The future of freeports

In 1983, 36 years ago, Dr Eamonn Butler and Dr Madsen Pirie, founders of the Adam Smith Institute, wrote Free Ports. 3 years later, Dr Butler co-authored Free Ports Experiment. In 1981, the ASI had proposed freeports for the UK – and six were established – but their chances of great success were scuppered from both sides by the EU and HM Treasury. The European Union steadfastly refused to ease any of their choking regulations – and the UK Treasury, similarly, refused to ease VAT or tariffs. According to Dr Madsen Pirie in the Spectator today, ‘the freeports were effectively just reduced to being bonded warehouses, where goods could be stored, and only be taxed when they left.’

The Adam Smith Institute has long been clear that this isn’t what freeports should be about. Freeports could, and should, be hi-tech, high enterprise hubs for the British economy, springboards for regional and global competition through free trade, and gateways to local employment and prosperity.

Freeports aren’t a new concept – they rose to prominence in post-Renaissance Italy – and they aren’t a complex idea. As Dr Butler explains in his piece for the Telegraph today: ‘take a bit of land near a port or airport and treat it as if it were a foreign country as far as import/export trade is concerned. So, people can fly or ship in goods from abroad, store, consolidate, process, assemble, package or label them in the freeport, and fly or ship them out again. All this with no import tariffs, no VAT or any other taxes, and no paperwork when the goods leave. All plain and simple for the importers and exporters, and a nice generator of jobs, enterprise and investment for the local community.’

Despite the simple nature of freeports policy – and the limited cost to the public purse – government has insisted on getting them wrong in the past. The sites rolled out when the Adam Smith Institute first championed the idea were chosen by the government for political reasons, not for sound business ones. Freeports should have regulations which are as simple as possible – and tax codes to match. Freeports should be treated as foreign territory in many ways – and managed through an independent port operator – not a meddling government.

If done right, freeports can be a huge win for post-Brexit Britain. We can increase the capacity of our ports, develop strategic assets needed to be a serious global player on trade, and boost jobs and British products at the same time. As Dr Pirie said today: ‘Liz Truss, as the new International Trade Secretary should be bold. We should support her fight for real freeports, ones that can draw business, wealth and jobs to some of the UK’s ports, located in areas that have not kept pace with its economic expansion, and which could be regenerated with a such a boost. Low taxes and low regulation mixed with high-tech and tall global ambition — a recipe for success.’

Freeports are one of those policies which can make one really excited for the future – if they’re rolled out in the right way. Since 1981, the Adam Smith Institute has led the calls for freeports policy – and there’s now a wealth of evidence from around the world that shows we’re right. If done properly, freeports can be serious assets to an economy – we look forward to continuing to make the case for them. 

Excellent, we can stop doing government now

PJ O'Rourke once asked perhaps the most interesting question we can ask about government. Namely, when are we done? When have we passed all the laws that need to be passed and we can fold the tent and quietly creep away? When have we addressed all those problems that can be addressed by legislation and thus have no need to support a class of legislators? He didn't know the answer to that but we now do: we have reached that point. We're done:

The traditional summertime sound of the ice cream van chime has, for decades, been music to the ears of pensioners, as well as children, who duly venture outside for a weekly treat. But a city council's decision to ban vendors from pausing on the street for longer than 15 minutes has caused great upset amongst the elderly, who fear they won't make it to the van in time. The crackdown has been branded "ridiculous" and prompted more than 65 people, many of them pensioners, to write to town hall chiefs, warning that they are too frail to adhere to such a time limit. Previously, ice cream vans were allowed to remain static for 20 minutes but could stay as long as they liked if they had a queue. The new rules mean that they must leave their spot within 15 minutes, only staying an extra quarter-of-an-hour maximum if there are people waiting. If they breach the 30-minute limit, they face having their licence to trade revoked.

Pensioners have been writing in to point out that, given the NHS' ability to perform hip replacements, it can take them 30 minutes to get to the van. But our objection is not to what this rule is, it's to the existence of the rule at all. This is clearly and obviously something that can be left to the market unadorned to solve. After all, the point of the ice cream van is that it is mobile: it goes to where the customers are. If there are none it will move on: if there're lots it will stay longer. This is what we want: our aim is always to at least attempt to increase the consumption opportunities of the population and "stay if you've got customers, move if you don't" obviously maximises that, our goal.

This regulation is not just therefore ridiculous (seriously, that grown adults working on the taxpayers' money, even dream of the idea that the parking time of an ice cream van needs regulating?) it is counter-productive, it takes us further away from our aim of maximising the people getting what the people want. We have therefore reached Peak Government, we have solved all possible problems and are now left meddling where there is no need to.

Which, while the thought that anyone tried to regulate Mr. Whippy is depressing, is actually a cheerful message, isn't it? For now we have ahead of us the pleasant task of firing the politicians given that their predecessors have already managed to complete the necessary tasks.

The simple existence of a set of parking time regulations for ice cream vans proves that this is so.

The EU’s pro-cancer tax policy

If there’s anything the EU does well, it’s petty bureaucratic interference that worsens the problem it’s purporting to fix. It was, then, probably a mere matter of time before this approach would lead them to blunder towards e-cigarettes and propose policies that, effectively, promote cancer. The EU is making moves towards increasing tax on e-cigarettes by classifying them as a tobacco product and setting a minimum excise duty. This will, of course, lead to the price of e-cigarettes significantly increasing.

The logic appears to be that smoking is a demerit good that harms the consumer and imposes third party costs. Given the market fails to factor this into the price, the government steps in and places a ‘sin tax’ on the good, in order to discourage its harmful consumption.

Regardless of your views on the effectiveness or desirability of these policies with regards to smoking, there is a small problem with treating e-cigarettes the same way. They do not contain tobacco. Vaping, whatever its risks and flaws, is not smoking. In fact, most vapers use e-cigarettes as a substitute in order to give up smoking, with almost one million doing so successfully.

Whilst largely motivated by the (comparatively) lower risks of inhaling nicotine without tobacco, the considerably lower price of e-cigarettes is another major attraction (the smoother feel, the better taste, and the less unpleasant smell don’t hurt either). Anyone familiar with basic economics understands that raising the price of a product will make more people buy a substitute instead. In the case of smoking, which is more than a little habit forming, this is even more likely to lead people to stick with their established habit rather than switching to the alternative.

It is true that the risks of vaping are not yet fully known. However, the research that has been done indicates that it is 95% healthier than smoking. And, in any case, punitive taxation and crushing regulation can only be justified when the cost of intervention is outweighed by the activity’s perceived cost to third parties. It is arguable that this standard has been met for tobacco. It is absurd to think it applies to vaping.

The motivation for this move is probably the tax revenue that EU Member States fear they will lose if people switch from tobacco to vaping. This seems a poor excuse for imposing a policy that effectively protects carcinogenic products from competition. This also appears to be an incredibly misguided move in the build-up to the Brexit referendum.

You can't just hand wave the Living Wage away with higher productivity

This is a drum which one of us has been banging for some time now. You cannot just wave away the effects on unemployment of the Living Wage by muttering about productivity. Increased productivity is using less labour.

Nida Broughton at the SMF says:

If businesses can increase productivity there is less likely to be a risk of higher unemployment as a result of the introduction of the National Living Wage.

This is true only in a very particular sense. In other senses, increasing productivitymeans raising unemployment.

As Chris Dillow goes on to point out, productivity is the amount of output we get from a particular input of labour. Or, of course, it's possible to reduce the amount of labour and get the same output. Thus the problem if people say that business can simply deal with higher imposed wages if only they increase productivity.

If it takes us currently the labour of 10 people to make 100 hamburgers an hour, and we raise wages and thus effort is made to raise productivity, perhaps through automation or by the manager buying a whip, we then have 5 people making 100 hamburgers an hour. Or perhaps we have 10 people making 200. We have now raised productivity and sure, the late nite eatery can now afford its higher wage bill.

But note what else has happened. We are either using half the labour we used to in order to produce the same number of comestibles, or we are using half the number we would have used to make the larger amount.

Thus the argument that productivity increases will take care of higher wages is not an answer to the insistence that higher imposed wages will cause the use of less labour. Far from being a rejection of the point it's just an explanation of that very same point, the reason why it will happen.

Of course British farmers would be better off outside the EU

We find this a slightly puzzling question to ask: whether British farmers would be better off inside or outside the EU? Because the answer is entirely obvious:

Would British farmers be better off in or out of the EU? Environment department ministers are at odds over whether a Brexit would be good for farmers, who receive roughly £2.5-3bn a year in EU subsidies

The answer is obvious not because it's the EU, nor because of free trade or anything else like that. It's obvious because of the form the subsidies take.

Currently farm subsidies are pretty much entirely an area based payment. Have one acre, get x, have 1,000 acres, get 1,000x. Not entirely but close enough, that's the system.

What does David Ricardo tell us about a rise in rent? It gets very quickly capitalised into the value of the land itself. And of course an annual payment, unconnected with anything very much other than the area of land owned is equal to a rise in rent. So, all that the current subsidy scheme does is push up the price of farming land. Which is lovely for those who already own it and wish to sell. But of course it just increases the capital requirements for those who wish to enter the field, or who wish to expand their operations. The end result is more capital, or more borrowings and thus interest, and at very best the farmers are back where they started before the subsidy scheme was set up.

All the current subsidy process does is raise the cost of the major input into farming, the land itself. It's a ludicrous system of subsidy. And farmers and everyone else would be better off if the system simply did not exist.

That leaving would enable us to abolish that system, although of course the usual political cravenness in the face of the farmers means that we probably wouldn't, which would be a good idea.

This is not to take a view on Brexit specifically: it's only that the current system of farming subsidies is simply ludicrous and anything at all that would allow is to get out of it would be both useful and sensible.

Once more into the breach on prostitution

We have yet another of these regular attempts to change the law on prostitution in the UK. To argue for change is fine of course: we don't think the current law is correct either. Yet the actual argument being put forward here is that we should switch to the Nordic (sometimes "Swedish") model. To understand this, at present in the UK, the selling of sex is not illegal: it's entirely legal in fact, as is the buying of it. Certain surrounding practices, soliciting (almost exclusively to do with street prostitution), living off immoral earnings (aka "pimping"), brothel keeping and so on are illegal. We don't think this is the correct structure of the law either. That Nordic system is that the selling of sex is not illegal, the purchasing of it is.

Caroline Bennett seems to be remarkably confused about the benefits of this:

Incidentally, with decreased supply, prices for sex have risen: witness a neat ledger shown to the commission by a Swedish state prosecutor, Lars Ågren, documenting the massive profits enjoyed, prior to discovery, by a Polish outfit running 23 prostitutes. “They could charge double in Sweden than in Poland.” He adds: “The girls aren’t making money.”

This is used as an argument in favour of the Swedish system as opposed to that Polish one. The Polish one being remarkably similar in law to the UK one. Pimping and brothels are illegal, the actual work itself is not. So, as Bennett herself says, the Swedish illegality of purchase seems to produce those profits for the managers of the trade, the pimps, but not benefit the actual people doing the work. Quite why this is an advantage of that system we're really struggling very hard to understand.

Our own attitude is more fundamental. Freedom, liberty, require that consenting adults get to do what consenting adults consent to. With the proviso that regulation of harm to others, those not directly involved or consenting (and obviously, those who are not adults) being entirely allowable, often sensible and sometimes necessary. To mangle Mill: their freedom to deploy their genitals as they wish stops where your genitals become involved, not before.

The correct form of the law is therefore very simple indeed. We do indeed say that any consenting adult may have sex with any other consenting adult as they wish. We do not regard the addition of cash payment to the process as changing this. Similarly, anyone may offer a massage to another for payment or not for payment. We do not regard the addition of erotic to this process as changing the basic liberty either. Thus the law should be that both the selling and purchase of sex should be, must be, legal, with whatever limitations necessary to protect those who are not adult and or who do not consent.

So just how should we inspire innovation?

We really would rather like to crack the secret of encouraging innovation. For it is the major determinant of how living standards are going to change in the long term. Thus having more innovation would be a good thing for the kiddies and thus we'd like to have more innovation. Yet the policies required to generate it are still a bit or an unknown. As James Pethokoukis over at AEI says:

Yet despite all that, the US still somehow creates more high-impact startups — innovative, disruptive new companies that grow big and make their founders superrich — than any other large economy. This is arguably a pretty good proxy for a nation’s innovative oomph and entrepreneurial spirit.

Sounds like a reasonable way to measure it to us. Although the people paid to ponder about innovation don't see it that way:

While the United States scores well in terms of refraining from using policies that detract from the global innovation system, its overall score is brought down by the fact that its contributions’ scores do not match those of leading innovation nations. The United States ranks just 17th on contributions. Most notably, the United States has weaker scores on tax policies that incentivize innovation (e.g., relatively weak R&D incentives, no innovation box, and no collaborative R&D tax credit), its lack of a national innovation foundation, and, in recent years, relatively faltering federal investment in scientific research. It speaks to America’s need to implement a more innovation-friendly corporate tax code, while at the same time increasing funding for science and technology.

Hmm, no, we think we'd probably read that the other way around. There's a currently trendy set of things that everyone is urged to have. Tax subsidies for innovation, federal scientific research and, obviously, a national innovation foundation where the people who recommend such things can sit and thing about foundational innovation. Nationally.

And it turns out that by far the largest rich economy on the planet does it just by allowing those who innovate successfully to keep their squillions. Seems simple enough to us, fire all the bureaucrats, lower the tax rate and watch that richer future approach at warp speed.

The terrors of zero hours contracts

Forgive us but we do find this shouting about the evils of zero hours contracts to be really terribly amusing in one sense. For it is almost universally true that those writing the articles about the evils of zero hours contracts are themselves employed on zero hours contracts. Or, as it is also known, on a freelance basis and that just is the way that vast swathes of the media work:

What are zero-hours contracts? You asked Google – here’s the answer Dawn Foster

And off we go into a rather predictable Guardian rant about how awful such contracts are. Which then leads to our amusement, for when we examine the working life of the writer:

Dawn Foster is a writer on politics, social affairs and economics for The Guardian, London Review of Books, Independent and Times Literary Supplement, and is a regular political commentator for Sky News, Channel 4 News, and BBC Newsnight. Her first book, Lean Out, is on feminism, austerity and corporate culture.

Among us here at the ASI we have written for or appeared on near all of those outlets and the absolutely standard contract for all of them is a zero hours contract. It could be that this outpouring of protest is really a deeply buried attack on the media's own hiring practices, by those doing that very media reporting but we're really unsure as to whether people are being that Machiavellian. And observing the sharp elbowed jostle to gain absolutely any such work from any of those media outlets we really don't think people are protesting about their own employment.

Thus we're just left with the rather puzzling observation that zero hours contracts seem to be just fine for the middle class literati but obviously no one else should be allowed to enjoy the same employment structure. Which is, when you think about it, rather odd really.

Small businesses needn't fret about relaxed Sunday trading laws

In a column for the Huffington Post, I’ve asked whether small business outcry over changes to Sunday Trading Laws is justified. From Autumn 2016, prohibitions limiting large stores (with a floor space of over 3,000 sq ft) from opening on Sundays for more than six hours will be lifted – an announcement which has led to claims that this will only see more trade moving to larger stores at the expense of smaller shops. Yet the evidence (research, polls and local borough reports), does not suggest that small businesses will suffer from their larger rivals opening for longer. One Australian study, for example, “found no relationship between the proportion of small retail businesses and the stringency of trading hours regulation in each state”. A fifth of consumers have said they would do more shopping on a Sunday were the changes implemented, meaning more customers for everyone – and another way for bricks-and-mortar stores to compete with online retailers.

And rather than wishing the competition be banned from trading, small business owners – many of whom are disruptive by nature – should view this proposal as an opportunity to find new ways to innovate and outsmart their larger rivals.

Read the whole thing here.

Women Drivers & The Counter-Productive European Court of Justice

My car insurance is due soon. I hadn't kept up with all the arcane ways that EU legislation affects UK business, but being curious about whether women still get cheaper car insurance than men on grounds of being statistically safer drivers who have fewer accidents, I looked online and found this:

The European Court of Justice (ECJ) has ruled that the long-established practice of setting insurance prices according to gender is illegal discrimination. The Court's decision forced members of the European Union to introduce a ban on gender-based pricing.

So, in basic terms, car insurers used to yield to market-based risk calculation (using a reliable tool called actuarial mathematics) and offer statistically safer drivers cheaper premiums (perfectly sensibly, in my view). Then the EU decided that it's much better to ignore all this data and assent to a spurious anti-unfair-discrimination policy, while failing to see the irony that in penalising statistically safer people for purposes of parity they are unfairly discriminating against safer drivers. This is beyond absurd. The primary measure of unfair discrimination in actuarial analyses is not treating different people differently, it is treating different people the same. Women are statistically safer drivers than men, which means they are cheaper customers, which means to increase their premium to the same as men is to unfairly discriminate against women.

The reasons why women are safer drivers are well known. Women are, on average, less likely to have fast cars, they drive fewer miles, they drive slower, they take fewer risks, and they are less aggressive than men. Giving women a lower premium based on those facts amounts to a simple and rational statistical evaluation of risk. The same is true of other considerations too - age, post code, miles per year, type of car, and so forth - each of these are important factors in risk evaluation, and the ECJ should leave well alone. The free market is the best tool for eradicating unfair discrimination in business, because pretty much any time a company decided to discriminate against women, black people, gay people, tall people, fat people, or whomever, they would pay for it with a reduction in profits*.

Of course, we know the probable motive in the ECJ's equalisation of gender - it is to guard against people with identical data having different premiums based solely on gender. But that misses the whole quintessence of how competition works in the free market. Suppose we have Jack and Jill, who are the same age, with the same car, same post code, and driving the same miles per year - the ECJ would have it that they should be given equal premiums because to do otherwise would be to discriminate on the only variable factor - gender.

But that is not what happens - while the data picks up facts like age, car type, post code, and miles per year, it doesn't account for those significant differences - speed of driving, risk-taking, aggression and other factors of mentality behind the wheel that make women more likely to be safer and have fewer accidents, and better candidates for cheaper premiums. The ECJ is guarding against the general being applied to the particular - but this is part of what makes competitive business healthy. In a free market we can work under an assumption of cheaper insurance premiums for a safer driving record at the individual level anyway - so it's a law that only actually compounds what already happens.

But we can extend far beyond that too - competing firms can solicit new custom by offering deals to acquire that custom. This proves very effective in the insurance market: some providers specialise in good deals for modified cars (like my modified Subaru), some specialise in good deals for women, some specialise in good deals for the elderly, some for first time drivers, and so on. Insurance companies have asymmetry of information when it comes to those vital premium-changers - they have transparency with data like age, post code, miles per year, type of car - but they don't have anything like the same transparency with things like speed of driving, risk-taking, aggression and other factors of mentality behind the wheel - which is where the actuary matters.

A company that's free to offer deals for women is acting on probability related to those invisible factors - but that also means women are free to look for insurers sensitive to such data, as are Subaru drivers, as are the elderly, and so forth. That's how beautifully the market for insurance rewards this innovation. If women are consistently safer, then they are consistently on average cheaper customers, which rewards those companies that are prepared in response to lower the premium for women. But if the data is spurious and women are less consistently as safe as the premium indicates then those same companies will incur a loss and adjust their women-favoured premiums to accord with that. It's a hugely efficient system that the ECJ hasn't properly factored into its considerations.