Tax, spending and pensions

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In preparation for a recent media appearance, I had to work out what I would do if I were prime minister for a day. The programme turned out to be less serious than I had anticipated – invading France and bringing back the stocks were typical topics of discussion – so much of what I had planned to say went out of the window. Regardless, here's what I was originally thinking...

My first priority would be sorting out the public finances. The government is now overspending by something like £15m an hour, 24 hours a day, 7 days a week. They are going to borrow £175bn this year, and more than £700bn over the next five. That's on top of the £3tn or so of debt we've already got, once you include PFI, the nationalized banks, unfunded public sector pension liabilities, and the rest. With figures like that it's perfectly clear that the government's £15bn 'efficiency drive' just isn't going to cut it – far more radical cuts are needed. I think £100bn should be the absolute minimum, and like former Blair adviser David Halpern, I'd argue 20% is a good figure to aim for. Things just can't go on as they are.

My other economic priorities would be tax and pensions. On the tax front, radical simplification would be the order of the day. At 10,000 pages Britain's tax code is now the longest in the world, and imposes an administrative cost of more than £5bn a year on the UK economy, which is just ridiculous.

On pensions, I'd start by acknowledging the extent of the problem. Over 65s now outnumber under 16s. And while there are currently four potential workers to support every pensioner, by 2050 there'll only be two. As a result, our PAYGO pension system (where current taxes are used to pay current pensions) is simply not sustainable. I'd follow Chile's lead and introduce compulsory private savings accounts, in place of national insurance contributions. As Kristian Niemitz points out on the IEA blog, Chile's highly successful system just celebrated its 28th birthday, so it's high time the UK caught up.

Greener grass?

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As I wrote yesterday, I'm quite a fan of California (OK, I'll be honest this time – the weather and the beaches do have something to do with it...). All things being equal, I'd rather like to live there. And who knows? Given the way things are going in the UK at the moment, maybe I'll want to join the next 'brain drain' and flee gloomy Britain for the land of the free.

The only trouble is I'm not sure the land of the free is really that free anymore. Take California as an example – assuming I earned the same in relation to the average wage as I do in the UK, I'd end up handing over 30 percent of my income to the government if I lived there (adding up federal and state income taxes, and various payroll taxes). In the UK, it's closer to 25 percent. True, sales and excise taxes are much lower in the US, but property taxes are also much higher. It's hard to see me being much better off.

There are a couple of qualifications I should make. Firstly, California is clearly not the best example to choose, being one of the most left-leaning states in the Union. One could move to Iowa and not pay state income tax at all. Secondly, something like 50 percent of Americans don't pay income tax at all, thanks to their crafty use of credits and exemptions, so it's not that bad for everyone. Of course, single men are not typically the recipients of much legislative largesse, so I doubt there would be much in the complexities of the tax code for me.

Anyway, the main point is, where are we libertarians meant to escape to these days? Are we all going to have to go seasteading?

Stimulating demand

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The problem with this country is that the government is trying to force smokers to stop. In China it is quite the opposite.

Blog Review 952

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Yes, Netsmith supports this. Polly Toynbee for Poet Laureate. She is after all no more than a praise singer....

Quite possibly the best description of the Prime Minister and the influence the Kirk has had on him written to date.

The might not be accurate in each and every particular, this analysis of the interactions between the unions and the Labour Party. But there's certainly some truths in it.

Five things the next government is going to have to do. Anyone believably promising to implement them would get Netsmith's vote, whatever their party label.

The importance of property rights can be difficult to overstate. But some just will not get it. So why not try using the New Testament to explain them?

You really shouldn't believe all of the international statistics you see floating around. Many of them are really not all that accurate.

And finally, Stanford turns himself in. Probably so that he can say he did and they didn't arrest him, so he can say he's innocent, right?

A libertarian Fed?

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A bewildering article in the Financial Times by economist Henry Kaufman made the peculiar claim that the Federal Reserve had a commitment to libertarian dogma and laissez faire. He obviously does not understand these words. Despite Alan Greenspan’s early writings, his actions at the Fed should have disabused any of the idea that the Greenspan Fed was in any sense libertarian.

Indeed, throughout his tenure, Greenspan was constantly berated by free-market and libertarian economists. Bill Fleckenstein called him “bubble-blower in chief".

In his widely-noted article in the FT, Kaufman cites as examples of the Greenspan Fed’s failings the growth of securitization, quantitative risk modeling, and the infamous failure to recognize bubbles. But there are in no sense libertarian; the last, indeed, is just blindness and ignorance.

There is now widespread discussion among U.S. establishment economists about how to recognize asset bubbles; Treasury Secretary Tim Geithner wants to establish a study group to devise ways of making sure bubbles to do not become dangerous. But many observers, including libertarian-inclined economists and even more casual observers, warned repeatedly about the housing bubble and the Fed’s primary role in creating it, by keeping monetary policy far-too-easy for far-too-long after 9/11. This is not Monday morning quarterbacking; the warnings were loud and repeated as the bubble built.

The “Greenspan put" (by creating an asymmetry between risk and reward), was another major legacy of the Greenspan Fed; it helped ensure the bubbles grew larger and longer; there is no sense in which that can be deemed “libertarian".

We might agree on some of the failings of the Greenspan Federal Reserve, but we should at least call it something it clearly wasn’t.

Indeed, the very concept of the Federal Reserve is the antithesis of libertarian dogma: it is a price fixer (interest rates) and a government-enforced monopoly (issuer of monetary notes). There is now a move afoot in the U.S., led by Rep. Ron Paul, a Misean, to abolish the Federal Reserve. More likely to get somewhere in the short term is another move, also led by Paul but with growing bi-partisan support, to force the Fed to open its books. After all, despite all the much-vaunted talk of independence, the Fed is just another branch of government and taxpayers and savers are on the hook for its profligacy.

Adrian Day is president of a money management firm specializing in global and resource equities. He can be contacted via his website.

Recession

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The gloomy economic news from the European Commission is that they expect European economies to shrink this year by 4 percent, which is twice what they forecast in January. UK Chancellor Darling has forecast our shrinkage at 3.5 percent this year, but many think even that over-optimistic.

This will mean more job losses across Britain and Europe; more school and university leavers will fail to get jobs; people will see their disposable incomes shrink and have to cut back. Generally it means leaner times and tighter belts. There will be fewer opportunities to do pleasant things.

It is as well to remember that there are people who welcome this. The anti-growth brigade think that we should be producing and consuming less, and that economic activity should shrink. In the name of the planet, the environment, or their own notion of what it takes to make people really happy, they welcome a recession because it forces us to a lower level of output, one that might be 'more sustainable,' or more conducive to a 'fulfilling lifestyle.'

It is not just those receiving their pink slips who should feel contempt for this attitude. Lower economic activity and reduced wealth mean fewer choices for all of us, and less opportunity for advancement. It means people being less able to do the things they want to do. It also means slower technological advance and innovation because of reduced investment, and less ability for us to solve our problems.

Ironically some of the fashionable causes beloved by anti-growthers are taking the hit. Locally grown and organic produce are luxuries people can afford in prosperity, but are less willing to pay for when times are harder.

Growth is good, as Gordon Gekko might have said. It generates the resources with which we can achieve our goals and solve our problems. There are few problems so big that they cannot be solved by throwing money at them. But in a recession the money is not there. Those who welcome the bleak forecasts about economic contraction might think about that.

In praise of Los Angeles

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A couple of weeks ago I had a holiday in Los Angeles. I'd been there before in 2004, but it was only on this second visit that I realized what a fantastic city it is. To some that might seem a controversial statement: a lot of people are quite negative about LA, its sprawl, its smog, and its supposed superficiality. But I loved it.

The reason is that LA strikes me as one of the world's only truly modern cities, designed around the kind of lives we have today, and not the ones we led hundreds of years ago. Ayn Rand once wrote that, "civilization is the progress toward a society of privacy", and that's how Los Angeles feels: private. You can drive everywhere. You're not forced to live on top of one another. You have all the benefits of suburbia, combined with all the amenities and attractions of a major urban area.

That's a product of the way LA sprawls, of course, but why shouldn't a city expand? It's not like there isn't room for it to do so. Besides, whatever the government planners try to tell us, people don't want to live in the sort of high-density developments they're so fond of – people want detached houses and space to themselves.

Another thing that struck me was how much better at suburbia the Americans are than us. Whereas British suburbs too often contain an endless monotony of virtually identical houses (another product of our wonderful planning system), in LA it looked like everyone has designed their own houses. Some, naturally, were testaments to bad taste. But the overall effect was to create a much more attractive environment.

One last point: anyone who thinks that the state needs to subsidize and support 'culture' should visit LA's Getty Center (pictured). It's free to enter and contains a magnificent art collection, housed in a series of buildings that showcase modern architecture at its best. And the whole thing is privately financed.

Cato Unbound: Libertarian institutions and its communities

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A facinating discussion is taking place on the excellent Cato Unbound. It starts with Patri Friedman (who spoke at the ASI earlier this year) and is followed by responses from Brian Doherty, Jason Sorens and Peter Thiel. All are well worth reading.

Blog Review 951

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There are simply far too many reports like this one. Ones where all of the costs are carefully enumerated and none of the benefits. In this instance, yes, of course, alcohol has its costs: but to refuse to even acknowledge that people enjoy it and thus gain benefits is absurd.

This is the most importnt issue about current financial events. What is going to happen to the trend growth rate?

What's really happening between the hedgies, Obama and the UAW.

Amazing, someone has found a positive result from the ethanol programme.

What's wrong with Friedrich List and his idea of national self sufficiency.

News just in: dog food tastes terrible.

And finally, a national database we really do need.

Thatcher: Thirty years on

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Thirty years ago, on May 4th 1979, a feeble and bankrupt government was swept to oblivion by the Conservatives under Margaret Thatcher, and Britain began the process of recovery. Few thought it could be done.  Indeed, those of the postwar consensus waited smugly for the U-turn when Mrs Thatcher would find that markets, incentives and private ownership were simply not relevant in the modern world.  It never happened, and Britain was rapidly restored from being the sick man of Europe and an international joke to recover its self-confidence and become one of the world's leading economies.

It has taken a Labour government only a few years to run that recovery into the ground. Profligate spending and reckless borrowing were hidden by the sleight of hand of stealth taxes and false accounting.  Financial downturns were smoothed for political advantage by pumping vast amounts of credit into the system, credit that sent false signals about how cheap money was, and to whom it could prudently be lent.

Now it all hangs out.  The financial crisis has exposed the hidden follies and destroyed reputations.  Britain is more deeply indebted than ever, and faces a contracting economy beset by job losses and no visible means of repaying those vast debts. Yet there is hope, as there was 30 years ago. When this sad apology for a government is finally put down, a new team can repeat the success that was gained then. The problems are different, but financial prudence combined with spending cuts and a boost to private enterprise can work the same magic. It is a magic so potent that it can take on even so daunting a task.

Adam Smith thought little was needed to lift a country from poverty to affluence save "peace, easy taxes and a tolerable administration of justice." We have none of these at present, and could use a spell of all three.  Will the next government please take note.