Adam Smith Institute

I was a guest on BBC 1 West's Politics Show yesterday, discussing post office closures and housing development - both emotive issues in the West Country, I imagine.

Post office closures were first up. I argued that we needed to put aside emotional attachments to the post office and put things in context. Firstly, 95 percent of people will still be within one mile of a post office after the closures. Secondly, the only reason the post offices are being closed is because not enough people use them - despite taxpayer subsidies to the tune of £150m a year, the post office network still loses more than £100m per annum. If people want to save their post office they should spend more money there, not expect the taxpayer to keep an uneconomic business going. In any case, the services provided by post office counters can easily be offered in more cost-effective ways. The mail functions could provided by other shops - just as you can buy a lottery ticket anywhere, why shouldn't you be able to pay for postage? Bills can be paid over the phone or online, and pensions and benefits can almost always be paid directly into people's bank accounts. Where they cannot, it would be much cheaper to send 'mobile post offices' out to rural areas on a regular basis, rather than keep the post offices open.

In the second half of the show we talked about the planning system. I was asked whether I agreed with the government's new target for house building. My reply was that the very fact the government has a housing target is the problem. Development should be led by demand, and not government dictat. Certainly, areas of outstanding natural beauty can be protected, but that still leaves plenty of space for development in the UK. More than 90 percent of the population currently lives on just 8 percent of the land. The only reason it feels cramped is that the government artificially restricts the supply of land, and then imposes density requirements on the land that is available. This also explains much of the objection to new development - government regulations often prevent developers from building houses in a way that 'fits in' (precisely the opposite of what the planning system was meant to achieve). The truth is that government cannot plan land-use any better than it can plan the rest of the economy, and the sooner it gives up trying the better. That wouldn't mean a free-for-all, as most people assume: Bath and Edinburgh were both privately planned cities, and they are much more attractive than anything the government has ever managed. 

You can watch the show here via the BBC website.

"A Nevada brothel is encouraging its customers to give their tips to the Ron Paul campaign. How did this endorsement deal slip by Bill Clinton? He must be getting old."

– Jay Leno

Economists and politicians: sadly, while the economists might have some pretty good ideas, the politicians, well, no one actually knows.

Then again, some politicians seem to have sensible ideas, it's the rest of their party that holds them back. 

Just what is the optimal size for a firm or organisation? Sadly, no one knows except ex-post: which is why having politicians trying to determine it won't work. 

So this saving the planet stuff: how's it going to work when one EU insistence on energy meets another on the environment? 

Was the rise in tax revenues in the 1920s a Laffer Curve event? 

A shout out to one of our blogging friends : cancer is treatable but pimples where? Ouch! Get well soon! 

And finally, perhaps not the best part of the world to be getting advice from on these two problems. 

By now everyone and their dog has heard about Jerome and the €4.9 billion he lost his employers by playing around with equity derivatives. A decent explanation of the machinations is here. The Daily Mash is (as ever) slightly over the top in ascribing it all to his working (quelle horreur) more than 30 hours a week but even The Guardian notes that he didn't take a single day's holiday in eight months!

But there's one very important point that I haven't seen mentioned anywhere else, a by product of the fact that he lost the money in equity derivatives. That point is that over the system as a whole, there has been no net loss at all. To understand this Willem Buiter's concept of "inside instruments " is very useful. 

Another way of putting this is that derivatives trading is a zero sum game. Risk gets shuffled around (a good thing) but at the system level, rather than that of the individual company or trader, no money is made or lost.

For with each and every one of the contracts that Kerviel made there was a counter-party. If we ignore the trivial sums paid to the marketplaces and clearing houses, each and every euro that he lost on said contracts was made by said counter-party.

This obviously isn't going to be of much comfort to Societe Generale and its shareholders, just as much as it will be a comfort to those who now have that €4.9 billion. But no wealth or money was "lost" in this case: rather, it was transferred.

The competence of this government has been put into question once again over the ongoing capital gains tax fiasco. The latest concession in offering "entrepreneurs’ relief" is just another example of how out of touch the government with the business community. Richard Lambert, director-general of the CBI employers' body, stated that the new relief would "do nothing to help the real business powerhouses of this country":

[The] real wealth and job creators of the UK's economy ... will be seriously clobbered. The bottom line is that the reaction of the UK government, in the face of an economic slowdown, has been to slap on a major tax hike of £700m. This will have a damaging effect on job creation, investment and savings at exactly the wrong time in the economic cycle.

The most apposite dissection of Brown and Darling comes from Mark Constantine, founder of the Lush chain, in simply pointing out that: "If I ran my business like that, I would get the sack."

All of which is true. Outside the Treasury, we all know that taxes have dynamic effects because they affect incentives. What is less commonly realized, however, is that the greatest dynamic effects are attached to taxes on capital gains and dividends. Raise these taxes and you discourage investment, damaging the economy. Cut them, on the other hand, and you can boost the economy (and ultimately collect more revenue too) – just what is needed in the midst of an economic slowdown. But what does the government do? It raises the tax by £900 million (now £700 million), in a misguided attempt to fill the Treasury's pockets.

Of course, there's nothing wrong with having a flat tax on capital gains. How about we start with ten percent, and then see if we can beat them down to zero?

18. "Positive discrimination is needed to make good to minorities the effects of past exploitation or discrimination."

This is the crux of the case for 'affirmative action.' But to discriminate in favour of some groups has to involve unfairly discriminating against others. Although it is called "positive discrimination," it still means giving positions and jobs to those less qualified than other applicants. Since no one alleges that the other applicants have personally committed discrimination, they are being treated unfairly. This practice pigeon-holes people into ethnic and minority boxes, rather than treating them on their individual merits.

Given open access in university applications, some groups seem to gain more places than their proportion of society would suggest; maybe their culture values education and study more than others do. To allow others entry on lower qualifications discriminates against them. If people are to be discriminated against because of something done by a group their ancestors might have belonged to, there are no limits, nor any indication as to how far back this should go. To the Romans, perhaps?

What is needed is not positive discrimination, with its unsavoury flavour of racial classification and quotas, but open opportunity for people of all groups. Instead of giving preferred places to those whose race, sex, sexual or religious preference have been discriminated against in the past, we should be making sure that we extend to all the choices and the opportunities which were more restricted in previous times. We should be creating an open society, not one where advancement depends on membership of whatever minority groups are sufficiently powerful or fashionable to command preference.

Positive discrimination perpetuates racism and dignifies it with legal claims, whereas the open society overwhelms it by being blind to a person's background. It should matter more where a person is going, rather than where they came from. It should be individual merit, not ethnic quota, which determines advancement.

"The great virtue of a free market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another."

– Milton Friedman

Could Guido really be a Tory in disguise? No is the answer, rather, an artful user of ill-protected computer systems. Further, Private Eye has for decades had a phrase to describe this problem. "New technology baffles pissed old hack" although Netsmith would like to point out that he possess absolutely no knowledge whatsoever of the unitary alcohol intake of Mr. Kirkup: nor, indeed, of his age.

Just in case you think it's only our own domestic politicians that place inane curbs on liberty. It might even be that the Martini (or even vermouth itself, port and so on) are illegal under the same law. 

It's very difficult to find a word that describes this better than extortion.

More on those unintended consequences. Expanding the guarantees given to part of the US mortgage market could make all mortgages more expensive. 

Explaining changes in income inequality. 

Could it be that certain BBC journalists are a tad baised? Or is it simply that they're not all that well informed? 

And finally, yes, incentives matter. 

17. "We should allow the police to hold suspected terrorists for a long period while the evidence is assembled."

When the law holds people in custody it has them as prisoners. Since they have not been before a court and convicted of a crime, we must be careful that this custody does not constitute a sentence without trial. If the authorities can hold people indefinitely to question them and gather evidence, they will not need a trial to sustain what is, in effect, a prison sentence. This is why the law forbids them to do so for long periods. They are required to produce the accused in person before a court of law. It is called habeas corpus and is one of the cornerstones of our liberties. The law cannot hold us incommunicado; it must produce us in the body.

The period is short, typically 48 hours, and can be briefly extended only by asking the permission of a magistrate. This cannot be repeated indefinitely; at some point the accused must either be released or charged and go to trial.

Government has attempted to extend this period of confinement to many weeks in cases of suspected terrorist crimes, but produced no good reasons to support its case. Neither Parliament nor people were told why so long a period was deemed useful or necessary.

The problem is that when police are given powers, they have used them for cases they were never intended to cover. US laws designed to stop mafia-style racketeering have been routinely used on business transgressions. A UK anti-terrorist law enabled police to detain an 80 year-old who dared heckle a government minister, and a Scottish pedestrian who walked along what was marked as a cycle track.

The law which prevents long confinement without trial is important for our liberties. Nothing has emerged to suggest that it should be over-ridden when the police wish it to be.

Now that he's gambled £55bn of the taxpayers' money on Northern Rock, you would have thought that Gordon Brown's record for economic competence would be well and truly buried. After all, the defective regulation he put in place was responsible for the first run on a British bank for 100 years, and many economists are now forecasting a recession. Yet Brown blames all this on international trends and seems to get away with it. People may not think much of him as a prime minister, but they still believe he did a good job as chancellor. The reality is very different:

• The period of low inflation that he likes to take sole credit for was common to most economies around the world, thanks to a growing India and China churning out cheap consumer goods. Low interest rates meant credit was cheap, and that fuelled economic growth. However, it also created a mountain of debt and produced the house price bubble that now looks set to crash.
• In any event, according to OECD figures, the UK has experienced slower growth than most developed economies since 1997. Britain has actually been the slowest growing economy in the English-speaking world.
• Despite fifteen years of economic growth, the UK's budget deficit is more than 3 percent of GDP – a result of Brown's inexcusable profligacy. At this point in the economic cycle we should have a surplus. At the end of 2007, public sector debt stood at £536.5bn, or 37.7 percent of GDP. And that excludes the £48bn buried off the books in private finance initiative deals.
• Public spending now stands at 44.7 percent of GDP – higher than Germany – but there has been no commensurate improvement in public services. The Taxpayers' Alliance recently identified £101bn of waste in the public sector.
• While other countries were cutting taxes to boost their competitiveness, Brown was raising ours. When he became chancellor Tax Freedom Day (the day when we stop working for the Treasury and start working for ourselves) was May 27. Now it's June 1. That's why the average family's monthly disposable income has fallen from £899 to £838 over the last four years.
• Brown's infamous pensions raid cost savers more than £100bn and destroyed the best private pension system in Europe. Just what we needed with a demographic time bomb on the horizon.
• Five years ago Brown sold the UK's gold reserves at $275 an ounce – a 20-year low. Now bullion is worth more than $900 an ounce. His mistake has cost the UK £3bn – as much as Black Wednesday.

The list goes on and on. Brown's 'economic miracle' is really just an economic mirage. History will judge him harshly.

In a recent article in the Sunday Times property section, Phil Spencer called for the barricades to be stormed. He took great offence (no pun intended) to the fact that communities were erecting security fences and creating their own private, secluded worlds seemingly cut off from the real world that you, he and I inhabit. What he fails to understand is one of the deep psychological underpinnings of human nature: the need to surround yourself with those of a similar mentality, especially with regard to such things as property, trust and respect. Some people feel the need to wall themselves off from the threats that the wider community now carries, and in a free sociey, why shouldn’t they?

Mr Spencer claims that these gated communities separate rich from poor, cut off once publicly accessible roads and undermine law and order. But the reason for cutting off these roads to public access is that many people are failing to respect the private property and the lives of others, while the state is failing in its primary duty to provide security and administer justice. Unable to rely on traditional institutions, the residents of gated communities choose to protect their personal domain in other ways.

Throughout our lives we consciously erect barriers to others based on previous experiences and similarly exhibited character traits. We do so to protect ourselves from wider harm, trusting those with an equivalent outlook. Attempting to create a free, respectful and trustworthy society of individuals through political interference steeped in the ideas of political correctness and multiculturalism has failed. The gated communities are the burgeoning pockets of resistance, the resting place of decent civil society free from the cloying fingers of statism. Society would be stronger now if political interference over the past 50 years had not been so pervasive.

A young brunette went into the doctor's office and told him that her body hurt wherever she touched it.
"Impossible," said the doctor. "Show me."
She took her finger and pushed on her elbow and screamed in agony. She then pushed on her knee and screamed, pushed on her ankle and screamed, and so on. No matter where she touched, her agony was apparent.
After some thought, the doctor said "You're not really a brunette, are you? You're really a blonde".
She sheepishly admitted that indeed, she was a blonde.
"I thought so," said the doctor. "Your finger is broken."

This post contains the speech that Alistair Darling should have given. Think how his popularity would have risen if he had told the simple, plain, unadorned truth?

As neat an explanation of the Law of Unintended Consequences as you are likely to see. Further discussion and what it means for policy decisions here.

For example, taxes don't stay where they're put. 

Was that huge Soc Gen loss really caused simply by a rogue trader? 

Why Bill Gates' speech at Davos wasn't just simplistic, but wrong. Wrong in analysis and wrong in suggestions for policy. 

So why is the US Government trying to offer everyone a payday loan?

And finally, why the Morning Star headlines get reviewed on the telly and  which would you prefer with your New Statesman subscription? The Chavez t-shirt or the Fidel book? 

16. "Equality is more important than freedom."

No. Freedom is more important. It is not a value which competes with others, but the source and condition of all values. Freedom gives people the chance to express themselves and their individuality. It is what makes them human. Animals can be cared for, fed and sheltered. Human beings are not pets or domestic livestock to be protected. They make moral decisions and act on them. They face the consequences of their actions and acquire responsibility and moral growth. All of this requires freedom.

People are not equal and never will be. Life would be dull if they were. They differ in strength, size and intellectual power. They differ in looks and in character. They differ in talent, and in athletic prowess and musical ability. They differ in the value of the services they can render to their fellow humans. If we pay them equally for services of unequal value, we lose the signals which tell people where to direct their efforts.

We can and should choose to make people equal before the law, and to say that they should all be treated equally by it. This expresses not a fact of life, but a determination on our part to create a just society and to respect the rights of all who respect the rights of others. The law looks at the criminal abuse of people's rights, rather than at the criminal, and prohibits it no matter who does it.

Some point to what they claim is a trade-off between people's freedom to live as they wish and their health and well-being. This is completely false, for without freedom there is nothing to trade. We might choose immediate pleasure at risk of long-term consequences, but that is not a choice between freedom and other things; it is a choice only made possible by freedom. Without that choice we are no longer autonomous beings.

The EU Commission has decided to increase the use of biofuels as part of Wednesday's €60 billion (0.5 percent of Europe’s GDP) plan to 'save the world'. The goal is that biofuels will account for 10 percent of all European energy needs by the year 2020.

Given the extensive bad press that biofuels have recived, this decision makes little sense. The environmental damage of biofuels is fast becoming clear. It often takes more energy to create biofuels than they produce – which means they create more emissions than they replace. They are also inefficient: the crops needed to fill the tank of a 4x4 with biofuels could feed someone for a year. Perhaps most importantly, biofuel production drives up food prices, worsening the plight of the world's poor.

The intransigence of the Commission in continuing to support biofuels in the face of the criticism is testament to its continued attachment to the European farm lobby, and its failure of it to engage with the outside realities of the world. This "Fortress Europe" mentality is also refelcted in its protectionist decision to inhibit the likely response of industries wishing to move out of Europe to avoid excessive EU regulations.

In sum, the Commission’s plan consists of limiting the opportunities for people in poor countries to work their way out of poverty, whilst continuing to undermine the possibility of Europe benefiting from free trade with them. Just as they are demonstrably damaging the environment they claim they are seeking to protect, the EU's member states are decreasing Europe’s economic potential through excessive taxation (thus making technological advances less likely). Saving the world? No, quite the opposite...