Savage spending cuts
The chart above shows total UK public spending between 1997 and 2015 in constant 2005 £. Does that look like radical austerity to you?
This is hardly an original point, but it’s worth restating until people start to notice: Britain is not radically cutting public expenditure. As displayed on this chart, spending was £613bn in 2010 and £615bn in 2011; in 2012 and 2013 it will be £618bn, and in 2014 and 2015 it will be £617bn. Even in real terms, spending will be higher at the end of this parliament than it was at the beginning. It would be fair to characterize this as spending restraint, but it’s nothing more than that.
Why does public debate bear so little resemblance to this reality? In part, it’s down to the fact that the government is desperate to show bond markets that it is serious about deficit reduction, so that they can keep borrowing cheaply. This makes them dial up the austerity rhetoric, even when its not backed up by real spending cuts.
Another reason is the way the Treasury initially presented the coalition government’s austerity plan – as a recipe for £80bn in cuts. But these are cuts against a baseline of projected increases, not actual reductions in spending. Moreover, these are only ‘cuts’ in Departmental Expenditure Limits (DELs). Annually Managed Expenditure (AME), the other half of Total Managed Expenditure (TME), which includes social security, public sector pensions, debt interest payments, and European Union Contributions, would continue to rise.
And then there’s the fact that the public sector has grown so used to huge annual rises in spending that it struggles to cope without them. When you are accustomed to profligacy, fiscal restraint can be a shock to the system. Indeed, many of the promises made to public sector workers were based on the assumption that spending could grow by 7 or 8 percent a year indefinitely. Now that’s been exposed as a cruel lie, their union representatives are prepared to make a lot of noise about it.
But whichever way you slice it, there is no radical austerity, no savage spending cuts, no public sector apocalypse. Someone ought to tell Paul Krugman.
P.S. Apologies for the fact that my chart is titled ‘This’. For some reason, I couldn’t get ukpublicspending.co.uk to produce anything else!
The third-party payment problem
It will probably have passed most British readers by, but US politicians have been talking a lot about contraception recently. The short version is this. First, the Obama administration decided to mandate that church-affiliated employers offer insurance that covers contraception, regardless of their religious objections. Predictably, a political firestorm kicked off. So the Obama administration came up with a ‘compromise’ – church-affiliated employers won’t be charged for contraception coverage, but insurers have to provide it anyway.
Now, I’m no Rick Santorum. I’m a fan of contraception. But there’s so much wrong with this story that it’s hard to know where to start. Should the government really compel you to buy a service from a private company? It’s probably better than the government nicking your money and providing that service themselves, but for a libertarian it still rankles. Then there’s the insensitivity to deeply-held religious conviction, which not only exposes the ‘liberal’ left’s inability to tolerate social mores that differ from their own, but also highlights the way big government inevitably tramples on diversity and choice with its one-size-fits-all monomania. And then there’s the idiot-economics which suggests that you can force a company to provide a service without anyone having to pay for it. In this case, assuming insurance companies can’t find a way of covertly passing on the cost of contraceptive cover to church-affiliated employers, then everyone else with insurance ends up footing the bills through higher premiums.
But perhaps the biggest problem is the one explained by Sheldon Richman in this Freeman article: contraception has nothing whatsoever to do with insurance.
Insurance arose as a way for individuals to pool their risk of some low-probability/high-cost misfortune befalling them. It shouldn’t be necessary to point this out, but coming of child-bearing age and choosing to use contraception is not an insurable event. It’s a volitional act. It may have good consequences for the person taking the action and society at large, but it is still a volitional act. It makes no sense to talk about insuring against the eventuality that a particular person will use contraception.
This gets right to the heart of the fundamental problem with modern-day healthcare: we rely too much on third-party payment, whether by governments or insurers. As Richman says, taking out insurance (or paying taxes) so that some third-party pays when a big-ticket, catastrophic health expense comes your way is perfectly rational. But paying someone else to take responsibility for your predictable, routine, run-of-the-mill health costs is crazy. It introduces huge dead-weight administrative costs and seriously distorted incentives, and is one of the key drivers of out-of-control healthcare inflation.
As I wrote a while back, “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.” This Adam Smith Institute report suggested a way of doing it, and we’ll be addressing the issue in greater depth in a forthcoming paper on Singapore’s healthcare system. Watch this space.
When a council tax freeze is not a freeze
Councillor Colin Barrow, leader of Westminster Council, had a post on Conservative Home yesterday boasting about Westminster's council tax freeze:
Today Westminster’s Cabinet will confirm our intention to freeze our council tax for a record fifth year in a row, whilst at the same time responding to the concerns of our residents by putting an additional £2 million back in to street cleansing for the coming year.
Sounds good. Except that, in exchange for freezing council tax, Eric Pickles is offering councils a payment equivalent to a 2.5% rise in their council tax in exchange for freezing their rates. In other words, Westminster's council tax "freeze" has come at a cost to the rest of us that do not live in Westminster and might be facing rises in our own council tax. Eric Pickles's money is taxpayers' money, so this "freeze" is in fact a tax hike for everyone else so that Westminster council can look prudent.
There's a bigger point here than just the deceptive use of taxpayer money. That the central government can do this sort of trickery to allow councils to look prudent (and to avoid bad headlines for the government) points to a much deeper rot in the system. Councils only get about a quarter of their funds through council tax — the rest is from national taxes and centrally-collected and -allocated business rates. The idea is to use government to redistribute between rich and poor parts of the country. This bears the same zero-sum thinking of all redistributive taxation.
A much better approach would be to devolve fiscal, tax and regulatory powers to councils, so that the poor parts of the country can grow their way into prosperity. If the Barking and Dagenham Council could slash business regulation, it could stimulate business and attract investment to enrich its residents. If the plain people of Islington don't want laissez-faire, fine, but they shouldn't stop poorer places from enriching themselves by cutting back the state.
Alas, it's unlikely to happen. As long as councils are dependent on the central government for most of their funding, their "constituents" will not be council taxpayers but government pen-pushers. No wonder they're happy to boast about tax "freezes" that cost taxpayers even more money.
Plain packaging - a new Adam Smith Institute report
Today sees the launch of the Adam Smith Institute's latest report, Plain packaging: Commercial expression, anti-smoking extremism and the risks of hyper-regulation. Its author, Christopher Snowdon, is the author of books including The Spirit Level Delusion, Velvet Glove, Iron Fist, and The Art of Supression. We reproduce the report's executive summary in this post, but the whole report is available to download for free here:
1. The UK government is considering the policy of ‘plain packaging’ for tobacco products. If such a law is passed, all cigarettes, cigars and smokeless tobacco will be sold in generic packs without branding or trademarks. All packs will be the same size and colour (to be decided by the government) and the only permitted images will be large graphic warnings, such as photos of tumours and corpses. Consumers will be able to distinguish between products only by the brand name, which will appear in a small, standardised font.
2. As plain packaging has yet to be tried anywhere in the world, there is no solid evidence of its efficacy or unintended consequences.
3. Focus groups and opinion polls have repeatedly shown that the public does not believe that plain packaging will stop people smoking. Even ardent antismoking campaigners do not make such a claim. Instead, activists assert that nonsmokers take up the habit as a result of seeing “glitzy” tobacco packaging. This claim lacks plausibility and is bereft of empirical evidence.
4. One in nine cigarettes smoked around the world is counterfeit or smuggled. The illicit market lowers prices, fuels underage consumption, deprives the treasury of tax revenue and makes an unhealthy habit still more hazardous. It is hard to think of a policy that could delight counterfeiters more than standardising the design, shape and colour of cigarette packs.
5. The wholesale confiscation of an industry’s brands and trademarks represents an unprecedented assault on commercial expression. It not only tramples on the principles of a free market, but it may also be illegal. Expert opinion, including that of the European Communities Trade Mark Association, the British Brands Group and the International Trademark Association, says that plain packaging is an infringement of intellectual property rights and a violation of international free trade agreements to which the UK is a signatory.
6. Anti-smoking lobbyists claim that plain packaging will not be imposed on other industries in the future, but this is a hollow reassurance in the light of the accelerating war on alcohol, sugar, salt and fat. What happens to tobacco tends to happen to other products sooner or later. Public health organisations around the world have been applying the blueprint of antitobacco regulation to other products for years. Sin taxes and advertising bans are increasingly common for certain types of food and drink, and various campaigners have called for graphic warnings to be placed on bottles of alcohol. It should be no surprise that in Australia, where a plain packaging law was passed in 2011, activists are already demanding that ‘junk food’ be sold in generic packaging. Australian anti-smoking lobbyists, meanwhile, say that the next step after plain packaging is to force the tobacco industry to make cigarettes “foul-tasting”.
7. Plain packaging is not a health policy is any recognisable sense. It neither informs nor educates. On the contrary, it limits information and restricts choice. It will serve only to inconvenience retailers, stigmatise consumers and encourage counterfeiters. Wholesale expropriation of private property to make way for public propaganda represents an unacceptable intrusion into an already over-regulated marketplace which will set a dangerous precedent for other products.
Economics is fun, part 8: Speculators
Madsen takes on speculators this week. Or, rather, people who object to speculators. As Madsen explains, when you think about what speculators do on an individual level, they seem rather reasonable — and, indeed, valuable to the rest of us. Speculators are a form of insurers. They don't gamble any more than your car insurer does, but they absorb risk so you don't have to worry about it. It's all a form of specialization and trade.
You can watch the rest of Madsen's videos here, and be sure to subscribe to our channel too.
Has digital copying killed the music business?
There's actually a fairly simple answer to that question: we don't care. Seriously, we care not a jot nor tittle, nor anything earthier and more Anglo Saxon, about the survival or not of the music business in this digital age. Just as if we're thinking straight we don't care at all about the health of any business ever.
For we don't in fact care about the profits of business, the health of business. We care only about the ability of consumers to consume.
Now it's undoubtedly true that digital copying, the internet, bit torrents etc have reduced the ability of the record companies (and to whatever extent they ever got any of it, the musicians) to monetise their products. But that's not what we actually care about, what we want to know is whether we the consumers have been able to consume more music as a result. Which clearly we have.
We need to go a little deeper though. Such things as copyright protection are not there to aid producers: they're to aid consumers again. For we recognise that a limited property right in new creations encourages such new creations. Thus, such property rights increase the number of new creations that can be consumed. And yes, that really is the reason why we have the whole structure of intellectual property. Nothing at all to do with just rewards, all entirely to do with incentives to allow consumption.
So what we'd really like to know is whether there has been a decrease in new composition in recent years, perhaps even a reduction in the quality of those new compositions, as a result of digital copying. It's a slightly difficult thing to test that as by definition any music written after the listener passed 21 is rubbish to said listener and anything published after they're 30 is simply noise. That's actually one of the points of pop music, to differentiate between the young and the old.
However, using a set of techniques, each independent but each of which provide roughly the same answer, Joel Waldfogel has been able to show that there has not been a decline in quality since Napster spearheaded the don't pay a red penny for music thing.
The answer is, as he says, that while monetisation of what is created has become more difficult, the very same digital revolution has lowered the cost of creation. Given that the incentive to create is not the income from having done so, but the net income, the incentives to create still work.
Thus, given that what we actually care about is consumption ability, we don't have to worry overmuch about the business models of the music recorders and distributors. At least not at present. For we're getting to consume a similar amount of high quality new creations but paying less for being able to do so.
That is, the consumers are getting better off and as for the producers, well, we only care about them to the extent that consumers are getting better off. Or as in this case, we don't care about them at all.
Drill Baby Drill
This shale gas thing: drill or not drill? There are reasonable arguments all around the question and the final answer will depend slightly upon what you think particularly important and mostly on how strong or important each of the arguments are.
On the one side we've the various economic arguments: lots of cheap gas right here at home would be a nice thing to have. Keeping the lights and the heating on on those cold winter days when there's no wind would be nice too. On the other hand we've all those environmental arguments. Will we be polluting the groundwater? What about earthquakes?
Now it is possible for each of us to try and wade through each and every of these different arguments and try to come to some sort of conclusion. Or we could make use of those nice people called scientists to wade through them all for us. We'd need to read and consider their conclusions, sure, but we don't have to do all the digging ourselves.
And we're in luck for here is just such a report. OK, so it's about the US but the gas is the same, the basic geology is the same and the techniques are all the same. The conclusion is that yes, of course, there are possible environmental dangers. But given that they're easily controllable by basic safety measures we should get on with the drill baby drill bit.
The benefits of large amounts of locally available and relatively low carbon, and above all cheap, energy are simply so much higher than the risks that it's pretty much a no brainer.
And we in the UK have a further consideration of course. If it all goes wrong in the test case, well, it's only Lancashire, isn't it?
New at AdamSmith.org: The triumph of global capitalism
The rise of global capitalism since 1980 has been the central factor in the massive rise in global quality of life. In this article, Jacob Lundberg explains why more liberalized global markets have meant richer and freer people.
When she was young, Maria Vargas moved from the countryside in northern Brazil to Sacadura Cabral, a poor suburb (favela) of São Paolo. (Melo, 2002) She worked as a maid and in the textiles industry, but was injured and had to provide for herself and her seven children – one of whom died as a four-year-old – by sewing after the death of her husband. Maria is only one of the many faces of poverty.
But poverty is decreasing and the world is gradually becoming a better place to live in: health is improving, school enrolment is increasing and democracy is on the rise. Many people seem to be unaware of this fact. An important reason for the progress that is taking place is the fact that during the last decades of the 20th century, there was a movement towards liberalization and globalization almost everywhere.
World trade has become considerably freer over time – the median global tariff rate has decreased from 26 percent to 9 percent since 1980. (Gwartney & Lawson, 2009) Today, 80 percent of developing countries’ exports to industrialized countries do not face any tariffs, up from 54 percent in 1998. (UN, 2010, p. 68) Government intervention in agriculture has become less pervasive. An obvious case is China, where agricultural output has increased considerably since liberalization.
Nazis v the Bank of England
BBC News reported today that newly de-classified files from 1945 reveal that MI5 concluded that a Nazi counterfeit currency programme which increased the amount of British Pound notes in circulation by 10% during World War II had achieved the Nazi’s goal of “destroying confidence abroad in Bank of England notes”.
By contrast, during the 3.5 years since September 2008, the Bank of England has increased the amount of British Pound notes in circulation by 28% and increased the total UK money supply by a factor of 3.34 times! Has this also had the effect of “destroying confidence abroad in Bank of England notes”? Well, the fact that the British Pound has lost almost 60% of its value relative to the price of gold since September 2008 might be a clue.