Skip to content
January 5, 2011 / David Woodford

Trusting privileged politicians

It is obviously a problem with our “democracy” that most of the senior politicians, in all there main parties, seem to have come from privileged backgrounds. This means the system is skewed to favour people with these backgrounds meaning it is not truly representative of the people. However, that is not what this post is about. What this post is about is whether we can trust these privileged politicians to make decisions about the economy, decisions that may make us all poorer but will make the less well off notice the difference more.

Of course the argument is that those who have never struggled to earn a living, who have never had to rely on the NHS or state eduction don’t know what it’s like. They can’t imagine what its like to be poor and so they can’t make the correct policies to help the poor. I would partially agree with this. If you have never struggled for money, gone to a bad school or been unable to find a job it must be a lot harder to work out solutions to these problems.

A lot of people then move on to say we can’t agree with their policies. Apparently if the same policy is put forward by someone rich it is bad for the poor yet if a poor person has the same policy it is good for the poor. This is obviously a contradiction. What we need to understand is that we don’t need to judge politicians ability to make policy on their background because the policy is there to be judged itself. The politician with the best policy should be chosen whatever their background.

A rich politician may find it harder to work out a policy that is good for the poor but if they do put forward the best policy we should still choose them. Even if you believe it is impossible for someone who is rich to do something for the general good when do have an idea judge them on that idea rather than refusing to consider it because they had it. You can’t choose your background, whether rich or poor, so it shouldn’t be held against you.

November 12, 2010 / David Woodford

Why not tax people their time rather than their income

Many of the arguments about how to make taxation fair arise from the fact that we are taxed based on our income. The problem with income is that people have different incomes  for different reasons and it is very difficult to decide what those reasons are and hence who to tax. The system would be greatly simplified if were instead taxed in time. Everyone starts of with the same amount of time, 7 days a week. If we said that everyone had to dedicate say 2 days a week to “the social good” ie the state then we would have a fair system where everyone is doing their bit.

Your time is your basic commodity when earning a living. It is ultimately your time that you exchange for goods and services, usually by working to provide one good or service and getting paid money for that time which you can then exchange for the goods and services you actually want. So the idea that it would be best to tax your income, which is everything you have minus the time you spend not working, is slightly odd. IT means that time is effectively tax exempt as you are paying tax on income earned to buy every other good and service.

For example it is considered fair that those who earn the most should pay the most tax, since it assumed that it is less of a sacrifice for them to give the money. Whilst this partially works there are factors other than differences in the rate of pay that effect your income. Someone who prefers goods and services to they can buy to their free time will be inclined to work more. As a result they will earn a higher income, yet their utility will be the same as the person who prefers time and is doing less work, so it is wrong to suggest the working person is making a smaller sacrifice to pay the tax.

How would a time tax work? It could be paid in two ways by people in different positions. Someone who can command a high wage rate would simply pay the money they earned from the designated amounts of time, say two days, to the government. People who are on lower incomes or who are unemployed, and therefore cannot afford to give up the goods and services that they can buy with the money that they have earned, can pay the tax by doing work for the government.

This way everyone has to make the same sacrifice since everyone starts out with the same amount of time. We will achieve the idea of the current taxation system that people who are able to earn more than others should have to make bigger contribution, since it’s a smaller sacrifice to them, without penalising people who choose to work harder or those letting people on low incomes or without any income not contribute anything.

November 8, 2010 / David Woodford

Why can’t we just give the unemployed jobs

The goverment is now announcing some work placement schemes that they can put unemployed people on so they know what it feels like to work. What would be much better would be to give these people a real job. Don’t give people all the stigma of being unemployed and then “force” them to work as if its something they are trying to avoid. Instead just offer these “work placements” as jobs paying what the benefits do now.

The goverment seems determined to brand the unemployed as lazy and then show the public how tough their being on these lazy people. A fairer system would be to offer these people work and if they take it they get paid and if they’d rather lie around in bed let them do it without having to pay for it. The we really could say the unemployed are lazy and don’t deserve anything off the state.

Now don’t get me wrong, I’m not in favour of a larger state or anything like that, but this system would cost the state less than the current benefits system as they would be getting something back off the people who are currently unemployed.

I belive that everyone should have the choice of whether or not they want to work. If you value your time more than the goods and services you can get in exchange for that time then that’s your choice, but you’re the one who lives without those services. However, if it’s just that employers think your time is worth less than the National Minimum Wage and hence don’t want to employ you then it’s not your fault and you deserve a decent quality of life. But, everyone who takes from the state (and that’s everyone) should also contribute so if your going to get money from the state you should have to do some work for it.

The important difference point is that you are working because you want to contribute to the state not as a punishment for not being able to find a job and you should always have the choice if you don’t want to contribute (its just that then you won’t get anything back).

October 27, 2010 / David Woodford

Its wrong for the government to give loans or grants to business

To understand why the government shouldn’t be making loans or even giving grants to business lets look at the fundamentals of what it involves.

  1. Hard working people go out and earn money to provide themselves and their families with a higher standard of living
  2. The government takes some off that money off them in the form of taxes in the name of public services and welfare
  3. The money is then given to business either as a loan or a grant. To be effective loans must be at a favourable rate to that offered by banks
  4. The business then use the money to earn a profit

This means that the governments is forcing you to help someone else make themselves rich. Now of course it is in the interest of everyone that there is new investment in the economy but if you thought that the company the government has decided to invest in is going to make a profit you could lend it the money yourself (either directly or by entrusting it to a bank) and take the share of the profits you deserve for offering your own money that you could have used to improve your life at the moment.

It should be more efficient to leave it to the market to decide which firms to invest in. People with spare money (the money that would have been taken in taxes to fund the government loans) will put it where they belive it will earn the most money. This means that collectively we will invest in the companies that are the most productive and will hence help the economy the most. This means that the money will be better invested by individuals.

However there is a more fundamental objection to the government investing in business. This objection is about freedom. If you have earned money then you should be free to invest it however you like. Why should everyone else, which is what the government should represent in a perfectly democratic system, or a small group of powerful individuals, if our democracy isn’t quite working, get to dictate to you what you are allowed to do with your money. Furthermore is you have worked hard to earn the money you should get to enjoy the benefits of it directly. If the government invests it on your behalf in, order to allow someone else to enjoy the money you have worked hard to earn, then the only benefit you receive is a slight increase in GDP that benefits everyone however hard they are working.

The system amounts to taking money off one group of people in order to give it to another which, is deeply unfair when the people who are being given the money are no more deserving than the people it is being taken off. And when you consider this with the fact that the money is likely to be invested inefficiently so that the amount the people receiving gain is lower than they amount the people have the money taken off them lose it is just plain wrong.

October 25, 2010 / David Woodford

How prison should work

Most people agree that people who do bad things should be punished and they also agree that prison is an effective way of doing so. However when we look at what prison is supposed to achieve we tend to get confused and as a result can’t decide what sort of sentences should be given. The two main purposes of prison are:

  1. To punish people who commit crimes (ie to do justice (ie to get revenge ))
  2. To prevent crime

However the more “liberal” a society we become the more we tend towards the second point. There are again two ways in which this is achieved:

  1. To deter people from committing crimes because they want to avoid going to prison
  2. To “reform” people when they are in prison so they won’t commit those crimes again

However because we are a nice society and want to make sure that we are avoiding the punishment (aka revenge) reason for prison we are scared of the “deterring” option because, threatening to do something someone doesn’t like if they commit a crime, to stop them committing it is feels to much like doing something someone doesn’t like to get revenge.

However, going for the “reforming” option as the main way prison prevents crime is flawed. Mainly because however good you are at reforming criminals you can’t reform some one in prison until they’re in prison; and you can’t put them in prison untill they commit a crime (well technically you can but it would be plain wrong). This means you can’t stop people committing crimes until they’ve committed a crime, so we aren’t going to solve the problem this way.

Of course I belive we should try to reform people in prisons, since these are the people for whom it wasn’t enough of a deterrent so they need something extra, but we shouldn’t make this the primary purpose of prison. The main purpose of prison is that if people don’t want to go there they will try and avoid it by not committing crimes. How do we know that were not just getting revenge on people. Well one big reason is that we don’t use the death penalty (unlike old barbaric systems that did seem to be more about punishment) so we still give people another chance.

However clearly in its current state prison isn’t enough of a deterrent as too many people are still committing crimes and going to prison – to the point where we don’t have enough prison space. An obvious answer is to increase sentences. People may argue that this will always  increase the number of prisoners making to problem worse but, these people are as ignorant as the people who think always raising prices will make a company more money. There becomes a point where committing crime isn’t worth it, however evil a person you are. We must remember that an “evil” person will usually still act rationally. Tougher sentences won’t make criminals nicer people, but that’s not the aim. Instead they will make criminal decide not to commit crimes (for the purely selfish reason that they don’t want anything they don’t like happening to them) and so eventually our prisons will need fewer places.

The other less obvious way is to make the sentences clearer.  People should know before they ever commit the crime what sentence they will get if they are caught. The combination today of early releases and wide-ranging sentences, whether these are real or perceived, mean that criminals are more likely to take the risk. You can think of breaking the law as an inverse gamble. When you gamble you judge the chance of winning with the amount you will win. A criminal has to judge the chance of getting caught with sentence they will receive. And as you would be less likely to gamble if you didn’t know the winnings in advance and thought their was a possibility they could be low, which would in effect reduce the probability of winning a criminal will be more likely to commit a crime if they think that even if they do get caught their sentence could be much easier.

So we should be clear that the primary role of prison is to deter people from committing crimes. A combination of longer sentences and more certainty of the sentence should a criminal be found guilty will have the effect of increasing the deterrent of prison. If the deterrent is increased sufficiently prison populations will fall as the fall in the number of people committing crimes will be greater than the increase in sentences. Whilst people are in prison they should, of course, be given help so that they can become better citizens when they are released but we should always remember that the main role of prison is to deter people before they commit a crime and need to be reformed.

October 18, 2010 / David Woodford

What is a progressive way of paying for tuition fees

Usually when we are talking about taxes or charges for public services it is clear what is meant by a progressive or regressive system. A progressive system is where the proportion of your income you pay in tax increases as you earn more and regressive is where the proportion of your income that you pay in tax is lower the greater you income. However when we look at tuition fees things get confused and usually the media and politicians end up on the wrong side.

The problem is that there are two different incomes to look at: your income before going to university (or your parents income) and the income you receive after you graduate. The main cause of the problem being that your income after graduating is (hopefully) increased because of your degree (in most cases this is the point of a degree).

At the moment politicians want to increase the number of people from poorer backgrounds going to university in order that these people can then use their degree to earn a higher income and be more socially mobile. They are then deciding that in order to do this we need a progressive system whereby poorer people pay less for their degree than richer people in order that poorer people are not put off. Since you borrow the money to pay for your degree and then pay it back after you start working the government is making the repayments progressive by making the repayments progressive after you graduate. However, if their plan of allowing people from poorer backgrounds to increase their future earnings works then it is these people who are going to be faced with the higher  repayments. That is your repayments depend upon your income after graduation, which is higher for precisely the reason why you went to university, whilst your decision to go to university is made before you know your final salary.

In fact your income (or that of your parents) before you go to university should have no bearing on whether you decide to go  to university because you don’t have to pay anything untill you are receiving the higher income as a result of having your degree. The only time that the tuition fees will put anyone off is if they judge that the increase in their earning power as a result of graduating wont be greater than the cost of their tuition fees (and other costs of university including lost earnings and experience of three or four years of work) in which case they shouldn’t be going to university any way (since they would be better off if they were just given the money that could have been spent on University). The only thing that matters when deciding whether or not to go is the expected increase in earning power and not your current income (before going).

In fact you could argue that people from poorer backgrounds, where it is more likely neither of their parents has gone to university, are more likely to over-estimate the increase in their earning power and as a result be less put off by tuition fees since many people seem to presume that they will be guaranteed a high paying job after graduating.

So back to the main point. To suppose that a system of repayments that is progressive at the time of repayment (after graduation) is somehow encouraging people from poorer background to go to university is to suppose that your income after graduation is closely related to your income before going to university. Which is in itself to suppose that going to university hasn’t increased the social mobility of the person going and therefore makes the whole exercise of encouraging more people from poorer backgrounds to go to university to increase their social mobility pointless.

Of course people from poorer background do have less chance of going to university and do often get put off by high levels of tuition fees. However here the problem is not the tuition fees themselves. The problem is that poorer people tend to go to worse schools where they are less able to achieve the grades required to get into a good university or to get the foundation of knowledge they need to do well in a good degree course. As a result they tend to go to worse universities or study easier courses and receive lower class degrees. This means the income people from poorer background can earn upon graduation is lower and so this income is less likely to cover the costs of university. Here simply reducing the costs of going to university won’t help these people as it still won’t increase their incomes upon graduation (and it is this increase in income that is the reason we are encouraging them to go). What is needed is for the money being spent on helping poorer people pay for university to be spent on improving the worst state schools instead. This will allow the (poorer) people who attend these schools to get an education closer to those going to the best schools and hence are able to enjoy the full benefits of going to university. They will then able to fully pay for the costs of their degree and, in the end, will pay for the rest of their education through higher taxes.

October 3, 2010 / David Woodford

Effects of the National Minimum Wage on Equality

The purpose of the National Minimum Wage (NMW) when it was introduced was to ensure that everyone had a decent standard of living and to reduce inequality by ensuring that when people worked they earnt at east a minimum wage.

When people look at the effects on equality of the minimum wage they tend to look at the difference in wage between those on the minimum wage and those earning the most in society; and hence conclude that it is increasing equality since it is reducing the gap between those that earn the most and those that earn the least. However, you should also look at the gap between those who can’t find work and those who are on the minimum wage. The minimum wage has a number of effects on “fairness” when looking at the unemployed.

For the minimum wage to have any effect in the free market there must be people working for less than the NMW before it is introduced, otherwise no ones wage is going to increase. However, if people are being paid less than the minimum wage this means that giving them a pay rise will reduce the number of people an employer can afford to employ.

An employer will employ someone at a given wage rate if the value of what that person produces exceeds the cost of employing them, of which a large proportion is their wage. This means at a wage lower than the NMW there will be higher demand for labour because all of the people whom it would have been economic to employ at the NMW are still economic to employ, since their costs are lower but their output is the same, but there will be some people for whom the output of their employment is valued between the lower wage and the NMW and are hence employable at the lower wage but not the NMW.

This means that when attempting to give employees a higher wage  a fraction of the employees will be made redundant. That is in the name of equality and fairness some people will lose their jobs in order that those left can be paid more. Not forgetting of course that the impact on the rest of society is lower output at higher prices.

The problem is made worse when look at the government’s ability to pay benefits to those on low incomes and unemployed. When the NMW is introduced some of the money that companies earn that used to be profit is now given in additional wages to its employees. However the company would have been charged corporation tax on this money or its share holders would have paid income tax which would have provided money to the Government in order to pay the welfare bill. Now this money is going to employees on the NMW. By definition these are people on low incomes which means that they will pay no or little tax on the money they earn compared with the amount the employer would have had to pay. At the same time the increased unemployment mentioned above will mean that the government needs to pay out more money in benefits.

So to conclude, whilst I obviously support ensuring that the least well off in society have enough money to have a decent standard of life, the Nation Minimum Wage is an unfair and counter productive way of doing so. It ensures that the second poorest section of society earn a decent wage by aggravating problems for the poorest. Without going into detail I think continuing to pay benefits to people in work to ensure that their income meets a given level is a better solution for society as a whole as well as the people we are trying to help.

October 1, 2010 / David Woodford

Fund online newspapers with a premium for instant content

There is a lot of public debate about how to fund newspapers online. The two main ways are to charge for advertising on the newspapers website and make all of the content free or to charge users to view the content (and then have less advertising). The problem with advertising is the revenues are low and increasing the amount of advertising detracts from the quality of the newspaper. It seems that most newspapers are struggling to survive online using advertising only. The problem with a subscription or charge for reading the news online is that only a small percentage of people are willing to pay. Seeing as the main costs to the newspaper are those involved in actually writing the news it seems pointless to be turning away readers who could be sold advertising space but are unwilling to pay.

The answer is to use price discrimination. Find those people who are willing to pay and charge them whilst leaving the service free for everyone else. The way to do this is to find a way of differentiating the services so that people who pay feel like they are getting something extra (such as whilst the main costs of a flight are those which apply to the plane and not to individual passengers, like fuel and airport charges, airlines can charge much higher fees to first class passengers by offering them a slightly better service). I think the best way of differentiating would be on how recent the news is. Readers who pay could be shown advert free news as soon as its published whilst those that choose not to can read the same news after a time delay, with advertising of course.

So, for example, if you want to read a story that was published today you have to pay but if you want to read yesterdays news you don’t. There could of course be different charges for different amounts of time and some articles could require a payment for longer. Quickly breaking news might only require a payment for the first 6 hours whereas opinion items might require it for a few days.

This system should give the best of both worlds for the newspapers allowing them to profit on the low marginal cost of readers whilst generating the revenue to pay for the new coverage.

September 28, 2010 / David Woodford

Those who hate big business should favour deregulation

Regulation is usually seen as a way of keeping big businesses under control. It means that they can’t exploit market power to make excessive profits at the expense of consumers by colluding with each other or using dodgy strategies. But people become so concerned about regulating the companies that are behaving “badly” that they forget about the free market way of keeping things working.

In a competitive market consumers don’t get ripped off  because if one firm got a bad reputation people would go elsewhere and that firm would fail. However, in a less competitive market (such as a monopoly or an oligopoly – where there a small number of large firms) it may be hard to switch to a different firm and it is likely that all the firms will offer an equally bad level of service. What should happen in this case is that new firms open up offering a better level of service. When they don’t it usually means that there are large barriers to entry.

There are often a lot of barriers to entry that are hard to remove in these markets:

  • Requiring an existing skilled workforce
  • large upfront costs such as expensive machinery
  • higher interest rates for startups than existing firms
  • the need for expensive marketing

However in many industries one of the largest barriers to entry is regulation. An industry with a large amount of regulation will mean that any new entrant will need an army of lawyers and experts to make sure they are following all the procedures. They will also have to focus a large amount of time working with the regulators to make sure everything is in order. The result is that only a large firm can afford to compete in these markets. A firm must have a large market share just to make it profitable to pay all of these people involved in the regulation.

This means in a market with lots of regulations it will be hard for any new company to enter the market, meaning that even if there is demand for a higher quality of service or better value for money than the existing firms offer no one is able to enter to offer it. Hence regulation that is there to protect consumers means that they get worse service. Society is too focused on stopping the bad firms that it blocks the good firms from overtaking them.

September 27, 2010 / David Woodford

The inefficiency in buying a present

It is traditional that at times like christmas you buy the people you are close to a present and they buy you one. Usually (unless one person earns a much larger income than the other) the presents are of roughly the same value. This means that the net effect of buying the present is that each person spends an amount, say £10, and receives a good which can be bought for that amount.

The way the free market is supposed to work is that if you would be willing to spend an amount on a good which exceeds the amount someone else, eg a shop, is willing to sell it to you for then you should swap your money for the good; and if it isn’t then you don’t. So far it all makes sense. However, when presents comes into the matter things get complicated. This is because the person has to try to guess what the other person would choose to spend the money on. In general they aren’t as good at guessing what the receiving person wants as the person who is actually receiving and hence the value for money isn’t maximised.

So people would be better off allowing the other person to choose their own present, or using some form of proxy such as a gift card. This enables the other person to find the best consumer good or service they can for the money being spent on the gift, so maximises the efficiency of giving gifts.

However buying gifts, even when the other person is allowed to choose them, won’t be as efficient as keeping the money yourself. Allowing someone to choose their own gift maximises the value for money but it doesn’t mean they think the gift is worth the money that is spent on it. How do we know this? Because if they do value the gift bought more than the money required to buy it, they would have bought it for themselves already (since they have the money as they are giving the other person the same amount). When you are allowing the other person to choose a gift you are still denying them the option of keeping the money in their bank account, paying off debts or using it as part of a larger transaction.

So the best way of buying someone a gift is to simply give them the money. Which is fine except that if you are both “buying” each other gifts of equal value this means you exchange equivalent sums of money and there is no net effect. That is you haven’t actually exchanged anything.

People may then argue that spending time buying someone a present and actually giving it to them means that giving someone a present has more value than that of the present itself as it demonstrates how much you like them. This may be true but it’s still pointless. The fact you’ve spent an afternoon looking for a present for me shows how much you value me in terms of your time but I don’t actually benefit from it. It would be better to show me how much you value me in terms of your time by doing something that actually benefits me, such as spending that time with me. It is also by convention that we feel we get benefits from giving and receiving presents. If we change our conventions then these wouldn’t matter.

You should also consider whether the value of giving someone the present makes up for the loss involved in them not spending the money themselves.

Of course we will never stop giving presents because stopping only has a net benefit if we all stop together; otherwise people just look selfish when they take a present but don’t give one. It’s a strange example of doing something to help society (being your group of friends) which if done on your own benefits only you and hence makes you look as if you don’t care about anyone else. Ironic.