Sadiq Khan should accept the case for legalising and regulating drugs

This morning in Mayor's Question Time, Conservative London Assembly member Andrew Boff secured a meeting with Sadiq Khan for him to listen to the case for legalising and regulating drugs.

Daniel Pryor, Head of Programmes at the Adam Smith Institute, welcomed the news:

It’s great to hear that the Mayor is willing to hear the compelling case for taking back control of our violent drugs market by legalising and regulating drugs. Teenagers are being exploited by county-lines gangs, with an estimated 4,000 caught up in smuggling in London alone, precisely because we hand over a drugs market worth £5.3 billion to criminals. Young people are able to access hard drugs from dealers who don’t ask for ID, and users have no access to information on the purity of what they’re taking. Our current approach leads to tragic, entirely avoidable deaths from violent crime, overdose, a lack of support for problem users.

With around 12,000 people in prison for drug-related offences, police time and taxpayers’ money is being wasted on fighting an unwinnable war that makes our streets less safe. We should follow the examples of Canada and many U.S. states by moving towards a harm reduction approach, starting with legalising and regulating cannabis. These efforts were led by a coalition of public health experts and law-and-order conservatives, and the same groups are calling for legalisation in the UK.

Please get in touch with Matt Kilcoyne (07904099599 or 02072224995) to arrange an interview or further comment.

Bring in airline style competition to allow rail to soar

New report by analyst, former journalist and rail expert Adrian Quine for the Adam Smith Institute calls for the introduction of much greater competition in our railways. 
 

• Privatisation of British Rail led to greater number of services and record passenger numbers, but DfT over-specification and monopolistic franchises are costing consumers dearly
• Open Access operators compete directly with incumbent franchises
• Fares on Open Access are cost less per mile with higher customer satisfaction; fares on Virgin’s East Coast franchise where it faces direct competition are 24% cheaper than on its West Coast franchise where it doesn’t
• Open Access (OA) operators are held back by the excessive strictness of the “Not Primarily Abstractive” test, which is designed to prevent OA operators cherry picking the most profitable routes.
• Just 1% of passenger miles are travelled on OA operators despite OA operators topping passenger satisfaction polls.  
• Lack of competition has seen the cost of unregulated ‘anytime’ fares rise by as much as 250% on many routes since the last year of British Rail in 1995, while RPI has risen only 86%
• UK should learn from airline competition and scrap the one-size-fits-all model of franchising to give passengers real choice on long distance routes

A new paper by the free-market Adam Smith Institute is calling for a ‘complete rethink’ of how the country’s passenger rail services are structured. Rather than re-running tired debates between nationalisation and privatisation, the think tank advocates injecting more competition into the current franchise model by making it easier for Open Access (OA) Operators to compete on long-distance routes.

Short term political thinking and civil service micromanagement of the industry is unsustainable, argues report author Adrian Quine. Competition between rail providers on key long distance rail routes will deliver lower fares, reduced running costs, improved customer service, and a greater focus on technology and innovation to ensure a better deal for the passenger & taxpayer.

This new report follows on from the Public Accounts Committee’s (PAC) damning account of the Department for Transport’s management of the Southern rail franchise Govia and the East Coast mainline, which it called a “debacle” and “totally unacceptable”.

20 years on from privatisation, its full promise is yet to be fulfilled. Despite record numbers of passengers and high levels of investment, there is a lack of competition in the market and government is increasingly over-specifying franchise conditions. As consumers are well aware, this has meant uncompetitive delivery of bare bones services and high ticket prices despite the Competition and Markets Authority’s 2015 report ‘Competition in Passenger Rail Services in Great Britain’ calling for greater competition.  

Since the last year of British Rail in 1995 the cost of an ‘anytime fare’ has risen by 250% on many routes, while RPI has risen only 86% in that time.

Fares are dragged down where competition does exist. Virgin’s fare on the West Coast is 32% more than it charges on the East Coast where it faces competition. Between London and Crewe a peak train is £131 for a journey of 158 miles, while the 156 miles between London and Doncaster where there is Open Access competition costs £99 (The two open access operators are even cheaper: £58 with Hull Trains and £52 with Grand Central).

Open Access operators regularly top passenger satisfaction leagues, with Grand Central and Hull Trains taking the top two spots.

Where franchises overlap, unintended competition delivers cheaper and more frequent services. Peterborough is the starting point for GoVia Thameslink Railway (GTR) running a half hourly stopping service to London and onwards to the South Coast. Slower and with more stops, but lower in price than Virgin’s direct service, the GTR route has seen a 70% increase in commuter numbers in just 14 years.

But Open Access competition is rare in the UK with just 1% of passenger miles conducted by OA operators, despite the current Railway Act allowing for such competition. This slow take-up is down to the ‘Not Primarily Abstractive’ test.

At present operators are required by government to ensure that for every pound of abstracted revenue 30% of new revenue has to be generated. In practice this means virtually no competition on long-distance inter-city lines. This is part of the reason the UK is the only European country that runs its commercial inter-city operations on such a model despite the reduction in costs a move to Open Access would deliver to passengers.

Unlike commuter trains, long-distance inter-city services are “closer in style to the airline business” with most routes used by one-off business or leisure passengers who buy their tickets in advance, the report argues. But, while passengers choosing to fly have access to choice between budget operators like Ryanair and premium services like British Airways, rail passengers lack a similar range of options.

And that competition delivers dividends for passengers. Report author Adrian Quine finds that where competition does exist between airlines on intra-UK flights fares were nearly half as much as where there is a sole operator.

The lack of innovation in rail stems in small part from the level of micromanagement by the Department of Transport, which has left private companies hamstrung by what they can provide. The DfT can dictate timetables, frequency of trains, stopping patterns and even minor details such as whether a train has a catering trolley or not.

The paper argues that the level of detail the DfT can stipulate and the power of unions on services with just a single provider often leads to unexpected consequences, such as the recent scandal where half of the carriages on some inter-city services were closed on trains run by Great Western Railway.  

With such high levels of government oversight and control over the railways, what we have is now nationalisation in all but name. But Adrian Quine argues that ‘advocates of nationalisation really need look no further than the current costly’ running of the publicly-owned National Rail to understand why renationalisation would not work.

Opening up inter-city services to competition would drastically improve services, drive down operating costs, reduce fares, boost innovation, and give passengers real choice. By steering people away from road and air onto rail, the paper argues, we will see additional revenue from rail and reduce the burden on the taxpayer.

Competition in the Long Distance inter-city rail market has the potential to bring about the most radical and progressive realignment of our rail system since privatisation and create a true rail renaissance.

Adrian Quine, author of the paper and rail consultant, said:

“The UK rail industry structure is wasteful, bureaucratic and largely not fit for purpose. This paper highlights many of the core issues at stake yet provides radical, achievable solutions that are in the best interests of users, the taxpayer and the wider economy”.

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Renationalising the railways wouldn’t solve today’s problems. We need more, not less, competition on the UK’s railways. Allowing more Open Access operators to compete directly on long-distance rail routes would boost productivity, improve customer service, and deliver cheaper fares”

About the author:

Adrian Quine is an analyst and entrepreneur with a specialist interest in transport and infrastructure. He is a former investigative journalist and broadcaster and has worked for many leading publications including: the BBC, Discovery Channel, National Geographic and the Times. He also writes regular opinion pieces on rail as a columnist for The Telegraph.

Adrian has worked as a consultant on various projects including rail and aviation. He has specialist knowledge in public transport and infrastructure.

Adrian has a particular interest in rail competition and was one of the original founders of ‘Alliance Rail Holdings Ltd’ – he devised the name around a proposed ‘Open Access’ service between the Scottish and Welsh capitals from Edinburgh to Cardiff via the West Coast Mainline and Shrewsbury.

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report ‘A Third Way for Britain’s Railways’ can be accessed here.

A capitalist revolution in housebuilding

New paper by top architect Patrik Schumacher for the Adam Smith Institute calls for radical capitalist reform to solve Britain’s housing crisis

• Housing crisis is a failure of politics not markets and is the result of restrictive planning laws.

• Restrictive planning laws have led to an increase in house price to earnings ratio in London from 4:1 in the early noughties to 10:1

• Rent-to-income ratio has climbed from 1:5 to 1:3 in the last 15 years

• Government should resist calls to impose rent controls or mandatory long-term tenancies as they reduce supply and hamper labour mobility

• Sadiq Khan’s plan to mandate that up to 50% of developments be “affordable” will discourage development and push up prices elsewhere

• Micromanaging land uses creates high price distortions in our cities and should be abolished

• Reliance on home ownership as a savings and retirement vehicle is risky and hampers locational adaptation and labour mobility. Saving and housing should be decoupled

The housing crisis of ever rising prices and unaffordability can only be ended by a capitalist revolution in housing, a new paper by leading architect Patrik Schumacher, released by the Adam Smith Institute, argues today.

Instead of populist state-led solutions, the housing crisis can only be fixed effectively through the denationalisation and depoliticisation of development rights in general and in the radical liberalisation of housing in particular.

London’s house prices have gone from four times to over ten times the average annual wage over the past two decades. Meanwhile the average renter has gone from spending one fifth of their income each year on rent to spending over a third. Fifty years ago land values in the UK amounted to just 50% of GDP, now prices are nearly 200% of the national income. Local planning restrictions on supply, and increased demand to live in cities has led to these price rises. An expansion in supply, the paper argues, would help to alleviate the price rises that have made housing increasingly unaffordable for so many city dwellers.

While most of the 20th century was marked by increased numbers living in suburbs, recent decades have seen this trend reverse. IT, finance, and other service industries are most productive in dense urban clusters. With growing numbers needing and wanting to live in cities like London, prices have increased as new supply has been prevented from meeting demand.

Politically motivated nimbyism, as seen in the rejection of the 2,000 home redevelopment of an ASDA car park on the Isle of Dogs, and the discouragement of the redevelopment of the Bishopsgate Goods Yard in Hackney, shows the difficulty that developers face with any project in the capital. Delays or outright rejections of development are the most obvious costs of political interference. But the report also highlights the high cost of restrictions on different land uses, with residential plots reaching values nearly four times those of office space in London. As heavy industry has moved out of the city there is little social benefit to cities micromanaging land uses. Leaving decisions about the best use for a plot of land to entrepreneurs and consumers would increase affordability and boost growth.

All of this is hurting Britain’s productivity, argues the paper. London, which Patrik Schumacher calls the global prosperity engine, is artificially held back as many workers are discouraged due to the cost of living. While those that do choose to live in the city (and other high-price cities like Oxford, Cambridge, and Manchester) see their disposable income shrunk, live in less desirable locations, and spend more time and money commuting.

The answer to this problem, Schumacher argues, is to end the cycle of restrictive planning and price rises. More homes must be built to reduce house prices. Current land values are hugely enhanced by the permissions they receive if they receive them, with windfall gains as permission is granted. Removing planning restrictions across the board would push land prices down and make housing more affordable. Further restrictions on the number of small units allowed per development and size should also be reviewed to increase the number of studio flats available to those on lower incomes.

Government should resist calls to impose rent controls and mandate long-term contracts, argues the paper, with such actions reducing the supply of low-income housing. In doing so these measures hamper labour mobility and further hit productivity.

Plans by London Mayor Sadiq Khan to force developers to earmark up to 50% of developments as ‘affordable’ will have the opposite effect, suggests the paper. Affordable housing requirements act as a tax on new development. Schumacher argues this creates a vicious cycle as developments are disapproved, disrupted or abandoned, and other plots on sites are hiked in price to reflect politically imposed rationing.

A capitalist revolution is needed in house building the paper suggests, arguing “there is no need to infantilize people via paternalistic subsidies” but instead to reform planning laws to enable house builders to “deliver decent, truly affordable housing”.

Patrik Schumacher, top architect and author of the paper, said:

“Capitalism was and is the great prosperity engine behind all the material freedoms of modern life. Tragically capitalism is not allowed to work its magic with what matters most to us, namely our dwellings and cities. Urban development and housing provision have been unduly politicised and thereby paralyzed. We should be experiencing an urban Renaissance as a crucial productivity boosting component of our knowledge-and network society. Instead planning restrictions and imposed standards block the adequate supply of urban residences leading to prohibitive prices. Paradoxically, the “affordability” system contributes to rather than alleviates the affordability crisis.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“There is a growing consensus that our planning system is not fit for purpose. Restrictive planning systems are pricing people out of the places where they are most productive and redistributing wealth upwards. This situation is crying out for change, so it is great to see a leading architect call for a capitalist revolution in housebuilding.”

Sophie Jarvis, Research Associate, Adam Smith Institute, said:

“Millennials already know that they are at a massive disadvantage to their parents in terms of getting on the housing ladder. What they don’t know is that rent caps and restrictive planning laws are holding them back, not helping them out. Liberalising planning laws, however, could get them on that ladder. The best example of this is if developers were allowed to build smaller houses, millennials could live in a compact, ergonomic flat in  Zone 1 or 2, instead of a rundown, cold flat in at the end of the Central line or half-way to Hull”.

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. 

You can read the full paper here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Standing up for safe standing after West Brom decision

Following the news of West Brom's safe standing bid rejection by government Sam Dumitriu, Head of Research, Adam Smith Institute said:

“Sports Minister Tracey Crouch’s decision to reject West Bromwich Albion’s plan to introduce ‘safe standing’ next season is a blow to football fans across the country. The requirement for all teams in the top-two tiers of English football to have all-seater stadiums is outdated. Rail seating is widely used in German, Austria and Sweden, and was recently introduced at Celtic Park to great success. 

“Right now in most football grounds, many of the most enthusiastic fans will stand throughout the match, regardless of the all-seater nature of Premier League stadia. This is more dangerous than rail seating as fans frequently fall over the seats in front of them causing injury. Under the status quo, we have unsafe standing. 

“Safe standing is overwhelmingly popular with football fans, with polls regularly finding more than 80% of football supporters in favour. According to Adam Smith Institute research, it could cut the cost of a season ticket at some top-flight grounds in half and save West Brom fans around £120 a year on the lowest-priced season ticket. Tracey Couch should follow the evidence and listen to the fans. After the season they’ve had, the Baggies’ deserve all the good news they can get.”

For more information, read the Adam Smith Institute report Safe Standing: Why it’s time to remove the ban. Please get in touch with Matt Kilcoyne (07904099599 or 02072224995) to arrange an interview or further comment.

Getting a ruddy grip on Britain's drug gang problem

Following the Home Secretary's speech this morning unveiling her plan to tackle violent crime, Daniel Pryor, Head of Programmes at the Adam Smith Institute, said:

"In setting out her strategy for tackling violent crime, the Home Secretary has inadvertently made a powerful case for ending drug prohibition. Gang violence, including youth violence, is intimately connected to the illegal drugs market. You’re less likely to face violent crime purchasing alcohol in an off-licence than buying cannabis in a dark alley. Taking drugs out of the hands of gangs by legalising and regulating them would significantly reduce violent crime: putting drug dealers out of business, protecting young people (drug dealers don’t ask for ID) and destroying the black market.

Last week, David Lammy MP told BBC Radio 4's Today programme that “the police and our country has lost control of [the] drugs market,” but the truth is that they never had control in the first place. Our failed policy of prohibition undermines relations between police and communities, and leaves criminal gangs violently competing over power vacuums left in the wake of police disrupting incumbents. Get drugs into the light of the legal market. Until we do, the police will be left chasing shadows."

For further comment or to arrange an interview please contact Matt Kilcoyne (matt@adamsmith.org, 07584778207, 02072224995).

Auction work visas after Brexit

New report shows how the UK can reform immigration after Brexit, be responsive to business needs and pay for public services.

• UK must set out post-Brexit immigration system by year-end
• Immigration has been a net positive to the UK’s fiscal position, with little impact on unemployment or wages of low-skilled workers
• Reducing high-skilled immigration would hit businesses and UK competitiveness
• Points-based systems attract workers who look good “on paper” but are not necessarily the best fit for employers
• A more business friendly approach would be to auction work visas to employers
• Auctioning visas would promote economic growth and allow government to raise funds to spend on addressing concerns about pressures on public services and low-skilled wages

With just over one year to go until Britain leaves the European Union, the country must design an immigration system that can win popular support. Building on the work of Nobel Prize winning economist Gary Becker, labour economists Pia Orrenius and Madeline Zavodny argue that auctioning employer permits to hire foreign workers, provided security checks are met,  would maximize the economic benefits of immigration and increase government revenue. The Adam Smith Institute’s new report comes at a time that the UK has to decide on how it will manage immigration. It’s time to kick-start a mature debate on how we organise this system. 

At present the UK has two migration systems. The first, for non-EU migrants, has five tiers for work- and study-based visas as well as additional channels for family migration and humanitarian migrants. The second is the free movement regime that the UK has with the European Union, which grants EU citizens preferential access. As we prepare to leave the EU, the government has made clear it is seeking to control numbers, the skill level of migrants, their length of stay and the benefits they receive. 

It might be easy for the UK government to simply fold the EU into the existing skills-based tiered system. While doing so might enable the Conservatives to hit their goal of reducing annual net inflows to the tens of thousands, it would come at considerable economic cost with businesses hit by labour shortages and consumers facing higher prices for goods and services, the report suggests. Points-based immigration systems, as used by Canada and Australia, tend to attract workers who look good “on paper” but are not necessarily the best fit for employers. 

Instead, the UK should consider auctioning employment visas to employers. Auctions are a flexible alternative to complex points-based systems and replace central planning with employers’ bottom-up knowledge. By allocating visas to the firms that value migrant labour the most the policy has the potential to boost economic growth and government revenues.

Visas purchased by companies could be resold, while foreign workers would be allowed to move across employers with a visa, to ensure workers’ rights are protected. With the Migration Advisory Committee providing advice or setting a target number of visas up for auction, it would be responsive to changes in UK economic conditions and the demand for foreign workers. Changes in permit prices would act as a signal to increase or reduce the numbers of permits available in auctions in future years.

The UK should consider separate auctions for high- and low-skilled permits, with low-skilled permits reserved for foreign workers who will earn less than a certain amount or work in certain occupations or industries. Creating another separate auction of short-term permits for seasonal foreign  workers, such as those working in agricultural jobs or at holiday  resorts, might also be advisable.

Visas as currently constructed are not free. At present a typical Tier 1 exceptional talent applicant pays ₤585 to apply, while a typical Tier 2 general applicant for a three-year visa pays between ₤587 and ₤1267 (although less if in a shortage occupation). Sponsoring employers of Tier 2 and Tier 5 workers also pay an Immigration Skills Charge of up to ₤1476. Thousands more are paid in legal fees to lawyers as applicants and employers attempt to prove need and skills. An auction system would allow the government to streamline the process, make it more responsive to business requirements, and capture funds currently spent on legal costs.

In 2014, Professor Sir David Metcalf, who chaired the Government’s Migration Advisory Committee until 2016, proposed using auctions to allocate investor visas. 

The paper also draws on extensive research to conclude that immigration has had negligible effects on employment, unemployment, or the earnings of people born in the UK. However, some research suggests that low-skilled immigration slightly lowers the earnings of low-paid workers, with the most-negative effects on wages felt among other immigrants.

Immigrants to the UK contribute more to taxes than they consume in terms of public benefits and services. Immigrants from countries that joined the EU in 2004, including Poland, Hungary and Lithuania, are strongly net positive contributors to the UK government’s coffers. 

Immigration responds to and generates more economic activity, the report suggests, with the economy especially able to absorb higher migrant rates during times of expansion. Extensive research finds migration leads to greater levels of trade, innovation, and productivity gains. Report authors Zavodny and Orrenius report that migration increases patent activity and productivity, and in the UK has been instrumental in retaining the City of London’s pre-eminent position at the centre of global finance. 

Immigration was named by 73% of those who voted leave as a concern in the British Social Attitude survey immediately after the EU referendum. But instead of using Brexit as a means toward reducing immigration from the EU, the UK government should seize it as an opportunity to design an immigration system that best strengthens the country’s economy. Creating an auction system would be a bold move that would maximize the economic benefits from immigration while possibly bolstering public support for immigration.

Madeline Zavodny, author of the report and Professor of Economics at University of North Florida, said:

“The UK has a unique opportunity to replace its immigration system with one that would benefit the economy and increase support for immigration. Auctioning visas to employers is the best way to bring in talented workers who contribute to the economy while minimizing any harms to UK natives. It would also generate funds that could be used to achieve other public goals.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“It is vital that the UK’s post-Brexit immigration policy is informed by evidence. This important report by two distinguished economists reviews extensive empirical research to develop the framework for a innovative immigration policy that meets the UK’s specific economic requirements and improves the public’s support for immigration.”

About the authors:

Madeline S. Zavodny is a Professor of Economics at the University of North Florida. She is also a Research Fellow at the Institute of Labor Economics (IZA), a Fellow at the Global Labor Organization, and an Adjunct Scholar at the American Enterprise Institute. Much of her research focuses on economic issues related to immigration, including Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (AEI Press, 2010) and The Economics of Immigration (Routledge, 2015). Her research on immigration has also been published in the Journal of Labor Economics, Industrial and Labor Relations Review, the Journal of Policy Analysis and Management and Demography, among others. Before joining UNF she was a professor of economics at Agnes Scott College and Occidental College and an economist with the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of Dallas.

Pia M. Orrenius is Vice President and Senior Economist at the Federal Reserve Bank of Dallas where she works on regional economic growth and demographic change. She manages the regional and microeconomics group in the Dallas Fed Research Department. Her academic research focuses on the labor market impacts of immigration, unauthorized immigration and U.S. immigration policy. She is coauthor of the book Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (2010, AEI Press). She is research fellow at the Tower Center for Political Studies at Southern Methodist University and at the IZA Institute of Labor in Bonn, Germany, as well as adjunct scholar at the American Enterprise Institute. Orrenius is also adjunct professor at Baylor University (Dallas campus), where she teaches in the executive MBA program. Orrenius was senior economist on the Council of Economic Advisers in the Executive Office of the President, Washington D.C., in 2004–05, where she advised the Bush administration on labor, health and immigration issues. She holds a PhD in economics from the University of California at Los Angeles and bachelor degrees in economics and Spanish from the University of Illinois at Urbana—Champaign.

PLEASE NOTE: The views expressed here are solely those of the authors and do not reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.   

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. 

You can read the full report here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Build out of the mess we've got ourselves in

After the Prime Minister's speech in central London this morning on tackling the housing crisis Sam Dumitriu, Head of Research at the Adam Smith Institute, speaks out on Mrs May's policy priorities:

"The Campaign to Prevent Real Estate may object, but the Prime Minister is right to take-on NIMBY councils in high-demand areas. Restrictions on new development push rents up and hold back productivity by pricing workers out of the best jobs. But we must go further and build on the Green Belt.

“Building on the Green Belt doesn’t mean ugly sprawl or trashing the environment. If we only freed up intensively farmed land within a ten-minute walking distance of a train station for development, we could build one million new homes.”

“Paying executives for generating profit rather than building homes may seem perverse to Mrs May, but the alternative would create even worse incentives. In a market economy, executive pay should be determined by shareholders, not by compliance with the government’s five year plan.

“We shouldn’t blame land banking for slowing down construction. The uncertainty of the planning system incentives housebuilders to build up a pipeline of permissions. Without it, withdrawn permission could leave builders, tools and cement mixers sitting idle."

To arrange further comment, opinion pieces or interviews please contact Matt Kilcoyne (matt@adamsmith.org, 07584778207, 02072224995).

Corbyn's custom union proposal is not finger licking good

As Jeremy Corbyn comes out to support a customs union with the European Union risks throwing away the key benefits from Brexit. Matt Kilcoyne, Head of Communications at the Adam Smith Institute, says:

"Jeremy Corbyn’s latest position on Brexit makes little sense. A customs union with Europe, while walking away from the single market threatens any potential gains from Brexit and Corbyn's hostility to America will also hurt British consumers.

"The customs union of the European Union is dominated by continental manufacturing interests. Britain could be nimbler in its approach than the EU has managed over the past four decades and draw down its tariff structures on third countries to reduce costs for consumers while boosting trade (be it with the developing world or with the largest economies like America and China). Corbyn says that he doesn’t want the UK to become a rule taker but that is precisely what this proposal will see us end up as. The UK is the tenth largest trader in the world. In 2016, the United Kingdom exported $404bn and imported $625bn. We should make the most of this opportunity to be the bastion for free trade with the rest of the world, not be shackled to institutions and decisions made in Brussels without our say.

"A comprehensive free trade deal with the USA could open up a market of 323m to our world-beating financial services, high-quality food, legal services and cars – while driving down costs for consumers here. Corbyn might be getting all in a flap about chlorine chicken in an FTA but EU institutions like the European Food Safety Authority he so lauded have said it was safe to eat time after time. Throwing away the chance for trade deals with the USA by hamstringing the UK to a customs union with the EU would be like buying a chicken burger, throwing out the meat, and eating the wrapping."

For further comment or to arrange a interview please contact Matt Kilcoyne (matt@adamsmith.org, 07584778207, 02072224995).

Mutually Assured Prosperity

Following David Davis' speech this morning where he called on European Union partners and member states to agree mutual recognition on the basis of trust the Adam Smith Institute says that the government's Brexit secretary is speaking sense. Matt Kilcoyne, Head of Communications at the ASI, said:

"When talking about trade we often hear of the importance of rule makers and rule takers. Most countries though know that in some things they make the rules, in others they take them. It will be the same for Britain as we leave the EU. In insurance, in banking, in legal contracts and many commodities it is British rules that are the basis of global trade. In goods we've worked for four decades with European partners to set global standards. 

"The Adam Smith Institute has argued in favour of mutual recognition before and it makes sense that we'll seek to mutually recognise the work of institutions that we've helped to build. Use of a single set of approvals boosts trade by removing barriers and time costs. 

"But it mustn't stop at the borders of Europe. The safety of medical devices in the USA, Switzerland, and Canada are just as good as those found on the continent. Cars from Japan are just as safe as those sold by German manufacturers. At the heart of this issue is trust. Governments should trust each other, just as multinational companies do in their supply chains. If we want a globally facing Britain we'd do well to support further mutual recognition and trust between our allies."

For further comment or to arrange an interview please contact Matt Kilcoyne (07584778207, 02072224995, matt@adamsmith.org).

Scrap the Bank of England's Inflation Target

New Report calls on Bank of England’s remit to be reformed to move from CPI Inflation rate targeting to a nominal income target and remove discretion over Quantitative Easing. 

• Government should replace the Bank’s 2% CPI Inflation target with a nominal income (NDGP) target
• By moving to NGDP targeting, the Bank of England can credibly maintain a single target in good times and bad
• Forward guidance must be clear and credible, ambiguity creates uncertainty and reduces the effectiveness of monetary policy.
• Clear and consistent action by central banks allows effective financial market reaction and reduces spillover effects in the wider economy 
• Prediction markets, allowing people to trade on bank’s solvency, would punish excessive risk taking and create a more sustainable financial sector 

Ten years on from the financial crisis, a new report by the Adam Smith Institute urges the government to scrap the Bank of England’s 2% inflation target and move to a new system that targets nominal income. 

Conventional monetary policy by central banks used interest rates control inflation, but since the financial crisis a decade ago, the central bank has used emergency asset purchases (i.e quantitative easing). A move to nominal income (NGDP) targeting would mean more accurate and responsive decisions made by the Monetary Policy Committee (MPC) by allowing a single focus on aggregate demand.

The price system is meant to reflect real scarcities – and so supply shocks should be reflected in inflation data with policymakers trained to ‘see through’ them. The central bank itself is described as being the primary cause of demand shocks. As nominal income is demand, NGDP targeting avoids requiring ratesetters to distinguish between supply and demand shocks and increases stability.

Decisions on asset purchases by the MPC at present are discretionary and arbitrary. While forward guidance has been issued, it is sometimes seen as publicly committing the bank to future actions and sometimes seen merely as a forecast of where the economy is headed. Instead the Bank of England should move to a rules-based system, the report argues. The MPC should clearly set out the amounts and types of assets the Bank will hold in each scenario. For example, if the Bank of England owns more than a certain percentage of gilts of a specified maturity, they then extend asset purchases to a pre-announced basket of investment-grade bonds.

Monetary policy since the crisis, including consistently near-zero interest rates have prompted destabilising capital flows and driven large swings in emerging market currencies, increased the costs of pension provision, and encouraged speculation in commodities. With open market operations limited in scope, and financial markets knowing in advance which margins the Bank of England intends to exploit, these spillover effects could be limited.

By being clearer with markets about the intention of monetary policy, the Bank of England’s actions would have stronger intended effects, the paper argues. 

Ten years on from the financial crisis, it’s time to look again at whether we regulate lenders and financial markets correctly. The cat and mouse charade of complex banking regulation, setting banks up against government regulators presumed to know all, is destined to fail, the paper says. Referencing Andrew Haldane’s 2012 speech at Jackson Hole, the paper argues that clear, simple and consistent rules based regulation has a better effect than increasing complication as “you do not fight fire with fire, you do not fight complexity with complexity.”

By replacing bank stress tests that straight-jacket bank behaviour with prediction markets, the Bank of England could also help taxpayers avoid future bailouts. Questions could be posed relating to the banks objectives which could be traded on, the paper argues, and so provide real time probabilities of risks that are transparent to all markets. These markets would end up boosting competition and punishing excessive risk taking efficiently and effectively, more effectively than current regulation allows and far better than that a decade ago. 

Anthony J. Evans, author of the report and Professor of economics at ESCP Europe Business School, said:

“Since the financial crisis monetary policy has played a reasonable role in stabilising the economy, but only because it has strayed from its conventional remit. Given the damage caused by that remit in the first place, the Bank of England should take the opportunity to adopt a new approach. Reforming open market operations and adopting a Nominal GDP target is effective in good times and bad, and provides a coherent, rule-based framework for monetary stability.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Monetary policy should be stable, predictable, and rules-based. The extraordinary policy measures the Bank of England took in response to the financial crisis increasingly relied on the discretion and wisdom of policymakers. Now, nearly ten years since the start of the Great Recession, we should take the opportunity to change the Bank of England’s mandate and reform open market operations.”

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report ‘Monetary Policy After The Crash: Lessons Learned?’ is available here.