Virginia Postrel, The Future and Its Enemies.
There’s a lot of really angry people out there. The assorted collection of Occupy Wall Street-types around the world are getting all the media attention. Nobody’s quite sure what they really want or what would make them fold away their spiffy tents. Something about socking it to the 1% of the population in order to satisfy the other 99%.
Well, now there’s another percentage movement underway – The 53%. Launched earlier this month in the U.S., it’s a grass roots bunch purporting to represent the 53% of Americans who actually pay federal taxes. Their website is just a collection of individual testimonials in a photograph about working hard, saving and eschewing handouts to the other 47%. Like this.
If the Occupy crowd are hoping to do for the Democrats what the Tea Party movement did for The Republicans, then The 53% have just upped the ante.
Here in the U.K., HMRC estimates there were 30.2 million income tax payers in 2010 in a country of some 62.3 million people as just reported by the ONS so any such movement here would be The 48%. But they’ll have to be flexible on the name. HMRC forecasts 29.9 million tax payers for 2012 while the ONS forecasts annual population growth of 500,000, putting the number of people in the UK in 2012 at 63.3 so the movement would need to change its name to The 47%.
What are the chances of a British The 48%? Well, as the Lib Dems’ Chris Huhne so clearly warned the Conservatives last month (“We need no tea party tendency in Britain), not much. Right?
What about The 47%? Or The 46%? Or the 45%.....
I’m aware that this point has been raised before at the ASI and elsewhere, but I think it’s worth reviewing, especially in light of the ‘Occupy the London Stock Exchange’ protest currently on-going. That the protesters have succeeded not a whit in occupying the LSE but have instead closed St Paul’s Cathedral is perhaps a sign that we shouldn’t take them too seriously – for a start they clearly don’t understand the law of unintended consequences. However, if asked the question ‘do we have capitalism in the UK?’ most of the Clapham omnibus would respond in the affirmative.
I would suggest that the UK does not have capitalism because of the presence of government intervention in the economy. Clearly – unless we believe in anarcho-capitalism – there will always be some level of government intervention in the economy. However, I would argue that it is not only the great extent but also the nature of that intervention which lead to this conclusion.
We could quite easily ask the protestors whether they thought an economy in which circa 50% of GDP is spent by the government could reasonably defined as capitalist? Where 20% of workers are government employees and almost everyone in the economy is in receipt of state transfer payments or other forms of state aid is ‘free market’? Where the top rate of income tax is 50%? Where government debt is 392% of GDP? Where the remaining 50% of the ‘free market’ economy is heavily regulated by the multitude of statutes and statutory bodies across every sector? [Continue reading]
It's 25 years since the Big Bang deregulation of financial services in the City of London.
I remember the City before the Big Bang. It seemed more like a gentlemen's club rather than a place of business. It was dominated by sleepy upper-crust partnerships, most of them the same names that had been in the Square Mile for centuries. They couldn't take on the opportunities offered by the world's growing globalisation, even if they had wanted too. No wonder the City had been overtaken by New York. It was a closed shop with its own bizarre and old-fashioned customs, underpinned by regulation and law.
Nor could this cobwebby old-boy City have handled the privatisation revolution that Margaret Thatcher had in mind. Before the sale of BT in 1984, just a few thousand people owned shares. Today, nearly ten million people have some stake in British business – thanks to Big Bang.
True, lots of American financial firms pounced to buy up their sleepy London counterparts. But that brought in new capital and new ideas. London grew and overhauled New York to become the world's top financial centre once again.
People also say the Big Bang produced a 'loadsamoney' culture and huge salaries in the financial sector. Wrong. The deregulation certainly opened up new markets, and brought in more capital that allowed firms to grasp those new opportunities. And computerisation, which came in at the same time, made that new business hugely more efficient. The rise in wages and profits simply reflected that new productivity.
Other people blame the Big Bang deregulation of the City for the over-borrowing and over-spending that led to the current financial crisis. But it seems a bit much to blame that on something that happened 25 years ago. More recent mistakes – huge over-spending and over-borrowing by governments, easy money and expansionary policies – are a much better explanation. And we have only governments, not the bankers, to blame for that.
Today we release our new report on High Speed 2, High speed fail: Assessing the case for High Speed 2. The report examines the case for the HS2 project and finds that in almost every case the evidence is highly doubtful about whether it would be worth the money. Put together, the doubts and unanswered questions around HS2's viability mean that the case really isn't persuasive enough for the government to go ahead with it.
The first leg of the project, between London and Birmingham, will cost at least £17bn – and up to £50bn if the whole project between London and Scotland goes ahead. We think that this is a low-ball estimate, given the very high inflation rate we are experiencing and public pressure for more tunnels to avoid despoiling natural landscapes.
Previous experiences with high speed rail in the UK should make even the most enthusiastic supporter of HS2 think twice. High Speed 1, which links London St Pancras station with the Channel tunnel, cost £5.7bn but only sold for £2.1bn. Projections by the promoters of HS1 overestimated the number of passengers by three times the actual figure. Passenger predictions are notoriously difficult – they cannot take account of what measures competitors will take. If the reality for HS2 was anything like these figures, it would create a fiscal catastrophe for the government.
Internationally, there are only two high speed rail lines in the world that do not rely on taxpayer subsidies to remain operational. (They are Paris-Lyon and Tokyo-Osaka, for the trainspotters out there!) The company that operates TGV in France is €25bn in debt. China, long used by advocates of HS2 as an example of a country doing high speed rail properly, has had a disastrous experience with train crashes.
The supposed environmental benefits are extremely weak too, mostly resting on the idea that fewer people will choose to fly to Scotland once a high speed rail link is operational. Even if this were true – and, again, it is undermined by previous experiences with high speed rail passenger estimates – it would not take effect for at least thirty years. Nobody in 1980 could predict travel patterns in 2011; why does anybody today think they know what the world will be like in 2041? In the meantime, the 30 minute travel reduction between London and Birmingham is unlikely to change much.
In short, the case for HS2 is remarkably weak. The government should scrap it and save taxpayers from having to cough up for it.
Gordon Brown's premiership will not be remembered as a success. He did so many things wrong that the list is too long to tell. Among the highlights are his sale of 395 tons of Britain's gold reserves between 1999 and 2002 for £2.3bn, an amount that would now be worth $14.3bn.
He devalued trust in open government by sneaking in 'stealth' taxes without declaring them. He turned Britain from one of the most competitive, low-tax regimes in Europe to one of the least competitive, high-tax regimes.
He squandered mind-boggling sums on public services, claiming that their poor performance was because they were under-resourced. The mountain of extra cash brought no improvement remotely commensurate with it.
He schemed against Blair's premiership, undermining it whenever he could, and thwarting its ability to restructure and improve the public services.
He borrowed without limit, leaving his country with a crippling burden of debt. It had taken 300 years and innumerable wars to take Britain's public sector net debt to £352bn by 1997. It took Brown 12 years to double that, and it is well on the way to doubling again by 2014.
The list goes on, but he did two things right. He gave the Bank of England its independence (though its Monetary Policy Committee is still government appointed). And his 5 conditions kept us from joining the euro. Given a chance, Tony Blair would have taken Britain into the single currency faster than he took us into Iraq, but those 5 conditions were never met, so Britain stayed out.
Looking at the mess the eurozone is in today, we can be grateful that staying out was one of the things Gordon Brown did right. The euro represented an attempt to impose political wishful thinking upon economic reality. Even in its current crisis, eurozone leaders are putting EU politics ahead of what economic sense requires. We are well out of it, and Brown merits a nod of praise to punctuate the torrents of well-deserved abuse.
Over on The Spectator’s Coffee House blog, Fraser Nelson has mischievously offered a bottle of Pol Roger champagne to the reader best able to articulate George Osborne’s growth strategy.
The joke, of course, is that many commentators don’t believe the government has a growth agenda. And it’s easy to see why they’d say that: various tax rises, a distinct lack of progress on cutting red tape, and a foolhardy determination to drive up energy costs certainly give the impression that the government doesn’t have a plan for growth.
But that isn’t quite fair. The government does, in its own mind, have a growth strategy: keep interest rates low and try to encourage lending and borrowing. Ultimately, that’s why they committed to spending restraint. That’s why they’ve been supportive of quantitative easing. And that’s why they’re now talking about credit easing – that is, subsidizing loans to SMEs.
Easy money and cheap credit – it’s all very 2007, isn’t it? And that’s my big problem with the government’s growth strategy (such as it is) – it is more about propping up a broken, credit-fuelled economic model than it is about creating real, sustainable growth for the future.
The trouble is that the most crucial policy for future growth – finally, after years of resistance, letting markets adjust – could bring with it a degree of short-term pain that many politicians would find unacceptable. Yet while recessions are undoubtedly painful, preventing the liquidation, deleveraging and capital reallocation they entail makes stagnation (at best) the most likely outcome.
Of course, I’m not suggesting that returning to growth is only about ‘letting go’ and allowing things to work themselves out. Supply-side measures to boost enterprise and entrepreneurship are vital too, and that means lower taxes, particularly on investment, and less onerous regulation. We also need a healthy savings ratio and greater capital accumulation, a sounder banking system, and the radical liberalization of public services.
So there is actually plenty the government can do to encourage growth. Right now, I’m just not sure they’re doing it.
This is a good time to remember what our shadow chancellor, Ed Balls, said about the Irish austerity package. When Ireland's second quarter growth last year was lacklustre, he said, “These figures are a stark warning to governments across Europe including our own. That is not a credible economic strategy because lower growth and fewer people in work and paying taxes ultimately leads to a bigger deficit, not a smaller one.”
And what, asks Anthony J. Evans in City AM today, has happened since then. He lists the following:
• Ireland’s gross national product is now growing.
• Domestic demand is rising.
• Bank deposits are rising too.
• Bond yields are now under 10 per cent.
• Unemployment has continued to rise, but has slowed from the spring 2008-autumn 2009 spike.
To the unbiased observer, this might seem to suggest that Ireland's austerity package shows signs of delivering the goods. Ireland is not out of the woods yet, and its national debt (the true value of which is obscured by the existence of the NAMA "bad bank" and the government's stake in the still-risky financial sector) should be sobering to any optimist.
But the signs are quite promising, and seem to have achieved rather more than the 'borrow your way of out debt and keep spending' policy that Mr Balls was advocating and still is. I can safely predict what he will say about Ireland's performance: nothing.
I met one of our ASI associates, the excellent Andrew Selkirk, at a lecture last week by the equally excellent Professor James Tooley. Andrew is editor in chief of Current Archaeology, which circulates mostly to interested amateurs like me. He passed on to me a copy of another magazine I had not seen, Ad Familiares, published by Friends of Classics. Not something I thought might be a right riveting read. But it was.
Two articles in the current issue are particularly interesting to modern free-market thinkers. One is Andrew Selkirk's own article on Ancient and Modern Market Economy. His thesis is that what produced the enormous dynamism of the ancient Athenian and Roman worlds is that they discovered money and the market economy. That made them hugely more efficient than earlier, barter economies. And through the market economy they discovered the free society. By contrast, the Spartans (whom Xenophon, says Selkirk, thought were 'jolly good chaps') rejected money and the market economy, turned their backs on civilisation and the open society, and because disciplined militarists. But disciplined militarism only carries you so far.
As for the Romans, we are told they were always fighting wars too; but Selkirk believes that the various rights enjoyed by Roman citizens – including the right to trade peacefully, actually made it quite an open society and contributed more to its success. It only started to unravel when emperors started debasing the currency to pay for all that bread and all those circuses, and the market economy could not function any more.
Which brings us to Philip Kay's article on the Financial Meltdown in the Roman Republic. In 2008 the world financial system took quite a knock from the US sub-prime mortgage market. When the boom ended and the music stopped, a lot of banks in the UK and other countries found themselves holding loans that were never going to be repaid – and, basically, ran out of cash. It was no different in 88 BC says Kay. When Mithridates VI, King of Pontus, invaded the Roman province of Asia (part of modern Turkey), people there lost large fortunes. So large, indeed, that Cicero reported that the bankers in the Roman Forum found themselves running out of cash just like their modern counterparts. An ancient credit crunch. The shock was made even worse by the fact that until then, in much of the previous century, Rome had enjoyed a boom thanks to military conquests bringing in vast quantities of gold and silver. And on the back of that cash avalanche, Roman financiers lent extensively to places like Asia.
A worrying parallel, perhaps, with modern governments, who also unleashed an international credit boom on the back of money that they had created in large quantities over a long time.
