Sunday 28 December 2008

Half a free market is better than none (1)

If at all possible, it would be nice to have a free market in everything. You can't really have a free market in public goods or core functions of the state*, but that's only five or ten per cent of the economy or overall activity.

The only other half-way sensible thing that a government can do is redistribution and/or subsidising merit goods, i.e. education and health. Given our starting point, it is politically a non-starter to call for the entire welfare state, NHS and State education system to be scrapped, but we can arrive at something approaching free markets via universal benefits and vouchers.

Completely private schools, barring the usual collusion, would compete to provide the highest standards at the lowest cost; but children of poor families who aren't lucky enough to win a free place at a posh school would have to make do with a much more basic education, or end up in schools run by sects. 

OTOH, if you give all school age children a voucher worth £5,000-plus, then as far as I can see, everybody wins. It would shave £20 billion off the schools budget (overheads and waste are enormous) so the taxpayer's happy; wealthy people with kids at private school are laughing because they no longer have to pay twice for education (once for the 'free' places they don't use and again in cold hard cash); the not-so-wealthy can now afford private education and children of poor families who can't afford much of a top-up to the vouchers still have a much wider choice of school - even if it's only a choice of state run schools without top-up fees.

Remember also, education is to a large extent a common good, i.e. having a good education is primarily for your own benefit, but even if you are an under-achiever, you are better off in a well-educated than in a poorly-educated society.

The same sort of principles apply to health vouchers, as ably expounded by Health Minister Dick P.

For some reason education and health vouchers are seen as right-wing, probably because they have been proposed by the Tories. But exactly the same principles apply to the Welfare System. The Citizen's Income idea is seen as left-wing because it involves (forcible) redistribution, but it is no more redistributive than education or health vouchers, and the same general rules apply.

In the absence of a Welfare State, we'd have hardly any single mothers (which is the root of a lot of problems) and more people working, albeit for low wages. But it is not fact that we have redistribution that causes this, it is the way the Welfare State has been designed, for example:

a) It actively rewards the feckless, i.e. an unemployed single woman boost her income by £120 or so a week if she has two children. If a married, working woman with a working husband gives up work to have two children, they lose the mother's income (obviously) and the welfare state gives them a derisory £24 or so.

b) It actively discourages stable families.

c) It actively discourages taking up temporary, part time or low paid work (to the extent that the National Minimum Wage hasn't destroyed many of those jobs anyway) because you lose as much in benefits as you gain in net income.

The idea behind the Citizen's Income scheme is, broadly, 1. Take the entire amount that 11 million pensioners, 5 million working age adults, 1 million students and 12 million children currently receive, plus the billions lost in fraud and administration costs; 2. Extend the class of those entitled to stay-at-home parents (of which there are only about a million or two) and better-off students (of whom there are only a few hundred thousand) and 3. Dish it out as non-taxable, non-means tested weekly payments (lower rates for children and higher rates for pensioners, obviously). To avoid overlaps with the tax system, there'd be a choice - claim the CI payment or a much higher personal allowance.

This would still be redistribution and a safety net against poverty, but the way I see it, would completely avoid problems a), b) and c) listed above, provided of course that Child Benefit were considerably less than the cash cost of bringing up a child to prevent 'baby farming', to reinforce this, it could be restricted to the first two or three children-per-mother.

* Although you could have half a free market in e.g. police, street lighting, refuse collection if local councils had one source of revenue and one source only, i.e. Land Value Tax. Property prices in areas with cleaner, safer and better lit streets would of course be higher than in crime-ridden areas. If the council in the crime ridden area wants more revenue (which is just human nature) they will have to concentrate on doing those things which push up property prices, i.e. make it more desirable, i.e. that add value - like reducing crime and so on. To the extent that councils make a surplus by concentrating on doing sensible things, you would hope that this is returned to the voters in tax reductions or spent on other stuff that adds value, so that ultimately cost to taxpayers = value of services they receive = cost to the council of providing those services, which is the ideal of free market capitalism. 

If the mood takes me, I shall explain why LVT, unlike existing property and wealth related taxes (which are pure revenue raisers and/or jealousy surcharges) makes the land market more like a free market in a later post.

23 comments:

DavidNcl said...

On Tactics
Arguing for a free market is more likely to get you half a free market than arguing for half a free market which is likely to get you very little indeed.

People can see the attraction of principles like liberty and freedom but the sort of "sensible" stuff your advocating is just more efficient state socialism than what's currently on offer.

On Vouchers
I know Milton Friedman was a big fan and I used to think that they have potential as an interim step in some sort of phased dismantling of the state. Today I can't even them as a transitional measure (while my junta dismantles the coercive apparatus of state education ;)

I’d much rather give people the actual money as a cash payment and let them choose what to do with it.

If they want their kids to leave school at 12 and start work on the family farm who am I to determine that they’re making the wrong choice. Or maybe they want to send the sprogs to a Swiss finishing school. Or home school them and save like mad so that they can afford to send them to Harvard University in the US of A (bet they don’t take your vouchers). Whatever. If you must continue to loot while alternative arrangements arise, give your the clients cash and let them chose how to spend what is, after all, to some extent their money.

Isn’t this the exact point in being libertarian? To devolve decision making all the way down to individuals who know they’re situations and aspirations rather than the state (at some level) choosing for them?

AntiCitizenOne said...

If (and they should) children get a citizens dividend (LVT less defence costs) then parents can use it to buy education for their children.

SantaToryB said...

Mark,

I have followed your blog for year(s?) and never once have I seen a mention of the affliction that affects modern retailers. I have followed your arguments vis a vis LTV and CBI and yet no mention of the ill that our society is
founded upon. Retailers retail, wholesalers resell, importers buy and resell and someone somewhere, is as I write thinking of doing any one or multible combinations of the above.

Now I know you are making generalised points about your vision but there has to be a time when you actually have to question that underlying thesis that, all things being equal(ly stacked up), anyone can go out and become one of our great nation of shopkeepers?

The problem with that is, of course, the likes of the Grosvernor Estates, the CofE estates et al: they not only
gain from the rises in property prices they never ever retrench. There are no options: you want to sell? Never expect retail. We only sell at future prices and they always, but always increase.

And they are a law unto themselves.

As an accountant you will be aware of the generalised mark-up for gift shops i.e. x2.35 (for those who do not know, take your buying price, or cost of production plus expected profit, or what you think the market will accept and multiply by 2.35. That should cover your outgoings per annum).

The inbuilt understanding is that the cost of renting premises is so high that you have to leverage goods bought at 60p to a retail price of £4.99 which totally negates my x2.35 except when an allowance is made for the rent.

And that is the thing that makes goods so expensive in the UK today. Not the wholesale price nor the retail price but the margin added by the property price.

So, why post here?

You are arguing that vouchers etc. will work: nothing I disagree with in general but until property prices are made such that they are affordable by newcomers prices will always remain high.

Now, as someone who recognises that it is retail rents(buying being almost impossible)that dictate the market price of goods, the probability of companies remaining in existence therefore depend on the retail price of shop rental.

Until that is addressed we will always come back to today's situation.


STB.

Mark Wadsworth said...

DN, good points indeed. But this is a political thing. If we earmark cash for education vouchers, that is broadly acceptable to the right wingers, and the left wingers might be against it politically but hugely in favour when it comes to educating their own children. So that's a start. Suggesting that we give people cash for their children to spend as they see fit is neither acceptable to rightwingers (who don't like redistribution) nor to left wingers (who like to tell people how to spend their money).

AC1, obviously, but you know the depth of feeling against LVT.

STB, broadly speaking, I agree. Keeping land prices low and stable and attacking such monopolies arising is a job for LVT, really, but it is perhaps more subtle than that. As I have said before, the prices that Primark charge on Leytonstone High Road are much the same as on Oxford Street. But they presumably sell a hundred times as much stuff on Oxford Street as on LHR, which is why the rents there are one hundred times as high.

By reverse logic, now that retailers are doing really badly and commercial rents and property prices are falling, these large monopolies have quite a few lean years ahead of them (although their losses are largely on paper as they have no intention of selling, as you point out).

As to overly high retail prices and wafer thin margins in the retail sector, VAT has a lot to do with it as well.

Anton Howes said...

Regarding your blog post (and much of your blog in general), I still don't see why you aren't in the SLP.

Anonymous said...

So am right in assuming:

Land Value Tax = Cost of providing government services / Number of Land Owners

?

Anonymous said...

You can't have a Land Value Tax unless you know what the value is, and how do you propose to arrive at that number?

Any valuation method which involves judgment, discretion, or opinion, especially if exercised by the existing ruling class (ie New Labour and the Media) or their client state (ie the whole public sector), would clearly be manipulated to their own advantage.

How could this be done objectively?

Anton Howes said...

Anon 1: No, LVT is meant to be value of the land (calculated by taking the average property prices in the area, and then compiling an index of relative property prices for all such areas across the whole country) and then times by area (e.g. square metres).
So, for example, the SLP wants to raise £254bn in LVT, so it average rate charged per square metre per annum would be £7.40. But in a high-value area (remember these are relative price indexes) such as Kensington and Chelsea it would be £288 per sq m pa, and the opposite for a low area (Burnley town centre I think - at about £2.63per sq m pa).
In terms of relation to the Council, it means that if they spend their money well and actually raise the value (as in the relative property prices in the area - determined by consumers) of the land, then they get more LVT revenue - it's aligning your interests with theirs.

Anon 2: see my above explanation for a simple, easy, objective method of calculating LVT (except for the figure raised of course - the SLP intends to use that to replace a whole bunch of existing taxes, but yes, current gov would be right ol' bastards with it and raise taxes).
NB: it's by no means the only method out there for LVT
But, my method is quick and easy - I managed to compile it for all local authorities in just 2 hours (+ a colour-coded map!) and seeing as it could respond instantly to changes in house prices, it's potentially v accurate - I'd also say do it by postcodes, or one better by polling district. Bureacracy- wise you just need to compile the original data, and then get some guy sitting behind a computer inputting the house prices as they change!

Anton Howes said...
This comment has been removed by the author.
Mark Wadsworth said...

Anton, I think your way of doing it is as good as mine and it would come to much the same answer.

Except that I would only use it to replace existing property and wealth taxes for the time being (Council Tax, Business Rates, IHT, SDLT, CGT, TV licence, Insurance Premium Tax etc etc) so my rate per square yard would be a quarter or a third of yours.

Snafu said...

The only people who lose out with educational vouchers are poor quality teachers. Their unions would never allow this and their block vote within the Labour Party will ensure that such progress will never happen!

Whilst you should expect the Conservatives to offer these options, they are unable to explain why they are good ideas and wilt in the face of the slightest breeze of hostility!

Meanwhile, BBC Radio 4's Ed Stourton can continue to send his son to Eton for a truly working class education!

Anonymous said...

Anton Howes, calculating Land Value Tax using property prices can create a vicious spiral, this would create property boom and bust as well as creating a problem for maintaining monetary stability.

Mark Wadsworth said...

Anon 3, if the LVT rate were set correctly, it would significantly dampen booms (and hence busts) because it would act like a much higher interest rate on the location/land/bubble element - while leaving the effective interest rate on the buildings and improvements unchanged (i.e. whatever the bank charges you). That's one of the many things I like about LVT.

Anton Howes said...

Anonymous,

the stress is on the word *relative* property prices. If all property rises in value nationwide by an equal amount, then tax stays the same as the same overall amount is being gained from tax no matter what.
What happens is that different areas appreciate and others don't and LVT rises or falls accordingly.

If one area rises in value with a bubble, then LVT rises accordingly, thus causing people to stop buying there and buy somewhere cheaper, of lower relative value where LVT is lower. As it's based on relative property prices, if one area rises in value, then another must be dropping in relative value (the index is based on percentages - so if one area rises from 0.1% to 1%, another area or a group of other areas must have lowered by 0.9% overall and thus LVT lowered there by that amount. Thus, it doesn't cause bubbles, but rather prevents them happening.

Mark has separate proposals (another sort of LVT) for reducing nationwide bubbles, where tax increases by the amount that the rate of growth in house prices exceeds the rate of growth in wages.
The SLP is still looking at this proposal.

Please explain how it causes problems with monetary stability though.

Anton Howes said...

...and what he said lol

Anonymous said...

It's the job of Bank of England to set interest rates as part of it's Monetary Policy Committee. It's inflation target needs to include property prices, this means in practise using RPIX as inflation measure like it did in the past.

If property price rise year-on-year, this would be registered as inflation to Bank of England and may decide to rise interest rate to cool things down before the bubble occurs.

Anton Howes said...

Anonymous:

Yep, but seeing as LVT lessens property bubbles, this means that the BoE's interest rate cuts would now take place based on the rest of the economy instead of being distorted as it is now by property prices.

If there's a bubble, LVT rises automatically in that area as it is tied to relative property prices - if those prices increase, the rate of LVT increases. This causes people to go elsewhere for houses as the cost of holding that property is greater, causing demand to fall or lessen and the bubble to disappear. LVT thus provides stability in the housing market - it's a bit like an automatic interest rate change but just for land.

Anonymous said...

Doing that would remove the link in the tax payment and cost of providing government service which I oppose fundementally.

Most property purchase are financed using a loan, it make sense to use Bank of England's interest rate to steer things.

Some other countries use loan-to-value ratio to stablise housing market.

Anton Howes said...

I never said it would completely take over the role of interest rates. Far from it - I'd say interest rates would still have a much, much greater effect on house prices than LVT in this respect.

But all the same, it does the opposite to what you claimed earlier - it does not cause housing bubbles or monetary instability.

I don't see how it removes the link between tax and cost of gov service - if revenue from the LVT is always constant (as, once again it's based on relative prices as opposed to just prices), then it's still a load of tax covering the cost of government services

Also, it's in the council's interests to improve the value of the area in order to obtain more revenue, by spending their money with an aim to getting 'value for money' - in which case it strengthens the bond between taxation and gov service, even causing a system where council is on the people's side!

Dick Puddlecote said...

Great article Mark. I think Snafu nailed it with this:

"The only people who lose out with educational vouchers are poor quality teachers."

DBC Reed said...

One of the Anonymouses is suggesting not unreasonably that the MPC should include house prices in the data it considers for interest-rate setting and deal with house price inflation that way.
Problem is continued house price inflation would then necessitate high interest rates which would choke off cheap credit to manufacturers and retail.Out-of- control housing would hold the more productive part of the economy to ransom.Better for house prices,created by land values ,to be taken out of the equation by a Land Value Tax and for interest rates to find their own level.

Anonymous said...

"...families who aren't lucky enough to win a free place at a posh school would have to make do with a much more basic education, or end up in schools run by sects."

Isn't that how the system works now? It is where we live.

Mark Wadsworth said...

HB, that's a good point. So what we have is just a hugely expensive version of what the taxpayer could have for free anyway. But what you say sort of cancels out DavidNcl's equally valid points above.

So we can rule out the current system; it is just a question of whether we go for vouchers; straight cash redistribution or tax cuts, or a mixture of all three, and if so what mix. As a moderate I'd go for a mix of vouchers (two thirds) and tax cuts (one third). I suspect that this would be the 'least bad' mix.