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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 BBC and the licence fee will be tackled when hell freezes over

Written by JP Floru | Thursday 12 September 2013

In the light of the recent pay-off scandals at the BBC, one would expect there to be demands for the abolition of the licence fee and the excessive protection the BBC enjoys.  There have been some mutterings, but nothing serious.  Nor is it likely to.  Why is this?

Public Choice Theory, which explains human actions in terms of weighing the costs and benefits by each individual, offers a powerful explanation as to why the BBC continues to enjoy such widespread support.  It is important to keep in mind that the more an individual has to gain from a particular action, the harder he/she will fight for it.

The politician
Fighting the licence fee and the BBC:
                Cost: Very high. Death by BBC silence. Politicians live and breathe by media attention.
                Benefit: Low. A large part of the population believes in the BBC.
Standing up for the BBC:
                Cost: nil.  Will have political outlets to make his views known. The licence payer pays.
                Benefit: Very high. Becoming the Darling of the BBC. Re-elected.

The BBC employee
Fighting the licence fee and the BBC:
                Cost: Very high. Ostracised/unemployed/no leaving sweetener.
                Benefit: Nil. Unlikely to succeed – portrayed as disgruntled ex-employee.
Standing up for the BBC:
                Cost: Nil
                Benefit: Very high. Promotion?  High salary, cushy job, big sweetener when leaving.

The licence payer
Fighting the licence fee and the BBC:
                Cost: very high if one wants to make any impact at all, as virtually everybody has a reason to like the BBC (favourite nature programme, that soap, etc.).
                Benefit: £145.50 if the licence fee were to be abolished.

Standing up for the BBC:
                Cost: Little—join the club.
                Benefit: The BBC continues as before.

Observe that in all three cases the individuals involved have a personal vested interest in the continuation of the licence fee and the BBC as before.  Politicians and BBC employees have the strongest incentives and will therefore campaign extra hard.

So the BBC need not fear: neither the pay-off scandal, nor Jimmy Savile, nor BBC bias are likely to challenge the status quo.  The only chance of change is a Churchillian figure with a bee in his bonnet. Churchill famously abolished the BBC monopoly in favour of commercial TV.  He called the BBC tyrannical for having effectively banned him from the airwaves in the 1930s. John Reith, the BBC’s founding father, said that commercial television would be as disastrous for Britain as “dog racing, smallpox and bubonic plague”.  John Reith’s objection was probably the main reason why Churchill went for it.  One more Churchill might just do the trick tomorrow.

JP Floru is the author of What the Immigrant Saw and How to Create Mass Prosperity. On Saturday he will speak at the Conservative Renewal Conference about the abolition of the licence fee.

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Our long-nailed mandarins are granting privileges to bakers and caravanners

Written by JP Floru | Tuesday 29 May 2012

A year ago I attended a seminar on space travel. Some of the libertarians there couldn’t wait to leave socialist earth. Sadly, while space travel is still in its infancy, some of us will have to do with a caravan. Is the government’s volte-face on VAT on caravans good news or bad news? Static caravans will only be taxed at 5% instead of 20%. And the pasty tax has been abandoned altogether. Should we rejoice? Or not?

Governments giving privileges to specific industries or people was very prevalent in the Middle Ages. One of the reasons why the industrial revolution took place is because this sort of preferment went out of the window around the time of the Glorious Revolution.  No longer were trade, monopolies and tax privileges in the gift of politicians. Individuals were (at least theoretically) treated equally before the law. The Rule of Law — with laws the same for everyone, predictable, and not at the whim of politicians — was one of the greatest export product the Anglo Saxon world ever produced. The insights and choices of billions of individuals began to steer the economy, instead of the preferences of politicians.

One place where this freedom delivered prosperity was Hong Kong.  Its landscape, people, and environment were very much the same as the rest of China. Yet it boomed while China remained static. In Hong Kong, the rule of law was applied equally, not in accordance with the whims of long-nailed mandarins or Confucian officials. Occasionally, this equal treatment needed reiterating: in the 1960s, Hong Kong's Financial Secretary John Cowperthwaite (the man behind the Hong Kong miracle) fended off attempts by industrialists to obtain preferment again and again. Two Cowperthwaite quotes on industries seeking preferment:

“I must confess my distaste for any proposal to use public funds for the support of selected, and thereby, privileged, industrialists, the more particularly if this is to be based on bureaucratic views of what is good and what is bad by way of industrial development”.

“I am afraid that I do not believe that any body of men can have enough knowledge of the past, the present and the future to establish “development priorities” — which presumably means procuring some developments as being good and prohibiting others as being bad”.

Or, to quote a certain Mr A. Smith from K. (who, sadly, is not a special advisor): “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.”

So the bakers and caravanners have won the day.  Good for them: I don’t like taxes being put on anyone.  But, really, politicians should stop giving preferential treatment to their friends, and stop punishing those industries of which they don’t approve. Either you charge VAT on everything (allowing for a lower rate), or you don’t charge VAT at all.

Wasn’t this government supposed to fight red tape? Differential VAT rates most certainly add an extra layer of costly bureaucracy upon businesses.  An equal sales tax for all goods and services would make clear what the tax is to individuals and dispense with silly side-effects such as having to ascertain whether take-away food is hot or cold to know whether VAT is due; or small people avoiding VAT by buying the largest size at Baby GAP.

But most important of all, equalising VAT would avoid the cringe worthy spectacle of politicians claiming to have bought their sustenance at none-existent pasty outlets.  It would be worth it for that reason alone.

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Cash for no access

Written by JP Floru | Monday 26 March 2012

As long as government rules vast parts of our lives and our businesses, with nannying and interfering and market distorting measures left, right, and centre, some will try to pull the duvet towards them, leaving others out in the cold. This weekend's cash for access story is just another in a long line of similar cases.

The allegation of cronyism exposed over the weekend illustrates the absence of a free market capitalist society in 2012 Britain.  A free market is neutral.  It treats every individual equally, without privileges: you work, you thrive.

Since time immemorial people have spotted that there is a faster route to prosperity: to take it away from others.  Once, this was merely the preserve of common thieves.  The clever ones identified a more efficient device, called government. And if this government calls itself “democratic” new heights of refinement are achieved: take away from some to give to others under the guise of “fairness”, “equality”, and morality.

Sometimes it is called redistribution, as in: rob Peter to pay Paul, in the hope that Paul will vote for the robber.  Sometimes it is called crony capitalism, as in: privatise company’s gains, but socialise the losses.  Sometimes it is called fairness, as in: do all of the above, but hide it under the moral high ground.

There is a whiff of zero sum thinking about political favours.  It is the logic of the Genghis Khan and his hordes from the steppes, who pillaged and murdered their way through large parts of Europe to enrich themselves. The idea that there is only so much to go around, and that it is therefore essential to take from others to enrich yourself.  Redistributing the pie, instead of making the pie grow for all.  Redistributing by taking away property, granting privileges, and ordering people about; instead of creating wealth by way of property rights, equality before the law, and leaving people free to pursue their dreams and aspirations as they see fit.

Trade unions are at it.  Employers’ organisations are at it.  Businesses are at it.  Collectives are at it.  And you? You pay.  Cash for no access.  Not that most people, notice, of course: a large chunk of the financing system for the redistribution of favours by politicians is carefully hidden in inclusive taxes such as VAT or stealth tax such as PAYE which take the loot away without you even touching it.

Want to stop cash for access? Take away the cause.  Prevent government from looting the nameless. Reduce the size of government.

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The Coalition’s new home loan scheme: just a carrot for floating voters?

Written by JP Floru | Monday 12 March 2012

Taxpayers will guarantee deposits for new houses up to £500,000 under the government's New Buy Guarantee scheme. Many buyers find it difficult to raise 20% (or more) deposits and this scheme will allow them to buy houses with as little as 5% deposit.

Home ownership is certainly a plus for society as a whole – it gives people a stake which encourages responsibility. It is also a form of saving, which reduces the risk of ending up on welfare; and it builds up a lever to finance future entrepreneurship (most entrepreneurs self-finance their venture). Home ownership is in decline and is becoming increasingly difficult for first-time buyers.

So is this New Buy Guarantee scheme the right way to encourage home ownership? I don’t think so, for a number of reasons:

1. Taxpayers will be forced to take the risk for people who may not be able to repay their mortgage. Arguably, requiring a 20% deposit is a pretty good indicator as to whether a buyer risks defaulting. Why should people who are prudent with their money have to pay for risks taken by others?

2. Mortgages to uncreditworthy borrowers triggered the crash of 2008.  In America, Freddie Mac and Fannie Mae were set up to expand the mortgage market: they bought mortgages from lenders which allowed the lenders to issue new mortgages.  Freddie and Fannie were implicitly guaranteed by the government and thus the taxpayer. George Bush Sr and Bill Clinton forced Freddie and Fannie to take on ever greater shares of mortgages to the poor, thereby encouraging banks to give mortgages to uncreditworthy borrowers.  This was the root cause of the crash.  Who receives a mortgage should be the private sector’s responsibility (for both profit and loss); not the state’s.

3. It is true that it is more difficult than ever for first-time buyers to get onto the housing ladder. But this scheme is not limited to first-time buyers.  Claiming that its aim it to help first-time buyers is misleading.

4. Whose fault is it that first-time buyers find it so difficult to raise a deposit?  The government’s. Inflation has been pushed up by quantitative easing and artificially low interest rates, which make saving unattractive and raises the price of housing. (It is naïve to suggest that the Bank of England is independent in this matter.)

5. Property prices have shot up through a shortage in housing supply. Planning regulations create a stranglehold on new developments.

6. The measure is specifically aimed at the construction industry.  There is a whiff of “picking winners” to this.  The market is much better placed to allocate its resources as to maximise return and growth. Governments tend to pick losers because they lack the information dispersed among millions of individuals in the market – Hayek’s “knowledge problem”.

For politicians, schemes like this are love at first sight.  They allow them to claim credit for “results” they can boast about come polling day.  An ordinary tax cut won't convince specific categories of floating voters such as first-time buyers to vote for them. The figure of 50,000 jobs has already been plucked out of thin air.  No doubt this new scheme will allow politicians to claim credit for any uplift in the construction industry, irrespective of whether it's related to this scheme or not.

There is a better solution:

  • Reduce taxes to make it easier for people to save so they can take care of themselves – including saving for a mortgage.
  • Extend the stamp duty holiday for first time buyers.  It runs out on 24th March.
  • End the artificially low interest rates and stop money printing to encourage saving, reduce inflation, and reduce asset bubbles.
  • Continue the reform of planning law to make house building easier. [ed — see our recent paper Planning in a Free Society for ideas] Take some of the heat off by introducing private compensation legislation to operate between developers and individual neighbours to compensate them for loss to their property’s value resulting from development.

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Selling the Rule of Law for £500m

Written by JP Floru | Tuesday 28 February 2012

On Radio 4’s Today Programme this morning, Exchequer Secretary to the Treasury David Gauke defended the introduction of retrospective tax law to make Barclays pay tax which it had avoided legally. “When we see something like this, behaviour which is unacceptable, we are willing to step in”, he said. There are always reasons to ditch rules which aren’t very convenient.  But such reasons are rarely good enough.  And certainly not when it is to scrape away the glue which keeps the law together: the Rule of Law.

Retrospective legislation – or Ex Post Facto law, as it is called in jargon – is unacceptable because it make coercive rules random at the behest of the rule maker.  In The Constitution of Liberty, Hayek describes how some coercive action by government is acceptable, provided it satisfies three conditions: generality, certainty, and equality.  Retrospective legislation fails on the certainty ground, and is therefore objectionable. Earlier, in The Road to Serfdom, he said:

“[The Rule of Law] means that the government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge.”

How is a company to assess costs and gains before it makes an investment if greedy government can turn around at any given moment and ask for more?  It is fundamentally unfair to hold a person to be in contravention of the law when the law did not exist when the alleged contravention occurred.

This is not the first time a greedy government has decided to outlaw behaviour after the facts. But there is even worse: leaving tax laws vague to give the taxman discretion to tax no matter what has been common practice in the UK for years.

Some have tried to legitimise the Treasury’s actions by pointing out that Barclays has signed a voluntary code of practice in which it promised not to use tax avoidance schemes. It was certainly silly of Barclays to do so, as tax avoidance is not illegal (tax evasion is); and by signing this code of practice it effectively harmed its shareholders. Its action may have been inspired by a fashionable public spirited sense of “corporate responsibility”.  Barclays wouldn’t be the first corporate player to decide that it’s quite a good little idea to collaborate with coercive greedy government. Never mind the consequences for the entrepreneurs who arrive later.

You cannot opt out of the Rule of Law. Barclays' silly signature changes nothing to that simple fact.  For the Treasury, £500 million of additional tax revenue is a sufficient reason to walk over legal certainty. Never mind the billions of pounds investment which will now walk out of the UK.

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Ireland and the law of unintended domino effects

Written by JP Floru | Wednesday 25 January 2012

Ireland bailed out its banks to stop the much vaunted but never explained domino effect of banks going down.  As a result its debt went up, and its AAA credit rating went down.  Most investment funds are required to be established in AAA countries. So, it is said, Ireland’s financial industry is increasingly moving abroad to places like Luxembourg.

How’s that for a domino effect?

When individuals make a mistake, it may have a domino effect.  But so do the state's mistakes.  The only difference is that when the state creates a domino effect it will be of far greater magnitude than an individual's.

On top of that, the state making mistakes is more likely than an individual making mistakes, because of Hayek's Knowledge Problem: central decision makers simply do not have the knowledge about individuals' choices and opportunities that those individuals have. That state intervention usually has side effect is generally accepted — the left's response is to mend it with more regulations which in turn will fail.  State failure is therefore not so much a domino, it is a spiral.

The domino effect was the argument which was successfully used by politicians to explain why they bailed out the banks with taxpayers' money.  The domino effect of banks collapsing remains elusive, but in the UK the domino effect of bailing them out is very real indeed: the debt rising to £1 trillion; no growth; and sky-high unemployment. 

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What Queen Elizabeth I's silk stockings tell us about inequality

Written by JP Floru | Thursday 19 January 2012

Inequality drives civilisation.  Unequal distribution of income indicates which behaviour needs to be copied to prosper, and which doesn’t.  If you stay in bed you earn nothing; if you get on your bike to work you do: the unequal income incentivises behaviour which will create growth and prosperity from which ultimately the whole of society benefits. 

Inequality does not only benefit everybody with regards to income – but also in spending patterns.  Wealthy individuals will typically buy luxury goods while they are still exclusive.  Spurred on by the high income, manufacturers will produce more – and this leads to those previously exclusive goods becoming cheaply available to all.  Silk stockings once were a luxury which only Queen Elizabeth I and the richest in the land could afford – now everybody can buy them for £28.95.

What is important is that everyone should have enough food to eat, clothes, and a roof above one’s head – not whether or not your neighbour drives a Rolls Royce or just a bicycle.  It is perfectly possible to  have a reduction in inequality through high taxes for the rich, while seeing an increase in absolute poverty at the same time.

Inequality as indicated by the Gini Coefficient therefore misses the point completely.  Poverty is absolute, not relative.  Read more in our report, Does Inequality Matter.

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The ASI's best of 2011: JP Floru

Written by JP Floru | Thursday 29 December 2011

JP Floru, Director of Programmes:

As a contrarian I’m reluctant to prove that I am human after all - what’s wrong with being a Martian?  But our Sam has asked us to do this – so here we go.

Talking of Martians, the most interesting event I attended this year was a talk organised by the Economic Research Council about Space Travel and Space Exploitation – some people there couldn’t wait to move to another planet.  My second most favourite event was attending mass at Westminster Abbey with the Pope.  He is even smaller than I am, and has a very high-pitched voice with a strong German accent.  Lots of incense and pump and circumstance, and red mitres and golden clothes.   Yes!

As for films, for me only those where everybody is rich will do.  This started when my communist teacher in school discouraged us from watching Dallas “because it glamourised the rich in America”.  Not for me, serfs crawling in the mud, fighting over a potato: films are to escape.  I switched the DVD three minutes into Black Death last week.  This film featured Eddie Redmayne, who I saw in the fantastic play Richard II at the Donmar last week.  Favourite play of the year, though I don’t really do plays.  Richard II would be the favourite play always, because of the “Sceptered Isle” bit (tears), which also talks about “That England that was wont to conquer others, hath made a shameful conquest of itself”.  This second bit, presumably, talks about the European Union.  All very topical.

Back to films.  Melancholia by Lars von Trier ticks all the boxes: everybody is rich; they live in castles; there is some SF in it (without ghosts and Martians, all perfectly possible); it is sufficiently weird and hasn’t bee done before.  Another potential contender, Almodovar’s The Skin I Live In I disliked profoundly because too gory. The King’s Speech had glorious decors but no story and I never got Mr. Darcy’s allure anyway.  Downtown Abbey (of course), though the second season was not as good as the first (of course).  Had Lord Fellowes been told by the BBC to write more about downstairs than last year?

Music: I listen to XFM at high volume while driving through Central London and making tourists jump.  I like most of it, especially when upbeat.  Surprise then that this year’s winners for me are two melancholic tunes: Video Games by Lana Del Ray; and On Melancholy Hill by Gorillaz.  But I am more a classical music person: the grander and the more pompous the better: Handel, Vivaldi, Lully. Versailles rocks.

Politician of the year would be Boris (as all years for the previous five). David Cameron was a surprise second (late entrant after the Veto in Brussels).  Ed Millibore: Zero Point. Other losers include: Rowan Williams, for being so predictably socialist (and therefore boring).  Most dangerous politician of the future: Yvette Cooper.

Favourite places of 2011: Sweden (very civilised) and St. Jean-Cap-Ferrat (France) where I will move to when I win the lottery.

Most impressive video clip: Zach Wahls Speaks About Family.

What I look forward to in 2012: More vetoes on Europe; The Iron Lady; and writing a second book.

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It’s official: the BoE’s money printing achieved almost nothing

Written by JP Floru | Tuesday 13 December 2011

By taking away from one side of the economy to stimulate another, Keynesian economics is smoke and mirrors at the best of times.  But now it transpires that our own most recent example, Quantitative Easing, was more akin to a volcanic ash cloud and a one hundred mile-long mirage.

The BoE claimed that the £200 billion it printed in 2009 onwards, resulted in the yields on five and ten years gilts being 100 basis points lower than they would otherwise have been.  It claimed that growth was boosted by between 1.5 and 2%.  On the basis of this, it enthusiastically decided to print another £75 billion this October.

Not so, says the highly authoritative (and not personally interested) Bank for International Settlements in its latest quarterly report.  The real effect was about a quarter of what the BoE claims.  Yields were on average 27 points lower.

The BIS also doesn’t agree with the BoE’s belief that new stimulus will have a similar effect.  “It may be harder to achieve the same degree of effectiveness as with the initial programmes once the surprise or novelty element wanes”, it states in its conclusion.  This basically means that financial movers realise that the money printing results in inflation, and that they therefore add that future inflation into their behaviour.

Will Sir Mervyn now review the decision of the 6th of May to print another £75 billion? 

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Regional Fund: Coalition's job plan destroys jobs

Written by JP Floru | Tuesday 01 November 2011

treeBy handing out cheques to selected companies, the Coalition expects to create or protect 201,000 jobs. Even though three quarters of bidders were disappointed, the government promised to dole out £950 million.

As state money does not grow on trees, it has to be raised elsewhere. Thereby destroying other jobs. The only thing we see is displacement: jobs are taxed away to subsidise the government's favourites. Nick Clegg, for example, who is the MP for Sheffield Hallam, announced the new plan while visiting Sheffield Forgemasters - which will benefit from the government's profligacy.

When governments pick winners, they invariably end up picking losers. This stems from the classical Hayekian knowledge problem: millions of decisions by people are infinitely better placed to allocate funds to guarantee maximum returns, than bureaucrats from Whitehall are. Investment decisions should be left to those who are best placed to assess them: the parties concerned. They are driven to success by risking their own money on their own projects. Let's make sure we follow up on the "success" of the winners in today's cash bonanza. It will make for a splendid disaster book in about five years time.

The government will hand over £1 to the private companies for every £5 of investment the companies can find privately. It is to be expected that most projects were planned a long time ago and would have been gone ahead anyway. And if they would not have happened without the government's cash, then they should not be subsidised, as the market had determined that it was not a sound investment.

One would have thought that after the disastrous bank-and country bailouts the government would have been wisened up enough by now not to gamble with taxpayers' money in this way.

It looks as if this year Wesminster's Father Christmases will fill company stockings with presents the companies paid for themselves.

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