The Pin Factory Blog

Tyler Cowen reports in on how austerity is affecting Ireland:

Ireland now has had two quarters of considerably stronger than expected growth, it’s now both gnp and gdp [1.1% in Q1 and 1.6% in Q2], and domestic demand (!) is up, and borrowing rates are down, though employment remains miserable. Even I am surprised by the positive signs here (I never bought the doctrine of expansionary fiscal austerity, though I saw austerity as necessary for Ireland)

He follows up with a damning series of quotations from Paul Krugman, who repeatedly predicted that austerity would make Ireland's troubles even worse, but who now claims that he predicted Ireland's recovery all along. Cowen concludes:

You still don’t have to believe that immediate fiscal contractions are expansionary; in general they’re not, but you can still have been wrong about Ireland. The simplest lesson to at least try on is that internal devaluation sometimes does better on the AD side than we are inclined to think, or that real factors mattered more than expected, or a bit of both. Or try Karl Smith’s ideas. It’s not all about the downward spiral, although this was one scenario laid out in Keynes. We should and will await more data, not to mention data revisions, but in the meantime it is correct to be surprised by the much-better-than-expected Irish growth performance, and at a difficult global time at that; you can’t claim the American and European growth locomotives pulled them out of the slump. This expert on the Irish economy offers a sector-by-sector breakdown of the new numbers and he too admits he was surprised.

The basic point here is that Ireland has done surprisingly well out of austerity – far better than anybody hoped. But the Irish economy is still on life-support and its debt-to-GDP ratio is expected to reach 115% next year. Constantin Gurgdiev, an Irish-based economist who has been one of the few clear thinkers throughout Ireland's crisis, estimates that total public and private debt levels in Ireland are 494% of GNP. As the recession continues, mass mortgage defaults – possibly bailed out by taxpayers – grow ever more likely. And it's hard to know if Ireland can avoid default after Greece finally does so.

But, for the UK, the crucial point is that austerity has not produced the results for Ireland that most Keynesians predicted. One ray of light for Ireland was Twitter's decision to locate its international HQ in Dublin, despite intense lobbying from the Coalition government to locate in London. British growth is sluggish, but so is that of "stimulated" America. It looks like the key to growth is not government spending, but ease of doing business. It's a pity the Chancellor and the rest of the Coalition only know half that story.

Douglas Carswell had a good piece up on his blog recently about “bailout-and-borrow” economics, and the prevailing fallacy that artificially increasing demand leads to growth. He points out that despite the $1 trillion stimulus failure in America and the failure of the Greek bailout,

Today Washington is preparing yet another $400 billion bailout, while the Bank of England is preparing to print £100 billion to give to the banks.

This was inevitable; the consensus prevails because admitting defeat would be too embarrassing. It would mean admitting that policy makers have been wasting billions of pounds of public money at a time of supposed austerity; admitting that you got it that wrong means losing an election.

It’s the old problem of honesty in politics. No one calls a spade and spade and admits that they are giving to Peter by taking from Paul. When presented with quotes by George Osborne and Vince Cable form 2009 that printing money was the last resort of desperate governments and “Mugabe economics” Danny Alexander laughed it off. This is because people don’t really understand economics – they see the headline figures, they associate recessions with whoever is in government; but as Ron Paul recently said, “A lot of people just flat out don’t understand what I’m talking about.”

But the Austrian explanation doesn’t have to be complicated. It just needs to be explained clearly in the media, like the mainstream theories. Here’s a quotation from Gottfried Haberler, taken from an essay available on-line for free at the Mises Institute:

And it can be shown that certain monetary influences, concretely, a credit expansion by the banks which lowers the rate of interest below that rate which would prevail if only those sums which are deliberately saved by the public from their current income came on the capital…it can be shown that such an artificial decrease of the rate of interest will induce the business leaders to indulge in an excessive lengthening of the process of production, in other words, in over-investments.

As the finishing of a productive process takes a considerable period of time, it turns out only too late that these newly initiated processes are too long. A reaction is inevitably produced…which raises the rate of interest again to its natural level or even higher. Then these new investments are no longer profitable, and it becomes impossible to finish the new roundabout ways of production. They have to be abandoned, and productive resources are returned to the older, shorter methods of production.

This process of adjustment of the vertical structure of production, which necessarily implies the loss of large amounts of fixed capital which is invested in those longer processes and cannot be shifted, takes place during, and constitutes the essence of, the period of depression.

The ASI's Eamonn Butler has written a comprehensive Primer on Austrian Economics, available for free download. If only the BBC would put explanations like these alongside the populist ideas it dolls out all too freely, then maybe the electorate wouldn’t have stood for so much bad economics for so long. And maybe Danny Alexander would have felt compelled to explain the change of policy towards Mugabe economics.  

The young libertarian network, the Liberty League, will be holding its inaugural conference on Saturday October 22nd at the National Liberal Club in Whitehall, London. This is likely to be the UK libertarian event of the year, with brilliant speakers like James Tooley, author of 'The Beautiful Tree', the free school pioneer Toby Young, Spectator columnist Theodore Dalrymple, and of course the ASI's very own Sam Bowman and Eamonn Butler along with many others.

It will be great chance to meet and discuss ideas with like-minded pro-liberty activists and thinkers. The sessions will include a debate on the Chicago versus Austrian economic schools, a discussion of Libertarianism and Islam, and an exploration of how the state harms the poor. As if that weren't enough, the ticket price of just £30 for students and £65 for non-students includes a set dinner at the end.

Spaces are extremely limited and have been going fast, so make sure to apply soon. The full details are here.

Anton Howes is Director of the Liberty League.

One of the more annoying things we hear from the left side of the political aisle is that "companies must pay more tax". Given that companies do not pay tax, ever, cannot pay tax, ever, this is of course the call of the ignorant. But explaining how it is that companies, while they definitely hand over the cheque, do not actually carry the burden of a tax is difficult and can be complex.

So now that I've found this excellent and simple explanation of how this all works out I'll point you to it. Here.

Do note a couple of other things that come with this argument. For example, the Financial Transactions, or Robin Hood, Tax that is so popular among the economic mouth breathers suffers from exactly the same problem. Yes, sure, it would be lovely to "make the banks pay" but it just won't be them that does, they're companies, they cannot. It will be us the consumers who pay the tax.

One little point about that paper though: I'm afraid that in proposing their alternative tax system they've forgotten something that we here in Europe learned a long time ago. They want to impose a sales tax of 17.5% (of goods value, or 15% of tax and goods value). I'm afraid that doesn't really work because, shocking as I know everyone will find this news, not everyone is entirely and openly 100% honest.

Which means that there's a limit to how high you can make a consumption tax if that tax is levied just at the final point of retail sale. And 17.5 % is, I would suggest, very much above that limit. In order to be able to have such a high rate you need to make it a VAT: so that it accumulates at each stage along the production and distribution chain, lowering the temptation not to collect it at that final point.

But, the reason I draw your attention to the paper is that the first couple of pages give a very clear and excellent description of how and why it is that it isn't the company that pays corporation tax. It's largely (and even more so in a smaller more open economy like the UK) the workers that do.

The UK bus sector has prospered in recent years, despite all the prophecies of gloom when Lady Thatcher’s Conservative Government decided that competition was the best answer to reversing decades of under-investment, lousy service and poor time-tabling.

First up was the 1980 Transport Act which introduced competition on long-distance coach routes. Subsequently, sector leader, National Express, saw demand rise sharply.  And, despite serious setbacks on the railways, National Express’ bus operations have continued to thrive, with much expanded services. Apart from travelling on much more comfortable buses, passengers are also being offered highly competitive fares. For example, single fares of c£13 are currently available on the six-hour plus London to Newcastle route.

Given that these fares are just 3x the cost of a one-station hop on the London Underground, they offer remarkably value – as National Express sharpens its pencil in the face of competition. On the shorter routes, the stimulus was provided by the 1985 Transport Act, which introduced bus competition locally - the franchise arrangements for London, though, are very different.

In recent months, both sector leader, First Group, and the ever-controversial Stagecoach have reported robust revenues and divisional operating profit increases of an impressive c20%. Whilst all bus operators have to cope with rising fuel prices, heavy investment is underway. First Group plans to invest £160 million over the next two years in modernising its fleet – with 955 new buses.

Looking forward, the UK bus sector stands to gain from the rising costs of motoring. When introduced in the 1980s, the aggressive bus competition initiatives were roundly condemned, especially with regard to the viability of many poorly patronised rural routes: some now receive substantial subsidy. A few bus businesses remain Local Authority-owned and they are ripe to be sold off.

Overall, though, the story of UK buses since the 1980s has been impressive. Embracing the competitive market has been fully vindicated.

So, the eurozone and the IMF are putting together a £1.7 trillion fund to save Greece (and for that matter Portugal and Ireland) and stave off a default. Right?

Cuadrilla Resources has reported their huge gas find near Blackpool. And it is huge, just enormous:

And it's a whopper: 200 trillion cubic feet. Recoverable reserves will be less, perhaps considerably so: but to put it in perspective, the Groningen field, at 100 TCF, completely transformed the Dutch economy** in the '60's and 70's and will last to 2080. The largest North Sea gas field discovery to date - the Troll field in Norwegian waters - was about 50 TCF recoverable, and has been supplying France, Belgium and Germany since the mid '90s, with many more productive years to come.

The reason this is important? It completely changes the economics of renewables and climate change. Yes, gas is a fossil fuel, yes, there are emissions, but they're a lot lower than coal. We've already got most of the country piped for gas delivery and this new cheap and above all local source can just be pumped into that system.

It simply makes windmills an irrelevance: quite apart from the massive difficulty we'd have with the variability of wind power if we did build out the proposed system. Which is why, of course, Greens like Caroline Lucas are squawking:

Instead of caving in to fierce industry lobbying, the government should follow the example of France and others by agreeing a moratorium on new shale gas exploration, at least until the environmental and health effects are fully understood.

Why should we stop looking around for shale gas just because we're uncertain about the effect of exploiting it? Sounds very odd: until you consider that Blackpool isn't the only place in the UK with shale gas underneath it. Find a few more fields, see that we've got a century of more of energy under our feet and, well, standing between 60 million Brits and cheap and clean heat and power is unlikely to do a political career much good. Thus the call to ban the exploration, so that we never do manage to find out how much we've got.

And that's the political battle we've got to gird ourselves up to win: we really mustn't let the greens (and Greens) impose an exploration ban. This is going to be difficult though: Chris Huhne has been heard spouting off about people lighting their tap water in the film Gasland. Except of course that has been happening for decades longer than frakking has been done, it's an entirely natural (even if worrying) occurence.

We simply mustn't let them ban exploration or cheap energy in favour of their damn windmills.

The plan to restore Adam Smith's old home in Edinburgh, Panmure House, is now getting underway in earnest. The only one of Smith's lifetime homes still standing, he resided there for the last nine years of his life, and held literary salons every Sunday when he would invite some of the leading intellectuals of the Scottish Enlightenment round to discuss ideas. Now the Edinburgh Business School at Heriot Watt University has bought the house to save it for future generations, and return to this tradition, creating an elegant space for meetings, debates and the arts.

It is not an easy job. It has taken three years (!) to get planning approval for the restoration. And sadly, this fine eighteenth-century townhouse is in a dangerous condition, reduced to a sorry state by three decades of local-authority occupation, as these pictures of the inside show. When restored, the same rooms (also pictured) will be quite magnificent. Work starts in March.

This week a fundraising panel at the Edinburgh Business School started work on raising the £5m needed to restore the house and keep it running, in use and indeed loved. If you would like to help this effort – or indeed contribute financially to the work of breathing life into Adam Smith's too-long-neglected home, do let me know: eamonn.butler@adamsmith.org.

One of the great unknowns is why tax systems are so appallingly bad. We try to tax corporations, bodies that are physically incapable of actually paying tax, tax the returns to wealth generating capital, tax the poor far too heavily: it cannot be that each and every politician ever elected is an entire and complete loon, there must be something else going on. And indeed there is:

There is often a gap between the prescriptions of an “optimal” tax system and actual tax systems, some of which can be neither efficient economically nor efficient at redistributing income. With a focus on personal income taxes, this paper reviews the political economics literature on tax systems and reforms to see whether political mechanisms allow us to better understand why tax systems look the way they look. Finally, we exploit a database of reforms in labour taxation in the European Union to check the determinants of all reforms, on the one hand, and of targeted reforms, on the other hand. The results fit well with political economy theories and show that political variables carry more weight in triggering reforms than economic variables. This shed light on whether and how tax reforms are achievable. It also explains why many reforms that seem economically optimal fail to be implemented.

While they don't quite phrase it like this the problem is that there are a sufficiently large number of loons with the vote for politicians to have an incentive to both propose and maintain absurd tax systems. They get voted for which is all they care about.

Just as an example, here's a quote from Polly Toynbee:

Yes, it's interesting that many LDs are leaving themselves wiggle-room on 50p tax. It may be that mansion taxes and others would bring in more from the rich - but I think it would be political suicide to lower the top rate - until we are a far more equal society. It would become the totemic policy.

She doesn't care whether the 50 p rate actually raises any money, whether a lower rate would raise more, what possible damage might be being done to longer term entrepreneurialism and wealth generation. No, only that anyone trying to abolish it could be castigated as only aiding the rich for we're too unequal a country (she doesn't even seem to care that you don't use the tax system to create equality anyway, you use the benefits system for that. The UK's tax system is already more progressive than Sweden's, just as an example).

That's why we end up with appalling tax systems, because the people who influence policy on tax systems simply don't care about tax systems: they're following the voices in their heads about politics instead.

One is hard pressed to find much to smile about in the eurozone crisis, but one slight silver lining is that it may present the government with an opportunity to renegotiate our relationship with the EU. That doesn’t mean that I am reveling in the eurozone’s woes. Far from it: I take no pleasure whatsoever in the crisis which is engulfing the continent, and remain deeply concerned about the implications of a eurozone collapse – both economically and politically. But concerns of this sort should not prevent British negotiators pursuing British interests if the occasion presents itself. Like it or not, EU politics is not a game of cricket.

But what should be on our shopping list, should we find ourselves in a position to make demands? You could probably write a book on that subject, but for now, here is where I would start. I would want Britain out of the Common Agricultural Policy and the Common External Tariff, so that we could pursue a genuine free trade agenda. I would want Britain out of the Common Fisheries Policy, so that we could establish a property rights-based fishing regime and end the current, disastrous tragedy of the commons. I’d want Britain out of the EU’s financial regulation system, so that we could pursue banking reforms based on free market discipline rather than bailouts and micromanagement.

Rather more modestly, I’d like to see Britain’s opt-out from the social chapter of the Maastricht Treaty restored, so that we would be free to promote job growth and entrepreneurship through a radical programme of liberalization. While we’re at it, perhaps we could force the EU to finally implement its own services directive, pursue a single energy market, and undertake various other long-mooted market reforms that have been kept waiting while the eurocrats focused their attention on ever-closer political union.

If you've got any more ideas, post them in the comments below.