Misuse of anti-terror laws

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The number of cases in which the US Patriot Act's "sneak-and-peek" warrants have been used, arranged by category. How many people are willing to bet that the British police have been any better? (Patriot Act: The kitchen-sink approach to national security)

Options for debtors

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Interesting piece, as always, by John Stepek in Money Morning's newsletter yesterday. Making the point that there's far too much debt around and governments from Greece to America can't repay it on the terms it was lent, he looks at the options. Cuts and backbreaking toil to repay it all; defaulting; or repaying your debts in devalued currency – that is, inflation.

Well, no government is up for prudence and backbreaking toil, of course. Their preference is to dream up some new eurobond or quantitative easing way of inflating their way out of trouble. Stepek's view:

I favour default, I must say. That way you punish lenders who failed to do their jobs properly, and clear a space for more competent ones. You also rapidly and cleanly reduce asset prices to levels where those with capital to deploy are keen to jump in...

But it doesn’t matter what I think. So far inflation is the favoured option for those governments that have the choice. The worry for Europe is that there’s a chance it will be forced into the ‘default’ option before politicians can agree on a way to go for the ‘inflation’ option instead.

That of course is what always happens when you don't get to grips with your debt. Other people do it for you.

Boosting demand isn't a magic bullet

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I like Simon Jenkins a lot, so I was sorry to read this in his column yesterday:

Forget "It's the economy, stupid." Switch to "It's demand, stupid." If the 20th-century revolution in economics meant anything, it was that unless people go out and buy things, there will be no jobs, no incomes, no growth. Governments can worry about borrowing, lending, inflation, fiscal rectitude, whatever until the cows come home – but without demand there is recession.

I don't think this is true. Overall spending has recovered – its sluggish recent growth is a symptom, not a cause, of the recession. The attempt to boost aggregate demand fiscally in the United States failed miserably. The Keynesian economist Paul Krugman, who Jenkins approvingly cites, says that this was just because the stimulus was too small. Effectively, Krugman thinks the value of stimulus is unfalsifiable – even a clear refutation of its effectiveness is just proof that we didn’t do enough of it.

We cannot avoid a recession after an artificial boom driven by cheap credit. During the boom, people made a lot of bad investments, both financially and in terms of the skills they trained in. These bad investments have to be undone. Businesses set up to satisfy a demand that isn’t really there have to fail. Skills learned to fill jobs that are no longer wanted have to be replaced with new skills. There is no alternative to these processes. Boosting demand, either through fiscal or monetary policy, will just cause a delay in the recalculation process by messing around with the market signals people use to decide how they should reinvest their money and time.

Some people will favour generous unemployment support and the like for people at the sharp end of the recalculation process – I don't, but you can oppose stimulus without necessarily opposing a generous welfare state. The debate over stimulus isn't a left-right argument about justice, it's an economic one about the nature of booms and busts.

Jenkins is right to criticise the way quantitative easing was carried out, with money printed and given to banks. Certainly that was a poor way of doing QE, but QE cannot create wealth even if done “properly”. To avoid or reduce credit deflation, it may be justifiable. Such is the nature of a central bank system. (Targeting nominal GDP to avoid deflation and limit inflation during a boom would probably be an improvement, but central banking is a fundamentally flawed system.) As a tool for stimulating the economy, it is worthless. Fiscal stimulus (even if we could afford it) is also useless, simply interfering with the market signals of what people really want.

Simon Jenkins is wrong to say that the problem is a lack of demand. We need time and clear signals about what consumers want and what they don’t want. When a credit-driven boom drives something up, it must come down again. Bad investments have to be undone before we can return to real growth. Politicians aren’t powerless – they can make the recalculation process easier by reducing taxes and regulation.  But they can’t defy gravity and think that boosting aggregate demand will avoid the need to liquidate bad time and money investments. The longer they try to avoid the inevitable, the longer this recession will last.

The 50p tax must go

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Er…told you so. Twenty leading UK economists have today written to the Financial Times to say that the 50p tax rate, introduced by Gordon Brown's outgoing Labour government last year and maintained at the insistence of the Liberal Democrat partners in the current coalition, is counterproductive. It will not raise much money, but will do 'lasting damage' if it persists, they say.

Quite. Back in March, in the snappily-titled The Revenue and Growth Effects of Britain's High Personal Taxes, our experts said pretty much the same. Indeed, we calculated that the tax would actually lose the Treasury some £350bn over the next decade, as businesses and high-fliers left the UK for lower-taxed countries. Of which there are many: a KPMG survey of 86 countries last year showed that 82 of them had lower taxes than the UK.

That's partly because the 50p tax rate is actually a 60% tax rate, by the time you have factored in National Insurance increases and phasing out of allowances. But evidence from past experience in the UK, from the US, Canada, France, india, Hong Kong and Russia is consistent. High top-rate taxes fail to produce revenue and harm economies.

The 50p tax was supposed to help cut the deficit, but it will do the opposite. It should go, now.

Odds and ends, 6/9/11

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Here's a list of the best things I've read online over the last week or so. We're trying it out as some might find it interesting – it's a trial, so leave your suggestions in the comments.

The Most Important Economics Debate of the Interwar Period – Steven Horwitz

Austrian school economist Steve Horwitz says that the Hayek-Knight capital theory debate was the crucial economics debate of the 1920s and 1930s. Horwitz says that disagreements over the nature of capital and how decisions about its allocation are made that are at the root of both the socialist calculation debate and the Hayek-Keynes debate about economic stimulus and recessions.

Russia's Economy: Putin and the KGB State – Paul Gregory

Economist and Russian historian Paul Gregory argues that the street gangs of the Yeltsin era have been overtaken by the state KGB gang under Vladimir Putin. He says that weak property rights, a cronyist banking system and the insecurity of foreign investment in Russia will cause the Russian economy to stagnate.

North Korea: The Long Coma – Alex Tabarrok

Reviewing Barbara Demick's extraordinary study of ordinary people's lives in North Korea, Nothing to Envy, Alex Tabarrok reflects on the insulation that North Korea has had from the rest of the world, even compared with the Soviet-era Eastern Bloc. This was so tight that many North Koreans believed that their dystopian state was prospering relative to the rest of the world.

Labor is Not Fungible – Sheldon Richman/"Dhanson" 

Why didn't the Obama stimulus work? Because jobs are not the same, and labour is not homogeneous. An economic stimulus package disrupts the normal economy (by pulling some workers out of their gainful employment and by changing reskilling incentives for others) and boosting aggregate demand does nothing if the problem is a supply-side problem with finding the right people for jobs that really are in demand.

What is Wrong with Global Warming Anyway? – David Friedman

The key point here is uncertainty. Anybody who claims to know what any economy will look like in one hundred years is being foolish. We have little idea about the costs and benefits of a warmer temperature – or how rich, say, Bangladesh will be in a century, which is a very important factor when determining what (if any) action we should take to try to prevent global warming.

"the tax on freddos" – e-petitions

Thank goodness somebody is finally raising this important issue (Freddo bars). This is what e-petitions were made for.

Free schools good, profit motive better

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I went on the BBC News Channel yesterday afternoon defending free schools against the charge that they would lower standards and lead to social segregation.

First, it is worth re-capping what the ‘free schools agenda’ is all about. Essentially, it has two purposes. The main one is to increase the supply of good school places by letting independent providers set up new schools, and receive state funding on a per pupil basis. The idea is that this allows parents to exercise a meaningful choice over where their child is educated. That drives schools to compete for pupils, which increases accountability and drives up standards. The second purpose of the free schools agenda is to give schools greater freedom from bureaucratic interference: let them innovate, let them focus on teaching the child in front of them, and stop thinking the man in Whitehall always knows best.

School choice may be a radical idea, but it isn’t a new one, and it has worked where it’s been tried – most famously in Sweden, that well-known socialist nirvana. Moreover, it is hard to deny that the British education system is in need of serious reform: despite the fact that spending has practically doubled in real terms over the last decade, Britain has tumbled down the international league tables. Academic research has even suggested that 17 percent of British 16-19 year olds are illiterate, while 22 percent of them are functionally innumerate – a shocking indictment of a failing system.

Moreover, the claims made by the critics of free schools do not hold water. They suggest that free schools will promote inequality, but this has not been the experience in Sweden or the US. In fact, American evidence suggests the opposite: that privately operated schools can be better integrated, since attendance is not as closely linked to where one lives as it is in the state sector. Indeed, it is worth remembering that our current schools system is deeply unequal precisely on these grounds – in many cases it amounts to little more than segregation by house price. Live in a nice area, and chances are you’ll get to attend a fairly decent school; live on a sink estate, and you probably won’t be so lucky. Free schools offer an escape route.

At this stage, however, it is worth making a point about the profit motive – which Nick Clegg today ruled out of bounds vis-à-vis free schools. The trouble with not allowing for-profit companies to run free schools is that it dramatically narrows the pool of potential school operators. Fewer new schools will be set up, and those that are established are more likely to be concentrated in relatively affluent areas, where parents have the time and the ability to push for them. By contrast, if we were to allow profit-making free schools, we would get far more of them, and see more of them being set up in deprived areas – where both the demand and the need for them is greatest. Whatever Nick Clegg says, the profit motive in education could easily be a force for social mobility, not against it.

Finally, a point on standards: there simply isn’t any convincing evidence to suggest that free schools will provide a lower standard of education than state comprehensives, or that standards at those state comprehensives will suffer because of the existence of free schools. True, part of the rationale behind school choice is that irredeemably bad schools should go out of business. But that is surely as it should be: a system where good schools can grow and be replicated, and where bad schools are not kept interminably on life support, will lead to standards being driven up across the board.

Parental responsibility in schooling depends on choice

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It would appear that the reason why the UK¹s education sector will remain closed to private investment, innovation and entrepreneurship for the foreseeable future is because Nick Clegg and his Liberal colleagues personally dislike the idea of giving highly efficient and successful for-profit companies the opportunity to transform the way education is designed and delivered across the UK. That said, Nick Clegg is now also calling for more parental responsibility in education which sounds like a positive development. Mr Clegg can’t have his cake and eat it too.

If parents are responsible for their children’s education then they can only fulfil this responsibility if they are free to choose the nature and form of education which their children receive. As a result, if the freedom of parents to choose is restricted then this will also undermine parental responsibility. Parental responsibility and the freedom of parents to choose are therefore intimately linked and are best viewed as two sides of the same coin.

Governments therefore have a clear choice. They can either promote parental responsibility in education by guaranteeing that they have the greatest possible variety of educational opportunities to choose from or they can undermine parental responsibility in education by restricting the variety of different educational opportunities which parents are free to choose from.

Therefore, by refusing to allow a variety of different education providers to compete on a fair and level playing field, Nick Clegg is continuing to undermine parental responsibility in education. Any rhetoric about wanting to increase parental responsibility in education should therefore be challenged as being in direct conflict with his position on refusing to allow for-profit companies to compete in education.

Think piece: "War or Class or some combination of the two"

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The London riots seemed to confirm everybody's worldview, however different those views were. Was there some overarching lesson about class or the state, asks PJ Byrne, or were the riots simply a sad reminder that we are all animals, capable of good and bad choices?

Last month, Tom wrote that he was "glad to be out of London while the rioting and looting was going on", for while "it may have been chilly and damp in the Lake District... it was also peaceful and quiet." Nonetheless, he added, "watching the footage on the news, I couldn’t help thinking that most of those responsible were ‘looters’ long before they started smashing up JD Sports and setting shops on fire." Tom then provided an example of what he meant by quoting an extract from Ayn Rand's epic novel Atlas Shrugged, staple fare for any libertarian firebrand, where key protagonist Francisco D'Anconia said:

"when a society establishes criminals-by-right and looters-by-law—men who use force to seize the wealth of disarmed victims—then money becomes its creators’ avenger. Such looters believe it safe to rob defenseless men, once they’ve passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality."

Tom's implication was, at least to me, abundantly clear: the looters were merely acting as they had been taught by the welfare state, by assuming that they were entitled, by right, to the property of others in a topsy-turvy world where the role of government, "instead of being a protector of man's rights... is becoming their most dangerous violator; instead of guarding freedom... is establishing slavery; instead of protecting men from the initiators of physical force... is initiating physical force and coercion in any manner and issue it pleases". (Rand, 1964) [Continue reading...]

What a tangled web we weave

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A recurring story in UK journalism is the exposure of mendacity on the part of some prominent left-wing journalist. Hailed as a darling of the left, and with a devoted following of those whose prejudices they confirm, periodically one of them is exposed for lack of journalistic integrity. Sometimes they misattribute quotation or quote selectively to mislead, sometimes they pass off completely fabricated stories as true reporting. Commonly they use statistics dishonestly to lend their opinions more support than the real facts offer.

Patient work and fact-checking by critics, usually from the blogosphere, can expose a pattern of deceit that ultimately shames and discredits the journalist concerned, leaving the left bereft once more of one of their rising stars. The self-justifications and half-hearted excuses are to no avail. "My work expressed the spirit of the truth." "Perhaps I did cut corners, but it was to expose wrong-doing."

The regularity of these events poses the question as to why it happens. What is it about promising left-wing journalists that leads some of them to blur the truth? The answer could be a simple one. It is that the real world does not fit their ideological view of it. They want a world in which people feel collective solidarity and are content to pay high taxes to have 'society' (by which they mean the state) provide services that enlightened people think appropriate. And they want equality.

In the real world people want to improve their lot and that of their families. They prefer to allocate their resources on the things they think important, and have scant respect for the collectivist views of 'enlightened' thinkers. They are more concerned with opportunity than with equality, and don't mind some people being richer if they have the chance to better their own lot.

In a nutshell the real world itself is centre-right. When left-wing journalists find it fails to conform to their ideology and their preferences, some of them are tempted to lie about it. They gloss over key facts and evidence that would falsify their preferred interpretation, and interpolate fabricated material to make it fit their Procrustean bed. They lie, in other words, because the truth itself would refute them.

Jobs are costs, not benefits

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As I've been saying here and elsewhere for a number of years now. Jobs are costs of a plan, not a benefit of one. No, not claiming credit for this simple point being made by another, just noting that it is being made in this excellent report on green jobs.

The first level is that of projects or programmes. Here he makes the fundamental point that in appraising these, prospective labour inputs are to be viewed as a cost not a benefit: labour costs should be counted as such, along with other inputs (such as energy). Hughes notes that if the objective of policy is to reduce CO2 emissions, the right course of action is to minimise the costs of any such reduction; and these include the costs of labour.

The report is worth reading in full for it also goes on to examine the role of "green jobs" in the macroeconomic sense.

Please do note that the thrust is not that "there's no climate change so we don't have to do anything so Yah Boo Sucks! Greenies!". Instead it's the much more subtle points that, as above, jobs are a cost not a benefit. We should not applaud a specific anti-climate change policy because it "creates more jobs", this is entirely the wrong way around. We want to, just as in any other economic adventure, perform the task, that minimization of climate change, at the least cost in resources, whether those resources be labour,capital, energy or anything else.

On the macro side, here we are in Bastiat territory. Sure, we can see those jobs being created building windmills. However, how many other jobs in the economy are being destroyed by higher energy costs? Those higher energy costs we have to suffer to employ the people to build the windmills? The Spanish experience has been 2.2 jobs lost for every one created: that's on a generous interpretation of the results.

I know that I'm a little out of step with many on this climate change thing. I annoy one group by being quite willing to believe that it's happening and perhaps we should do something about it. I annoy those who agree with me there by continually pointing out that most plans floated to "do something" are appallingly awful and would ashame three year old children if they were to propose them.

Which is, if I am to be honest, why I like this report so much. The argument is that if we are going to do something can we at least make sure we don't do this long list of very stupid things that people are currently proposing? Please?

Sounds like a plan to me.