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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

We shouldn’t subsidise the new political class

Written by James Lawson | Monday 22 July 2013

In 1911 MPs began receiving a salary. By paying MPs it was hoped the general population could independently enter politics, rather than simply leaving it dominated by a wealthy elite.

MPs compensation has since betrayed this vision. The system now supports a new political class. In the 1970s MPs' salaries were comparable with average UK income, today they seek triple the average, putting them in the top 2% of earners. Not to mention the abuse of expenses or even illegal activities by some of this political class.

Hence the rise of professional career politicians. Consider Victoria Fowler, Labour’s 22 year old Parliamentary candidate. Her (now-deleted) Wikipedia page cites her running the Warwick Speakers (a student society) and two years experience as a councillor, to justify a potential starting salary of £77,000. Glancing over Liberal and Conservative lists, she is not alone in the political class. Many pursue power with a bland CV of nothing more than work in Parliament, brief Party Research Department experience or a token career in PR. The narratives about working class links or special expertise are common but seem to have little bearing on reality.

The solution is simple. MPs should have their pay fixed around average UK salary. After all, there are many perks, like a £5.8m subsidy for food and booze in the Commons, and prestige from the post too. Perhaps they could continue to receive a second home allowance, or basic temporary accommodation to allow them to attend debates. Travel expenses, only from the constituency to Westminster when supported by just cause, such as a vote, might be reasonable.

Rather than cutting the number of MPs and supporting politics as a full time career, MPs should be part time. Politicians should understand real world working Britons as workers themselves. They should bring genuine specialist expertise, not just the skillset of a student hack. This might reduce time for legislation, though the MPs of past debated in the evenings after work and were not supported by a modern Civil Service. Why must every government create more laws anyway? What of simplification and repeals?

MPs should take a pay cut. We need more parliamentarians from the real world rather than the rising political class. MPs should be part time, and driven by a desire for public service not the raw pursuit of power and a fat cheque at the expense of their constituents.

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Vaclav Klaus on privatisation and monetary union

Written by James Lawson | Monday 13 May 2013

I was lucky enough to be at the 3rd Pembroke College (Cambridge) Annual Adam Smith Lecture. This year we were graced by the presence of Vaclav Klaus, 2nd President of the Czech Republic.  He combined a rich understanding of Classical Liberal theory with decades of practical experience completing reforms at the height of Czech politics. His full speech can be read here, but there were four highlights I particularly enjoyed.

Firstly his 5 point plan for reform:

  • open-up the country after half a century of life in a semi-autarkic society
  • liberalize prices and foreign trade
  • radically deregulate the markets
  • privatize the whole economy, not just a particular small segment of it as in the UK;
  • de-subsidize the heavily distorted economy and to return it to economic principles.

Secondly his account of the sheer scale of reform:

"We had no private economy at all. I remember repeatedly saying that my hero Margaret Thatcher had to privatize 3 – 4 firms per year, whereas we were forced to privatize 3 – 4 firms per hour…The inefficient visible hand of the bureaucratic communist government was replaced by Adam Smith’s invisible hand of the market."

Thirdly, in response to questions about the Eurozone crisis he drew upon his experience as the last leader to break up a major currency union. He highlighted the relative insignificance of Greece to the Eurozone. It represents roughly just 2% of total GDP. When he broke up the Czechoslovakian currency union as Finance Minister, Slovakia represented around a third of GDP. For Klaus, this was easy. It was an event that passed without crisis, an event he claims few would even remember.

Also on the Eurozone he highlighted the Latin Monetary Union, established in 1865 by France, Belgium and Italy. They were later joined by Spain, Greece, Romania, Bulgaria, Venezuela, Serbia and San Marino. This currency zone collapsed as the governments took on excess debt and debased the currency. There was one particular culprit, Greece, who were temporarily expelled in 1908. Greece decreased the amount of gold in their coins in breach of the currency zone’s rules. Economic turbulence in 20s finished off the flawed Union.

Finally when asked about the correct rate of tax, he gave an answer sure to please many a free-marketeer. He declared that he was no philosopher king who could impose an ideal tax level. Instead, he simply pleaded to see them cut as low as possible. For Klaus, taxes in the UK and Czech Republic are far too high across the board. We should get cutting.


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Basic budget blunders

Written by James Lawson | Tuesday 26 March 2013

Worryingly many commentators repeatedly make two basic budget blunders. Firstly, ‘deficit’ and ‘debt’ are not the same. Secondly, this government is not cutting spending. Neither point is original. Both should be simple to understand. Given consistent misinformation these both need clarification.

Debt is an obligation owed by one party (the British Government, i.e. the taxpayer) to a second party, the creditor (owners of British government bonds). The national debt is the total amount our government owes. It is different from the budget balance. That is the gap between what the government spends and what it receives. The budget is in deficit when the government spends more than it receives.

So what are the numbers? According to latest estimates from the Office for Budget Responsibility, public sector net debt for 2012-13 is projected at £1189 billion. By 2017-18 this is expected to reach £1637 billion. So when David Cameron said earlier this year, “…this government has had to make some difficult decisions, we are making progress. We are paying down Britain’s debts”, he was wrong. No. We haven’t paid down debt and will owe more.

It is the deficit that is projected to fall. For 2012-13 the deficit is forecast at £120.9 billion. However, the coalition no longer expects to meet pledges to balance the budget. Even by 2017-18, government will spend more than it takes in (with an estimated £43 billion deficit). High deficits will remain and the Government will add to the amount we owe every year.

Surely we've been cutting spending? No, again. The OBR neglect to mention how much the government spends for most of their report. Yet on page 123, they note spending is rising. For 2012-13 they forecast government spending of £673.3 billion, increasing to £765.1 billion by 2017-18. So in absolute terms expenditure is rising, not falling. Even accounting for inflation (using their inflation projections) expenditure rises significantly. The Coalition have only reduced the amount by which government planned to grow expenditure. Nevertheless, this brings pain, from pay freezes to programme closures, because budgets assumed even more profligate spending. Now that expenditure is growing more slowly than previously planned, some old commitments have lost out to new sources of expenditure.

Debt is rising, expenditure continues to outstrip receipts, and the Government is increasing not shrinking spending.

James was a founder of the Liberty League, who are hosting the upcoming Freedom Forum.

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The mediocrity of chasing the middle ground

Written by James Lawson | Thursday 07 March 2013

The economy is stagnant, government spending continues to rise, and we’ve lost our AAA rating. With the recent rejection of boundary reforms, and the UKIP-led humiliation at Eastleigh, it’s no surprise that some Conservative backbenchers are grumbling.

Cameron is adamant that he will not “lurch to the right” in response. His focus remains on the centre. After all, the median voter theorem tells us that majority rule voting will select the outcome most preferred by the median voter. But is success as simple as chasing the middle ground?

Firstly, the median voter theorem only works along one-dimension, 'Left' v 'Right'. This is hopelessly simplistic as the public’s views vary across issues. When we vote, we are limited to choosing a party package and we each have different priorities within those packages.

Secondly, it relies on there only being two parties, and assumes that those at the extremes will vote on side. Yet there are at least three significant parties.By some estimates UKIP cost the Conservatives a number of key marginal seats at the last election too. The winner of the 2010 election was actually ‘none of the above’ – more people avoided the ballot box altogether than voted Conservative.

Thirdly, the theorem assumes that preferences are ‘single-peaked’. Instead it’s possible to have different views on the same issue depending on the scenario. For example, one might in theory oppose paying for state schools. Yet, after being taxed for education, one might then prefer to pay a bit more voluntarily to get better state schools and thus avoid the additional cost of going private.

Finally, chasing the median voter has limited grounding in the public good. Public Choice theory teaches us that politicians and voters are liable to government failure. Some will act selfishly, voting to promote their wellbeing at the expense of the masses. Excessive focus on the centre also guarantees that principles are left behind in the wake of the latest opinion polls. U-turns can turn off past loyalists. Many who did support the Conservatives now lack enthusiasm, and the Government is generally criticised for its chameleonic approach.

Yes, the Conservatives had lost three elections in a row, and were ‘toxic’. Yes, there are votes to be won in the centre, and policies should be presented in terms that resonate with the public. However, votes may also be won by pursuing radical policies, by building enthusiasm amongst core voters, by reengaging non-voters and even by turning 'right'. One shouldn't just focus on the middle ground, there are many votes to be won elsewhere.

Having never won a General Election, Cameron might consider his predecessors. Margaret Thatcher was radical, faced an entrenched socialist status quo and was more ‘right-wing’. She delivered three electoral majorities, enthused her core vote, won over many ‘working class Tories’ and left a legacy that shaped the political world.

James was a founder of the Liberty League, who are hosting the upcoming Freedom Forum.

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In the long run we're all dead

Written by James Lawson | Monday 20 December 2010

chart“Higher-than-expected inflation defies City forecasts” (The Guardian, August 2009)

“Inflation pushed to 14-month high
” (The Telegraph, February 2010)

“UK inflation higher than expected in August” (ITN, September 2010)

“Inflation unexpectedly hits six-month high” (Reuters, December 2010)

For the last 12 months inflation has been above target, and consistently seems to have been higher than expected. This has been accepted on the basis that the Bank of England’s medium term forecasts have shown inflation falling to more tolerable levels. We are told each month that high inflation “will be temporary”, that the causes were just momentary changes in supply, and to rejoice that we are avoiding deflation. Yet, a long run trend seems to be forming.

Though Charles Bean, deputy governor of the Bank of England, says the Bank’s economists are watching inflation “like proverbial hawks”, the threat of huge monetary ‘stimulus’ remains.

Many will simply disregard these figures; what’s a percentage point here or there? But inflation is hugely damaging to savers. Taking the current RPI inflation rate of 4.7%, if one were to hold savings of £10,000 for 15 years, perhaps for the children or retirement, it would lose half of its real value. If inflation rises and wages fail to keep up then wages fall in real terms. Moreover, inflation increases costs for companies as they must adjust to artificial changes in prices.

Even worse, though less immediately noticeable, is the effect of inflation on the long term stability of the economy. Artificially low interest rates, and increases in the money supply may distort the market, giving false signals that we have large stocks of savings. This can in turn lead to misdirected and unsustainable investment. With many prices actually declining (think plasma televisions and Chinese-produced manufactures), the full extent of inflation in certain markets can be disguised. Though the inflation may lead to what appears to be strong growth, eventually, the unsustainable misdirection of resources must end. The result is bust.

Caution is needed, or the Monetary Policy Committee’s reputation may face a similar destruction to that of Brown’s Treasury, with us all paying the (greatly inflated) price.

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Send in the clowns

Written by James Lawson | Monday 11 October 2010

clownTo many, the election of a clown to government in Brazil is of little surprise. After all, we’ve had our fair share of clowns in Britain. If the last Labour government had proposed to change the name of the Commons to the House of Clowns, it no doubt would have met significant public approval.

Prime Trickster Gordon led a particularly funny act as ringmaster. He corrupted the word investment (to mean spending), woefully mismanaged the economy and continued the assault on our freedoms. It was one hell of a trapeze act for Britain, and quite a memorable piece – we will be paying for his crafty spectacle for generations. No wonder so many people suffer from coulrophobia (a fear of clowns). Though, Brown’s walk the plank item on May the 6th did make for a happy ending.

So what’s so funny about Brazil’s clown? Unlike most clowns in politics, recently elected Francisco Everardo Oliveira Silva, whose stage name is ‘Grumpy’, knows he’s a clown and admits it. In fact, he has actually worked in a circus before his congressional career. His campaign slogans admirably included, "What does a federal deputy do? Truly, I don't know. But vote for me and I will find out for you," and "It can’t get any worse". He received more than 1.3 million votes. It is good to see somebody aim the cannonball at corrupt politicians and poor policies.

Unfortunately, it seems that this clown may have pulled some pranks too; his campaign was not quite as rebellious as the smoke and mirrors suggest. In Brazil, politicians can pass surplus votes on to others. Grumpy is a member of the left leaning coalition which includes the ruling Worker’s party. According to David Fleischer of the University of Brasilia, these sorts of candidates "are promoted by their parties in the hope that they will get enough votes to pull some two or three less-voted-for candidates into office." It seems the clowns have the last laugh.

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Toy Story 3: Socialism isn’t for play time

Written by James Lawson | Wednesday 04 August 2010

Warning - slight spolier!

The other day I watched Toy Story 3. Amongst the fun animation, adventure and a tale of a boy parting ways with his much loved childhood, was a significant sub-theme. Toy Story 3 was a film that was anti-authoritarian and pro freedom.

Much of the film focuses around the toys’ lives in the world of Sunnyside Day Care Center. The center is initially depicted as a utopia, where the toys are played with frequently and a wise benevolent strawberry scented teddy called Lots-O'-Huggin' Bear (A.K.A Lotso) acts as community organizer.

However, the dystopian reality of this socialism becomes quickly apparent, as Lotso has conflicting opinions about the public good, inequality before the law prevails and our protagonists begin to suffer under this coercive system of hierarchical public control. A vast totalitarian machinery of cameras, toy trucks and a large dolly is used to maintain order, ensuring that toys must follow the rules, and that the only escape is death.

The story tracks the toys’ escape from the center, politically climaxing with Barbie’s proclamation that “authority should derive from the consent of the governed, not from the threat of force”, a statement that would have surely gained the approval of the U.S. founding fathers if they had been in figurine form.

For those who have yet to seen it, I will avoid revealing the ending, simply noting that many have described it as a tear jerker. While I was hardly blown away by the film, I did enjoy it. I’m also pleased to note that the film has been a capitalist success story in reality, raking in over $800,000,000.

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Taxpayers of Europe, Unite!

Written by James Lawson | Thursday 29 July 2010

As individuals, businesses, and even governments tighten their belts, the Kraken beast that is the European Union continues to feed. With a budget of 141 billion euros in 2010, and evidence that it is struggling to spend all the money it currently has, The European Commission and European Parliament strangely thinks that an EU budget of 1 percent of GDP is 'inadequate'.

Despite this spending challenge and the state of EU economies, the EU is not only failing to cut back but there exists significant demand for a bigger budget. It can only raise this money through greater payments from the member states, or by collecting its own taxes. The latter option is becoming an increasingly plausible threat as many desire the introduction of indirect European taxes, higher contributions from national VAT, excise duties on CO2 emissions and charges on the financial sector amongst many possible revenue streams.

The first point to reiterate is that the needs for these additional funds is highly questionable. Secondly, the potential implementation of additional taxes, without a significant consent from the governed is highly worrying. Thirdly, if the EU acquires this power to raise revenues, then the bureaucratic machine will decide how much to raise. The EU project has already expanded to significantly restrict the liberties of member citizens. The EU has imposed over 70% of the UK’s regulation costs since 1998, impinged upon our sovereignty in an anti democratic manner and has had a share of grand yet damaging schemes such as the Common Agricultural Policy. With the ability to tax, its expansion and the threat to liberty will only increase.

Derk Jan Eppink’s campaign, Say no to EU Tax whose objective is that there be “No introduction of direct EU taxes or increase in national VAT contributions to the EU” and to “Restrict the EU budget to no more than 1 percent of European GNP, for more efficient use of the existing means”, is highly welcome. Paul the octopus with predictive powers might be fashionable, but the Kraken needs repeated harpooning before it grows a new tentacle and sinks the ship.

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New New Labour Economics

Written by James Lawson | Wednesday 07 July 2010

Over the last year we have seen Labour’s line on the economy develop. Firstly, debt rose because of the action needed to secure recovery. Secondly, we should be hostile to the Coalition’s cuts. Thirdly, the cuts threaten to plunge us into a double dip recession. All three of these are a deception.

[1] It is certainly true that debt rose faster as we entered recession, with low tax receipts and more government payments, combined with bailouts and stimulus (whose merits I do not assess here). However, the Labour government, its regulators and the Central Bank must take much of the blame for getting us into the crisis in the first place. Furthermore, spending and debt once Labour dropped the Tory spending plans were already on an unsustainable trajectory, before the crisis even began (not to mention the further spree and the off balance sheet debts).

[2] They have attempted to create a dividing line. Unfortunately not only are they on the wrong side, appearing delusional, but their own spending plans implied substantial cuts too. Their rhetoric too often forgets the opportunity cost of government action and the existence of a private sector. If they want to be taken seriously again, they must get a hold of reality and be honest.

[3] If we enter a double dip recession, it won’t be the Coalition who’s to blame. Labour never led us to a robust recovery, if 0.3% GDP growth counts as a recovery at all. The effects on the real economy have yet to all unfold, we must one day unwind the printing presses, and many of our trade partners that have followed socialist policies and failed to tackle their debt addictions’ are stagnating. Further adjustments due to the Labour era mal-investments, government burdening the productive private sector, limited trade demand and declining confidence pose the greatest threat of extending the crisis. Responding to debt and unleashing private enterprise are the only way to escape.

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Gordon’s great deception

Written by James Lawson | Tuesday 06 April 2010

Gordon Brown has decided to make his National Insurance rise, “a tax on ordinary families" in his own words, one of his hundreds of stealth tax rises, the defining diving line of the election. After Mandelson finally nailed the coffin of Labour’s relationship with business last week, this final ‘come back’ attempt has left Gordon and Labour in full view, caught on the wrong side of the line.

Gordon’s election argument is that we should not risk the recovery. George Osborne’s and the Conservative Party’s tax cut will directly benefit seven out of ten families and indirectly helps us all, but Gordon notes that it will lower government revenue by around £6 billion, and thus he argues, take money out of the economy.

Fundamentally, Gordon must answer how the tax cut would take money out of the economy. Unless his vision of the economy is severely impaired, so that it includes only the actions of government and not the people (I wouldn’t put it beyond him), his argument is a manifestly illogical and economically illiterate.

If Gordon were re-elected, and came knocking at your door, and the door of your employer, to collect his national insurance tax, he would take money out of your pocket and that of your employer. He would thus take money out of the economy.

Now it is true that the government would then spend this money. They might channel the funds (that he seized from you and your employer) through layers of bureaucracy (wasting it inefficiently along the way), and then ‘invest’ in a big government scheme that is probably not needed, makes the problem worse and creates new problems, is over budget beyond belief, and infringes on your fundamental freedoms. Gordon will have employed people, may have developed some capital, and hence would have undertaken some economic activity.

However, Gordon’s economic activity comes at a steep price. Remember that Gordon has to take money from you and your employer. Any of Gordon’s economic activity comes at the expense of that which you and your employer would have spent that money on instead. It is an unseen opportunity cost, the loss is that which might have been. Had the tax not been collected, you and your employer would have had more money to save and spend. These actions would have led to economic activity too.

Gordon can only sustain his argument by claiming that he will spend your money better than you can. So, either he has no understanding of the economy or he is showing his true Socialist stripes. The latter case is no more promising. Whilst Gordon’s tax rises may be stimulating his own activity, the net result is destruction.

It is not just that Gordon Brown is wrong to say that tax cut will take money out of the economy, he is also wrong to think the tax could stimulate the economy. Taxes disincentivise economic activities, drive the productive and mobile away, and take money out of the productive sector of the economy. The only way to deal with the economic mess Gordon has got us into, of stagnant growth and astronomical debt, is to stop over spending and go for growth with tax cuts that will stimulate wealth creation, boost our economic competitiveness and support job creation. Gordon’s stance confirms the death of New Labour.

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