Capitalism and Catholicism

2716

capitalism-and-catholicism

At a luxurious black-tie fundraising dinner this week, Cardinal Cormac Murphy O'Connor, head of the Catholic Church in England and Wales, pronounced that capitalism had been killed by the events of Autumn 2008 just as surely as communism had been killed by the events of August 1989. He should know better.

Churchmen should not pontificate about economics. What do they know about it? As much as I know about theology, probably, which is almost nothing. What they know about economics is what they read in the papers – not the business pages, but the headlines – and hear on the BBC. Most ordinary journalists have little grasp of how the great world economy actually works, and even those that do don't have the space or the time to explain its intricacies to listeners and readers. But politicians can shout louder than any economist, so the prevailing wisdom becomes what the politicians want us to believe, not what the economists know is true.

Right now the politicians want us to believe that it is capitalism, markets, bankers and all things business that have failed. In reality it is the politicians who have failed, and who have caused this crisis. They engineered a 20-year boom built on easy money. With credit cheap, we could all afford whatever we wanted – luxury goods, cars, holidays, houses at £400,000 and beyond. It was a great party. Now we're suffering the hangover.

The good Cardinal sees and worries about this hangover – people unemployed, families in despair. But these are not the effects of capitalism. They are the effects of its perversion by governments and their wild spending with no thought for tomorrow. Meanwhile, capitalism has at last begun to pull billions of people in India and China out of abject poverty – after decades of state socialism which did nothing for them. The Cardinal should be praising capitalism, and scourging those politicians who have managed it so badly.

Blog Review 833

2718

blog-review-833

It might be that medical research by private companies is not the best: but government research would face its own set of incentive problems too. Might even be worse.

Why is that so many people think the New Deal "worked" when at least half of economists think it didn't?

How the world has changed now that the political regime is about to.

So, can the US actually afford the Keynesian stimulus being talked of?

More evidence that the SEC really should have cottoned on to Madoff before he confessed.

If you'd like to understand what is really going on with Russia, the Ukraine and gas supplies....

And finally, it's curtains for curtains.

Regulation, the FSA and the Bank of England

2713

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Edmund Conway, writing in The Telegraph this week, says he thinks he's partly to blame for the recession. At an interview meeting at the Bank of England a couple of years ago, he saw some scary charts suggesting that the banks were lending far more then they had in their vaults. And that if a problem arose, they would have great difficulties covering the shortfall. Yes, he did report these worries at the time. But in hindsight, he says, he should have made far more of them.

But Edmund and his media colleagues aren't really to blame. The real culprit is Gordon Brown, who took banking regulation away from the Bank of England in 1997, and shipped it out East to the Financial Services Authority, in their Canary Wharf tombstone. The fact is that the Bank knew what was going on in the markets, while the FSA hadn't a clue. The Bank knew what the banks were doing, and which of them were coming in to borrow money to cover their short-term embarrassments. The FSA was more interested in making sure they all ticked boxes and treated their customers nicely.

So the real cause of the problem was that the Bank had all that information, and couldn't do anything about it. Apart from tell the FSA, which they did. But the FSA didn't do anything like enough to check out such problems and get the banks to balance their books.

Brown took banking regulation away from the Bank of England for the best of reasons. He thought it might conflict with the new power that he had given them, the power to set interest rates (and for giving them that power, he has been rightly applauded). But that was still a mistake.

Alexander Stoddart: Her Majesty's Sculptor in Ordinary in Scotland

2711

alexander-stoddart-her-majestys-sculptor-in-ordinary-in-scotland

At the end of 2008, Alexander Stoddart was given the prestigious title of ‘Her Majesty's Sculptor in Ordinary in Scotland’. An honour justly deserved, if only for the excellent statue he created for us of Adam Smith on the Royal Mile in Edinburgh.

Following the unveiling of the statue of Adam Smith last summer, Stoddart spoke of the many people needed to build the magnificent statue. Upon receipt of this title he paid tribute once more to the work of others:

 What I might have done to have this honour conferred upon me is in large part owing to the steady support and great skill of the foundrymen, plaster-workers, stone-masons and carvers, architects, planners and engineers with whom it is my privilege to work, in Scotland, England, Italy and America.

Thus, the division of labour leads not only to an increase in the quantity of production, but the skills of men and women come to together to produce such quality as Stoddart’s work. As such, Adam Smith is now well placed to stand firm against the vagaries of fashion and those cold Scottish winds.

Obituary: Sir Alan Walters

2712

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Sir Alan Walters, economic adviser to Margaret Thatcher and leading monetarist, has died at the age of 82.

In the 1960s, his view that the money supply must be strictly controlled if inflation was to be held in check, was hugely unfashionable The postwar ‘Keynesian Consensus’ saw monetary policy as a weak tool. They thought that employment could be boosted at a modest cost in terms of inflation. When inflation and unemployment began to rise together, though, they found this 'stagflation' hard to explain.

Walters knew there was no trade-off between inflation and unemployment. Inflation makes it impossible to see what prices are really doing – the ‘signal’ of real price movements gets lost in the ‘noise’ of general price rises. So people can’t make rational plans, resources are wasted, and unemployment rises. There had to be strict limits on how much money governments created. You could not just spend your way out of a recession.

Margaret Thatcher lured Walters back to Britain as her economic adviser. He provided the intellectual case for bearing down on public spending, even as Britain entered recession. Mainstream economists were shocked – 364 of them wrote to The Times to denounce the policy. But the new policy stabilized prices and laid a solid foundation for economic expansion.

Walters – now Sir Alan – returned to Washington, but continued to advise Thatcher from afar. She brought him back in 1989. But Walters was an academic rather than a politician, and did not conceal his conflicts with her Chancellor Nigel Lawson. When he publicly called the ERM – which Lawson was shadowing – ‘half baked’, the Chancellor walked out. Walters tended his resignation the same day. The affair contributed to Thatcher’s demise.

But Walters was right. John Major went on join the ERM, but the policy exploded on Black Wednesday in 1992, giving the Conservatives a reputation for economic incompetence that they did not shake off for more than a decade. As Walters knew that it would.

- Watch Patrick Minford's dedication here

- Watch a BBC video on Walters here

- Read The Times obituary here

Quote of the week

2714

quote-of-the-week

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.

Peter Schiff, Wall Street Journal

Raising the personal allowance?

2719

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The House of Commons Treasury Committee chairman, John McFall MP, says that raising the tax threshold for low-income workers is 'in the prime minister's mind'. It would mean that instead of paying tax on earnings over £6,035, nobody would face tax until they earned £10,000 or more.

Let's hope that John McFall is right and that what's in the prime minister's mind actually becomes reality for once. £10,000 is roughly what someone working full time on the minimum wage of £5.73 could earn in a year. It's scandalous that people earning less than that should be paying tax at all. Worse, there are millions of people who face an unemployment and benefits trap because of the high tax rates they have to pay. Not only do they pay income tax on low incomes, they also start losing benefits as well. In some cases the effective rate of tax they face is 70% or more. And who's going to work an extra hour at minimum wage rates if 70% of their extra earnings is taken straight off them.

There are so many millions of people on the minimum wage that this tax change would have a really big economic effect. Far more so than Gordon Brown's overcomplicated Tax Credit system. It would entice hundreds of thousands back to work, and hundreds of thousands more to move from part-time work to full-time work. It would help the government to meet its targets on reducing child poverty. And poorer people spend more of what they earn - they don't have the slack to put it aside as savings. So nearly all that money would go straight into the economy, boosting demand for our hard-pressed retailers and producers.

We've been calling for a doubling of the income-tax threshold for years , as part of a plan to reduce and to simplify the taxes on work. Perhaps it has taken economic disaster to make the government see the merit of it. If they have, then the whole country will be the gainers.

Blog Review 832

2717

blog-review-832

Even Paul Krugman (when writing as an economist that is) seems to think that fiscal stimulus simply buys time rather than it is a solution.

Whether you call it political corruption seems to be a point of view more than anything else.

No, tariffs are not the solution and one reason is that you've got to assume that everyone else does nothing about them.

Automating tasks is how we progress: but there might be those who will game an automated system.

A textbook example of creative destruction in action.

History is supposed to repeat itself, first as tragedy, then as farce. Not, as in this case, a tragedy repeating a farce.

And finally, fun for all. The internet anagram server.

Twelve angry men

2709

twelve-angry-men

Should we elect our leaders by lot? There's an ad in the current edition of Standpoint magazine saying just that, and calling for a 'people's parliament' and 'citizens' juries' which apparently, we are told, make much better policy decisions than so-called experts.

I've often said that I'd prefer to be governed by the first twelve people in the phone book than by 650 career politicians and hundreds more party placemen posing as peers. But only so long as none of them actually want to do the job. The problem in any system of government is not how to choose our leaders, but how to restrain them. An elected government with unlimited powers is no better, in my book, than a government chosen by lot with unlimited powers. And I don't think that members of the general public, taken jury-service style off the street for a short stint in government (it couldn't be a long one, because they've all got jobs and businesses to look after) would make better decisions than career politicians. At least the careerists know there are limits - they may be in office now, but eventually they'll have to live in opposition. But people who are parachuted into government for a few weeks or months will be focused entirely on the present. The future won't be their concern.

However our leaders are chosen, we need rules to keep them in their place. In Britain, we developed these rules over many centuries, largely through struggles between kings and commoners (or kings and aristocrats). Trial by jury, habeas corpus, double jeopardy - all the rules that ensure our leaders can't just grab us, torture us, stick us in jail and forget us without some form of due process of law that involves ordinary people as well as officials. The trouble is, in the last ten years all that has been torn up. However we choose our leaders, those basic rules of personal liberty need to be reasserted.

Don't think twice

2710

dont-think-twice

In the ongoing battle between Conservative supporters who want Cameron to take a small government low tax approach, and those who would prefer he sticks close to Labour policies, the former are finally starting to win out. Cameron has announced that if elected he would scrap taxes on basic rate taxpayers' savings and would increase the level of non-taxable income for pensioners by £2,000 a year. The tax cuts will be fully funded by lower public spending.

Cameron is now committed to cut public spending by ₤5 billion. It will no longer be anathema within Conservative circles to hear opinions on the shrinking of the state. Ideally we would see promises of more than a ₤5 billion, though it is a start. In response to Cameron Labour has warned that transport, research and universities would be at risk from Conservative cuts. As these are areas best out of government hands, we can only hope that Labour's warnings come to fruition.

Scrapping taxes on basic rate taxpayers' savings is not so much a move that incentivises saving, but one that goes some way towards not disincentivising it. This will offer a practical and potentially popular alternative to Labour profligacy and waste; failure underwritten by debt ridden public finances. The reality has fallen desperately short of the rhetoric; the mindless mantras Brown has been repeating for the last few months make Tony Blair’s spin look like profound intellectualism.

Of course, Cameron has mantras of his own. To talk of attacking “excessive materialism" makes him sound more like the Archbishop of Canterbury than is really comfortable. However, given the choice, Cameron’s paternalism should perhaps be tolerated. We may have to give him our soul, but at least he will steal less of our money than the chap currently in charge.