The danger of inflation

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On sound monetarist principles I thought that quantitative easing – the Bank of England's euphemism for printing money – was a sensible policy. There was such a huge output gap – a growing number of unemployed people and a greater stock of underemployed productive capacity – that any new money would first go into boosting employment and productivity. Only when things had stabilized did we need to worry about the new money driving up prices.

There were, I thought, two possible dangers. One was that confidence would return as rapidly as it had disappeared, meaning that money would reappear from under people's mattresses and come back into the productive economy. With the Bank creating even more, that could over- egg the pudding and produce an inflation mess instead. The other was that, even if the new money worked as the Bank intended, and gradually stabilized the economy, it might not rein back in again quickly enough. After all, central bankers rather enjoy booms, and so do their political masters. So that would be another pudding over-egged, with similar results.

Since then, the economic situation has changed, and there now every danger that the Bank's (recently boosted) quantitative easing will indeed produce inflation. First, monetary aggregates are expanding, and prices haven't exactly fallen much, so the deflation dragon seems to be more of a gekko. Second, the output gap is big, but it has not grown as much as expected. The OECD says we've bottomed out, even George Soros says so. The reason, of course, is that we have borrowed so hard to stave off a collapse. Borrowing may stoke up future problems, but we seem to have bought our way out of a complete meltdown. We've been high on the drug of cheap credit for years, and instead of going cold turkey, we have bought ourselves a rehab course. It takes a lot longer, it might not be so effective, and the methadone of borrowing might have its own unpleasant effects, but at least we're not quivering and sweating on the floor.

You can argue whether that's the right policy – and I'd argue that it's highly dangerous – but the implications for quantitative easing must be clear. If this was largely a crisis of confidence, and confidence is now returning and the economy is reviving under its own steam, there is no point in stoking up the boiler yet further with new money. It can only lead to an explosion of inflation.

The real key to health reform

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I often feel that the healthcare debate in the UK is so limited as to be pointless. It's not just that people only ever talk about 'reforming' the monolithic NHS, rather than admitting that it’s a relic of the Soviet-era central planning which is never going to provide the standards of healthcare that 21st Century consumers rightly expect. Rather, the problem is that even people willing to consider real change usually get bogged down obsessing about the wrong issue.

Discussion inevitably revolves around whether we should have national insurance, or social insurance, or private insurance. But what is completely missed is that it is the very over-reliance on third-party payment that causes most of the economic problems in healthcare, regardless of whether governments, non-profits or businesses are in charge.

The point is that while it makes sense to insure yourself against big-ticket, catastrophic health expenses that might (but hopefully won't) happen, it really isn't sensible to use insurance to pay for unavoidable, everyday occurrences (like having to go to the doctor every once in a while).

When you introduce third party payment into those situations, it causes a number of problems. Firstly, it introduces lots of administrative costs, which frequently exceed the cost of the treatment itself. Secondly, it gives both doctors and patients an incentive to maximize expenses – the patient because he's paid his dues and wants his money's worth, the doctor because he wants to increase his income. Thirdly, it blunts incentives to stay healthy, because that's what you've got insurance for. All this makes third-party payment the main reason why medical inflations runs at 8 or 9 percent a year, even when the wider economy is only running at 2 percent.

The key to successful healthcare reform is to get patients paying doctors directly for routine services, and returning insurance (of whatever sort) to its natural role. If you want a real-world example look at Singapore (where they get great outcomes for less than 4 percent of GDP). And if you want to know how it might work in the UK, have a look at this ASI report from 2001.

1950: The end of fuel rations

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On this day in 1950 fuel rations ended thanks to trade with the United States.

Free to choose what we tell you

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Anyone that has a vague understanding of the differences between Labour and the Conservatives on education policy knows that the latter have quite a different vision and remarkably better one. Despite some success with Academies, Labour are increasingly stuck in the mantra of a system that continues to fail children taught be the state, while the Conservatives are committed to creating a limited market in education.However, don’t be fooled into thinking that education will be liberated under the Conservatives. As Thatcher centralized while privatizing, Cameron’s Conservatives seem intent on offering choice within boundaries that in fact restrict. In much the same way that Labour has fermented education and its institutions to defend its socialistic vision of the world, the Conservatives will use education to promote theirs.

Claiming in ‘ Raising the Bar, Closing the Gap’ that “the only constraints on New Academies, and indeed on existing Academies, should be the curriculum requirements which apply to independent schools" is in reality a hefty weight around the necks of those educating and being educated. Like Labour, the Conservative Party will use the National Curriculum as tool with which to try to instil their view of the world into the minds of the children of this country. This is not freedom for schools and teachers, but the contiued politicization of education.

Take history for example. The Conservative's plan to force teaching with a focus on British history. Of course, you might think this is better than what we have now, but let parents, schools and teachers decide if that is the case. For my part, I would like to see a school teach the history of various battles for freedom throughout the ages; a fair amount of this would be British history, but rather a lot would not. Instead the Conservative Party want to “instill an appreciation of our national culture and nation’s past". No thanks.

Blog Review 972

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Much is made of the need to save local newspapers. There are those who say that maybe local governments, or central, might subsidise them. Here's evidence that there wouldn't be any point in having them if they were so subsidised.

That preference for the unions in the Chrysler bankruptcy. Congratulations Mr. President, you've just made finance more expensive for each and every unionised company.

Why we shouldn't use the Human Development Index as a measurement of anything other than how like Scandanavia a place is.

Politics is so often about squaring circles: and refusing to admit that circles cannot be squared.

Economists don't try brain surgery: so why do brain surgeons try economics?

A very confused Early Day Motion praising Polly Toynbee. She reveals her salary from The Guardian, but not her speaking fees, other freelance income nor her book royalties. We are urged, at her example, to reveal our total incomes.

And finally, where your tax money goes.

Good for candidates

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This is a very good time to be a parliamentary candidate – for any party. The point is that as a candidate, you are untainted by expenses fraud and false claims. There is a good chance that your sitting MP is so tainted, in that all were part of, and connived in, a fundamentally corrupt system. It was designed to make the salaries of MPs seem modest and reasonable by hiding a huge part of them under the cloak of tax-free expenses.

Now it is payback time, and every MP with dubious claims out there is at the mercy of opponents using the local press to attack their expenses record. More than the usual number will elect not to re-stand, walking off with their gold-plated pension pots. This means that many candidates will not face incumbents, but faces as fresh as their own. Of the MPs who do try for re-election, many will not succeed, fatally tainted by what has been revealed.

The new House will be known as the "Parliament of Fresh Faces," in that record numbers will be new to Westminster. In many ways this clearing out will serve the nation well, taking with it the accumulated debris of cosy carve-ups that entrenched power and privilege in the hands of the long-serving. Fresh faces mean a fresh look, and a chance for some of the root-and-branch reforms needed to get Britain out of the hole in which the present crowd have dumped it.

Some advice to Bill Gates

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As if he doesn't have enough bright people giving him advice....still, there's a report that he and other philanthropists are thinking that overpopulation should be their major concern in the distribution of their charitable efforts:

SOME of America’s leading billionaires have met secretly to consider how their wealth could be used to slow the growth of the world’s population and speed up improvements in health and education...... At a conference in Long Beach, California, last February, he had made similar points. “Official projections say the world’s population will peak at 9.3 billion [up from 6.6 billion today] but with charitable initiatives, such as better reproductive healthcare, we think we can cap that at 8.3 billion," Gates said then.

I'm entirely unconvinced that overpopulation is a problem but will defer on that. Accept that it is and then ask, well, what can we do about it?

What we do know is that fertility rates fall the richer a country is. This is using a wide definition of rich by the way: a proper one. The more choices that women have, the greater their educational possibilities, the fewer children (and women) that die in childbirth, in youth.

Reproductive healthcare can obviously help here. Fewer deaths of children will lead, over time, to fewer being conceived. But if by reproductive health we mean simply the provision of more contraception (and or abortion) then there will be little effect upon fertility rates. For what needs to change first is peoples' desire to have many children before they'll use mechanical aids to make sure that they have fewer children. Indeed, it's been pointed out that 90% of the changes in actual fertility come from changes in desired, with availability of contraception making up only that last 10%.

So what we really want to do is increase that real wealth of the various societies. This will reduce the desired and thus the actual fertility rates, just as they have done in all of the currently wealthy countries. More educational possibilities for women, fewer deaths at young ages, decent vaccination programs and so on. Most importantly, valuing women as something more than simply children producing machines.

Which brings me to a somewhat cynical observation. If it were simple to change a society so that it valued women more, perhaps as economic actors rather than simply familial, wouldn't we see evidence that this has happened many times? Which I don't think we do. I think we see societies which are growing and/or rich valuing women as valuable economic actors. So it isn't that we might invest directly in, say, women's education but rather that we want to get those currently poor and high birthrate countries growing, so that the same factors that kicked in with us kick in there. When, to be very crude about it, women are valued for more than simply their child producing abilities then they will be treated as being more valuable than simply their child producing capabilities. And the way to get to this desired break with the past is to have an economy where women are indeed more valuable as economic actors than they are simply as mothers.

Then they'll be treated just as other valuable economic actors are, educated and trained, and the birth rate will fall.

Worked for us, worked for France, Germany, the US, Japan......everywere rich actually. Why won't it work again?

Buying in to Rand

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As global recession has taken a stranglehold on the world economy we have seen the vast majority of markets struggling. However, there are markets which buck the trend with goods growing in demand. Perhaps one of the most interesting of these is that sale of the 1957 novel ‘Atlas Shrugged’ by Ayn Rand.

Since the beginning of the economic crisis, Atlas Shrugged has climbed more than 500 places on the Amazon rankings, even overtaking contemporary bestsellers such as Barack Obama’s ‘The Audacity of Hope’. It is still ranked as one of the most influential books of all time alongside The Bible. Bearing in mind The Communist Manifesto is currently ranked 140,414 bestseller in the Amazon lists, the rise of Ayn Rands magnum opus poses some serious questions.

The fact that Atlas Shrugged is still so influential shows that capitalism is still holds an allure for many people. Rand's controversial philosophy of objectivism cannot be ignored and certainly has practical applications at the current time. With over 2 million unemployed in the UK perhaps it is time we should be allowing firms to utilise human capital with the aim of increased profits and self interest rather than imposing tighter and more stringent regulation that leads to an inevitable loss of efficiency for the economy. As we have seen during the expenses scandal, MPs clearly favour self-interest, but only under immoral and fraudulent circumstances that benefit them – why can't they extend greater freedoms to the economy allowing it to get back on it’s feet?

How will we drag ourselves out of recession? Who is John Galt?

India: Razeen Sally on the IEA blog

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Razeen Sally on India's need for an Industrial Revolution.

Blog Review 971

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A small watercolour (claretcolour perhaps) of what might be going wrong with the NHS. Simply too rule and hide bound.

Given that markets are network goods the wider the market the better the market, no?

Yes, MPs really did change the law so that they don't have to obey the same tax laws as the rest of us.

And some other politicians would like to upend the basic rules of the capitalist game so that their favoured buddies get a better deal.

There are fairly simple and obvious reasons why Chrysler and GM went bust.

This would rather shake up the sporting world.

And finally, better late than never.