Blog Review 865

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You know, it might just be that infrastructure spending isn't quite the way to revive an economy?

But if we are going to be all Keynesian about these things, might we not do what Keynes actually thought was a good idea?

Question: why are people listening on the subject of macroeconomics to people who are not macroeconomists?

It's happening in the streets now, these protests against the fat cats who don't pay their "fair share" of taxes.

Netsmith might need a little lie down in a moment. In praise of Hazel Blears.

Politics is as politics is: Obama's already breaking pledges.

And finally, the phrase of the day. "The process of quantifying our ignorance".

Purblind idiocy

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How did we end up being ruled by those who simply do not know what they are talking about?

Lord Turner, the chairman of the Committee on Climate Change, said people would be given personal flight limits to lower pollution from the aviation industry.

"We will have to constrain demand in an absolute sense, with people not allowed to make as many journeys as they could in an unconstrained manner," he told the Commons environmental audit committee.

Leave aside for a moment that such limits will clearly not affect the Noble Lord when he flies off to some climate change junket, nor his accompanying civil servants. Let us also accept the entire "scientific consensus" on climate change as represented by the IPCC.

There is nothing, absolutely nothing at all, in any of this that says that aviation needs to be restricted in any manner. It is true that the IPCC says that carbon emissions should be restrained: but that is not to say that aviation must be.

The different sources of emissions provide us with goods and services of differing values. We want, if we are indeed to reduce emissions, to reduce those which produce the least value to us in those goods and services. It might be that the deep and heavy ploughing necessary for organic farming produces the least value, it might be urban car transport, it could indeed be aviation. But value, utility, is in the eye of the beholder, not the supplier and most certainly not the bureaucrat.

Whatever the limits we put on emissions and however we do that, through caps or through taxes, the way to do it is still to allow the individual to decide which method of emitting provides them with the greatest utility. In this manner we solve climate change at the least diminution of our wealth. Rather than, say, an unelected quangocrat forcing us to accord to his values and judgement of our own utility.

Stick with capitalism

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It started out rather depressing. Our hosts were the Friedrich Ebert Stiftung, Germany's Social Democrat think-tank, and the Global Policy Institute, something of a UK equivalent. We were there to discuss The Role of the State in the 21st Century with Polly Toynbee in the chair. So I expected the worst.

And at first I got it. Dr Erhard Eppler, a former Social Democrat politician, was introducing his new book on The Return of the State. 'The state is back', he proudly announced. Market fundamentalism had failed us, most of the planet's problems were in places where the state was too weak, and people were willing to question capitalism and put their trust in the state much more.

Professor David Marquand started from the same prejudices but wasn't sure that capitalism could be written off just yet. Indeed, the world's politicians showed absolutely no inclination to tear up capitalism and replace it with a statist alternative, he thought. It was, sighed Polly, going to be 'the same bicycle, with the promise of better brakes'. There was general mumping all round that while politicians should wave goodbye to the market, they wouldn't.

Thank goodness for that, I thought - the only person with a smiley face by then. Because the market system has taken billions of the world's poorest out of poverty. It's the best anti-poverty device we can imagine. Of course, markets are human, and they only work within a framework of human laws and institutions – rules of property, honesty and contract. And yes, the state has to have the power to enforce those rules. But the awful financial crisis that's hit recently was caused by governments and regulators completely destabilizing the markets. Flooding the world with so much cheap credit, for example, that nobody could see the signals of what was really happening for the riotous noise of the boom.

It's plain that the Left would love 2008 to have been the high tide mark of capitalism. You'd have thought that they might rush forward with some alternative to replace it. But they can't, because we've tried various permutations of the socialist model before, and rejected them They've got nothing left. So yes, we'll stick with capitalism. And the state should stick to its knitting of enforcing the rules that make it work – and properly, this time.

Capping executive pay

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Earlier this week I was on Radio 2's Jeremy Vine Show arguing that the government should not cap executive pay in the City. I rather got the impression I was there as the villain of the piece – a worrying sign of the times!

Talking about executive pay in general, I said that whether or not a particular salary seems 'fair' is not the point. People are paid according to the market value of the goods and services they provide, and what you think of those goods and services is irrelevant. The government cannot possibly determine 'appropriate' pay accurately or justly, because any decision they make will necessarily be based on a political value judgement or personal prejudice. How much should a radio presenter be paid? Or a think-tanker? The government isn't capable of determining these figures, and haven't got any right to anyway.

I also pointed out that we need wealth creators, now more than ever, to get the economy going. And if you cap their pay, why should they bother? Or why shouldn't they just move to Shanghai or Dubai where they'll still be allowed to earn mega-bucks? I'm sure executive pay caps would be like manna from heaven for these emerging financial centres. Furthermore, I pointed out that the top 1% of earners in the UK pay 23% of our income tax. Left-wingers seem not to realize that someone has to foot the bill for all their social programmes.

We also discussed the specific topic of whether executives in the nationalized or part-nationalized banks should have their pay capped. Clearly, this is a more difficult area, since no one likes the idea of taxpayers' money going into the back pockets of incompetent fat cats. Nonetheless, I warned against knee-jerk populism. Now that the government is entangled in the banks (and I don't think they should ever have got in that position), it's important that they recover and that the taxpayers' gets their money back. If that means paying top-dollar for those staff who are still bringing in lots of business and making money for the companies, then so be it.

Quote of the week

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“Bringing the Government in to run Wall Street is like saying ‘Dad burnt dinner, let’s get the dog to cook’."

P.J. O’Rourke, on the US banks’ bailout

Near-zero interest rates won’t refloat the economy

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SIR – We shouldn’t bank on lower interest rates getting us out of the credit crunch.

They may encourage consumers to borrow and spend more, and make it cheaper for businesses to expand. But there are more savers than borrowers in Britain, and they have seen the income from their savings cut by four-fifths. Savers aren’t rushing out to spend — indeed, they are cutting back.

Secondly, lower interest rates drive down the pound. The Government needs to borrow huge sums to fund its bank bail-outs, but with money so scarce at home, much of that will have to come from abroad. A weak pound makes that borrowing hugely expensive.

Thirdly, interest rates at 1 per cent dent confidence, as people fear that the Government is running out of weapons to combat recession. A decade of near-zero interest rates in Japan has not solved their banking crisis.

The British economy might be refloated by lower taxes and cuts in business regulation, but not by lower interest rates.

Dr Eamonn Butler
Director, Adam Smith Institute

The Telegraph, Letters (7 February 2009)

Blog Review 864

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Do you remember when $30 billion was a lot of money?

Wasn't the problem that we didn't know what the correct prices were in the first place? To find out that the government overpaid is not all that much of a surprise is it?

Explaining AIG using the ever popular two cows method.

An excellent solution to the American problems with the trial lawyers.

Now really is not the time to be increasing statutory redudancy payments.

One way to get the housing market moving.

And finally, yes, there is such a thing as too much time on your hands.

Two minor problems here

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Camilla Cavendish doesn't spot the two minor problems we have with this dash for green energy.

Going low-carbon is no longer a seminar subject for caring greens. It's a real live competition to beat the oil regimes and make profits, in which the new environmentalists will be alpha males.

The first is of course that there are no profits here. If there were profits then that would mean that, entirely unaided by taxation, cap and trade or legislation/regulation, energy sources other than fossil fuels would be cheaper or more convenient than those fossil fuels. Our very problem about the whole issue is that this is not true. There are no profits in green energy systems, there are only losses. We might disguise those losses via regulation and or legislation, cap and trade or taxes, but they are losses all the same, not profits.

The second problem is that Britain risks being "left behind" in some manner. We must therefore, as the US subsidizes massively, subsidize so here as well, for we are in competition. Which is the very opposite of the truth. At present there are only losses, as above. Now it might be that after spending some billions, perhaps even trillions, a better and cheaper energy generation system will be designed. But the correct reaction from ourselves should be that once someone has indeed designed such we go and buy it from them.

There's absolutely no reason at all that we should be gouging ourselves as taxpayers to make such subsidies when the Americans seem so happy to pay for it themselves.

Bank bonuses

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The fuss about bank bonuses will run and run. The Royal Bank of Scotland, recipient of £20bn of taxpayers' money, is planning to give bonuses to its senior bankers and City traders that might well run into millions for some of them. And the Treasury seems to have agreed, provoking much public outrage. Why should a failed bank, especially a state-owned one, pay bonuses at all?

But there's a great deal of misapprehension about bonuses. They are actually a way in which banks, and other businesses that face upswings and downswings, manage their wage bills. For most companies who pay staff bonuses, it's a way to manage wages, not inflate them. Bonuses are tied to the performance of the individual or the company. So if times have been hard, the wage bill can be reduced, and when times are good, it's made up again.

Sure, there's a lag, because you can't calculate the bonus until your accounts are done and dusted, which might be nine months later. And these are contractual obligations: because things are bad now doesn't mean you can just tear up contracts for the sake of political correctness.

There is also the point that bonus payments incentivize people. When traders are paid according to the business they generate for a company, they are incentivized to generate more.  If people are bringing in billions' of pounds' worth of business, isn't that indeed worth millions? Of course, you need to make sure that they are bringing in good business, and not just selling more mortgages to people who can't afford them. And some bank executives have certainly made mistakes on that front. Incentives need to be carefully managed (as Gordon Brown should know: witness all those people waiting in ambulances and corridors because the A&E department don't want to go over their target time for treating people whom they admit).

The fourth plinth waiting game

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Will Trafalgar Square ever see a permanent resident to it’s vacant fourth plinth? I say vacant, it’s currently supporting a model that the pigeons have adopted as a dance club! Later in 2009, Anthony Gormley will be asking 2,400 people to stand on the plinth, 100 per hour (you can apply here). Following him will be “Victory in a Bottle" by Yinka Shonibare, which is exactly what it says on the tin. But perhaps the time has come to move away from the concept of placing modern art on there, it’s become somewhat staid. Modern art is supposed to push the envelope and it’s proven that.

However, the plinth is there for a statue to be placed on it, completing the square if you will, and recently there have been two very good proposals. The first, which is currently in the planning application stages would see RAF hero, Sir Keith Park overlooking the square. It would be in keeping with the military theme and would bring the area up-to-date by rightly immortalizing a Second World War flyer. The second is nothing more than a rumour that circulated in the press late last year, but one that is in fact a very noble idea: a statue of the Queen on horseback. The one drawback is that it would be unveiled after her passing (which could be a long way hence). Perhaps we shouldn’t wait. Why not set the goal of having it erected by 2012, 60 years after her ascension to the throne and also in the Olympic year?

What needs to be undertaken is a drive to erect something permanent there to stop us from enduring the rather public death of modern art. Modern art need not be constricted to one site in the corner of a square, it should be interspersed throughout the city so that it becomes a daily interaction that enlivens us. Rather than a drab reminder of where pigeons go to party.