My apologies but I've always found it slightly difficult to award Matt Yglesias the high rating that so many others do. He's certainly right some of the time but in what I've seen of his output there's all to often a reflexive defence of "my tribe" rather than careful thought. Not, as you know, something that I am ever subject to myself.

However, on this specific point he is absolutely spot on:

Almost all states—though not Alabama* or the anarchic United Kingdom—require barbers to be licensed, but the specific requirements seem to vary arbitrarily. New York barbers need 884 days of education and apprenticeship. Across the river in New Jersey, it’s 280. But getting one’s hair cut in New Jersey (to say nothing of England) is hardly a life-threatening gamble.

In most of the country, what you need to do in order to work as a locksmith is find someone to pay you to fix locks. But in Oklahoma you have to be 21 years old, New Jersey requires a high-school diploma, and Tennessee makes you take two exams.

These rules correlate strongly with burdensomeness in part for the same reason that they seem so random—they’re often imposed specifically in order to create a burden and stifle competition. Once a licensing regime is in place, existing license holders have an incentive to lobby to raise the bar for entry.

There are reasonable bits of red tape you might have about a locksmith: not having a criminal record perhaps, as those are skills that you'd not really like the average thief to be taught. But other than that, yes, much red tape, much regulation, is about protecting the insiders of an industry from upstart competition. In my own business area, metals, it is common knowledge that no one will ever build a new copper smelter in the US. The regulations make it impossible to do so at a profit: and all of the extant plants are grandfathered in and do not have to meet those same regulations.

At which point we might say so what? But the what is that we need and want the destruction part of capitalism just as much as the creative part. We need upstarts, non-insiders, to be able, perhaps through new technology or new methods of organisation, to be able to destroy those incumbents. Otherwise there's no room for the creative side, is there?

Yes, we really do want a bonfire of the red tape.
 

The game now is that everyone sits round the table, staring at Germany until it blinks. Eurozone leaders figure the only way to save the euro is for all 17 member nations to get together and issue 'eurobonds'. There are some big hitters among those who think this is a really good idea – people like the new President of France, Francois Holland, the Italian Prime Minister Mario Monti, and the European Commission President Jose Manuel Barroso.

Right now, when eurozone countries want to borrow money, they issue their own bonds, selling them to investors for cash and the promise of a return – a rate of interest paid each year over a specified period, say ten years. Sadly, it has become nigh impossible for the government of Greece to finance its spending this way, because investors figure that its promises to repay are so shaky they demand double-digit rates of interest – which is cripplingly difficult for Greek taxpayers to fund, making it even harder for the country to stay afloat. And there are precious few people prepared to take the risk that Greece will actually be able to repay them in anything like ten years from now.

So the plan is that the eurozone as a whole should step in and issue its own eurobonds. The promise to pay lenders interest and indeed to repay their principal at the end of the term would be collectively guaranteed by all 17 nations. So eurozone countries, including those in trouble such as Greece, Ireland and Portugal (and those who are likely to be in trouble soon, like Spain and Italy) could borrow at realistic rates of interest, without crippling themselves.

That is good news for the troubled countries, because it means that all countries in the eurozone would actually be able to borrow at the same interest rate.The snag is that any such country cannot actually pay its share of the interest and principal payments when they become due, the other countries would have to help them out. And the stronger countries are not exactly thrilled at this prospect.

Nor should they be. In the first place, the eurobond idea distorts the price mechanism. If you are lending to someone, the interest you get in return should reward not only your forbearance but the risk you run of not being repaid when you want your money back. Lumping risky and non-risky (well, less risky) countries together means that prices no longer reflect that risk. The risk is pooled. Specifically, the stronger countries are subsidising the risks that are being run by the weaker ones. And when you subsidise something, you generally get more of it. But who wants weak countries to live beyond their means and take a bigger risk of running out of money than they already have done? We had enough of that from the banks, thank you very much.

But the system builds in moral hazard for the over-spent, over-borrowed countries to do exactly that. Live beyond your means, and your richer cousins will underwrite your profligacy and pay people to keep lending to you. Act prudently, and you get hit for a bill from the imprudent nations.

When it comes down to it, of course, Germany has the broadest shoulders. France might think itself in the same league, but actually investors reckon that is a pretty bad bet too – all the more so now that it has a socialist president who figures that balancing the books is for the birds. The German public certainly can't see why they should pay for other people's profligacy. Germany and the other stronger countries would in fact find it more expensive to borrow themselves, because they would be sharing the cost of the weaker countries' borrowing too.

Will it happen, though? Yes, quite probably. The alternative is to let Greece slide out of the euro, followed probably by a number of others that just can't make the grade. That would be messy, and it would cost European banks a lot of money – urged on by regulators, the banks hold a lot of government bonds, which were always reckoned to be safe investments. Though now, patently, they are not. That purely financial concern is what is in George Osborne's mind. But the real concern of pretty much everyone else is a political concern: that the exit of any country marks a retreat from the EU idea of deeper and closer integration, the fear that the European Project would find itself on a falling tide. And that they find deeply shocking.

The euro was always a political rather than an economic venture. But, as my economist friend Richard Jeffrey of Cazenove Capital puts it: "Just because you want to ignore economics does not mean that economics will ignore you." It's painfully clear what the end will be. The only question is how long it will be postponed, and at what cost.

The austerity vs stimulus debate is the focal point of attention once more, as the recent results of Greek and French elections show an increasing opposition against Europe’s unique type of redistributive austerity. But few understand what austerity really means. They refer to it as “painful cuts that are hurting growth”. Even by phrasing the choice as 'austerity vs growth', it is obvious that people don't really understand what austerity is, and even less what their governments are doing. 

Recent posts from the Mercatus Center, Cato Institute, Tyler Cowen and many others shed some light on this, and have pointed to the inconvenient fact that there is no real austerity in Europe, at least not the type that could theoretically help these economies recover. In fact, Tyler Cowen asks what austerity is, trying to come up with a precise definition in order to overcome the biases behind the term and its policy effects. Looking at Wikipedia and Investopedia he finds the following:

"In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided."

"A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits."

Defining the term is particularly important for policy reasons. As you can see, there is no mention of tax increases in any of the two definitions. However, governments do often tend to use tax hikes to lower the deficit. But the very definition of austerity implies cutting spending and cutting entitlements in order to create more scope for the private sector to grow on its own. In other words, to remove the dependency mentality from people and from businesses. 

Then comes the following graph from Veronique de Rugy of the Mercatus Center: 

Where is the austerity here? Where are the significant cuts in spending necessary to address public and private sector dependency on the government and to reform the labour market? Particularly interesting examples are UK and France, where no signs of decreasing spending can be seen. In the UK, public spending to GDP has reached a 50-year historical high (46% of GDP). Some cuts have been made, but everything that was saved up was again used to steer the economy. And so Britain saw schemes that want to pick industrial winners, guide investment projects, subsidize housing, subsidize unemployed young people, and even control the amount and prices of loans in the economy. How do any of these address systemic dependency and how do any of these fit in the aforementioned austerity definition?


In France, the painful burden of redistributive austerity was one of the causes of Sarkozy's electoral defeat. The French were apparently fed up with it. Still, I'm struggling to see the actual austerity in France. I may be wrong, but maybe what's bothering the people in France is the same thing bothering people in the UK — taxes are going up, people are left with less and less disposable income, nothing is done to address the endemic dependency of the people or businesses to the state, private sector growth is unlikely, banks are in an uncertain position and refusing to lend. In France, as a result, people are resort to radicalism, which was evident on both French and Greek elections where ultra-right and ultra-left parties won seats in parliament and got a dangerously significant portion of the votes. 

The very idea of depicting the debate as austerity vs growth is wrong. This implies that the solution is the opposite of austerity — a monetary or fiscal stimulus to close down the nominal GDP gap. Even if a short-term fiscal or monetary stimulus can temporarily boost growth, that isn't the way towards a proper restructuring of the economy. I know the logic behind these views: "let's just get the economy going and all will be better afterwards". The idea that it's much easier to do structural reforms after things are going well is a wrong approach, since no politician will have the power, strength or the courage to engage into painful but necessary reforms after what the world economy is going through at the moment.

We should expect austerity to be an unpopular policy. Its primary goal is to cut the dependency to the government. This does not come easily and will cost votes. But doing what the European politicians are doing currently has no chance of achieving growth any time soon, is constraining the population from spending (through tax hikes) and the businesses from investing (by causing uncertainty, sending bad signals, and offering no institutional support), and will result in a double loss — of elections and the recovery. As Margaret Thatcher once said: "If you want to cut your own throat, don't come to me for a bandage". This precisely sums up what Europe's allegedly austere governments are doing — cutting their own throats and hoping they stay alive. Not likely. 

What with the ongoing eurozone crisis, G8 summits and NATO confabs, politicians from around the world continue to dominate the headlines – but things don’t seem to be getting any better. Amid all that hot air, though, were a couple of nice pearls of wisdom in the past week. Both suggested salvation from beyond the world of politics.

At a press conference on the occasion of his receipt of the Templeton prize, the Dalai Lama blamed last summer’s riots on young people “being brought up to believe that life was just easy. Life is not easy. If you take for granted that life will be easy, then anger develops, frustration and riots.”

Indeed. Politicians spend a lot of time promising to make life easy, alleviate risk and absolve individuals from the consequences of their behaviour.

Meanwhile, in a BBC interview prompted by the government’s scrapping of nutritional regulations for school lunches, celebrity chef Jamie Oliver said “I’ve given up on politics. My focus for the next 15 years is business and people. That is where the hope is. Governments are too short term. They’re too transient…They really don’t understand. There’s a political agenda but when you make these changes there’s very physical things that happen that they know nothing about which is very dangerous.”

Indeed, again. Jamie will probably be more successful spreading the gospel of healthy eating as a businessman than as a lobbyist.

Both express a sentiment reflected in the UK’s recent local elections when just less than a third of the electorate bothered to vote. That was the real news in the election – the vast majority of the population recognize that the government is just irrelevant to most of their needs and aspirations.

Whatever politicians may say and promise, life is not easy and they’re unreliable partners.

Eamonn Butler discusses the morality of taxation, which he wrote about for the Taxpayers' Alliance's excellent new report, The Single Income Tax.

Scott Sumner had another must-read post on his blog, The Money Illusion, last week. (Sumner is also the author of our report, The Case for NGDP Targeting.) Contrasting “Country A” and “Country B”, he asked which one looked like it was implementing austerity and which one fiscal stimulus: Country A, with a deficit of 8.8% and 8.2% unemployment, or Country B, with a budget surplus of 2% and 7.3% unemployment.

One of the countries is the UK, and one is Sweden. But, according to arch-Keynesian Paul Krugman, “Somebody has been practicing harsh spending-side austerity — and it’s not Sweden.” And, “Given that public investment is, you know, productive, [Britain] is almost surely a case of self-defeating austerity.”

But, of course, the deficit sizes tell a completely different story. In fiscal terms, deficits are what matter in the Keynesian framework, because they reflect the “extra” amount of money the government is adding to the economy. “Austere” Britain is Country A, with a 8.8% deficit; “stimulating” Sweden is Country B, with the 2% budget surplus. As Sumner asks,

If you are not a committed ideologue on either side, just look at the data provided up top.  Does Country A really look like savage austerity?  Does country B look like a country engaged in fiscal stimulus?

Sumner argues that Sweden’s success is thanks to a Central Bank that provided monetary stimulus back in 2009. There’s a large contingent of people who claim that the government’s cuts are hurting the economy, but seem completely ignorant of the fact that, in the Keynesian model, monetary expansion should be able to completely offset fiscal contractions.

That’s not a model I subscribe to, but the so-called “Keynesians” who seem to think that there exists some kind of “real” aggregate demand simply don’t know what they’re talking about. As Sumner says, “If monetary stimulus makes fiscal stimulus unnecessary (and it does), then why would Britain want to do fiscal stimulus?”.

There is another question here for the anti-austerity people to answer: if an 8% budget deficit isn’t enough to stimulate the economy, how big does it need to get? We already have a bigger deficit than any of the Eurozone basket-cases but, even if we set aside reality for a moment, I'd love to hear how big the anti-cuts crowd think the deficit would need to get before we have some growth.

Today the 2020 Tax Commission, a joint venture of the Taxpayers' Alliance and the Institute of Directors helmed by City AM's Allister Heath, releases its final report. The Single Income Tax (summary here) argues for a comprehensive tax reform that would see the state shrink from 50% to 33%, with many of the current taxes we have on income, inheritance, and transactions being replaced with a single rate of 30% on income from labour, interest and dividends, with a £10,000 personal allowance.

By eliminating things like National Insurance paid by employees and employers (the worst stealth tax of all), everyone's tax burden would fall, and the shift from transaction taxes like Capital Gains Tax and Stamp Duty would facilitate a more smoothly-functioning price system. Only flows of income would be taxed. Regrettably, VAT cannot be scrapped as long as we're part of in the EU Single Market.

The report also makes good nods to localism by calling for local authorities to be held responsible for raising 50% of their spending power themselves, through things like local income and sales taxes. With any luck, this sort of change would bring down the overall tax burden even more, as councils competed with their neighbours.

I've been browsing through my preview copy for the last week, and it's a masterpiece. It is the best report to come out of a British think tank in years, and I can only hope that it has the impact it deserves. For a government that seems to be asleep at the wheel, The Single Income Tax should be a loud wake-up call.

It pains me to have to admit this but this is from someone who purports to teach economics in a British university:

And in recent weeks we have heard many economists argue that growth in the eurozone will come from "structural reforms" that will make it easier to collect taxes, reduce red tape, and easier to hire and fire workers.

But growth requires investment. Companies invest to make profits and grow. Evidence shows those which invest more in new technology, human capital and research and development, and are located in countries where public spending in these areas is high, are able to produce more competitive and better value products.

It is the "but" that is painful.

The eurozone will grow only once weaker countries are allowed to make the strategic investments Germany has. There is much talk about the need for internal rebalancing, to increase the competitiveness of the deficit-burdened south relative to the surplus-blessed north, but this is a limited view. What is required is not that wages fall in Portugal, Italy, Greece, and Spain, but that they make investments that increase their productivity – an impossibility with austerity-driven policies.

And that is even more painful for she seems to have missed that Germany has just spent and entire decade screwing down the wages of the workforce in order to increase productivity. Productivity being a measure of how much production you get out for how much you spend on labour going in.

But the real problem is that she is claiming that there is some either or calculation going on here. That *either* we increase productivity *or* we cut red tape. Which is an entire nonsense, of course. Cutting red tape, freeing up labour markets, shooting bureaucrats, these are productivity improvement measures. Just as much as (on the rare occasions they work) are making strategic investments driven by political aims. If you want to improve producitivty shouldn't you be doing both of the things that improve it?

A nice little story here about Air India. It illustrates the dangers of having either state run or monopolistic companies.

Some of the airline’s staggering losses are rooted in exceptionally generous staff benefits. Investigators discovered pilots insisted in staying in five star hotels in New York, Chicago and Mumbai during stop-overs instead of spending the night at cheaper airport hotels.

Significant losses in revenues are due to serving and retired pilots and crew taking business class seats ahead of paying customers. The practice was restricted in 2009 when its chief executive appealed to staff to co-operate and stressed there was no shame in traveling economy.

Despite the restrictions on staff using business class tickets, paying passengers were rejected to make way for Air India staff who were upgraded from economy seats. At one point, Air India’s business class ticket holders were shunted onto rival airlines — at Air India’s cost — because their own staff had occupied the seats.

The temptation for any group of insiders is to make use of that insiderdom to gain privileges. This is as true of CEOs as it is of airline pilots, as true of politicians as it is of scribblers for think tanks. It's simply human nature: when we talk about bureaucrats we call it public choice economics and when we talk about everyone else we call it the blindingly obvious.

The only cure we've got for this is competition: everyone needs to be put in fear of their livelihood about the success of the organisation. To consider that a business class airfare not paid by a customer makes that job more insecure: that the claim of a gargantuan pay deal for inhabiting the corner office makes losing that job more likely. And this really only can be done when the players in the marketplace are indeed playing in a market. One where such behaviour really does bring down a company and thus impose discipline on all others.

Which does pose problems with the politicians. For we've tried having competing governments in the Wars of the Roses and didn't like the result much. Perhaps we'll just have to revert to terminal violence in this difficult case?

Parliamentary democracy – Britain’s great gift to the world – has gone bad. It has putrefied into brute populism. The 24-hour media cycle forces politicians to respond to every trifling issue and act on every interest-group demand, no matter how overblown. The more they do so, the more government pervades and controls citizens’ lives. Then, as the role and power of government expands to accommodate this widespread pervasion and control, the more largesse and patronage it has available to disperse, so the more supplicants it attracts and the bigger the political class that feeds off it.

In this downward spiral, principle is abandoned to pragmatism: politicians indulge every populist cause that might prolong their term in office, power accumulates unchecked, and the democratic rights and liberties of minorities – and of the mute majority – are trampled underfoot.

Politicians even seem to think that they can amend our very constitution by a simple majority vote in Parliament. Witness the remarks of UK Deputy Prime Minister Nick Clegg that a reform of the House of Lords does not need a referendum and the onus is on those who believe otherwise to make the case for it. That really is a breathtaking ignorance about the principles of democracy and the rule of law. There may be a lot wrong with the House of Lords, right enough. But by that argument, a majority in Parliament could at a stroke abolish any democratic institution, void any established civil right, and declare itself a dictatorship. As Ayn Rand put it:

Individual rights are not subject to a public vote; a majority has no right to vote away the rights of a minority; the political function of rights is precisely to protect minorities from oppression by majorities – and the smallest minority on earth is the individual.

Politicians' powers come from us. We might well be prepared to accept some curbs on our activities on the grounds that it will, on the whole, produce a better-functioning society. But none of us would willingly give a majority the power to exploit and abuse us. That is why we cook up complicated voting and parliamentary systems – not to choose and empower our representatives, but to limit them, to restrain them and to be able to get rid of them. Sure, a history full of accidents and entrenched power means that those institutions are far from perfect, but it should be up to the whole electorate to decide how they should be reformed. Allowing parliamentarians to design what parliament should look like is akin to putting the cat in charge of the cream jar.

Perhaps it is already too late. Even the much-feted US constitution has been unable to prevent politicians expanding their role, their power and their budgets. It seems we have overthrown the tyranny of monarchs, only to enslave ourselves under a new tyranny of elected dictatorships. And the trouble is that we ourselves connive in this tyranny. We demand favours and subsidies for our pet causes, one after another after another. And – in a sort of political version of Say's Law – government simply expands to meet that demand.

The West shook off the control of the old aristocratic class through a worldwide wave of revolutions. We need a new worldwide wave of revolutions – constitutional revolutions – to save ourselves from the new tyranny of the political class. As I explain in my primer on public choice economics, we need voting systems that prevent interest-group capture of the policy agenda. Rules to stop minorities being exploited. Limits on what politicians can do. Curbs to end political careerism. Ceilings on government’s power to spend, borrow and print money.

And we need a revolution in understanding: reminding ourselves and the likes of Nick Clegg and other MPs that democracy is not merely the dictatorship of the majority, but the vital mechanism by which dictatorship of can kind can be thwarted.