Freedom of Communication is helping communities defend themselves. Don't curb it

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The blame laid on social media for the looting is both misguided and dangerous. It is like blaming print media for the French Revolution, and neglects the fact that social media is part of the solution too. If communities are to reclaim the streets from disorder and fear, then people need to be able to organise themselves in opposition to the looters, and in order to clean up after them.

The best example of this is this collection of heart-warming tweets that should hopefully restore some of your faith in humanity, and the majority of law-abiding people. The proposal to shut down mobile communications would therefore do more harm than good: people need to be able to organise their communities, to check up on their friends and family, to stay informed about the location of violence in order to stay safe, and to use instant images and videos of the protests to identify looters and bring them to justice. Furthermore, it is now possible to track the violence and culprits due to the open and transparent nature of the BlackBerry broadcasts being used by looters.

We need to recognise that the rules of the game have changed, just as with every leap forward in communication technology. Organisation is faster than it was before - this means violence can be organised quickly, but means that counter-violence and defence can be organised just as quickly too. Any curbs on this freedom of communication and speech would not only harm everyone's liberty and the ability to defend against violence, but would misunderstand the socio-cultural nature of the problem. People do not incite violence because they have twitter; they incite violence because they are themselves violent.

These thugs are socially atomised, growing up in a system where they can receive 'rights' and privileges from a faceless, centralised and impersonal entity, never having to justify their taking from the communities and societies around them. This centralised welfare state means they effectively indirectly loot the rest of the community already - is it really any surprise that they are willing to take matters into their own hands for mindless fun? We've essentially been telling them for decades that they can.

Anton Howes is Director of the Liberty League.

The London Lootings need real solutions

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Let's be clear. The riots engulfing London over the past few days are not politically motivated, and nor are they even protests. What may have started out as a reaction to the shooting of Mark Duggan has evolved into a mindless, thuggish reaction to the noticeable absence of law and order. A police state that spread itself so thinly in order to control every one of us has failed in its core duty of protecting the peaceful majority's lives and property from the shocking rapacity of a violent minority.

So who are the culprits? The vast majority of the looters appear to be very young, revelling in the havoc and destruction they cause rather than expressing anger and frustration. Some blame poverty and inequality, citing youth unemployment and cuts to the Education Maintenance Allowance. This is of course an insult to every respectable poor person; those with the strength of character to get by and to better themselves without resorting to violence. If this is about poverty, it is poverty of spirit amongst a young few, rather than any widespread material poverty.

Diane Abbott, the MP for the affected Hackney North is probably much closer to the truth when she points out how these youths are destroying their own communities. Rather than venting frustration at figures of authority, they are actively destroying the livelihoods of their own neighbours. The poverty of spirit here is about alienation from the rest of society rather than purely the loss of respect for authority. After all, peacefully challenging authority is the healthy sign of a free and vibrant society, whereas relished violence towards your own neighbours is nothing more than sheer barbarism.

The knee-jerk reaction from many to use authoritarian measures has therefore also been disturbing. Calls to bring in the army, use water cannons and restore respect for authority do not address the problem. These young people are alienated by an impersonal, centralised welfare system that allows them to receive and take without any appeal or bond to the societies and communities immediately around them; so instilling a grudging respect for authority will only be temporary, and potentially perpetuate the problem when a deep-felt respect for all others is required instead.

Instead, the lasting solution must come from communities. Already, there are reports of groups of residents chasing away looters, and of Turkish communities in North London clashing with the thugs. Residents and shopkeepers have little choice but to rely on themselves and each other. Citizens therefore need to be made well aware of their rights in defending themselves and their property. The myth of neighbourhood policing has been shown up for the skin-deep and top-down sham it often is - but the answer is not to replace it with a more oppressive regime; it is to allow society to confidently step in so that law-abiding communities can themselves reclaim the city from fear. 

Anton Howes is Director of the Liberty League.

The micro alternative

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Financial markets are brutal task masters. Three years ago, they forced due recognition that housing and real estate were over-inflated and over-indebted. This past week, they did the same with western government finances. In both cases, the message from the markets has been clear – we can’t go on like this anymore. Blame the markets for being rude about it but don’t blame them for being wrong. They should have blown the whistle sooner but at least they had a whistle, unlike the politicians and their attendant hangers-on.

This has been and will continue to be a tough one – there’s just too much debt out there and it’s still growing for any simple one-button macro solution. G7 summits and spread-sheet driven Plan B’s aren’t going to make it. Even the Chinese last week fired off a warning that “the US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.” It’s a warning that applies equally well to most of Europe, including the UK.

Western governments didn’t get into this mess by any single policy that can be undone in one fell swoop. Rather, it was a series of policies that seemed innocuous, well-intentioned and even costless at the time but which slowly sapped economic growth potential. The list is endless and ASI fans can rattle them off easily. Here’s just three obvious ones for the UK:

High marginal tax rates are clearly counter-productive. This needs no explanation for friends of the ASI and our own Eamonn Butler elegantly restated the case last week.

Extensive labour market regulations discourage employment. Minimum wage rates mean people are unemployed at £5.93 an hour rather than employed at below £5.93. Job security rules mean protection for vacancies that are never created. Ditto for working time and vacation regulations.

Absurd pricing regimes for “green” energy and immoral subsidies for bio-fuels wildly distort investment from more productive purposes while raising the cost of energy and food for all.

It was curious to see Italy’s belated response last week to its fiscal crisis. Not only was there a macro proposal for a constitutional amendment to balance the budget but micro measures included liberalising closed professions, faster welfare reforms, overhauling the labour code and loosening up regulations on building a house or starting a business. Prime Minister Silvio Berlusconi’s credibility on this isn’t high after so many years in power but at least his heart seems to be in the right place – finally.

As the markets continue to thrash the errant, don’t be fooled by siren macro solutions of just a bit more quantitative easing, Plan B or slower-and-shallower cuts. It took a couple of decades of endless tinkering with the economy to get us here and it’s going to take some time to undo the worst of it.

It’s the micro-economy, stupid!

We need a Supercop

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With the riots and looting in London stretching into another day, David Cameron's idea of making Bill Bratton the Commissioner of the Metropolitan Police is looking like an inspired idea. Or it would have been, had the Home Secretary not vetoed it because he was an American.

Well, if you can have a Swede or an Italian running the England football team, you can sure have an American running London's policing. Especially one who was instrumental in turning around crime in New York. His view was that crime and disorder are not caused by the economy, racism or poverty, but by the illegal behaviour of groups and individuals – pretty much as the Home Secretary has been saying, in fact. And that if you allow such illegal behaviour to go unchecked, it undermines public confidence in the police and indeed more widely, in their society.

Successful policing, he insisted, is about leadership and focus. Not something the Yard has been noted for recently. And it is individual officers who are the key asset in getting to grips with things. Bratton cut New York's appalling murder and violent crime rates by half – yes, half – in just two years by his community policing initiative. He ended the domination of the gangs. Not community in the sense of the police trying to be nice to every different and mutually opposing local political group, but community in terms of being part of the community, being seen, and being approachable, so that local people saw the police as on the same side, and police saw the local people as part of the solution, not the problem. Back to Sir Robert Peel, in fact: the police and the public are the same people.

Bratton's achievements were not about spending money, but about pro-active community policing – and, crucially, prevention. Fix the broken window, clean up the graffiti, and people will value their neighbourhood more, and be less tolerant of the criminals. Deal with the small, quality of life, human problems and then you will be able to deal with the big, organised crime and violent disorder problems because you will have the public on your side.

A debt ceiling could be just what we need

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The current carnage in financial markets owes much to excessive debt levels, which have been so irresponsibly run up in recent years: the chickens are coming home to roost with a vengeance. In the EU, the paramount issue is the Euro, a project driven by politics and light on basic economic principles – one of which is that ‘you cannot buck the market’.

The Euro crisis is now probably reaching its denouement. The outcome is very unpredictable, although a split between a hard Euro and a soft Euro seems very possible. In the US, the President has struggled to prevent federal expenditure breaching the massive $14.3 trillion permissible public debt ceiling. To do so, heavy public expenditure cuts will be implemented.

The existence of such a ceiling may seem a crude financial mechanism but it has undoubtedly concentrated minds. But should a public debt ceiling – perhaps as a percentage of the previous year’s GDP – be imposed in the UK?

There is, in fact, a Private Members Bill, which aims to introduce such a ceiling: its chances of enactment are, though, slim. The evidence in recent decades is of a seemingly inexhaustible growth in public expenditure, especially over the last decade. Hence, public sector net debt is currently close to a barely imaginable £1 trillion – prior to various off-balance sheet liabilities, including public sector pensions.

Whilst the Coalition Government is slowing the growth in public expenditure, it continues to rise, especially once the net interest line is included. A mechanism to impose a debt limit can only be beneficial, providing the markets believe it is genuine and enforceable. The fact that the current yield on UK 10-year gilts is below 3% is testimony more to the dire situation elsewhere than to the Government’s belt-tightening policy here. Of course, this scenario could change – but a public debt ceiling could offer some valid defence against ever-rising public expenditure.

The end of the party

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I don't like to say 'told you so', but the current economic crisis says it louder than those mere words. Back in 2007-08, the politicians were rushing to blame the recklessness of the banks for the financial meltdown. We at ASI argued that the real culprit was actually the recklessness of the politicians. The UK and US governments, in particular, had been throwing a wild party, living beyond their means for decades, spending like mad, creating pointless public sector jobs, then printing money and keeping down interest rates in order to pay for it. But you can't keep partying forever.

And the politicians' answer to the inevitable hangover that followed? A hair of the dog. Quantitative easing that flooded us with fake electronic money which the politicians hoped we would think was real. Interest rates cut so low that they could go no further. Spending that just carried on – with a rising debt 'ceiling' in the US, and public spending cuts in the UK that are only just big enough to be real.

Continental Europe, meanwhile, superciliously grinned that it had escaped the contagion of those reckless Anglo-Saxon bankers. But again, the banks' high-risk behaviour were just what you'd expect when a government-fuelled party was in full swing – not the cause of it. And the Euro area was high on its own party substances. It had welcomed in dodgy economies like Italy, and even Greece, which had faked its financial ID to gain entry, and just turned a blind eye as their economic behaviour got more and more outrageous.

By now it's plain that you have to blame the politicians for all this, not the bankers. It is the politicians that the bankers are now punishing, because they fear that governments have let the financial rave get out of control and have no idea how to get themselves sober again. If the authorities do not reach for the strong coffee and drink it down to the bitter grounds of real deficit and debt reduction, the police and ambulances are going to be arriving, lights flashing and sirens blaring, rather earlier than they think.

It's not the banks or the speculators starving the poor

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I'm afraid that this all makes me rather angry. There are innumerable fools out there screaming that speculation, the banksters, the Vampire Squid, futures markets, are starving the poor by making food too expensive.

The true blame lies elsewhere:

A new report by the Committee on World Food Security found that using grains like corn and wheat to create bioethanol, often blended with gasoline to create transport fuel, has added 0.5 percentage points to the growth in world cereal demand, pushing it to 1.8% a year from 1.3%.

In vegetable oils, which are used to make biodiesel and dominate Europe’s market, growth has been even more pronounced. While their use for food slowed down between the 1990s and 2000s, from 4.4% to 3.3% a year, industrial use soared, so that in the decade to 2010 it grew from 11% to 24% of world use.

It really is the entirely stupid, damn fool, biofuels movement which is causing the food price rises. That US and EU politicians have insisted that all fuel used must be made of a certain percentage of plant derived material. It really is the entirely stupid, damn fool, laws, passed by our entirely stupid, damn fool, Lords and Masters which is killing the poor as we put food into cars not people.

The speculators, the commodity traders, the futures, options, the deep and liquid markets do their best to mitigate the effects of this damn foolery but the reason the poor are dying for lack of food is the actions of our own politicians.

That the proposed solution is for those politicians to be given more power over the food system moves me from rather to incandescently angry.

Could we all, please, just agree that biofuels are a damnably stupid idea that kill people and so just stop making or using them?

Please?

Taxes cannot defy gravity

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High rates of income tax don't work. They don't raise more money for the Treasury, nor do they soak the rich and help the poor. Britain's 50% tax rate – which actually means 52% by the time you add the National Insurance tax – is a case in point. It should go. Indeed, if the UK is to recover economically, it must go.

Over the last century, America's tax rates have gone up and down. Presidents Coolidge, Kennedy, Reagan and Bush all made large cuts to the rate. And after each, the wealthiest Americans ended up paying more tax, and paying a larger share of the total. Evidence from Canada, France, India, Hong Kong and Russia is perfectly consistent with this. The same has been true in the UK. When the top tax rate here was 60%, the richest five percent paid just over a quarter of the total tax take. After Nigel Lawson cut it to 40%, they were paying nearly a third of it. And revenues rose so strongly that Lawson did not have to borrow – indeed, he actually paid off some of the national debt.

When you take half – or more – of people's income in taxation, you really do cross a threshold. They regard it as unjust and unfair. So they down tools, move themselves or their business and their money abroad, cheat on their taxes, or pay expensive accountants to find ways to avoid the tax. That does the economy no good at all, and it generates absolutely no money to fund other government projects. Indeed, it loses the Treasury money.

We will know in February. By then, everyone's tax returns for the last year will be in, and we will be able to see what the effect of the 50% tax has been. I am certain the evidence will show lower returns and a smaller share being paid by the rich. Only three of the 86 largest economies in the world have tax rates higher than ours. Can we really be surprised if people think the UK is a rotten place to do business? And is it not obvious what we have to do about it?

Crowding out good deeds

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There's an interesting paper here on blood donations. As we know, many countries have both paid blood donors and unpaid, motivated purely by that joy of giving, blood donors. What the paper finds is that if some people are paid to donate then this dissuades others from giving without payment. Sort of a, well, if they're getting paid, why shouldn't I attitude perhaps?

On the specific subject of blood I think it's pretty clear that altruism works better than money. When the American system began to insist that blood must be labeled as paid or donated, demand for the paid blood dried up (yes, sorry). So if the users would prefer donated and we can get enough from civic mindedness, then by all means, let's use the system that works.

However, this paper takes one more step and compares the underlying question to Cameron's "Big Society".

Understanding the interaction between voluntary and paid is a key part of correcting government interventions which are held to crowd-out individual actions. For example, the current UK government has advocated the notion of a “big society”, which, although rather unclearly defined, appears to have altruistic behaviour as a central theme.

Quite: and their finding about blood is that paid donors crowd out unpaid. If people know others are being paid then they become less willing to donate. This isn't true of non-monetary rewards but is of monetary.

Which is really rather an interesting finding for the Big Society, isn't it? That we've an army of state functionaries paid for by gouging the taxpayers' wallets is actually deterring people from volunteering. We do have crowding out of charitable and voluntary impulses entirely as a result of others being paid to do those same things.

Note that non-monetary rewards do not do this, only monetary.

So, if we cull the State, move the things that need to be done into the voluntary sector, we'll find more people willing to do these things precisely and exactly because we've culled the people being paid to do them. And we've got the perfect non-monetary rewards to hand as well: called the honours system. BEMs to KBEs, the same work gets done and we've lightened the burden upon the pockets of the populace.

What's not to like?

Are we doomed?

Problem 4. Low private sector confidence

The one peculiar thing about the current outbreak of economic doom mongering is the there a lot of private enterprises that actually look pretty good. Particularly in the US, there have been strong earnings and good profits reported, and cash flow looks very positive. Yet businesses aren’t investing. Why? The main reason is a lack of confidence – they don’t want to invest in projects that will take time to come to fruition when the future is so uncertain. And who can blame them? When political failure is raising the spectre of sovereign default and financial collapse, when severe deflation and hyperinflation both look like genuine possibilities, and when you don’t know where the next tax or regulatory burden is coming from, who would want to take on any extra risk?

Policy implications

The first policy implication is straightforward enough. Governments have to come up with credible plans to eliminate their deficits and stabilize, then reduce, their levels of accumulated debt. Put simply they need to cut spending and live within their means. But they also need to do more than that. They need to fundamentally reform the state. They need to roll back bureaucracy, free up entrepreneurs, and reduce the burden of welfare. We cannot achieve what we need to achieve through efficiency alone. And we cannot pretend that governments can continue to do everything they currently do. We need a programme of reform that rivals the post-war settlement in its radicalism, but which heads in precisely the opposite direction.

The second policy implication concerns the financial sector. We need to accept the fact that we can’t keep bailing out failure, and find a way of managing it instead. The government needs to develop a credible method for ‘resolving’ banks that become insolvent. It needs to come up with a plan for winding up failed financial institutions without threatening the system as a whole. We’ve wasted three years obsessing over bank bonuses and arguing about whether retail and investment banking should be separated, but it’s not too late to switch our focus to something that would actually make a difference.

The third policy implication is that central banks desperately need to maintain monetary stability. That means keeping the money supply constant in the absence of changes in velocity, but increasing it if velocity falls and decreasing it if velocity rises. The second half of that task is not easy. Indeed, there’s a good case to be made for it being impossible. Firstly, in times of uncertainty, velocity tends to be volatile. Secondly, velocity can’t be observed directly. Thirdly, changes in the money supply take time to filter through the system. Fourthly, even if you could overcome those first three points, you still wouldn’t have a simple formula to work to – the economy is full of complex interrelationships and feedback loops, and people’s psychology and expectations play a far more important (and unpredictable) role than economic ‘scientists’ care to admit. Simply avoiding a severe deflation, on the one hand, or a hyperinflation, on the other, might be the best we can expect from central banks.

The bigger picture

What we are witnessing now are the concluding chapters of a credit-cycle that began in the early 2000s, when the US Federal Reserve decided to avoid the recession that should have followed the collapse of the dot-com bubble by flooding markets with easy money and cheap credit. But one could also argue – as Detlev Schlichter does – that we are really approaching the endgame of a much larger economic super-cycle that began when President Nixon closed the gold window in 1971 and removed the last vestige of restraint from government’s fiat money systems.

It is easy to construct an apocalyptic narrative from where we are today. One can easily imagine sovereign defaults triggering bank failures, which in turn would trigger more sovereign defaults as incompetent governments rushed to throw money at every emerging problem. You can picture financial collapse sparking a severe monetary contraction and plunging us into a 30s-style depression. Or you can see governments making a last-ditch attempt to monetize out-of-control debts, and prompting a hyperinflation that would also lead to systemic collapse and widespread economic depression.

And while, yes, there are those who argue that a more rational system would emerge phoenix-like from the ashes – ushering in fiscally-disciplined governments, a sounder international monetary regime, and greater freedom for private enterprise – it is more likely that wholesale collapse would lead to the resurgence of nationalist socialism. That would spell an end for liberty and private wealth-creation, and could even mark the return of large-scale international conflict. This is a Road to Serfdom that the world has walked before.

But as I said, it is easy to contruct an apocalyptic narrative. And when the headlines are dominated by doom and gloom, it is very tempting to do so. But we should also remember what Adam Smith said: “there is a great deal of ruin in a nation”. The reality is that doomsday is probably not upon us. If we get things wrong, then, yes, we may face a prolonged period of Japanese-style stagnation. But it is also possible that we could get things right. We could emerge from our current troubles with a brand of capitalism that is more robust, and better able to deliver real, lasting, sustainable prosperity than ever.

Ultimately, economics is all about choices. Right now, we just need to make the correct ones.

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With so much bad news from the financial markets, it is becoming difficult to see the wood for the trees. This is my attempt to identify the main economic problems we face, and to explore their policy implications.

Problem 1. Sovereign Debt

Put simply, governments throughout the West have borrowed, and continue to borrow, too much money. They have become accustomed to living far beyond their means, and seem to be unable to stop. Some countries have already hit the point of no return, while others are fast approaching it. What the markets are most concerned about is the prospect of sovereign default – that is, governments holding up their hands and saying, “sorry, we just can’t pay you back.” Sovereign defaults in major economies (like Italy) would likely have disastrous knock-on effects.

Problem 2. An exposed financial sector

The reason sovereign default is such a big problem is that governments bonds have long been considered more-or-less the safest kind of investment. They form the ‘security’ part of most portfolios. Indeed, one of the main ways we have tried to make our banks safer since the financial crisis is to force them to invest more in government bonds. So if the sovereigns go, so do many of our banks. And there does come a point where more bailouts just aren’t possible.

Problem 3. Sclerotic growth

Normally, one wouldn’t be too worried about sovereign debt. Governments are seen as going concerns, with extremely secure revenue streams. How can you run out of money when you are legally entitled to force people to give it to you? The difficulty comes when your growth rates are so low that there isn’t enough money to give. Then you have a big problem.

Of course, I’ve long argued that a quick bounce back from the recent recession was unlikely. Those countries that experienced a major credit-fuelled boom were left with severe economic distortions. Unsustainable bubbles had built up in financial services, housing and construction and the public sector. Given that these sectors form a major part of many country’s GDP figures, and given that a necessary part of the economic adjustment process was that these sectors would shrink, it was always hard to see where significant growth was going to come from.

But there’s also a broader point here. We may actually be witnessing the inevitable breakdown of the modern, bureaucratic welfare state. Countries are finding themselves with too many unproductive people for a dwindling stock of productive people to support. To put it more colourfully, the parasites are taking over the host, and they are slowly strangling it to death. [Cont'd...]