The mood passes

2319

the-mood-passes

Has Gordon Brown dithered himself out of office again? Last week there was a mood: SuperBrown had saved British finance, and shown the world how to do it. The public were beginning to think that he was the right person to have in charge in a crisis. And we're in a crisis. So a few people in Westminster were talking up the chance of an early election - mandate for a new world order sort of stuff.

This week the mood has gone. True, stock markets are recovering, and it's been a long time since we had a clear week without some government having to bail out some bank. But winter's coming, and a snap election at the end of November doesn't look so thrilling.

Unfortunately for Gordo, it won't get much better. The stock markets might be showing their relief that the whole world economy hasn't just collapsed into mush. But there's more bad news to come. House prices continue to fall, mortgages continue to be expensive (despite the government's guarantees on interbank lending). And with falling house prices comes falling consumer spending. People just don't feel as wealthy as they did six months ago and a year ago. Retailers are bracing themselves for a tough time, and unemployment is rising quickly. We're in for a winter of closures and generally bad news.

And of course, it's the economy, stupid. People think that Brown has had a good crisis, but they are now even less inclined to vote for him. And by the time of the next election window in May, the recession will have bitten and people will feel even poorer. October 2009, maybe? Well, things still won't be great. No, Brown will just hope that the green shoots of economic recovery will be popping through by May 2010. But by then he'll be down to the wire, and people don't like governments that hang on to the last possible moment.

What next for the Republicans (Part 2)?

2318

what-next-for-the-republicans-part-2

As I wrote last week, the forthcoming election season promises little in the way of good news for the US Republican Party. Chances are, once the dust has settled, they will be looking for a new direction to resurrect their tarnished brand. They could go populist, backing greater government intervention in the economy and focussing even more on ' traditional values' and social issues. They might go centrist, adopting something like David Cameron's liberal conservatism. Or they could go back to their roots, re-embracing the principles of liberty and small government.

Obvious personal preferences aside, there is a good electoral case for them pursuing the third strategy. According to Cato's polling research, the 'libertarian vote' represents between 10 and 20 percent of American voters – a group that is both large enough to swing elections and which has shifted away from Republicans and towards Democrats in recent years. Indeed, when you use the loosest definition, this 'libertarian vote' is even larger: some 44% of voters would describe themselves as "fiscally conservative and socially liberal".

Given the federal nature of US politics, any new movement in the Republican Party is likely to start in the states – which is why another Cato report, published this week, is so interesting. The Fiscal Policy Report Card on America's Governors ranks state governors on their tax, spending and borrowing records, giving them grades ranging from A to F. Two Republican governors got A grades: Charlie Crist of Florida, and Mark Sanford of South Carolina (who once brought live pigs into the state legislature in protest at pork-barrel spending). Both men were mentioned as potential vice-presidential candidates in 2008, and both may be ones to watch for 2012.

Blog Review 756

2322

blog-review-756

This financial market stuff: yes, we have been here before, if not quite at this level of panic.

This is of course a great time to become a regulator: the value of being someone who has put up barriers to market entry will be quite high.

The regulators and would be such are insisting that the CDS market must be regulated. Odd really, when it's the one credit market that has continued working, continued to be liquid.

Making the moral case for tax havens: Dan Mitchell rides again.

Thankfully, the credit crunch hasn't hit the real economy (at least, not yet).

Something lighter for the middle of the week. A clerihew contest.

And finally, The Orwell Prize is now open to bloggers.

Privatization: a public good

2317

privatization-a-public-good

Lord Mandleson, true to form, has upset Labour backbenchers by backing the partial privatization of Royal Mail. In an interview with the Financial Times, Mandleson has claimed that: "if I had not been forced to resign, it would have happened".

In Privatization: Reviving the Momentum – which we published earlier this year – Nigel Hawkins argues that the value of the public floatation could be in excess of £4 billion: tempting for a cash-strapped government. However, as Hawkins expounds in the same paper, Royal Mail will need to restructure its finances to reduce its long-standing pension fund deficit before the company is publicly floated.

Before action is taken we will have to wait for the soon-to-be-published review by Richard Hooper, the former communications regulator. Let’s hope he recommends the government push ahead with privatization. Of course, the privatization will necessarily result in some job loses, especially with the need to promote greater efficiencies in the sorting process. However, given that the Royal Mail is currently running at a loss, such efficiency savings (and resulting job losses) would have had to be introduced at some point anyway. The difference with privatization is that opening up of competition will enable Germany’s Deutsche Post and Holland’s TNT to step into the marketplace, which will raise standards and create jobs in the process. Staff will also benefit in their likely eligibility for Royal Mail shares.

Given the poor state of public finances, privatizations now appear increasingly attractive to the government (just as they did in the early 80s). It is a cost benefit analysis for the Labour Party: the undoubted gains to the exchequer could come at costs to the already precarious finances of the party. The Communications Workers’ Union this summer threatened to cut off funding to Labour if Royal Mail did not remain in public ownership. With tough times ahead, let’s hope Labour can prioritize the public good over their private benefit.

The right response to an economic downturn

2313

the-right-response-to-an-economic-downturn

Let's start with the wrong response: raising taxes and borrowing in order to spend money on government projects. Even if you accept the Keynesian argument that the government should 'prime the pump' with increased spending during a economic downturn (and I don't), the whole idea is predicated on counter-cyclical economic management – saving during the good times (increased taxes were meant to reduce demand, keeping down inflation) so that you have money to spend when things tighten up. Quite clearly, that is not what the current government has done: they've borrowed and spent beyond their means all through the boom years, and now intend to load us up with even more debt. More debt means higher taxes in future, and more money taken out of the productive (i.e. private) sector of the economy, to be spent in the unproductive (i.e. public) one. And that's not going to do a struggling economy any good at all.

A much better recipe for recovery would be to strictly control government spending and drive out government waste – that's what recessions do in the real economy; the public sector shouldn't be any different – while easing the burdens on business, strengthening the incentives for wealth creation, and putting money back into people's pockets. Here are some ideas politicians should be considering:

• Reduce the uniform business rate: For small businesses this can be a major problem since it is based on the rateable value of commercial premises, rather than ability to pay (i.e. profit).
• Eliminate employers' national insurance contributions: These 'contributions' are essentially just a tax on jobs – with unemployment on the rise it really makes sense for them to go.
• Stop the rise in the small business corporation tax rates: Following the last budget, the tax on small business profits has risen from 19 to 20%, and is set to rise another 2 points in 2009.
• Scrap the climate change levy: It doesn't do anything to combat climate change and it poses a significant burden on businesses – especially energy-intensive manufacturing ones that use a lot of electricity.
• Reduce the burden of business regulation: First, stop new burdens being introduced. Second, scale back existing burdens. Third, simplify administration to reduce costs.
• Get rid of stamp duty: This tax on share and property transactions makes little sense at the best of times, and less still when those markets are in trouble.
• Encourage private investment: Get rid of taxes on capital gains, dividends, inheritance and savings.
• Simplify and reduce corporation tax: Get rid of all the exemptions and complications – just have a single low rate on operating profit.
• Raise the personal allowance: Take low-earners out of the income tax net, and put more money in everyone's pocket.

Don’t make me laugh

2315

dont-make-me-laugh

According to Steve Richards of The Independent, "The reckless profligacy of Labour is a Tory myth" and "There's a version of events that ignores entirely the dire quality of life up to 2001."

Umm, yes... I had completely forgotten how we were all living in Dickensian poverty until that nice Mr Brown became fiscally incontinent and started spending like a footballer's wife on a shopping spree.

Thanks for 'reminding' me, Steve.

Blog Review 755

2321

blog-review-755

Is this really a proper use of public funds? That the Government subsidises a pressure group to conduct a survey which they pack with their own supporters to support an already decided upon policy being advanced by the Government?

It's true that not every financial innovation has turned out quite perfectly, but we are vastly better off as a result of the balance of financial innovation.

The costs of the current credit crisis are well within historical norms: and societies that lay themselves open to the risks of such crises do have higher long term growth rates than those that don't.

Examples of the huge differences over time of quite mild differences in growth rates in the short term.

Even Elmer Fudd gets most of it.

Why leaders aren't all that clever: because we wouldn't put up with it.

And finally, The English, the English, the English are best, we wouldn't give tuppence for all of the rest....who else would hand build a new steam engine?

Will they ever learn?

2309

will-they-ever-learn

While the British people are coming to terms with their own recent borrowing excesses, the government is doing quite the opposite in an attempt to stimulate the economy out of recession. Will they ever learn?

Based on the largely discredited theories of John Maynard Keynes, the government’s plan is for the government to fill the gap in the economy left by the now reticent private sector. Ignoring the fact that the ideas behind these policies are highly questionable, Keynes’ plan rests on the government acting countercyclically to the health of the economy: saving in the good times in order to spend in the bad times.

Due to Labour’s outrageous profligacy with taxpayer’s money and their loose borrowing since coming to power, the state of the public finances are well worth losing sleep over. Now is not the time to borrow more. They might as well be putting our taxes up, as we will be the ones to pay it back in the end. Brown and Darling are behaving in a fundamentally immoral way, inspired by political survival more than anthing else.

The reason for so much red on government’s balance sheets is simple: too much spending. Thus, government spending needs to be capped, only increasing in line with increases in inflation and population. If this had been in place in the good times, things would look very different now. The increased revenue could have been put away for a rainy day (now), or even better, returned to the taxpayer through tax cuts.

We might as well face up to the truth: they will never learn. It is so much easier to spend other people’s money. Thus, the only way to stop them spending is tie their hands behind their back. Now we just need a referendum on government spending…

Kyoto derailed by financial crisis

2310

kyoto-derailed-by-financial-crisis

I always wondered how environmental policies were able to escape the inevitable watering down in political horse-trading. For decades the over ambitious Kyoto targets for cutting carbon emissions have survived unblemished – thanks to powerful green lobbying. Yet finally this exception of the rule seems to be fading.

Firstly, many European countries, among them the United Kingdom, are trying to water down their Kyoto targets. They want to raise their allowance for offsetting emissions reductions under the Clean Development Mechanism (CDM) by purchasing carbon credits from developing countries from 30 percent to 50 percent. However, the CDM is already regarded as dodgy because some cheat with the technology transfer to developing countries, which earns them credit points under Kyoto. For it sometimes counts investments that would have been done anyway and are only relabeled under Kyoto, achieving no CO2 savings whatsoever. According to the BBC:

Various reports suggest that between 20 percent and 60 percent of CDM projects do not save additional CO2.

Secondly, a recent revolt against the Kyoto targets has emerged from eight European countries, led by Catholic Italy and Poland. It seems the global financial crisis, as The Times reported, may be achieving what sound arguments against poor efficiency of cap and trade de-carbonizing of our economy failed to do. The whole European climate change push seems now in disarray.

Plans for binding European legislation by December were dropped as the EU watered down the carbon dioxide blueprint that it had announced with a fanfare 18 months ago.

And it is unlikely that the rotating French EU presidency will be able to sort out the mess until before 1 January 2009 when one of the most outspoken opponents of Kyoto policies, Czech president Vaclav Klaus will take over Sarkozy’s job. Oh well...

A timely reminder...

2311

a-timely-reminder

Common Error 26: "Government must 'prime the pump' by stimulating demand through increased public spending."

Some urge that when the economy slows, and people are not spending or investing as much, government should step in with projects of its own to boost demand with public spending. In fact when government does this it destroys private sector jobs by taking away the resources which would have sustained them. Taxes are higher than they might otherwise be, leaving less to be invested in private business and to spend on its products.

Moreover, government uses those resources inefficiently. The administrative costs of sustaining each job are higher in the public sector, and the funds themselves are used less effectively. "Priming the pump" often means spending on infrastructure and civil engineering projects, all capital-intensive and less productive of jobs.

Even in labour-intensive areas, such as the public services, most of the extra money it puts in is swallowed up by increases in the public sector rate of inflation. It simply puts in more cash for public employees to bid for. This happened with the huge sums pumped into UK public services in the post-2000 budgets. All of the money was swallowed, but service improvements were not remotely commensurate with the enormous increases in spending. Indeed, some things became worse.

Private money goes where economic factors signal it should, but government cash follows political demands which are not as commercially viable or as sensible.

It takes a lot of money to sustain each public sector job. The private sector employs more people for the money. "Priming the pump" is a now discredited notion from Keynesian days. It creates a temporary and artificially high demand in certain sectors at the expense of others, followed thereafter by massive dislocation and unemployment when that artificial demand ceases. It tempts government to create artificial short-term 'booms' ahead of elections, with the consequences coming after they have been safely re-elected.

[This blog is part of a series of 101 'Common Errors' we published at the beginning of 2008. They were subsequently republished in book format as Freedom 101, which you can buy here]