Déjà vu

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The country snowbound, trains not working, strikes and industrial disruption, the Labour government massively in the red, economy sliding to disaster... It's just like the 1970s all over again!

Blog Review 859

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Revisting Ricardo on rent (and Tim Harford on Ricardo on rent).

No, we really don't want to insist that politicians do nothing else in their days than politics. In fact, given the mess they make of politics, can't we insist that they all have other full time jobs? Perhaps if they find enough energy to interfere in our live anyway we could insist they do mandatory overtime?

It doesn't matter whether compulsory volunteering is temporary or permanent: it's still slavery.

The structure of a tax system is indeed extremely important.

Words of wisdom as a quote of the day.

On the (in) efficiency of government.

And finally, no more insane than some investment selection procedures.

The optimum size of government

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Richard W. Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, has an interesting article in the Washington Times on the optimum size of government. 

Rahn explains that economists from the Institute for Market Economics in Bulgaria have determined new estimates of the optimum size of government. They conclude that its optimal size is less than 25 percent of GDP.

Rahn claims that: “Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run". As the excellent Peter Schiff has also argued, reducing its size is the one thing that governments can do to lessen the impact of the financial crisis.

There are of course problems with just looking at GDP as an indicator of the impact of government upon the economy. Through various regulations, the government has so many other ways to lesson the economic competitiveness of the people. Just take a look India before and after Manmohan Singh rightly threw much of License Raj in the intellectual dustbin of history. It is strange that while developing countries are continuing to unburden themselves of regulation with such profound effects on the lives of people, the UK and other more developed countries are heading in quite the opposite direction.

Frankly, 25 percent of GDP does not go far enough for me. This would take us back to pre-WWII levels; instead, we should be aiming to return to pre-WWI levels of less than 15 percent. However, given that UK public spending is over 40 percent of GDP, 25 percent would be a very welcome step.

There are more than pragmatic reasons to believe in small governments, but economic analysis such as this should be enough to convince individuals on the fence, though not many politicians I suspect.

The beginning of the end of the American Dream

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Faced with a deteriorating global economy, the initial rhetoric of global leaders was to oppose a return to protectionism to keep the wheels of trade turning and credit flowing. However, the current pro-protection American administration may well jeopardise this recovery effort and in effect hasten the decline of American growth, draw out the recession and delay its recovery.

Obama has promised change. His website proposes to “enhance competitiveness" and “create jobs" by repealing tax breaks for corporations retaining earnings overseas, and using those savings to lower corporate taxes for companies with operations in the U.S. However, according to the Wall Street Journal, America has the world’s second highest corporate income tax rate of 35% and nearly all of corporate America has extensive operations overseas. Raising their taxes would cause corporate America to lose greater market share to foreign competitors. 

This ties in with the Patriot Employer Act of 2007 introduced by Obama where he advocates American jobs for American workers. But he failed to realise that companies forced to increase wages and benefits will have to pass back additional costs to the already burdened consumer and make significant cutbacks on hiring. What he should have done instead was to create less incentive for jobs to go overseas by cutting back on the high corporate tax rate for all companies. 

Obama’s website stresses that he will “fight for a trade policy that opens up foreign markets to support good American jobs" and “amend the NAFTA" to alleviate the unfair burden placed on Americans. But as the Heritage Foundation points out, NAFTA countries conduct $2.2 billion trilateral trade daily that supports U.S. jobs and bolsters productivity and investment. Coupled with the deteriorating environment and dwindling domestic consumption, a sudden enforcing of trade barriers may cause other countries to retaliate leading to drying up of the export economy. Already burdened firms will go bust and thousands more jobs will be lost.

American policy makers must tread carefully.The CATO Institute rightly suggests that they must “focus on reforms that remove impediments to work, savings, investment and production". Otherwise, non-productive businesses and the increasing flight of capital will contribute to poverty and increase burdens on the state machinery, hastening America’s decline as a place of opportunity, prosperity and growth.

Unsubstantiated promises

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If history offers us any guide, and I strongly believe it does, then all the promises of the Kyoto crowd simply will not materialize. We don’t need to dismantle the one-sided quantitative science of global warming – disproportionately blown up by computer models – we just need to look at the history of previous energy transmission. That’s what Vaclav Smil did, author of Energy at the Crossroads. Natural gas was supposed to have us driving fuel cell cars by now.

Unfortunately this forecast like so many other projections from bureaucrats were terribly flawed. The transformation of the energy supply of modern industrial societies takes much longer than the green guru wants to make us believe. Al Gore should take notice:

• It took oil about 50 years since the beginning of its commercial production to capture 10 percent of the global primary energy market, and then almost exactly 30 years to go to reach 25 percent.
• Analogical spans for natural gas are almost identical: approximately 50 years and 40 years.
• Regarding electricity, hydrogeneration began in 1882, the same year as Edison's coal-fired generation, and just before World War I, water power produced about 50 percent of the world's electricity.
• Nuclear fission reached 10 percent of global electricity generation 27 years after the commissioning of the first nuclear power plant in 1956, and its share is now roughly the same as that of hydropower.
• But coal has reigned supreme since the late 1890s; in 2008, it supplied twice as much energy as it did in 1973.

On this day...

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On this day in 1905, Ayn Rand was born. She would certainly have had plenty to say about the general response to this financial crisis. If this is what you are after, you can do no better than taking a peek at what is coming out from the Ayn Rand Centre.

Blog Review 858

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Rather shocking, Bill Easterly actually says that Jeff Sachs is correct. About one thing at least.

Working for the civil service makes you ill apparently. Clearly we'd better fire a few hundred thousand of them. For their own good of course, you understand.

Or if said bureaucrats are going to act like this can we just shoot them instead?

Actually, perhaps we need to do more work on the appropriate torments.

Next week The Guardian will be running a series on corporate taxation. Here's why just about everything they say will be wrong.

A rose by any other name might smell as sweet but relabel a stimulus as "deficit spending" and it might not garner quite so much support.

And finally, why wait until June 15th?

Market failure, government failure

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We're all aware of the concept of market failure of course: and those who read around here are similarly going to be au fait with the concept of government failure. We tend to try and point out that government failure is going to be worse than the market kind, partly because of the incentives faced by the actors and partly because it's so much more difficult to reverse the government type of failure.

However, if you really want to have gobsmackingly awful failure you have to go further than mere government, bureaucracies, and get the politicians involved. Something which has just happened in fact, as a leftish but good economist notes, a Canadian economist, rightish economist, White House type, the economically literate and even the closest the US has to an economically literate social democrat notes. Congress has just made an entirely idiotic decision.

They've decided to bring back trade protectionism as a way of dealing with the economic downturn. The House version of the stimulus bill states that only US made iron and steel can be used in any of the projects funded. The Senate version says that anything used must be US made.

Einstein once said that lunacy was performing the same actions over again and expecting a different outcome. We tried this, protectionism, in the last big downturn and Smoot Hawley really didn't work all that well, did it? In fact, most people say that it made things worse, not better. I guess we simply have to conclude that the majority of the duly elected politicians of the USA are lunatics.

That economists are united in their opposition won't, unfortunately, make all that much difference. As last year's Nobelist*, Paul Krugman, has pointed out, it's when economists are most united in their policy proposals that they have the least influence.

Sigh.

* Yes, yes, Swedish Bank in honour of, still don't care.

The never ending rise of public spending

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There was an interesting piece over on Douglas Carswell MP's blog this week, asking "Why does government spending increase no matter who's in office?" Looking at the graph he produced using ukpublicspending.co.uk (left) it's easy to see his point. Whether the government has been Tory or Labour, spending has just gone up, up and up – albeit with an occasional (minor) dip or pause.

Douglas' suggestion is that the rise in spending mirrors the decline in Parliament's power to check, scrutinize, and hold the government to account. He argues that the UK's whole budgetary process should be overhauled, with Select Committees given the power to approve or reject annual departmental and QUANGO spending.

Well, I'm certainly in favour of greater parliamentary accountability and a more constrained executive, and I agree with Douglas that the UK's budget day is a 'charade'. But would giving MPs more people really reduce expenditure? I can see how it might, but I can also see that some MPs would soon be selling their approval in return for funding of their pet projects – pork-barrel politics, as the Americans call it.

The other problem is that cutting out waste can only take us so far. Now, I think the state could probably carry out all the functions it does now for around 30-35 percent of GDP – if they did things really efficiently – rather than the 45 percent or so they spend at the moment. But as long as we have a full-blown welfare state we're not going to be able to get it any lower than that. Indeed, with a growing and ageing population, welfare statism pretty much condemns us to ever-higher public spending.

The only way to escape that upward spiral, in the long run, is to move whole services out of public funding, and into the private sector economy. Getting people to save for their retirements (as in Chile) and their healthcare (as in Singapore) would be a good start. An education tax credit, like the one advocated by the Cato Institute, is also worth investigating.

Douglas Carswell's excellent new book, The Plan – Twelve Months to Renew Britain, is available here.

Liberal, Libertarianism and Classical Liberalism

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American English has expropriated the word “liberal". It uses it to signify a mishmash in which “lifestyle" must be absolutely free, subject to no rules of common decency and traditionally agreed norms of good taste, while “economic“ freedoms are subject to mild contempt and irony (“free choice between two dozen flavours of ice cream") and subordinated at every turn to labour union privileges, eminent domain, public interest, “positive rights", equal access and the administrative regulation of markets. The “liberal"of English English is replaced by “conservative".

Before this linguistic occupation of their ancient terrain, some liberals started to call themselves “libertarian". This conjures up images of wild devauchery, emancipation from authority, might over right and much else that gives honest citizens goose-pimples. It is doing liberalism no good. Other liberals have opted for calling their creed “classical liberalism." This term is perhaps the worst of all. It is instinctively understood as the opposite of “modern".  It is outdated, fuddy-duddy, 19th century, nice enough and worthy in its own limited way, but not up to the “great challenges of contemporary society".

The point I am trying to make is that retreat and peaceful acquiescence in the colonising infiltration of alien notions does not pay. It does not pay at the level of language any more than at the level of judgments of value and the finding of facts.  The order of the day should be to resist and counter-attack.
 

Extracts from a speech introducing Liberale Vernunft, Soziale Verwirrung, 27 January 2009 in Zurich.