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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

A few points on bank bonuses

Written by Tom Clougherty | Thursday 13 January 2011

Bank bonuses had nothing to do with the financial crisis. The fundamental issue was low interest rates leading to an unsustainable credit bubble, which was compounded by a variety of factors, ranging from housing policies, accounting rules and capital requirements, to deposit insurance and the expectation that banks would be bailed out if they ran into any trouble. Blaming bonuses is an easy option – which helpfully exculpates politicians, regulators, and central bankers – but it is also lazy and wrong.

The rules on bank bonuses are already pretty strict. You wouldn’t know it from the current furore, but bonuses have already been the subject of extensive government intervention. The code published by the Financial Services Authority in December, which applies to some 2,500 UK firms, significantly restricts the proportion of bonuses that can be paid in cash and insists that they be spread over 3-5 years. It’s a little rich for the government to complain when their own, recently passed regulations are being complied with.

Bonuses are a sensible way for banks to manage their payroll. Because financial business is volatile, financial institutions try to keep their fixed costs low. As such, bankers often receive lower basic pay than people in other comparable professions, but get larger bonuses. Really, this is how people should look at it: bankers don’t have bonuses per se, they just have variable pay.

Like it or not, Britain needs the City of London. Let’s not forget that the City contributed an estimated £53.4bn to the 2009/10 tax take. That’s 11.2 percent of government revenue. No one denies the pressing need for reform of the financial services industry, but we don’t do ourselves any favours by bullying bankers all the way to Zug.

Envy-ridden, class-war politics is the last thing Britain needs. The most depressing aspect of this debate is how little attention is paid to economics – and how much time is devoted to pandering to people’s prejudices about the wealthy. We need to examine policy options rationally, and ditch the class war rhetoric. Too often Britain is a country that denigrates success rather than celebrating it, and in the long run that will do us just as much harm as misguided regulations and taxes.

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A few words on super-injunctions

Written by Tom Clougherty | Wednesday 25 May 2011

Last week, the Daily Mail has a front-page headline that said, “Sir Fred’s affair: why we do have a right to know”. This is a sentiment that I’ve heard a lot when people are talking about super-injunctions. People have the right to know this, people have the right to know that, and so on.

But none of us have a right to know anything about any private individual. Our rights are just not the issue. The issue is about whether someone who knows something about someone else is free to say it. It’s all about the individual’s right to freedom of speech.

And I take a pretty hard line on this: the law should not be used to prohibit anyone from speaking the truth. Yes, there is a strong case for preventing the media reporting information about private individuals that has been obtained illegally. But beyond that, freedom of speech trumps other considerations.

Of course, I couldn’t care less which footballer has been sleeping with which z-list celebrity. And I’d much prefer to live in a society where other people didn’t care either. But my tastes don’t matter. Freedom of speech does. End of story.

Ultimately, Eamonn is right: if you live in the public eye, you shouldn’t do anything that you’re not prepared to see reported in the News of the World. It might not be fair. It might be a sign of cultural degradation. But that's the way it is. The lawyers don't get a say in the matter.

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A financial tea party

Written by Steve Bettison | Wednesday 11 March 2009

The people are revolting; we can be fairly certain that that is probably how the majority of politicians view the populace below them. In much the same way that the Parliamentarians of the late 18th Century viewed the North American colonists, especially after a particularly truculent tea party in Boston. The colonists wanted something in return for the taxes  the Crown was asking of them, specifically, representation in the English parliament, while the Crown was attempting to usurp this by forcing tea upon them. The act of throwing the tea into Boston Harbour is now synonymous with rebellion against higher powers abusing their positions to enslave.

A few weeks ago a new call to arms was raised by Rick Santelli in his now ‘infamous’ conversation with other presenters on CNBC where he exposed the true feelings of many in the US to President Obama’s bailout. He ended his piece by calling for a Tea Party in Chicago to protest against the bailout and the uncontrollable government spending. As such, there have already have been some protests across America, but now forces mobilizing for a larger event on Tax Day, April 15th 2009, Nationwide Tax Day Tea Party. Yet to reach the non-violent heights of 1773 it can only be a matter of time before money starts moving away from the shores of the US, as businesses and individuals look to keep their property safe from the tax collector.

It is rare for violence to flare in relation to taxation, especially in these modern times where capital is fluid and can be moved at the touch of a button. The coming financial revolution will not be one that is characterized by violence but by outflows of capital moving away from overbearing high tax, wasteful countries. The bailouts are a characteristic of wasteful spending: the purchasing of bad debts and even worse businesses. The time has come to starve the pigs at the trough.

NB. Our blogging contributor and friend Andrew Ian Dodge is organizing the Tax Day Tea Party in Maine, click here or on Facebook for more information.

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A firewall against bailouts

Written by Sam Bowman | Tuesday 07 December 2010

Allister Heath is firing on all cylinders in today's City AM, proposing a realistic way of avoiding a repeat of the 2008 and 2010 bank bailouts:

It is looking as if there is now serious support for a new special administration regime for banks that will include automatic debt-equity swap procedures to impose losses on bondholders in going concerns and recapitalise banks automatically. This would be a great move, strengthening the City while improving stability. Some in the Bank of England are also looking kindly on proposals to create special storage deposits, which would be separate from regular current accounts. The former would be truly safe but pay no interest; the latter will pay interest but be riskier, with depositors becoming preferred creditors in the event of a crisis with limited, if any, deposit insurance. Let us see exactly what actually emerges but the thinking has become much more sophisticated. It would allow much more market discipline to be reintroduced into the system, reduce moral hazard and protect taxpayers.

The lesson from the past two years has been that governments will always try to protect large bondholders at the taxpayer's expense. A full overhaul of the monetary and banking systems is needed in the long-term, but in the short-term the objective should be to put in place mechanisms that avoid government bailouts by burning bondholders without creating systemic collapse. Debt-to-equity swaps would have avoided the need for the Irish bailout, and would probably prevented the political rush to bail out the banks in 2008. They're not perfect by any means, but we need a realistic firewall against bank bailouts and Heath's proposals might be a good place to start.

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A flat tax for Canada?

Written by Philip Salter | Tuesday 08 January 2008

canadian-money.jpgA recent publication by the Vancouver-based Fraser Institute argues for the introduction of flat tax in Canada, convincingly showing that the move would make the tax system both simpler and more lucrative. They call for a 15-per-cent flat tax, which would save a significant amount of time, energy and money, estimating that the current multi-rate progressive federal and provincial tax system costs the country around $30 billion per year.

The report argues that the current system is impeding Canada’s economy, constructing strong disincentives for working hard, saving, investing and engaging in entrepreneurial activities. These findings chime with those of the Adam Smith Institute: we have made similar arguments in both Flat Tax – The British Case by Andrei Grecu and in A Flat Tax for the UK – A Practical Reality by Richard Teather. Of the latter, Allister Health, the editor of The Business, wrote the following:

Rarely has a think-tank publication been this influential so quickly. Its arguments have been dissected by the UK Treasury, are well known among the Shadow Treasury team, have had an influence on some parts of the Liberal Democrats and were even adopted by several minor political parties.

Yet despite the press and political interest the research has engendered, there remain obstacles to its implementation. The much discussed Huckabee FairTax, while superficially attractive, is not the answer and may be distracting from the sounder proposals that could be implemented by governments on both sides of the Atlantic. In the UK, as in many other countries, the research is there and politicians are engaging in debate; the next stage is for them to stick their necks out and argue the case.

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A flawed revolution

Written by Anton Howes | Monday 05 October 2009

Anders Hutin, one of the chief architects of the much vaunted Swedish schools reforms claims that the Conservatives are missing a crucial ingredient in their proposed attempts to recreate the Scandinavian policy phenomenon. Profit. In an article for the Telegraph, he explains that about 75% of the new 'free schools' created after the reform are profit-driven. By leaving the 'revolution' to non-profits and parents, Hutin points out that the emphasis will be on increasing waiting lists, as they mark out the desirability of a school. For-profit schools on the other hand are more likely to see every pupil as a potential new source of income, and will expand their capacity in order to accommodate them.

Michael Gove, the Shadow Schools Minister, despite recognising the desperate need for liberation of the state-funded schools sector, seems afraid to be seen to be privatizing state-run education, even though it is a continuation of Lord Adonis' Academies scheme. If these reforms are so central to the Conservative agenda, as Cameron keeps claiming, it is only right that the full extent of their intentions are made clear. Hopefully, the rapidly approaching conference will shed some light on whether or not Gove will make the right call on for-profit 'free schools'.

The Conservatives should certainly not be so complacent as to hope that their reforms can act as merely the next stage in liberating the state-funded supply of schools. As Sweden showed, it takes time for the grassroots revolution to take root, and if it progresses too slowly, the entire venture could be scrapped or stalled by a future administration. Gove's reforms will need all the boost they can get if they are to be both successful and lasting. Once they are established and recognised as an invaluable policy, the likelihood is that even Labour will cease to oppose the use of profit, much as their Swedish counterparts, the Social Democrats have done. Regardless of the political reality, Hutin explains that Britain is perhaps best-placed to benefit from the reforms that he designed, due to the high demand and extraordinary lengths that parents will go to in order to secure a good place - although this offers hope to reformers, it is a savage indictment of state education in this country.

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A free market in adoptions?

Written by Anna Moore | Wednesday 15 June 2011

adoptIf you’ve been following Made in Chelsea, you may have had the thought, “Where are their parents?”. The answer is more than likely Saint-Tropez.

The truth is that anyone who is physically able to do so may have children and, for the most part, may raise them with a free hand. The state does not purport to know who will be a good birth parent, and does not attempt to stop anyone from reproducing. Curiously, though, it places severe restrictions on those who would adopt. This raises the question, is the state’s monopoly on adoption legitimate? Is there any real difference between being “unqualified” to adopt and being similarly hopeless but nonetheless giving birth to a child?

Were we to poll, one might expect to see strong support for restrictions on, say, sex offenders adopting at the same time as strong disapproval of the state preventing people with genetic diseases from reproducing. Perhaps the logic is something like a natural rights theory of property: I have produced that child, she of my genetic material, you cannot raise her in a Platonic (Huxleyan?) state institution. This doesn’t really make sense, though; no one considers children to be actual property, not even Locke. The difference between birth and adoption seems more one of intuition than substance. Children who remain with their birth parents are no more immune to mistreatment than are adopted children.

Both demand to adopt and the number of children waiting to be adopted remain high. The stumbling block appears to be government regulation. The adoption process is notoriously slow, with a minimum time frame of six months; some families wait four to eight years to adopt. Part of this may be that direct adoption is banned except in cases where adopter and adoptee are related, and that extensive background checks and court dates are required before an adoption can go through.

Does it seem like someone with a child sex offence conviction should be able to adopt young children? Absolutely not. At the same time, allowing children to languish in foster care for years while there are plenty of reliable, caring people who would love to adopt them seems bizarre and cruel. The current system demands liberalisation. Might pregnant women be allowed to choose adopters? Might adopters be allowed to pay to adopt? A lot to think about, to be sure.

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A free market in European healthcare?

Written by Dr Eamonn Butler | Thursday 20 December 2007

francehospital.jpgThe European Commission has delayed making a controversial announcement which could see the state health plans of one Member State paying the costs of patients who opt to be treated in another EU country.

The idea of the plan was that British patients, say, could travel to Spain or Hungary for their treatment, as many do - with Britain's National Health Service picking up the tab. Part of the argument for this is that some countries have more efficient healthcare sectors, with shorter waiting times, for example, and EU citizens should be able to benefit from the competition between them. Following the case of Yvonne Watts, who had a hip operation in France and sent the bill to the NHS, Britain's High Court ruled that the NHS should pay for treatment abroad if patients otherwise had to wait too long. Quite right, I would say.

Already UK doctors are whingeing because they know that lots more people would indeed go abroad for treatment if the NHS was forced to pay for it, rather than put up with the sink service they get in the UK. The British Medical Association's Dr Vivienne Nathansan said that if people started travelling for operations there might 'not be enough need' for that treatment in the UK, which could lead to closures. Yes, well that's competition for you, Vivienne.

Meanwhile Nigel Edwards of the NHS Confederation complained that the EU plan was a stalking horse to create a 'free market' in European Healthcare. Oh, if only it were. We're talking about harmonizing state health plans here. If the EU actually created the conditions for a proper, open market in healthcare - one that wasn't dominated by doctors and politicians - I think we'd all be a lot fitter.

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A free market in labour: libertarians, employment and the unions

Written by Henry Hill | Monday 12 September 2011

Trade unions are an interesting problem for libertarians. Although they are essentially anti-liberal forces, most attacks on trade unions historically stem from the authoritarian Right. Too often the conflict between unions and business leads to many potential subscribers to libertarianism supporting decidedly illiberal business practises, due to a misconception that one can either be pro-business or pro-union.

For a libertarian, employment must be approached in a manner that is independent of the interests and prejudices of either side. Employment legislation inspired by libertarian principles would at once counter the serious business abuses that justify trade unions whilst removing the ability of unions to act as monopolies.

A libertarian believes that human beings should be free to undertake exchanges with each other free from force, fraud or coercion. Trade unions found their origins in defending workers against abuse by business, abuse often supported by the state. A libertarian state that functioned properly would not collude with anti-liberal business practises and would protect people from forceful, fraudulent or coercive practises that might necessitate trades union membership.

But libertarian employment law would undermine unions too. Like most things, labour is a commodity. A job is a contract between an employer and an employee in which the latter’s labour is traded at a given rate for remuneration in wages and perhaps other perks. Despite this trades unions are not seen as what they are in business terms: cartels working to inflate prices (wage costs) by restricting the labour market. While the horrors of the closed shop and the flying picket have (for the most part, student politics aside) disappeared, the fundamental leverage behind a strike is the idea that a union can exercise a labour monopoly and use the threat of withdrawal to coerce employers.

No libertarian system would ban strikes or unions. People are free to associate with each other as they wish and no libertarian would argue that a worker does not have the right to withdraw their labour. What is critical is that a libertarian recognises the right of an employer to replace that labour. In the same way in which a libertarian government would fight monopolist practises on the business side of industry, so it should strive to create a free market in labour. Not only would this be morally right in accordance with libertarian principles, but it would allow the market to adjust British wages back to internationally competitive levels.

Henry Hill is the winner of the 2011 Young Writer on Liberty Award.

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A free market solution to pollution

Written by Sam Bowman | Monday 23 April 2012

The chart above shows the number of deaths per watt of energy produced by various different energy sources. (Data from the World Health Organization, image from Seth Godin, original graphic here.) Coal is by far the worst offender, causing 161 deaths per terawatt hour (TWh). Nuclear power is remarkably safe by comparison, with just 0.04 deaths per TWh. Shale gas also does well compared to coal and oil, with 4 deaths per TWh.

Clearly, there are significant, unfactored external costs to the use of fuels like coal and oil compared to fuels like nuclear power. This does not mean that coal and oil should be banned, though many environmentalists would like it, because they both produce significant real benefits as well – cheap energy is one of the cornerstones of modern civilization. The optimal outcome is not a total ban or a total free-for-all. As with motoring, where some deaths are an inevitable outcome of socially beneficial activity, the optimal number of deaths is greater than zero.

This is a classic case of conflicting property rights: what we need is a situation that can balance the property rights of polluters with those people whose air is being polluted against.

The standard pseudo-market solution is to assign an arbitrary value to each life and tax polluters by a fraction of that, to “price in the cost to society”. But this is a poor approach, because the cost is borne by the individuals who get sick and die — not by society in general or the government, which gets the money.

A free market solution to pollution would, through courts or voluntary agreement, force polluters to compensate the people they pollute against. If the property rights of the polluted-against were upheld, this would lead to a situation where both parties would agree a pollution premium: a middle-point where the polluter is compensating local people enough to continue polluting.

This would have the happy outcome of incentivizing polluters to move away from urban areas. It might also incentivize people who care less about their lungs, like smokers, to move to areas of higher pollution. The big obstacle to this is that the technology for measuring air quality is quite primitive, and probably wouldn’t allow us to find this balance. But this isn’t as significant a problem as it seems: the very fact of these property rights being upheld (even crudely) would incentivise innovation in demarcating property rights, and so on.

Best of all, it would rebalance the relative price of dangerous fuels, like coal, against safer fuels, like shale gas and nuclear power. Currently, nuclear power isn’t really viable as a free market fuel source – it requires massive government subsidies for the initial investment. With a "free market environmentalist" mechanism that puts respect for property rights at its core, this could change — relative to coal and oil, nuclear may become quite competitive. Shale gas, cheap and relatively clean, would probably become even more invested-in than it is now. And the real costs of pollution would be mitigated to an acceptable level. There's no need for complex regulation and arbitrary "social" taxation. For an energy industry that bears the costs of its pollution, all we need to do is recognise property rights.

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