Cut public spending by a third

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Sir John Major, former Chancellor (and ex-PM) said at the weekend that public spending should be reduced by a third, including cutting the number of civil servants and ministers.

That would mean reducing government spending from nearly £700 billion to around £450 billion. Since the Treasury expects to collect just under £500 billion of tax this year, it would turn the monstrous £175 billion borrowing into a surplus of about £45 billion.

I’ll let you play fantasy Budgets, but that surplus would be more than enough to abolish council tax, fuel duty, or corporation tax, or increase the tax-free personal allowance to £15,000.

So Major’s proposed cut would mean significant tax cuts as well as a balanced Budget instead of record debt.

That sounds like an incredibly radical measure, even though a necessary and desirable one. But is it really (as I am sure the public sector unions will scream) a savage cut that would cripple public services, or is it a feasible, moderate policy?

Let’s look back a few years, to before the recent government profligacy.

In 2000, three years into the Labour government and with “Prudence" Brown as Chancellor, total government spending was just under £350 billion. Increase that by inflation, and it would be about £450 billion next year.

So the radical-sounding cut of one third of public spending just means that the government does what it did in 2000, with its costs increased by inflation. Is that really so difficult?

Just think of all the wonderful things that the government does now, that it didn’t do in 2000 (go on, try). Are they worth beggaring the country for?

As Tom blogged here last week, “all that extra cash has achieved more or less nothing." Well – except for a crippling public debt!

Kindness not enough to cut the queues

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Cheers all round as the Human Tissues Authority announce that the number of people donating kidneys to strangers has increased by 50 per cent. The only problem, alas, is that the increase is from ten people to fifteen. And three of those have yet to undergo surgery. In a country where 7,000 people are in need of a kidney, an increase of two donors is hardly a cause for celebration. Fortunately there is a long-ignored solution: compensating organ donors.

The sacrifices made by the fifteen new altruistic donors should not to be ignored; they are committing the most noble of acts, and as a recipient of a kidney myself I cannot overstate my admiration for them. But altruism is not enough; nowhere in the world does it make serious leeway into the long queues of people in desperate need of transplants.

According to the International Society of Nephrology, kidney disease affects more than 500 million people worldwide, while in the USA the number of people dependent on dialysis tripled over the last two decades.

Also, bans on organ vending have created a terrifying global black market in organs which sees people in poor countries forced into perilous situations. Efforts have been made to clamp down on the illicit market in organs, but where demand exists, supply finds a way to meet it. Even when countries such as China, India, and the Philippines had some success in thwarting the trade, it simply switched to other areas like the Eastern Europe. Patients will go to extraordinary lengths to save their lives, turning to underground sources when legitimate avenues are banned by governments.

Due to the corrupt nature of the black market, donors get little or no protection. Deprived of the security of contract law, they often fail to receive the money they are promised, go without follow-up medical care and are forced away from the institutions designed to protect them. These appalling conditions are not a result of a marketplace, but a result of laws that drive it underground, away from where it can be a transparent regime devoted to donor protection.

Such a regime should include an impartial not-for-profit or state body matching donors to patients, with donors carefully screened for physical and psychological problems. The provision of follow-up care, potentially for the rest of the donor’s life, is mandatory. This system therefore rewards all patients, not favouring the rich. Donors, meanwhile, receive excellent levels of care.

The only way to stop illicit markets is to create legal ones. Indeed, there is no better justification for testing legal modes of exchange than the very depredations of the underground market.

Momentum is growing. In the British Medical Journal, a leading British transplant surgeon called for a controlled donor compensation program for unrelated live donors, while Israeli, Saudi and Indian governments have decided to offer incentives ranging from lifelong health insurance for the donor to a cash benefit.

I heartily applaud the donors in the UK who have given their kidneys to strangers, and know what a precious gift this is. But we need thousands more. There is currently no room for individuals who would welcome an opportunity to be rewarded for rescuing their fellow human beings. The system is gridlocked, while those on waiting lists lose their lives.

Sally Satel M.D. is a practicing psychiatrist and resident scholar at the American Enterprise Institute.

The boys in green

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In the police state of Britain we are already harassed by the ‘boys in blue’ on a frequent basis, whether that be for taking photos in public, holding a peaceful protest or parking on double yellows. But now the government has decided to attack us from another side, sending in the ’boys in green’ to bully our firms and industries.

The Environment Agency is creating a new team to enforce the Carbon Reduction Commitment (CRC). The team of Green Police have been given powers to search company premises and inspect utility bills without the permission of the owners. This is just another way in which the state is trying to flex its muscles, rather than aiding them by letting them get on with the jobs in hand.

The most efficient way to combat carbon emissions is not to set restrictive top-down quotas on firms and then enforce them with jack- booted Carbon Cops. Rather, firms should be free to lead the fight against climate change, with profits as the incentive. As an Environmental Kuznets Curve shows, over time if left to the market, carbon emission will begin to fall as firms search for cheaper environmentally friendly fuels and consumers are willing to pay more towards greener firms.

This latest scheme is poorly timed. Many firms are struggling to survive, with falling revenues and increasing costs. By imposing stricter regulation upon energy producers, costs will inevitably rise, costs which will passed onto consumers – individuals and SMEs.

A view from D.C.

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Asim Khalid joins the ASI

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I have just finished my penultimate year at Oundle School, based near Peterborough, and look forward to going back in the Upper Sixth Form next September. Having achieved a good set of results at GCSE, I have challenged myself in undertaking 6 A-Levels (or equivalent qualifications) in Double Maths, Chemistry, Physics, Economics & Pre-U Economics. Although I have only taken four AS modules this year, as the system has changed, I hope to apply to Oxford University to read Economics & Management.

With the financial crisis inevitably taking its toll, the financial industry has proved to be quite a volatile sector for employment, however I hope to eventually work in this industry specifically pursueing banking or marketing. Gaining this work experience at ASI is a brilliant opportunity for me to not only get an insight into the working life in London, travelling to and from the city independently, but is also a chance to work in one of the UK's leading innovators in free-market economic and social policies; which, to me, is one chance not to be missed.

The socialist calculation problem

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The standard leftist/socialist argument about the economy is that it would all work vastly better if only it were planned. Omniscient and benevolent bureaucrats (or possibly politicians although few believe in the benevolence or omniscience of that tribe any more) will decide what should be produced where and how at what price and children will therefore gambol happily in the streets. The delusion isn't new of course, it's been around at least since Diocletian, but despie repeated failures still it persists.

Post 1945 Labour saw it as the way to build the New Jerusalem, the 70s was infested with the idea, even nominal Conservatives like Michael Heseltine have embraced it. But as various people have tried pointing out over the centuries, economies are complex things and it's going to be difficult to even measure everything, let alone make decisions in time to have an effect. Even the manifest failures of GOSPLAN in running a relatively simple society doesn't seem to cool the ardour.

The latest meme to ride to the rescue is that all encompassing cry of "computers!" As they get better, faster, more complex, we can model more complex things upon them. We will, at some point, reach that happy place where we can model the entire economy properly and thus plan it. Hurrah!

I'm afraid I have bad news for this secular but most pious hope:

Then there is the sheer number of products: Eric Beinhocker, author of The Origin of Wealth, reckons there are probably 10 billion distinct products and services available in a modern economic environment such as London, Tokyo or New York.

No, you're simply not, ever, going to be able to collate the information and then run the program on 10 billion discrete variables. It just isn't going to happen whatever happens to computers in the future.

For those who do suffer from the planning delusion might I suggest dusting off some Hayek?

Why interventionism works

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Short Term Serial Correlation and Long Term Mean Reversion sound rather heavy. And so they should. They were conceptualised by statisticians, after all; people who make economists sound normal. Yet an understanding of these two phenomena helps explain why the myth that politicians can and do solve real problems continues.

Short Term Serial Correlation emerges because people like to see patterns. Random events are never evenly distributed; some areas will manifest more incidents than others. Geographically, there may be a larger concentration of accidents, or geniuses, or Stephens in one locality; chronologically, there will be more crimes, or jackpots, or bankruptcies in one month than another. For some of these there may be real causes (a criminal has moved into the area, thus triggering a local crime wave) but very often apparent rises or falls in frequency are just the results of random coincidence.

Long Term Mean Reversion is the inevitable “return to form". If there is no cause for these clusters, in the long run they will even out. The average reasserts itself. Because there was no reason for the cluster of incidents, it is not sustained and everything returns to normal. All very dry stuff, you might think, and blindingly obvious. Except that this duel-phenomenon may explain why interventionism is so popular. Take two examples:

• A number of traffic accidents in a short space of time lead to a public outcry and a demand that something be done to improve safety in what is, apparently, a dangerous stretch of road. Local people focus not on the 10 year average but the tragedies of the past 12 months. Action is called for and local councillors step in. Money is spent changing the road layout, building speed humps or erecting a camera. The following year the number of accidents falls (returns to the long-term average) and both councillors and residents claim it is a success.
• The economy goes into a bit of a slide. Shares fall and unemployment rises. Worried citizens demand that something be done to prop up asset values and protect jobs. The government – ever eager to please – steps in with a lot of expensive and headline-grabbing measures. After a period, economic activity recovers its upward momentum. Government officials are quick to point out that the recovery results from their own policies. Put like this, the significance of these phenomena should be obvious.

The natural instinct of people to cry that “Something must be done" very often leads to policies that appear to have the desired result. This perpetuates the belief that politicians can make a difference and that without them the world would rapidly go to hell in a hand basket.

The future of grammar schools

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The Head of the Grammar Schools Heads’ Association has announced that he thinks children from poor backgrounds should be given priority over the middle-classes in admission to grammar schools. He has also said that the 11+ should be scraped in favour of an exam that benefits the lower classes.
 
This is a clear example of positive discrimination and a ‘dumbing-down’ of education. I agree with the view that the 11+ needs modernizing, at 11 children are too young to take high pressure exams which can have a huge outcome on their futures. There is no doubting the Middle-class education machine where parents are willing and able to spend on private tutoring and coaching. I have invigilated 11+ exams where children are distraught that they cannot answer any questions whilst their parents have imposed so much pressure upon them. But parents are not to blame for wanting the best for their children.
 
The blame lies with the poor standards of education that state schools currently provide. Parents and children are often faced with the choice of a grammar school or a comprehensive with little variation or scope for individual needs. If the education system was opened up and individual schools were given greater autonomy, pupils would be able to choose a school that could cater to their needs and offer a more tailored education.
 
Clearly the solution to the poor education standards is not to positively discriminate against middle class students. Instead we need to be offering pupils greater choice and opportunity and provide schools with greater incentives to raise standards across the board, not just for one section of society.

Charles Moore asks an interesting question

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And rather blows it, for the answer is in his question.

But I should like to concentrate on the non-economic elements of all this. What is the attitude of mind that has turned the most educated and prosperous part of the human race against reproducing itself?

It is also an entirely economic answer. The reason that the most educated and prosperous do not have great tribes of children is because they are educated and prosperous. We can see this in any indicator we like: whether it's average income in a country, the wealthier within a society, the richer people are the fewer children they have. The effect is even more striking for education of women: more years in school leads to fewer changing nappies. This much is simple.

But of course we want to know why this is as well. Why should anything from learning to read and write to a PhD in electrical engineering lead to women wanting fewer children? Why does having the physical wherewithal to provide a child with an entrancing life lead to having fewer? And it isn't just that children are a cost now as they weren't in peasant societies, as Moore mentions.

It is, I'm afraid, our old economists' friend, opportunity costs. The price of anything is not what we pay for it, it is what we give up to get it. The richer you are and the more educated you are the more glorious opportunities this modern world of ours gives you. You can travel the world, climb mountains, have a long and fulfilling career, run a major corporation, write novels, this globe of ours really is the mollusc of your choice. You can also spend some 30 years or so pumping out and raising (clearly, for men, only the latter) a series of five or eight children as our forbears did. But what you cannot do is all of them, choices have to be made.

The result of such is that given the multitude of choices available to the educated and prosperous fewer such are deciding to have children. That's pretty much it.

Smaller banks, more competition

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An editorial in the FT this week stated that:

The UK needs to set out a plan for selling off publicly owned shares, rolling back guarantees and reintroducing a competition regime under which banks get cut back if they are overdominant, and can be allowed to fail. During the panic, stability was the key aim of policy. For a time, banks had to be cosseted. But, as calm returns, so too must competition.

The need for more competition in the UK banking sector is one of the dominant themes which has emerged from my talking and listening to financial experts over the last few months. The primary motivation behind it is that banks should not be allowed to become 'too big to fail' in future, with all the moral hazard and systemic risk that carries with it. A more competitive market might also improve deals for consumers and encourage higher industry standards.

Of course, it might strike some people as not being very free-market to suggest that government policy should try to prevent businesses from growing too large. In many sectors, that might be the true: as long as it is possible for new competitors to enter the market, monopolies or oligopolies will not be able to get away with abusing their market position and offering consumers a bad deal. As such, government intervention would be unnecessary.

This argument may not apply to the banking sector, however. For starters, the regulatory barriers to market entry are extremely high, and make it hard for competitive forces to operate. It's also worth making the point that many big businesses would probably never emerge with a very basic legislative intervention in the market – limited liability incorporation laws. This means that supporters of the free market should not dismiss measures to promote competition out of hand.

The question remains though, how best to encourage smaller banks? This merits a more in-depth study, but the obvious place to start would be with the banks now majority-owned by the government. They should be broken up before being returned to the private sector. In the rest of the financial system, it might make sense to impose higher capital requirements and lower leverage ratios the larger a bank gets.