But it's a short-sighted policy, I am sure. Hong Kong has made its reputation as a meeting place of different cultures. Singapore by contrast makes its diversity an active statement of policy. Hong Kong will lose the electricity that is generated by different ideas and cultures coming together.

There is little overt regulation of business, but despite this, HK is by no means a free-market paradise. Many sectors of the economy are controlled, it seems, through a few oligopolists, particularly the property sector, which is so important here. (I remember many years ago being told that the Royal Bank of Scotland building in Hong Kong was worth more than the rest of the Bank put together. It's that sort of a place.) But of course development land is only made available in big tranches, so that only a few developers can afford to tackle it.

Likewise, the Jockey Club is huge. It's not the genteel group we have in the UK. It's a huge gambling monopoly. It fundamentally runs its own welfare system, which is one reason why taxes can be kept so low.

Health is particularly non-free-market. The hospital sector is 90% government, but primary care is nominally free. In fact, of course, that's how all the doctors make their money, because it isn't. It's hugely regulated (and many of the ruling folk in Hong Kong are doctors, so you know what that means), and doctors from abroad are not welcome, which reduces competition, and so on.

Nor is the rule of law by any means complete. People say that it's a fairly relaxed place until you annoy someone with power, and then you find your business has no electricity and you're done for.

Still, despite all this, most business sectors are left pretty much alone to get on with the job of making profits. Which is maybe why it looks like a free-market paradise, even though in important ways it isn't. It's remarkable how resilient the market is. As China unleashes more and more market activity, it doesn't know what's going to hit it.

As Bill Thomson, formerly VP of Asian Development Bank and now an adviser to Franklin Templeton International, said in a personal response:

“Of course, these discussions avoid the wider discussion of what inflation is and how it should be measured. The measures have changed dramatically over time and vary widely from country to country. The US CPI is especially vulnerable to the charge of being a politically charged figure. Since the CPI has major budgetary implications, in that many expensive government programs (including social security) are indexed to it, the government has a vested interest in holding inflation adjustments down”

Some market observers believe that the CPI may understate the true level of the US by as much as 5 percentage points.

More generally what is the point of this elaborate game in which a Central Bank with some independence is charged with meeting a target which keeps being changed by a Government preoccupied with short term politics? In Britain the Treasury is in constant conflict with the ONS on issues of measurement. Allowances may be made for increasing quality of items in the CPI (such as computers) of little interest those who use them as typewriters.

Anatole Kaletsky highlighted this in the Times:

the Federal Reserve Board strips energy prices out of its calculations of core inflation. Thus there is no risk that US monetary policy might be damagingly tightened by over-zealous central bankers in a panic response to soaring oil prices.

and

Although the European Central Bank suggested last week that it did not see an inflationary threat from temporary shortages of oil, it continues to include energy prices in its main indicators of inflation, leaving its monetary policy hostage to shocks such as Hurricane Katrina.

Is EU macroeconomic policy in a mess or what? Probably, but perhaps no more than the EU is already in.

Something is rustling in the long grasses of Europe. It is called miscanthus, a variety of elephant grass which is being tested as a possible 'green' way of producing energy. One of its features is that it achieves high yields on little fertilizer. BBC science reporter Jonathan Amos reports from the Dublin conference at which it was announced.

Burning biomass is broadly neutral in terms of its emissions of carbon dioxide, the major gas thought responsible for warming the planet. "As the plant grows it is drawing carbon dioxide out of the air," explained Professor Steve Long, from the University of Illinois. "When you burn it, you put that carbon dioxide back, so the net effect on atmospheric CO2 is zero.

The plant itself, at 4m (about 13 ft) high is being tested in varieties yielding 60 tonnes of dry material per hectare, five times today's typical yield. Prof Mike Jones told the British Association's Festival of Science that, grown on 10 percent of Europe’s useful land, it could generate 9 percent of Europe’s electricity.

These are big numbers. They may be above the best which can be realistically expected from wind farms at current progress, and provide yet another example of the ingenuity which is going into developing new energy sources. Currently high oil prices will provide a real boost to this type of research, encouraging us to find alternatives far more readily than any inter-governmental diktats or NGO exhortations.

True, it doesn't make us live more simply: if it works it simply gives us a renewable source of electricity. Europe at present grows many crops which are environmental unfriendly and unpleasant because of the fertilizers and pesticides they need. CAP subsidies and tariffs mean that this activity denies poorer countries the ability to gain wealth by selling us their crops. So roll on miscanthus. It even looks quite pretty, too.

Part of the problem is that China is a land of regions, some creating wealth, and some holding progress back. Consider: 3% of China's landmass accounts of 75% of its exports. And that landmass is Hong Kong and the Guangdong Province around it.

Hong Kong Economist Michael Enright tells me that this success is due to the happy juxtaposition of management and knowledge talent in Hong Kong and cheap manufacturing just over the border in Guangdong. The 'made in Hong Kong' stickers have been replaced by 'made in China' stickers. But the management, marketing, logistics, product sourcing and other parts of the chain all come from Hong Kong, whose knowledge workers have risen from 21% of the workforce in 1981 to over 50% today on the strength of this.

Hong Kong expertise is now having and important effect on China. They're sending delegations over all the time to see how things should be done. Meanwhile, China's agriculture and urban housing are now reformed, giving people an asset they can borrow against to set up new businesses. About 300-500m people will move from the farms to the towns as the economy matures. Better transport (highways now link all the big cities) will erode inter-regional protectionism, creating the world's biggest free trading bloc.

Sure, they still have to sort out their banking sector - the state banks are full of rotten loans, made to community enterprises as a politically expedient move rather than business sense. And Chinese businesses can fold up and disappear overnight, so they are hard for bankers to deal with. But things are happening on all those scores.

They're being cautious, but if they can do it, the financial expertise of Hong Kong will no doubt be in there like a shot. Then we'll really see some fireworks.

This summer's buzz is "flat tax", the proposition that matters fiscal would be dramatically simplified if we all paid a single rate on all the income we earned.

Well, no. No one, and most especially not the ASI, is proposing that all income should be subject to one tax rate.

But the basic case for progressivity remains the one made by that celebrated socialist Adam Smith, who said taxes should be based on equality of sacrifice. The extra income earned by a rich person is simply worth less than the extra pound in a poor household. Which is why a flat tax was, and is now, evidently unfair.

To get round this fundamental objection, flat taxers start talking about allowances. A recent pamphlet from the Adam Smith Institute reserved a flat tax for incomes above £12,000, which would exempt a fifth of all households from paying any tax at all.

Ah, he noticed.

But that would involve a huge loss of government revenue, £50bn or so - two-thirds of the cost of the NHS.

Which rather begs the question, what on earth are they doing with the other 450 billion? What’s being missed here is that having a large personal allowance is actually driven by a belief in egalitarianism of a kind. The poor should not be taxed to provide for the State, the rich should. If we cannot get enough from the rich to pay for all of the things desired from that State, perhaps we should change the things we ask the state to do rather than steal the crusts from the mouths of poor children? The idea that we should be taxing the poor to pay for the desires of the middle classes strikes me as profoundly inegalitarian.

So the flat taxers then deploy the Laffer curve (a back-of-the-envelope job from Arthur Laffer, an economist much lauded in the Reagan White House) and claim that cutting taxes will make us all work harder, earn more and - eventually - boost the Treasury's take. Eventually is a long time in politics and, surprise, in the meantime, public spending would have to be cut.

It was a napkin not an envelope, but to deride the Laffer Curve in this manner is obtuse. We’ve known of the existence of this curve since David Hume. The argument is always about where exactly on the curve we are. Are taxes so high that they cripple incentives and thus reduce total revenues? Or are we to the left of the curve, where taxes can be raised and the damage to incentives so small that revenues do rise? That's an empirical question, not an ideological one (we might also note that lowering top income tax rates from 83% and 98% on unearned income certainly seemed to show that we were to the right of the curve a couple of decades ago).

The Adam Smith Institute proposal is that tax is paid at 22% on income over £12,000. On the basis of a single such £12,000 allowance to each household, affluent households do well, but it could be that not everyone is as better off as the top fifth of households.

This is really quite remarkable. Yes, everyone is better off. But because some will be more better off than others the idea must be rejected? There is one further line that has me gasping with incredulity:

These days, everyone approves of incentives.

Does he mean that, finally, we’ve managed to teach everyone the first of Glenn Whitman's Two Things about Economics?

“You know, the Two Things. For every subject, there are really only two things you really need to know. Everything else is the application of those two things, or just not important.”

“Oh,” I said. “Okay, here are the Two Things about economics. One: Incentives matter. Two: There’s no such thing as a free lunch.”

The education system seems to be in better shape than I'd thought. There is also a much larger point to be made here. Walker is assuming that a flat tax will increase inequality and thus must be opposed on those grounds. As pointed out at the excellent Stumbling and Mumbling this is not necessarily true as this Spanish paper (pdf) shows:

Of course, the Spanish tax system is different to ours, so the results don't translate directly to the UK. But there are lessons in the paper: 1. It describes how we should set about analyzing the issue. 2.It disposes of two common arguments against a flat tax - that it is necessarily inegalitarian and is only applicable to post-communist economies rather than maturer capitalist ones. 3. It shows that there is a potential trade-off between efficiency gains and equality. To maximize efficiency gains, a flat tax should have low marginal tax rates. But that means low allowances, which is more regressive than the current system. A more egalitarian flat tax would have bigger allowances which means higher marginal tax rates. But this reduces the efficiency gains. However, Gonzales and Pijoan-Mas show that the current Spanish tax system is sufficiently bad that it's possible to increase both equality and efficiency, and this trade-off merely applies to how we apportion the gains.

Which rather goes to show the point made up above, that the ASI proposal is in fact driven by (at least in part) a desire for equality as it does precisely what is suggested, provides a high allowance, thus meaning higher marginal tax rates and thus, arguably, being more progressive than the current system.
Walker's real fear is this:

However, flat tax isn't really about tax at all. It's about spending. Look at the idea's provenance: the Hoover and Adam Smith Institutes. Their game is cutting government.

A slightly odd statement given that, within the assumptions of the plan itself, it is revenue neutral.

Back to everyday politics in the Blair third term - how to convince people public services, paid for by progressive taxes, are a necessary, irreplaceable part of their "income".

And that, unfortunately, is his real point. Nothing at all to do with how the money is raised, all to do with how it is spent. Nothing must be allowed to disturb the cosy system whereby we the citizens get what we are given by our enlightened bureaucracy in this most perfect of all possible worlds.

David Walker edits Public, the Guardian's monthly magazine for public-sector executives.

Well, yes, I suppose if I had that job I'd have to try and convince myself of that as well.

(Tim Worstall writes here).

the US, a powerful economy with annual output worth over $11 trillion (£6 trillion), growing at 3 to 4 per cent, locked through free trade and deregulated financial markets into a global economy that produces at a $50 trillion annual rate, will hardly miss a beat from the $50 billion losses estimated along the Gulf Coast.

There will be a slowdown caused by the drop in production and consumption in the area, but this will soon be regained by faster growth. There will be a surge in spending on construction and on flood defences, and the US deficit might rise a little. Lost oil production will be offset to some degree by the release of international reserves, and since energy prices are not part of the US core inflation index, they need not change monetary policy.

Why does Kaletsky see danger for Europe? Some of it lies with the central bank. Energy is included in their inflation measure, so higher oil prices will make interest rate cuts less likely. And Kaletsky sees the eurozone as finely balanced between a fall back into recession and a fragile recovery. The impact of higher oil prices and a fall in consumer confidence might tip the balance downwards.

A eurozone recovery depends to some extent on their embrace of more economic flexibility and freer labour markets, prompted by the election of Merkel in Germany, and, later, of Sarkozy in France. Kaletsky suggests that the hurricane and its disorderly aftermath might even influence those elections. What the eurozone seems unable to grasp is that the necessary reforms are most likely to occur in a growing economy with active monetary management, as was true of 1980s Britain. When individual members of the zone lack monetary autonomy, they lack one of the ingredients of successful reform. Katrina, from which the US should recover with scarcely a flicker, could undermine the fragile recovery which some see in the eurozone countries.

These are Hong Kong's domestic servants. Anyone on a reasonable income can hire them, their minimum wage is 3200 Hong Kong dollars (divide by 13 to get UK pounds): some people, particularly the expatriates, pay more, but a number of people work out ways of paying less. And they have to have certain facilities like a room for themselves.

And they get Sunday off. So they congregate in their thousands in the streets of Central, squatting on the pavement, gossiping, and swapping photos of friends and family back home. The Western Union office does a fantastic trade as they all line up to send money home. The apparently modest income of a Hong Kong helper can support most of a family back home, in fact. So it's regarded as a great deal all round.

In the UK, by contrast, we seem to do our best to stop people hiring domestic help. Hire anyone in the UK and there is a mountain of paperwork to process. Try to bring a worker in from a poor country, especially a female one, and you ask the impossible. Pay less than 10,000 pounds a year and you're put in jail. So a simple way in which British families could improve their lives a bit, getting someone in to look after the kids, go shopping, clean the house, is closed off. And poor families in other countries stay poor. Isn't it time we opened up a bit, and made our aid to poor countries real and personal?

The new plan is to set maximum charges and then let the market sort it out. It is believed that the maximum - not just on mobiles but on long-distance and other calls - will fall as competition drives prices down.

Other daft arrangements - such as the fact that, under the present order, both sending and receiving parties on a mobile phone get charged for the call - seem likely to go.

Good to see the PRC welcoming competition. Pity our regulators in the UK are not as laid back. The original idea of UK regulation was indeed to set price caps and then let the market sort it out. But our regulators have delved into, and regulated, so much of the mobile phone business that it is hardly a market at all. Folk here say that China will overtake the UK as the world's fourth largest economy by 2010, and if they do more of this free market stuff, they will probably make it.

China's market regulator gave the green light for companies listed on the Shanghai and Shenzen stock markets to convert their government stakes, held in non-tradable "legal person" form, into normal publicly tradable shares. At the same time, regulators instructed listed companies to move ahead with plans to buy out government stakes or put them on the market.

They have one advantage over us. In 1970s and early 80s Britain we did not know if there was enough money around to buy the shares we were selling. The Chinese do, with an estimated $1.6 trillion stashed away in private hands. The question now is whether they can persuade investors that the reform of their banking sector and securities laws will proceed on track to lure savers to make the commitment.

But since hitting its low on 11 July, the Shanghai exchange has rebounded 17%, indicating that the shareholding public are beginning to believe the government will reform the market.

At a time when Brussels bureaucrats and regulators are constantly trying to tighten their grip on European economies, it is refreshing to see the Chinese embark on so bold a step and so large a programme. The odds are very high that the Chinese approach will create more wealth for their country, whereas the Brussels approach will only limit growth and curb the wealth-creating process.

James K. Glassman says [Canada’s National Post, September 02, 2005 ] that one of the first out of the traps was, "Sir David King, the British government's Chief Scientific Advisor [who] warned that global warming may be responsible for the devastation reaped by Hurricane Katrina." The New York Times, says: "Because hurricanes form over warm ocean water it is easy to assume that the recent rise in their number and ferocity [sic] is because of global warming."

But scientists say the severity of hurricane seasons changes with cycles of temperatures of several decades in the Atlantic Ocean.” The recent onslaught "is very much natural," said William M. Gray, Professor of atmospheric science at Colorado State University.

What about frequency, though? The web site of the National Hurricane Center tells us that:

Giant hurricanes are rare - and they are not increasing. To the contrary. The peak for major hurricanes (categories 3, 4, 5) came in the decades of the 1930s, 1940s and 1950s, when such storms averaged nine per year. In the 1960s, there were six such storms; in the 1970s, four; in the 1980s, five; in the 1990s, five; and in 2001-04, there were three. Category 4 and 5 storms were also more prevalent in the past than they are now. As for Category 5 storms, there have been only three since the 1850s: in the decades of the 1930s, 1960s and 1990s.

The science of sea temperature and level is still evolving, and scientists have long pointed to a disparity that showed the atmosphere's lowest layer, the troposphere, had not warmed as much as the surface - contrary to greenhouse theory and model results. Dr Roy Spencer (U of Alabama) tells us:

This discrepancy between the UAH satellite LT trends and the surface thermometer trends has caused some consternation, since atmospheric physics suggests that sustained warming at the surface should be amplified with height in the troposphere, not reduced.

Hurricane Katrina has been a terrible tragedy, and may teach us to be better prepared for what nature throws our way. But to suggest it is man-made looks only like an attempt by interested parties to use it to their advantage.

It started when the reformist David Oddsson became prime minister in 1991. Taxes and inflation were high, and two of the three banks were state-owned and sluggish. He pulled the government out of commercial banking, with the result that Iceland now has 3 of the top 15 Nordic banks. He also went for flexible labour markets and lower taxes.

Big falls in company taxation were another key step. Capital gains tax is now 10%. Corporate taxes went from 30% to 18%, and asset taxes were filleted. Suddenly, businesses looked profitable again. Income tax is still high, but the 4% supertax looks to be on the way out, as does inheritance tax. The rate cut in corporate taxes actually resulted in larger revenues.

The privatization and deregulation of Telecoms has seen competition rise and prices fall, but other industries are surging ahead, and even fishing has been transformed by the introduction of tradable quotas to combat stock depletion.

Iceland has such abundant cheap energy in the form of geothermal and hydro-electric power that Alcoa ships ore there to be processed into Aluminium. There are plans to export that cheap power via an undersea pipeline to Europe. The country is a testament to what a determined people can do once governments step aside and give them the space to do it in.

Iceland is booming. This little economic powerhouse boasts a per-capita income higher than the UK, France, Germany, Austria – higher than nearly all European Union (EU) countries.

There are cranes everywhere, with new factories and apartments going up. One has the sense of a country on the move, an old country, but with a young and dynamic population determined to take it into the big league.