Adam Smith Institute

Official figures released tomorrow are expected to show a further deterioration in the government's finances. Rising  unemployment and a slowdown in wage rises mean that the Treasury is raking in less income and national-insurance taxes. Slowing business activity and a gloomy housing market mean that corporation tax and stamp duty have been hit too. But government spending, of course, continues – so the borrowing gap continues to widen.

Meanwhile, the Confederation of British Industry on Thursday will report an accelerating downturn in business, with fewer and fewer orders coming in. (The Institute of Chartered Accountants has already catalogued a nosedive in business confidence over the last year and a quarter.) Retailers too are likely to reveal a drop in sales when they report on Thursday. New GDP figures are likely to show UK growth as positive, but (at 1.6%) significantly below its long-term trend of roughly 2%.

Is Gordon Brown still on holiday? Even if he isn't, I'm sure he won't be available for comment.
 

Kate Hudson, Chair of CND, has a letter in The Guardian.

...there is no lack of resources for investment in the UK's energy sector, only a lack of forward thinking. The government is set to heavily subsidise a new generation of nuclear power stations, despite recent reports that decommissioning the existing generation could cost £83bn of taxpayers' money. Investment in renewable and clean energy sources would be a far more productive use of public funds in the long term.

There are several errors to unravel there: of course there is a lack of resources for investment. We cannot invest in everything, we face limits upon all our resources all the time. The question we need the answer to is what is the best method of using our available resources?

It could be that renewables and "clean energy sources" (of which number I would count nuclear as a possibility but still...) are the best use of public funds. It might be that nuclear is, it could even be a network of minions using stationary bicycles to power dynamos. What we need therefore is a system, a method, for working out which of the various available alternatives is indeed that best use of our limited resources.

That method is called a cost benefit analysis: how much will it cost to do something and what is the benefit of our doing so? But the important point is that we start from now: what has happened in the past might be used to guide our estimates of either costs or benefits, certainly, but money that we already have to spend, come what may, should not factor in our calculations.

For money that we already have to spend is a sunk cost. Whether we use windmills, new reactors or those bicycles, we still have to clean up the previous generation of nuclear sites. Whatever we do going forward, those costs are there: thus they should not be used in calculating which path we should follow.

It still might be true that the bicycles are the best option (I certainly don't think so) or the renewables (not with the current generation of technology they're not) but the waving around of that £83 billion figure is simply a distraction, a piece of political shroud waving.

Oh, and one other point. Given that the plan to cover the seas and the hills with windmills is costed at £100 billion, that sunk cost actually looks rather cheap.

After reading how the cute Chinese girl at the opening ceremony of the Beijing games was actually a fraud, miming for the talented unseen crooked toothed singer; I found myself thinking why do we think that ‘sweetness’ is a substitute for talent? Such is the mockery of the show ‘Britain’s Got Talent’ that large numbers of useless children were primarily chosen because they had gappy smiles or a good sob story. As evidenced by the winner, 14 year old George Sampson, who displaced many more talented acts simply because he was ‘good for his age’, as opposed to just good.

This discrimination based on age or looks has to stop. Teenagers have many talents and differing levels of maturity and they need to be treated on this basis. Not only is ageism ruining TV talent shows it’s costing us £31bn per year. A year after a mass of legislation apparently dealing with the problem of ageism it is still endemic, so new solutions need to be found. A start would be to rethink the legal age limits.

Citizens in their late teens experience more age discrimination than those in their fifties, due mainly to the multitude of minimum age laws in place regulating such things as working, voting, drinking, marriage and even networking sites. This is done primarily as the government knows what is best, absolving the role of parents and indeed the burgeoning intelligence of teenagers. You may mature when the government says so and not before.

The regulations currently in place can be seen to be having an adverse affect on the young. The rise in binge drinking and their complete disrespect towards authority stem from the nanny state we live in. It’s time that teenagers were accepted on an individual basis, rather than tarnished with the same age brush and forgotten about. These policies are bad for the teenagers and bad for the economy

Teenagers are responsible, they just don’t have the opportunity to prove it.
 

I recently returned from a holiday in the USA where, as always, I was struck by how cheap everything is. Part of this is down to exchange rates – my pounds go a long way the other side of the Atlantic – but that’s not the whole story.

I found that for most things the dollar price was the same or lower than the GBP price would have been at home – which is to say, something that costs £1 here, would sell for $1 or less is the US. If our incomes worked out as £1=$1, then that might make sense, but they don’t. In fact, the median income ratio is more like $1.5=£1, meaning life is about 50 percent more expensive for us Brits than it is for Americans.

The question is, why? Several reasons for Britain’s high prices spring to mind:

• Property prices are exceptionally high in the UK – partly a result of limited space, but also a product of our restrictive planning system. Government restricts the supply of available land, driving up prices. High land prices mean higher rents and higher wage demands, both of which push up costs for retailers. Then they have to charge more for their goods and services.
• VAT, at 17.5 percent, is much higher than the sales taxes in the US. High fuel duties don’t help either, since most goods have to be transported. Indeed, the very fact that Britain is a relatively high-tax economy pushes up prices – sellers need to charge more to come out with a decent profit.
• Regulation, another burden on business, has the same effect. In particular, employment regulations make labour more costly in the UK in the USA, as does a higher minimum wage (where, again, $1=£1). And that drives retail prices up.
• The EU’s Common Agricultural Policy and the Common External Tariff, makes a range of goods (especially food and clothing) more expensive than they would be if we traded freely.

Pondering these things, it’s pretty clear that smaller government and freer markets could do a great deal to reduce the cost of living in the UK. Is anyone surprised?

Is the message from those bright lads over at the new economics foundation (they, of course, launch their critique of capitalism by not using capitals). Unless we radically change the way we do everything then in 100 months time (wonder why 8.33 years wasn't used, maybe it doesn't have quite the same ring to it?) catastrophic climate change will be inevitable. Worth taking with a pinch of salt perhaps, as these were the people who told us that penis sheaths and worshipping the Duke of Edinburgh as a living God were the way to an earthly nirvana.

Exactly what we need to put in place of the current system is a little less amusing. Taking lessons from Cuban agriculture with the low level malnutrition there doesn't sound all that wise. The compulsion that accompanies the WWII style mobilisation (yes, they do make a direct comparison) they urge is of course anathema to anyone with the least pretence to a concern for liberty or freedom. Their ideas on how to reform the financial system actually brought on a bout of hysteria: they want credit controls, they want to lower the interest rates so that green schemes appear profitable and they want to divert pensions into such green schemes. They then have the audacity that stuffing your money in to low return green schemes will provide you with a decent pension. Eh? The hysteria turned to giggles when they described the capital controls needed to increase the amount of money available for such investments. Leave aside their both socialist and nationalist insistence that your money must be placed at the use of the nation rather than your use and think instead of this.

Given that we run a trade deficit we of course run a capital surplus. Capital controls might stop capital leaving but they'll also stop it coming in for fear of not being able to leave again: so given that we are nett capital importers they intend to increase investment capital by stopping such importation. Genius, don't you think?

One thing that really did amuse was that this article appeared in the same edition of the same newspaper. Crude oil from GM algae, a process some 16 times more efficient (claimed, at least) than biofuels. This, from the day before also amused, low cost electrolysis as a way of storing solar power. Then of course there's the repeated insistence by such as Jeremey Leggett that solar itself is only five or six years away from being cost competitive with coal for electricity generation.

My own view on all of this is that we really don't need to change society in the ways described, even if it were possible or even desirable. We did need to work out a way of weaning ourselves off fossil fuels, yes, but that process started in the labs a decade and more ago, is now in the hands of the engineers and soon the technologies of choice will be available off the shelf.

In short, technology will indeed save us, for people spotted a profit opportunity and got on with inventing and making the things that we will need. What we needed to do we've already done.

Hmm, I wonder what the next argument the millenarian socialists will use as a reason we must destroy civilisation will be?

It is a mixed bag on free trade. While agreements are being stalled in the US, across the other side of the globe the Association of Southeast Asian Nations (ASEAN) are deep in free trade negotiations with Australia, New Zealand, the EU and India. They are also implementing a free trade agreement with Japan, which will make 90 percent of trade tariff-free inside of 10 years and have signed a deal with China to create the biggest free trade zone by 2010.

So while much of the East is opening up, the West is closing its doors. An article by Avi Salzman in Business Week considers the reality on the ground for businesses in the US wishing to export. For the company Caterpillar – which assembles trucks of behmothian proportions – without the Colombian free trade deal, they face a tariff of $180,000 on a $1.2 million truck. Doug Goudie, director of international trade policy for the National Association of Manufacturers, is concerned: “Every day that goes by, we lose the opportunity to export manufactured goods".

With the next round of world trade talks starting up, it is time for ministers to step up to the plate and liberalize global trade. As The Economist reports: “Yvan Decreux and Lionel Fontagné, of CEPII, a French economic research institute, have tried to measure the effect on global growth. They estimate that the world economy would eventually be $43 billion a year better off. Throw in some liberalisation of services too, and the sum rises by $30 billion.”

In fact, as The Economist acknowledges, the financial gains would be much greater than this. All we need now is for the politicians throughout the world to sign up to free trade. I am not holding my breath...
 

Hayek was right. The cause of business cycles and market turbulence is – governments.

In the latest New Scientist, a bunch of 'econophysicists', using sophisticated computer analysis, suggest that crashes might well have something to do with the euphoric levels of credit that precede them. In other words, the cause of your hangover is the binge you went on the night before.

The geeks used some pretty impressive technology – not just looking at portfolios, but programming virtual hedge funds and brokers to see how they react to market conditions. In stable times, they conclude, these agents all work pretty well, spotting under-priced stock and borrowing to invest in it. But when credit is cheap and they borrow and buy more is when they can get into difficulties. Some single chance event can send waves through the entire market: because when everyone's borrowing, one person's failure becomes everyone else's problem.

So that's it. Politicians and monetary authorities love it when we're all borrowing to spend wildly. It's boom-time, everything succeeds, employment rises, production soars, house prices rocket, we all feel rich. And then pop! – the first person who can't pay the bills leaves a second short of cash, which knocks on to a third, a fourth, a fifth... Pretty soon the economy's in a tailspin. All those people the banks and building societies lent to suddenly can't pay it back.

You could mitigate this by regulating the gearing of financial institutions. Much better to do it through a sensible monetary policy that doesn't make credit too easy and keeps a close and concerned watch on the monetary aggregates. The quasi-independence of the Bank of England has probably helped: but it evidently needs tougher targets if boom and bust is truly to be eliminated for the future.
 

Cristiano Ronaldo is under fire for claiming he is like a slave because Manchester United will not release the final year of his contract so he can play at Real Madrid. We should all mourn this blatant violation of human rights.

Poor Ronaldo. In 2004, Man U exploited a helpless and innocent teenager, and then tricked him into signing a new contract in 2006 for £56 million 2010. When he said, "United have stood by me and been there for me and I want to repay that,” it was probably against his will. Those monsters at Man U made him say it. In April 2007, he renegotiated his contract through 2012 for £120,000 per week and said, "I am very happy at the club and I want to win trophies and hopefully we will do that this season."

Those guys in Manchester United can manipulate anyone to say anything. It’s ludicrous to believe anyone could possibly be happy playing football for a living—especially for such little money. It won’t be long until the bosses at Man U realize their errors and write the greatest hymn of anguish and repentance since “Amazing Grace” and Ronaldo releases his album of freedom songs.

For someone named after the Great Ronald Reagan, Ronaldo should realize that this is actually called CAPITALISM, not slavery. Two people negotiate, agree on the terms of a contract, and sign it. Then both parties do what they agreed. In this case Man U agreed to pay Ronaldo a ridiculous amount of money and Ronaldo agreed to play football for 5 years. A little different than being transported from Africa to South Carolina in the barracks of a terrible ship, being sold from one owner to the other, and performing forced labour your whole life…

I love discovering new or novel applications of property rights that make everyone better off without government interference.  A New York Times article charts the rise of so-called “community-supported agriculture,” in which families buy shares in local farms in exchange for a proportion of the meat and produce that is made. The families value locally produced, organic produce and are willing to spend a bit of extra money for the convenience and quality of the produce, in addition to whatever satisfaction they get from knowing that there is a successful old-fashioned, small-scale farm nearby. Because they are paying for a percentage of the produce, not a set amount, they have an extra incentive to help the farm succeed, and many of them even do voluntary fieldwork.

When small farms go out of business, so many people are quick to say that the solution is government subsidies. In contrast to government solutions, this system does not burden taxpayers who get no benefit from the farms, yet it still mitigates the risks of crop failure and market uncertainties that are inherent to small farms. Moreover, thousands of families get the benefit of fresh produce delivered to their door each week. In the lasts 15 years, the number of farms with this style of financing has grown from less than a hundred to over 1,500, and the trend continues to grow. Once again, the private sector solves a problem all by itself, and thousands benefit!

In certain quarters people keep arguing that the surging oil and food prices are caused by speculative international investments in these commodities. People who understand how the market is working have always maintained that the principle effect of commodity futures is beneficial because they smooth extreme swings of prices that tend to hurt consumers. A fairly convincing case can be made for this with regard to the market of the one commodity which has been exempted from the future markets: onions.

• Onions are the only commodity for which futures trading is banned.
  
• Back in 1958, onion growers convinced themselves that futures traders (and not the new onion farms sprouting up in Wisconsin) were responsible for falling onion prices.
  
• They lobbied Gerald Ford to push through a law banning all futures trading in onions, and the law still stands.

As a result of that we have seen extreme swings in onion prices over the last two years. Whereas oil prices have risen 100 percent and corn 300 percent - thanks to the future markets - the volatility in onion prices was even more extreme: they soared 400 percent between October 2006 and April 2007, only to crash 96 percent by March 2008 and then rebound 300 percent,

...reinforcing academics' belief that futures trading diminishes extreme prices, says Fortune. The volatility has been so extreme that many onion growers now believe the onion market would operate more smoothly if a futures contract were in place.

This week’s Economist contains some sad figures about my home country, the United States. Only one third of Americans believe free-trade agreements are good for the economy, the lowest figure in the developed world. On the other hand, a famous study in 1992 by Alston, Kearl and Vaughan (google: “Is There a Consensus Among Economists in the 1990's?”) found that 93% of economists support free trade. Why is there such a discrepancy, not just in America, but worldwide?

Economics, in general, is not exactly intuitive. Most people don’t naturally come to the same conclusions that Ricardo and Smith came to without instruction and explanation. It is much easier to comprehend, "We should have tariffs because if we don’t, people will buy sugar from Jamaica instead of America. Plus — it could be contaminated since it comes from a developing nation."

The problem is that most people never really learn economics. Some high schools offer one course as an elective class, but most students go through high school knowing nothing of supply and demand and absolutely nothing of comparative advantage. In university, students generally only take economics if it is a required course — meaning many students graduate college without ever studying economics — even those who aspire to be high school teachers. If high schools did start to offer economics, who would be qualified to teach it?

The general lack of understanding carries grave implications. If voters oppose free-trade agreements, then politicians will certainly pander to fill their need. The doors open wide for demagoguery —meaning free-trade advocates are portrayed as insensitive and greedy.

It could be people never learn because they don’t have the opportunity. Perhaps though, it’s just because the OK! Magazine special of Wayne Rooney’s wedding is just so much more interesting than The Economist…
 

Greg Clark's recent book, Farewell to Alms, makes the argument that the Industrial Revolution happened because the bourgeois values necessary for it to do so were bred into the English population. It's an appealing argument to both Little Englanders and Great Britons, that there's something special about us: and indeed it's also true that since the IR did indeed start here there was indeed something different about our forefathers.

However, the perceived weakness in the argument has been over the transmission mechanism of those virtues.  Was it genetic? or cultural, memetic even? New research seems to show that it might have been a bit of both.

We find that parents who are more trusting and parents who are risk tolerant have children with similar attitudes. The correlation is strong with both mothers and fathers for risk; for trust, the mother plays a more important role than the father. Parents also tend to marry individuals with similar trust and risk attitudes. This reinforces the impact on the child; having one parent with a given attitude means that the child is likely to have a second parent with that attitude as well. We also find a role for environment, because child attitudes are similar to the prevailing attitudes in the local geographic region, even controlling for parental attitudes. Whether attitude transmission works through nurture, nature, or both is not clear, although several pieces of evidence suggest that nurture must play some role.

Trust and risk tolerance are of course cultural pre-requisites for any form of large scale trading economy. Whether it's directly genetic or more to do with nurture and education doesn't really matter for the purposes of Clark's argument. All that's necessary is that such attitudes were passed on by the part of society which was outbreeding the others, as his work on the bourgeois shows they were.

Another result of this research is that there are national differences in these levels of trust and risk tolerance, something which might aid in explaining why there are such differences in economic structure, the prevalence of entrepreneurialism and the rate of growth between nations.

These figures relate to the US rather than the UK, but I think it's likely that the effects of Tesco's and China have been similar:

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged. And the reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

Part of the reasoning is that the richer you are the more of your income is used to purchase services rather than goods: and goods are more likely to be traded internationally and thus to have come down in price as a result of globalisation. There is also another point, Baumol's one that we would expect services to be rising in price relative to manufactures anyway, given the difference in the way that labour productivity can be increased in each.

These different inflation rates do, as mentioned, have an effect on inequality. This means that once again we should not be measuring inequality as a function of income, rather as a matter of consumption. If we do measure that inequality correctly, it's effects on the actual living standards of real people, then we find that globalisation isn't increasing it at all.

Which leads to an interesting thought about that Joseph Rowntree Foundation figure on the amount needed to be not poor in the UK. If we really let globalisation rip, if we tore down the remaining trade barriers, we might actually find that the further cheapening of goods would reduce that amount, the income necessary to reach a particular level of consumption.

A Joseph Rountree Foundation team headed by Jonathan Bradshaw, professor of social policy at the University of York, has published a report which sets out the sum required for a minimum standard of living in Britain. The headline figure is £13,400, but in fact the report sets out different sums for people in different circumstances. The study, which took more than 2 years to complete, defines a minimum acceptable standard as including "more than just food, clothes and shelter."  For example, a single person is reckoned to need "walking boots, a pay-as-you-go mobile phone and a bicycle."  A pensioner couple's sum covers "an occasional carvery meal and a bird feeder."  Wine is included, but no tobacco, and a car is not deemed essential.

One might quibble over the details of what should or should not be included, but the exercise itself is a laudable one. It is useful information for us to know what level of income is needed by specific groups to sustain a minimum acceptable standard of living. It would be a good thing if this were to be institutionalized, with a standing commission reporting annually on how the figure has changed over the year, much as the inflation rate basket of goods is changed from time to time to reflect changing lifestyles.

What is admirable about the new report is that it sets out the poverty levels as specific cash sums. This is a positive step, for it is on the basis of what poor people can afford that the poverty level has meaning, rather than on how they compare with the rich. Too often people talk of poverty when they are actually discussing inequality. For poor people inequality is rather less important than whether they can afford enough to eat, and to live at a minimum acceptable standard. This is not some hypothetical fraction of what rich people earn, or what the average income is. It is whether they have enough to get by on. The Joseph Rountree Foundation rightly includes extras in addition to basic survival needs, for they are part of living a decent life. Their report sets out targets for minimum income levels, and sensibly treats poverty as a problem of deprivation and needs, rather than as one of disparities of income. It is a most welcome and refreshing change.

To have to keep making the same obvious point and find it being continually ignored. Still gird the loins and keep stating the truth I tell myself.

Europe's biodiesel producers will today urge the European commission to levy punitive duties on US rivals after Brussels launched formal anti-subsidy and anti-dumping investigations into imports from America.

I've said it often enough before: if someone is willing to gouge their own taxpayers in order to provide us with cheaper goods then the correct response is to say thank you. Followed by an invitation for them to do the same tomorrow as well. To do otherwise is to be protectionist: protectionist of the interests of business above those of the consumers and that really isn't the way we're supposed to be playing the game. But in this report we see it even more nakedly:

Garofalo said that "splash and dash" accounted for only 10-15% of the biodiesel imported into the EU. "The real problem remains US biodiesel producers," he said. "Changing the rules to stop splash and dash doesn't change a lot as export subsidies will be maintained for US producers and that's precisely what we want to stop."

Garofalo is the head of the European Biodiesel Board, the trade organisation for producers. It is exactly as Adam Smith said all those years ago:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

There it is, plain as day. Garofalo wants you to be barred from purchasing the best offer so that his members might make more profit. That US taxpayers are subsidising that best offer is an irrelevance to your and my interests. The correct response to someone offering us subsidy in this manner is thank you, please call again.

Whatever the interests of Garofalo, the EBB and the producers.