of 6.%? They cite many factors. Chinese growth is still a lot slower than it was a few years ago. Europe and Japan seem stuck in low growth despite their central banks' expansionary policies. A strong dollar has caused America to make less and import more. Then there is Greece and doubts about the Eurozone.

And the IMF solution? The world has been growing too slow for too long. It needs a boost. Central banks should keep down interest rates, print money and spend taxpayers’ money on infrastructure improvements.

Wrong diagnosis, wrong. Things always change: economies go up and down, exchange rates fluctuate, markets rise and fall. And easy money, cheap credit and government overspending is what got us into this boom-bust cycle in the first place.

What’s happening is perfectly simple. The eclipse of communism saw countries – like China – joining the world trade system and developing their production markets. Technology helped the globalisation of world trade. So stuff got a lot cheaper. But Western governments still stuck to their generous inflation targets, their central banks pumping out money and keeping down interest rates. It was a huge boom – some of it down to trade making things cheaper, right enough: but more of it down to the continuing, misguided expansionism.

So consumers bought luxuries like crazy, government built new motorways, bridges, schools and hospitals, and people invested in the land, plant, equipment and workers needed to produce these things. When the music eventually stopped, our productive assets were in the wrong places, producing the wrong things for our post-crash economies.

It might have been right to palliate that with an immediate monetary expansion. But should interest rates have stayed at ‘emergency’ levels for the past five and more years? That just perpetuates the artificial boom and means we get by, without doing much. If you want to know why productivity is falling, look no further. If we want to return to economic growth, we have to recognise that the 2000s boom made us malinvest on a huge scale. And we need to grit our teeth and write off those malinvestments. Not perpetuate them with further expansions.

Here's why we're so in favour of a carbon tax

Every time we mention climate change we get a certain amount of stick from people who insist that it's not a thing, or that catastrophic isn't, or that the temperature numbers have been fiddled and so on. All of which rather means that we've not managed to get across our point and why, thus, we argue for a carbon tax.

That point being that it doesn't actually matter whether any or all of those things are true. Because there's sufficient head of steam up that our government, global governments, governments globally, are going to adopt some policy or other over climate change.  Even proof perfect that every thermometer on the planet was being steeped in a nice cup of hot tea before being read would not and will not change that. It's thus necessary to argue for the least bad alternatives out there of what that policy is going to be. And that's the carbon tax.

As rather shown by this:

Taxpayers have been left with a £17,000 bill for every household that signed up to the Government’s failed flagship energy efficiency scheme, the Green Deal.

Ministers wasted a total of £240 million on the ill-fated programme, which was launched in 2013 with the intention of upgrading Britain’s entire housing stock, a damning National Audit Office report found.

Even by government measures £240 million is real money. And this isn't, at all, what was spent on actually alleviating any problem. This is just the administration:

Yet the scheme was eventually abandoned in July last year after just 14,000 households signed up, taking out loans worth just £50 million - on average less than £3,600 each.
By contrast the Department of Energy and Climate Change (DECC) had spent £240 million – more than £17,000 per household – on setting up, promoting and helping administer the scheme.

This is known as wasting money to no good end: more colloquially as pissing it away. We've expended £240 million of our collective wealth and got nothing for it, we are collectively poorer by £240 million.

So, let's not do this sort of thing. On two grounds, one that pissing it all away isn't a decent justification for anything and also that such waste means we have less to use to solve any real problems there might be with this or anything else. Which, given that we know that some policy is going to be introduced is why we continually call for a carbon tax.

The carbon tax being what all economists propose: Yes, the Stern Review, Richard Tol, John Quiggin, William Nordhaus, any- and every- one who has bothered to study the point. Even James Hansen is on board. More, they all also say that planning lovely little schemes is contra-indicated. Precisely because the carbon tax is the least cost method of dealing with the supposed problem. Thus any other plans or methods mean that we will do less to solve the purported problem as a result of our resources being, as ever, scarce.

And thus our support for said carbon tax. We know that the idiots are going to do something so let's persuade them to do the least idiotic thing.

Even the supposedly self-sufficient seem to be trading

A quite lovely little piece about that trend for people trying to be self-sufficient in the 60s and 70s. Quite why people thought they should do this we think we know. Nostalgia really, coupled with very rose tinted glasses. The people who actually had, properly, lived as peasants fled for the cities as soon as they could scrape up the three groats to do so. One of us has seen the same in Russia: villagers crying out for blocks of concrete flats instead of their charming wooden huts. Because, you know, running water, hot water, heating. But a generation or two later some will start to decide that society made a wrong turn and pine for the old, not quite understanding what that old was:

The group lived in an Edwardian mansion, which had 12 acres of land. Although full of enthusiasm they lacked the necessary knowledge to create a sustainable community.

"Our first potato crop turned brown - we were surprised because none of us knew about blight.

"There have been many challenges living here from working out the ancient plumbing to keeping the tractor going. We've had to learn everything we've had to do."

...

"We built our first goat pens using Seymour's books," Patrick says.

"We soon learned goats were cunning and agile. One time they got out and ate the rhododendrons, which are poisonous. I had to make them ill with warm oil and stay up with them all night."

Well, yes, that's an important lesson to learn. Peasantry is a technology and it's a complex one too. That it's a technology which doesn't use many machines is all that's different about it conceptually: and thus it's a technology that requires much more human time, or as we might also put it, more labour to reach a particular standard of living. Which is,. of course, why all of those with three groats fled it a century back.

But it's also, as Young Molesworth might put it, something of a swizz:

John Seymour's book, The Complete Book of Self-Sufficiency, provided welcome advice. Published in 1976, it covered everything from how to plough a field to how to kill a pig and sold more than a million copies.

We regard that, as should everyone else, as trading with one million people. Which is a very odd indeed definition of self-sufficiency.

We would not, of course, want to stop anyone at all pursuing such a lifestyle. But we do regard it as being of the utmost importance that those billions out there who do not wish to live like this get not to. Which is why, of course, we are so vehement about the benefits of trade. As Madsen Pirie puts it, buy things made by poor people in poor countries. The point being not that we should or should not disrupt some happy peasant paradise, but that those who find it not so happy get to get out of it. What anyone does with the choice is up to them but the choice must be there.

New paper: Stuck in the middle with EU

Why it’s time we cut out the middle man and become global citizens.

EU membership has been made redundant by global regulators, according to a new paper from the Adam Smith Institute released today. Published independently of both the major campaigns, the report reveals that the UK often has little say over EU regulation, as in reality so much of it originates at the global level. 

Rather than the expected ‘bonfire of regulations’ upon exit, or a situation where the UK is at the mercy of Single Market regulations without having any influence on them, the free-market think tank has highlighted that 80% of Single Market legislation falls within the ambit of existing international organisations and is consequently open to global regulation. The EU itself originates very few market standards and rules, the study shows, despite its sprawling size, and it frequently outsources and copies global agreements verbatim.
 
The new paper Global Regulators: Stuck in the middle with EU, written by European Union expert and ASI fellow Roland Smith, lays out how the UK’s ability to influence global legislation would change for the better following an exit from the EU.
 
The author notes that whilst we are told EU membership is necessary so that we “have a say” in the rules affecting our industries, the fact is that everything from fishing to food packaging and car standards to disability rights are now driven by a myriad of global organisations – even the infamous rule on straight cucumbers is now in the hands of a global body.
 
Contrary to popular belief, the adoption of standards by the EU from bodies such as Codex is not voluntary, and is enforceable by the World Trade Organisation’s Technical Barriers to Trade Agreement. The TBT Agreement makes global bodies the ‘manufacturers’ of the law, whilst the EU is often merely the ‘wholesaler’.
 
The paper goes on to argue that rather than stay in the EU, the UK should focus on formalising and democratising the UK’s global governance involvement, bringing the UK’s full voice to it as an open, global trading nation. In the context of Brexit, ‘isolation’ is near impossible in the globalised world, in which Britain could operate at the new global top table as opposed to the EU’s shrinking one.
 
Author of the report Roland Smith said:

“The rhetoric about the UK being isolated is out of place when you consider the global landscape. If the EU didn’t exist, we wouldn’t be in a rush to invent it. The global single market is overtaking the EU, and since we are not in the Euro and have no need for political integration, it is time to leave and take our place as a truly global citizen.”

Sam Bowman, Executive Director of the Adam Smith Institute said:

This report shows that the strongest argument for staying in the EU is actually rather weak. The EU is increasingly best understood as a regulatory intermediary, codifying for member states rules that have been agreed at an international level. If so, it is not clear at all that the UK would have less influence on global regulation if it left the EU – indeed, paradoxically, Britain may have a louder voice at the top tables if it was outside the EU rather than in.

Read the whole paper here.

The Morality of Tax Avoidance

In the wake of the Panama Papers leak debates about the morality of taxation are back in vogue. Unlike tax evasion, tax avoidance is, by definition, legal. This is not the same thing as saying it’s acceptable. No one wants to live in a society where everything questionable is banned or where you cannot criticise someone for doing something legal.

There is certainly scope for closing the tax loopholes that create the biggest avoidance schemes. There is something fundamentally unfair about the very rich avoiding the punitive rates paid by ordinary people. But this is a policy question that can only be answered by serious proposals for reform, not self-righteous pontificating about tax dodgers being ‘disgusting’. And, in any case, the biggest problem with the UK’s convoluted and twisted tax code is that ordinary people are overtaxed due to, for instance, the insidious creep of fiscal drag. 

But given that, picking an example at random, having a beneficial interest in an offshore investment trust that does not pay UK tax (even if you do later pay UK tax on your dividends) is completely legal, is it ethical? The idea that people are obligated to enthusiastically pay as much tax as they can is perverse and absurd (it’s also usually hypocritical, but I’ll set that aside). The view that all taxation is theft may not have much currency outside of hardcore libertarian circles. The opposite view, that there’s no such thing as ‘your money’ and you have an absolute obligation to give up whatever the government thinks is fit, sadly seems to be gaining currency. 

The perspective that avoiding tax is inherently theft rests on some very peculiar assumptions. It needs to be accepted that current tax rates are either just, or not high enough, that the right things are being taxed in the right way, and that taking advantage of any loopholes is wrong. 

For instance, in order to think that setting up a company to avoid income tax is immoral, you need to assume that: (i) income should be taxed at a higher rate than corporate profits; (ii) there is an obvious and absolute moral distinction between income and profit; and (iii) there are objective grounds to determine when it is legitimate to register a company. 

And what about government encouraged avoidance schemes, such as ISAs and tax relief for risky investments? Is it wrong to take advantage of these?

It also needs to be assumed that providing the government with all the funds it demands is moral. It’s easy to talk about hospitals, schools, the roads, defence, and welfare. But that skirts over the real question of whether government should be funding these things at all and, if so, whether they should cost what they do. 

It also ignores less palatable areas of expense, such as spending on foreign wars, nuclear weapons, a quixotic and destructive drug war, nonsensical vanity projects, bloated and pointless government departments, and corporate welfare. The same people who attack tax avoidance also (I think correctly) decry much of this, yet remain absolutely committed to the ‘obligation’ to fund the state’s largesse above and beyond what the law requires. 

These issues may not have an obvious answer. But that’s exactly why tax dodging cannot just be lazily and self-righteously vilified as ‘disgusting’ by definition.

We're afraid that we find this very amusing indeed

Others might be more disturbed than we are but we rather expect this sort of thing to be happening and thus the amusement at seeing the numbers so proudly displayed upon the web.

In the rumpus over the Port Talbot plant an organisation called UK Steel has been vocal and vociferent in their insistence that something must be done. That something, or those somethings, being that the taxpayer should pick up some considerable bill at the same time as all consumers are made poorer by forcing up the price of steel. A typical piece of their output:

Sanjeev Gupta’s plan to rescue the Port Talbot steelworks in south Wales by ripping out and replacing its blast furnaces would leave it twice as exposed to Britain’s high electricity prices, according to UK Steel, the trade association.

It found that while the arc furnaces are more modern and efficient, they are twice as dependent on electricity as blast furnaces.

The paper, published on Monday, increases the pressure on the government to offer more energy subsidies to potential buyers of Tata Steel’s UK business.

Subsidies: your and our money going to those producers. What amuses us though is a look at the UK Steel membership page. Where there are some 60 companies and locations mentioned. Fully 33 of which are Tata Steel, the owners of that Port Talbot plant.

Now of course producers can band together like this: freedom of association is an important right whether it be the workers or the bosses doing it. But this does show that we're rather a long way down the road to UK Steel really being Tata itself insisting that we've all got to chip in so that they can lose a little less money. 

We're not sure that this is really what we want to be doing you know but we are amused at the chutzpah on show.

We don't like to say we told you so but we told you so

Actually, that headline is a lie. We just love to say "We told you so". 
And so it is with our repeated insistence that the vastly high price of British housing is caused by the idiot planning system currently in place:

New causal evidence on the impact of supply constraints on house prices shows land use regulation to be a major culprit of England’s current housing affordability crisis. Absent regulation, house prices would be lower by over a third and considerably less volatile. Young households are the obvious losers, yet macroeconomic stability is also impaired and productivity may suffer from constrained labour supply to the thriving cities where demand is highest.

Knocking 30% off house prices would obviously cause short term pain. But equally obviously would be of major benefit.

Figure 1 summarises our empirical findings. It illustrates the impact on house prices of removing, one by one, each of the three supply constraints in an average English local planning authority (LPA). What the figure shows is that house prices would have risen by about 100% less, in real terms, from 1974 to 2008 (from £79,000 to £147,000 instead of to £226,000) if, hypothetically, all regulatory constraints were removed.

As we have been telling you the solution to British house prices lies in simply blowing up the Town and Country Planning Act of 1947 and all subsequent revisions of it. Markets do indeed work and bureaucratic regulation of them does not.

And, yes, we have indeed told you this but then we just love being able to point out that we have told you so.

Nostalgia Must Not Distort British Industrial Policy

The collapse of the British steel industry is not an easy process. The job losses from the closure of Port Talbot could cause serious social and economic problems for the local community, much as the loss of manufacturing industries around the UK has. 

There is an important debate to be had about how to compensate the losers from trade. Perhaps deregulation and other market promoting policies will stimulate growth of new businesses and jobs. Perhaps the government should do more to fund and promote retraining programmes. Perhaps a basic income is the answer for easing transitional periods of structural unemployment that can result from creative destruction. 

However, the notion that the government should step in and subsidise a private buyer or even nationalise Tata steel is absurd. The Port Talbot plant is out-dated and not profitable. Even without the present supply glut, British steel faces an uphill battle to be competitive. The money required to sustain the industry would astronomical. Imposing tariffs can and will cause a trade war and will harm industries that use steel. And, in the long run, the industry will collapse and the jobs will be lost anyway.

So why is there widespread enthusiasm for terrible industrial policy? At root, I suspect, it comes down to nostalgia. There’s an odd romanticism that surrounds heavy industry, which comes from several, equally ill-conceived, notions.

There’s the nationalist sentiment that bemoans the loss of Britain’s former glory as a manufacturing powerhouse. There’s the fetishisation of industries dominated by organised labour. And then there’s the eternal pull of strategic trade policy hubris and the vanity of thinking that economic policy can be strategised and directed.

Most of all, though, I think that manufacturing nostalgia stems from the belief that manual labour is inherently morally superior to the service industry and, especially, finance. This may represent a hangover from the labour theory of value, and an emotive mistrust of capital and exchange. ‘Real work’ is obviously more important, more honest, and more inherently valuable, than facilitating, administrating, and furthering networks of production and exchange. The idea that prices are determined by supply and demand, and that value cannot be measured by effort and exertion alone, is either an alien concept or offensive. 

People losing their jobs and communities being faced with turbulence cannot be waved away. However, mythologizing manufacturing and propping up unviable plants is not only economically nonsensical but it creates and perpetuates a false and dangerous cultural narrative.

Panama, ethics and the law

Discussing the Panama Papers with the BBC's Moneybox presenter Paul Lewis, I said I thought it odious that politicians were deliberately conflating (illegal) tax evasion with (legal) tax avoidance – such that innocent people who simply park their money offshore because it would be taxed to death at home are lumped in with Russian mafia bosses and scumbag dictators concealing the proceeds of their thefts. Lewis was having none of it: there is a big difference, he claimed, between simple folk putting a few bob in an ISA, as Parliament fully intended they should, and smart advisers setting up short-lived paper companies in Panama just to get round the tax rules.

For some years, UK Chancellor George Osborne have been on the same bandwagon, criticising "aggressive tax avoidance" – such as companies shifting cash round subsidiaries in other jurisdictions in order to get the best tax treatment, celebrities billing the BBC from purpose-made companies so that they don't pay 40% income tax, people paying themselves in ways that are not liable to national insurance contributions, wheezes to avoid capital gains tax – and all that sort of thing. And Prime Minister David Cameron has fully signed up to that line.

Now he is being hoist by his own petard. As his father, a financial adviser, put clients' funds in Panama, people naturally wondered whether the Prime Minister benefited from Panamanian tax avoidance. He yielded to pressure to publish his tax returns. These showed that (among other things that will be pored over by the papers) he stood to save £80,000 in inheritance tax by using the 'lifetime gift' mechanism. 

Millions of middle-class families do the same, of course. But when you have been so strident in denouncing 'tax avoidance', it looks – and is – hypocritical. The Prime Minister could, of course, do the Paul Lewis thing and say that 'lifetime gift' tax-avoidance is allowed by Parliament and is OK, but 'aggressive' tax-avoidance is shady and unpatriotic. But the distinction is lost on most people – who don't know what a 'lifetime gift' is and certainly would not have enough money to benefit from it.

The pressure is now on all politicians to reveal their tax affairs. The claim, by critics such as the Shadow Chancellor John McDonnell, is that this will expose tax-avoidance, self-interest and corruption. Some chance: smart accountants would have no problem concealing the affairs of their career-politician clients. What it would do, however, is to discourage talented people, such as those who have had a successful career in some other sector, from going into politics in the first place. You might be a model citizen, but would you want your finances, and those of your family, exposed in the national newspapers?

As the journalist Janet Daley says, this is the sort of mess you get into when politicians wander away from legislating and start moralising instead. The trouble with morals is that everyone has a different view on them. If you break the law, it is a matter of fact; whether your actions are moral or not is a matter of debate. Moralisers open themselves up to constant criticism.

The solution to this mess is quite obvious. Taxes on businesses and individuals should be so low that it is not worth evading (or even avoiding) them. And much simpler – the more complicated your tax code is, the more places there are to hide in it: and the UK tax code is one of the most complicated in the world. Indeed, George Osborne has made it even more complicated with all kinds of new reliefs, subsidies, schemes, limits and whatever else. If you are worried about money drifting off to Panama, you really need to start at home.