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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

The time bomb keeps ticking

Written by Tom Clougherty | Thursday 02 August 2012

Last Saturday’s Wall Street Journal (US edition) carried an essay by David Wessel, author of the forthcoming book, “Red Ink: Inside the High-Stakes Politics of the Federal Budget”. It provides an excellent breakdown of the budget crisis looming over the US federal government.

Perhaps the most striking fact contained in the essay is that 63 percent of the US federal budget is on auto-pilot: “Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds.” In technical jargon, this is non-discretionary spending – unless Congress actively stops it, such spending continues every year without the need for any further authorization. Throw in an ageing population and inexorably rising healthcare costs, and it becomes clear that such spending is only heading in one direction – skywards.

What is most worrying is that the US federal government currently only funds 66 percent of its spending through taxes. For the rest, it has to borrow. And while that may be bearable in the short-term, as nervous investors around the world pile into US Treasuries and push bond yields to record lows, it spells big trouble in the medium- to long-term. Every cent the government borrows now means more debt interest payments – and even more non-discretionary spending – in the future.

For an idea of just how bad it could get, take a look at this 2010 working paper from the Bank of International Settlements (BIS). Its projections indicate that without a policy shift, US public debt would rise to more than 400 percent of GDP by 2040. That would translate into annual debt interest payments equaling 23 percent of GDP – well in excess of total federal tax revenues, which have averaged a little over 18 percent of GDP since the Second World War. Such a scenario is plainly impossible: the US would be forced to default on its obligations long before things reached that point.

The policy implication here is straightforward enough: non-discretionary spending programs like Social Security, Medicare and Medicaid need urgent, drastic reform to put them on a more sustainable footing. The problem is politics: neither party is really serious about dealing with this fiscal time-bomb. Politicians’ electorally-driven time horizons are just too short to permit the sort of significant, structural changes that are required.  Perhaps a rise Treasury yields will force the issue. Maybe another showdown over the debt ceiling will do the trick. But I won’t be holding my breath. As Detlev Schlichter puts it, when it comes to debt, governments around the world are determined to “extend and pretend”.  Sadly, it is only a matter of time before reality catches up with them.

Tom Clougherty is managing editor at Reason Foundation, a libertarian think tank with offices in Los Angeles and Washington, DC. This article was originally published at

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Cheerio, not goodbye

Written by Tom Clougherty | Monday 30 April 2012

As some readers will already know, I am moving on from the Adam Smith Institute. Friday was my final day as Executive Director here, and in June I will be moving to the United States. I'm heading for Washington, DC, where I am going to be Managing Editor at the Reason Foundation, a libertarian think tank which also publishes Reason Magazine and produces Reason TV.

I'm very excited about this new opportunity, but, needless to say, I am also very sad to be leaving the Adam Smith Institute. It has been a great five years, and I have so many wonderful memories to look back on. I will miss all the people I have worked with enormously.

We have done so much since I started in 2007, that it is hard to pick favourites. But here are few personal highlights: unveiling the Adam Smith statue back in 2008; running Freedom Week in 2011; filling the LSE with libertarians for last year's Hayek v Keynes debate. I have also hugely enjoyed establishing a top-notch ASI lecture series over the last few years. Tour de force talks by Tara Smith and Kevin Dowd stand out as particularly memorable moments.

More broadly, there are a handful of overarching themes that have characterized my time here: the resurgence of Austrian school economics in response to the financial crisis; the emergence of unabashed libertarianism as a distinct voice in the political debate; and the creation of a fast-growing libertarian youth movement in the form of the UK Liberty League and European Students for Liberty. I will always be very proud of the role we have played in these developments.

My final words, though, must go to Madsen and Eamonn – who gave me an opportunity few people fresh out of university could dream of – and to the Adam Smith Institute's friends, supporters, and donors, who make everything we do here possible. Thank you, and farewell.

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Kevin and Detlev explain it all

Written by Tom Clougherty | Wednesday 25 April 2012

If you want to understand why we're back in recession, these two videos are a good place to start.

Here's Kevin Dowd on The Decapitalization of the West:

And here's Detlev Schlichter on Paper Money Collapse:

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The return of the recession

Written by Tom Clougherty | Wednesday 25 April 2012

So it’s official: Britain has double-dipped. Is anyone really surprised?

Of course, today’s number are relatively insignificant in statistical terms, and there is every chance that the Office of National Statistics will revise them a few months down the line. So we shouldn’t put too much faith in the details of today’s announcement or try to draw lessons that aren’t there to be drawn.

But it has been obvious right from the start that this was not your average, run-of-the-mill, cyclical downturn. The financial crisis and the recession that followed it was and is the result of severe, deep-seated structural problems in Western economies. And Britain has bigger structural problems than most.

Put simply, we are addicted to debt and constant monetary expansion. This has eroded our capital base and undermined our productive capacity, and has skewed the economy disastrously towards those sectors that thrive on credit and easy money: namely housing, finance, and big government. The boom years inflated huge bubbles in these sectors; the bust years have revealed how much of that growth was unsustainable, or even illusory.  

The situation we are in now can be summarized as follows. The economy remains heavily distorted: the prices of houses and financial assets are artificially inflated by government policy; banks which would have failed in the market have been kept on life support; gigantic, hugely inefficient public sectors are being sustained by money-printing and growth-sapping taxation. The savings needed to support investment aren’t there, and we’re weighed down with one of the highest levels of public-private debt in the industrialized world.

The astonishing thing is that every single one of those distortions is consciously, willfully being pursued by the government as a matter of policy. Quite frankly, it is surprising we aren’t doing worse than we are.

Not that there is all that much governments can do to create growth in situations like this. Yes, tax cuts and deregulation would give the private sector a sorely needed boost. And yes, reforming / privatizing / abolishing the public sector (as appropriate) would do wonders for Britain’s productivity. But what really matters is what governments don’t do. They have to allow the mistakes of the boom years to be unwound. They have to let markets adjust. They have to let new patterns of sustainable specialization and trade develop spontaneously, without bureaucratic interference.

That is a process – and it takes time. But unless we go through it, we won’t be returning to robust, real growth any time soon. The road we are on leads to a zombie economy. It’s time we took a different one.

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Individuals matter

Written by Tom Clougherty | Thursday 19 April 2012

Allister Heath’s ‘Editor’s Letter’ in City AM is one of my daily must-reads. Even if you can’t pick up a copy of City AM in the morning, you can catch up on Allister’s latest thoughts here.

He’s been on top form this week. Yesterday’s piece on inflation was excellent, but the pièce de résistance was Tuesday’s letter – ‘UK is wrong to have turned its back on individual freedom’. This is, quite simply, one of the best things I’ve read in a newspaper for a very long time:

Our country is dominated by busybodies and collectivists who believe that they and the state have the right and duty to tell us all what to do, to spend our money for us and to control what we can eat, drink, trade or say. It’s all gone too far. Individual freedom and its twin sister personal responsibility are the cornerstones of successful Western, liberal capitalist societies; yet these are being relentlessly undermined…

So this is my plea: let’s put the emphasis back on the individual. Let’s stop trying to ban everything. Let’s stop describing a tax cut as a “cost” to the government or – even worse – as morally identical to public spending. Let’s stop assuming adults should no longer have the right to eat fast food, or smoke, or drink, or paint their walls bright green, or build a conservatory in their back garden, or whatever it is they wish to do with their own bodies and with their own private property. Let’s once again speak up for the rights of consenting adults to choose how to live their own lives, even if we disapprove. Let’s allow people to hold, discuss or display their beliefs freely, especially if we disagree.

Here at the Adam Smith Institute, we couldn’t agree more.

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The case for gold

Written by Tom Clougherty | Wednesday 11 April 2012

City AM asked me to make the case for gold in 140-words, for yesterday's comment pages. Here's what I came up with:

Gold isn’t a traditional investment good: it is an alternative to paper money. From that perspective, its allure is all too clear. The purchasing power of gold is as good now as it was in 1900. The pound lost 99 per cent of its value over the same period. As a store of value, gold wins hands down because its supply is inelastic: you can’t create more of it every time you need to bail out a bust financial sector or bankroll a profligate government. Of course, I don’t know whether the gold price will be higher next week, next month, or even next year. But I do know that the things which have driven gold’s surge – uncertainty, money-printing, and fiscal incontinence – are here to stay. Monetary debasement is the whole point of a fiat currency. Make of that what you will.

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Unprincipled politics

Written by Tom Clougherty | Thursday 05 April 2012

At a meeting of our Next Generation group this week, Sunday Telegraph columnist Iain Martin talked about the various failings of the Conservative Party. His primary criticism is that the Conservatives under David Cameron abandoned their principles in favour of telling people what they wanted to hear. That might have been a decent electoral strategy when the economy was booming, but once the financial crisis hit it left the Tories rootless and incoherent, so that no-one (least of all the Tories themselves) had a clear idea of what they stood for.

I more or less agree with that position, with the caveat I’m not convinced the Tories were that principled to begin with. Even a cursory look at the Conservative Party’s history will reveal that Margaret Thatcher’s reputed ideological fervour is very much the exception, rather than the rule. Indeed, many Tories will tell you that the rejection of hard and fast principles in favour of ‘pragmatic’, case-by-case managerialism is the essence of British conservatism. And as Sam wrote yesterday, the trouble with that mindset is that it leads inevitably to the persistent, piecemeal erosion of individual liberty.

After the speech, a few people asked me what I really thought about the coalition government. My honest response is not a terribly positive one. On education and welfare reform, their policies are generally pretty good. Their deficit reduction plan, while far less impressive than the chancellor’s rhetoric would suggest, is at least better than the alternative (I think that’s what they call damning with faint praise – ed.). There have been a few good moves on tax – like raising the personal allowance and cutting corporation tax – but it is hard to ignore the fact that they’ve has robbed Peter to pay Paul and skimmed off the top while doing it.

Beyond that, I struggle to think of anything nice to say. Certainly, when it comes to matters of personal freedom, this government borders on the fascist. The commitment to civil liberties that both parties claimed in opposition seems to have gone out of the window now they’re in government – the electronic surveillance powers trailed last week are even more despicable and grotesque than anything Labour managed to come up with. And when it comes to food, drink and tobacco, the government couldn’t be more in thrall to the bully-state establishment. To be blunt, they plainly care not a jot for individual liberty. 

I had hoped that coalition might mean the best of both worlds – that the Liberal Democrats’ civil libertarian, non-interventionism might be blended with the Conservatives’ fiscal conservatism and suspicion of state power.  That seems an increasingly forlorn hope.

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The need for multi-speed

Written by Tom Clougherty | Monday 02 April 2012

There’s an interesting piece of research out this morning from BDO, an accountancy and business services consultancy. Its quarterly Industry Watch, which makes projections about rates of company failure, suggests that Britain’s “two-speed recovery is starker than ever”.

There are a couple of points to make here. The first is that we shouldn’t expect a recovery to be ‘one-speed’.  The assumption that it ought to be reflects, I think, a misunderstanding of the boom-bust-recovery business cycle, and owes something to the Keynesian obsession with economy-wide aggregates – which frequently mislead more than they enlighten, particularly in times of economic volatility.

The thing to realise is that busts are usually the products of preceding booms. Typically, the boom is fuelled by expansionary monetary policy, which leads to too much easy credit and pushes market interest rates below their natural level (i.e. rates which balance the supply of savings with the demand for loans, and which signal the extent to which people are willing to forgo present consumption in favour of future consumption). The result is that people make bad decisions – they systemically take on too much debt, and invest too much in marginal projects.

Crucially, this affects different sectors in different ways. In particular, you get bubbles in those parts of the economy which are fuelled by credit, like housing, construction and financial services. Resources are sucked towards these bubbles – as they grow, more and more people want to jump on the bandwagon, creating a self-reinforcing cycle. Eventually you reach a point where the economy has grown completely out of kilter with the real, underlying demands of consumers, and any tightening of credit conditions will bring the house of cards tumbling down. Enter the recession.

Now, if recessions are about unwinding the mistakes of the boom years – liquidating unprofitable investments, paying down debts, reallocating scare resources and coming up with new plans to reflect changed consumer preferences – then it is inevitable that any real recovery will, of necessity, be ‘multi-speed’. Some sectors need to shrink. Others must simply weather the storm. And for a few, the recession presents an entrepreneurial opportunity – a chance to grow and prosper. Of course, this process happens within sectors as well as between them. The point is that recessions are, or at least should be, periods of dynamic change, of creative destruction writ large. Different sectors, let alone different companies, do not rise and fall like boats on a tide. What you get instead is constant churn.

The other interesting point to come from the BDO research is the relative strength of the technology, media and telecoms sector – and the finding that the best performing retailers are the ones who are capitalising on the new opportunities that technology, media and telecoms offer. This is a useful reminder of the overwhelming force of human innovation, which can drive forward growth and progress in ways no central planner could ever imagine. But it is also a warning – the government’s forthcoming Communications Bill, which represents the first effort to systematically regulate this emerging sector, must not strangle the life out of this revolution, or force it overseas. I wish I could say I had more faith in our lords and masters, but I don’t.

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Can the budget breathe life into the economy?

Written by Tom Clougherty | Wednesday 21 March 2012

It is worth remembering that no chancellor, however enlightened, can really be said to breathe life into the economy. Believing otherwise gives rise to all kinds of hubristic policies, which do little more than redistribute wealth from one area of the economy to another. In fact, all the chancellor can do is create the conditions in which the wealth-creating private sector can grow and prosper. This is the yardstick by which the forthcoming budget should be judged.

So what can we hope for from the chancellor? What can he do to help Britain’s beleaguered wealth-creators? Step one is to cut taxes. And here, perhaps we can be more optimistic than usual. All the indications are that the 50p tax rate is set to be cut to 45 percent. The chancellor ought to go further and faster, since cutting marginal rates for higher-earners has a history of boosting growth without significantly impacting revenues. But this is a start, and it sends a clear message that Britain is open for business. Raising the personal allowance, and leaving a bit more cash in every worker’s pocket, is a good move too.

Combined with the gradual reductions in corporation tax that we already know about, these moves make for an encouraging pro-growth tax agenda. But more needs to be done. Firstly, the chancellor must avoid the temptation to give with one hand and take with the other – so no new stealth taxes, and no more populist assualts on ‘the rich’.  More importantly, the chancellor needs to realize that Britain’s treatment of capital and investment is uncompetitive and economically damaging. Taxes on savings, dividends and capital gains should be reduced immediately, and ultimately eliminated altogether.

That is likely too much to hope for now. But there are other, politically easier things the chancellor could announce on Wednesday. Chief among these is a concerted effort to deregulate the UK economy, systematically reducing barriers to market entry, cutting costly red-tape, and boosting competition. The trouble is such campaigns have been announced countless times before, but the regulatory burden has just kept growing. This time, we need more than rhetoric.

Two areas are worth particular attention. Firstly, it is rumoured that the budget will contain early details of a new regulatory framework for the flourishing internet and technology industries. It is vital that this framework is the very epitome of ‘light-touch’ and does not stand in the way of innovation, growth and job creation. Sadly there are already indications the chancellor’s announcements will fail this test. Secondly, the chancellor ought to build on David Cameron’s recent call for more private investment in the road network by signalling the government’s intention to radically liberalize the planning system and free the private sector to invest in (and charge for) new infrastructure.

Cutting taxes, reducing regulation, and encouraging investment – these are the three most crucial things the chancellor’s budget can do to help the private sector breathe life into the UK economy. But there is also a broader point to be made. Britain’s financial crisis and recession was no random event – it was the product of the credit-fuelled boom that preceded it. Years of easy money distorted the economy, creating unsustainable booms in finance, property and the public sector, and left us weighed down with debt. Thanks to bailouts, quantitative easing, and record-breaking budget deficits, those problems are still with us. We haven’t allowed the economy to adjust, and that is significantly damaging our growth prospects. Such problems will take time to unwind, but for now, the chancellor must find the strength to eschew popular but counter-productive policies like credit easing and housing market stimulus. Doing otherwise risks the long-term zombification of the British economy – the very opposite of what the chancellor wants to achieve.

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Running for liberty

Written by Tom Clougherty | Tuesday 13 March 2012

This weekend, our friend Hunter DuBose (pictured left) ran the Bath Half Marathon in support of the Adam Smith Institute. Love the t-shirt, Hunter!

That's right, dear readers, we inspire such devotion and enthusiasm that people are prepared to run for 13 miles just to help fund our efforts to advance free markets and individual liberty.

It is worth reminding readers that even though we give almost all of our work away for free – whether it's this blog, our reports, our student programmes, or admission to our events – it does cost money. In some cases, quite a lot of it.

We don't take government funding. And contrary to popular myth, we don't get very much from big corporates either. So, ultimately, we depend on the generosity of individuals who share our ideals to make everything we do possible.

If you like the work we do, and you want to see us become a bigger, better force for liberty, please consider lending us your support. It's easy – all you need is a credit card!

If you'd like to know more, get in touch with me ( or Sally ( And don't worry – we won't make you run a half marathon unless you really want to!

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