The Pin Factory Blog

Tom links up to a post with this graph about US poverty levels.

The thought is that since the war on poverty began there's been no decrease in poverty: thus the war on poverty doesn't reduce poverty, perhaps it even confirms it?

There's certainly the possibility of welfare dependency however, US poverty line statistics are such a mess that that's perhaps not the best explanation possible. What has really changed since the mid 1970s is that we've changed the way we measure the effects of trying to alleviate poverty.

Unlike the rest of the world the US does not measure poverty after all the things we try to do to alleviate it. UK poverty statistics, for example, give us the number of people still in poverty after we've given them money, cheap housing, tax credits and all the rest. US poverty statistics however used to do this but no longer do.

The reason is that the US numbers include the market incomes of the poor plus the direct cash transfers they get as welfare. They do not include Section 8 (our housing benefit), Medicaid, Food Stamps nor the EITC (tax credits to us). The EITC for example costs $80 billion a year, raises 5 million above the poverty line on its own (just the Federal one, most States have one as well on top) but none of the effect of that is in that graph.

When did the EITC start? In the mid-1970s. When did all the move from straight cash welfare, which is included in those poverty figures, to goods and services in kind, which are not included, begin? In the early 1970s: exactly when we see poverty flatlining.

It all sounds a bit odd, I agree, but there is a real answer to the question "How come the US spends hundreds of billions a year on alleviating poverty and doesn't seem to alleviate much poverty?". The answer is that no one is counting the poverty alleviated by spending hundreds of billions of dollars a year.

Strange but true.

The Chief Economist of Deutsche Bank Group, Thomas Mayer, has announced that he is “an Austrian in economics”. In a new paper released today by Deutsche Bank Research, based on a speech he gave this week, Mayer says that the Austrian theory of the business cycle describes what we are living through pretty well:

– Failure of the liquidationists to overcome the Great Depression of the early 1930s prepared the ground for an era of interventionist economic policies. Modern macroeconomics and finance nourished the belief that we can successfully plan for the future. But the present crisis teaches us that we live in a world of Knightian uncertainty, where the ―unknown unknowns dominate and our plans for the future are regularly thwarted by unforeseen and unforeseeable events. . . .

— …First and foremost, firms should have the incentives to follow sound business practices. The best incentive is to make failure possible. Hence, we need resolution regimes for financial firms.

— In a world where people have imperfect foresight and do not always behave rationally, and markets are not always efficient, we need to accept that economic policy cannot fine-tune the cycle.

— For us economists, the lesson from recent events should be to rely less on the development of theories by ―deduction (like in natural sciences) and to apply more induction(like in social and historical sciences). Failure to study history makes us repeat the mistakes of the past.

Mayer goes on to outline and argue for the mainstream Hayekian narrative of the last decade. Low interest rates inflated a bubble and knocked the whole economy out of kilter. Where non-Austrians misconstrue Hayek is in thinking that he is only focused on the bubble itself – they rightly point out that the housing sector itself wasn’t big enough to create our current stagnation. But Hayek’s genius was in recognising that the entire economy is interconnected, and credit distortions in one sector can disjoint the rest. If you imagine a tower of blocks, taking one block away (or changing its shape) can knock all the others down if it’s in the wrong place, even if it’s relatively small. Similarly, credit distortions affect the whole economy because everything is so interlinked.

Anyway, read the whole Mayer piece. We can add him to the Hayek Club.

On the whole, in what I consider to be a baffling divergence from best tenets of the ideology, most libertarians I have met support devolution and the right to secede. This fetish for the local mistakes group sovereignty for individual liberty, and can most clearly be seen as an influence on libertarian thinking in the United States, where Ron Paul and others cite states’ rights and independence as their cure to the ‘imperialism of central government’.

I disagree completely with this approach. Local government has to possess coercive powers to force those subject to it to obey its edicts, and in my view no libertarian system of government actually leaves room for local government on any level.

Why should it? A libertarian government is at its core a legal framework for the defence of right and property. It is my belief that libertarians should aspire for all people to possess equal negative liberty, and equal levels of liberty can only be ensured by a centralised libertarian administration. The justification for local government is that it allows government to be different to suit local wishes – but under a libertarian system people do not have the right to coerce their neighbours, whose freedoms are protected, and the only outcome possible is differing levels of freedom across different areas.

Given that the proper defence of freedom and property is undertaken by the central, minarchist libertarian state, there remains no area in which a libertarian local government could properly legislate. Any action undertaken by a local government could only impinge upon liberty more than is necessary, and is thus an un-libertarian action.

The waters are muddied further by the problem of demarcating the areas and groups granted such autonomy. For example, if Wales voted to secede from the United Kingdom, why should inhabitants of Wales who voted against that policy be forced out of the UK? The legitimacy of ‘Wales’ as an entity might not be something they subscribe to, and no libertarian state should allow people to lay claim to others against their individual will on the basis of group identity.

It might seem counter-intuitive, but libertarians should be centralisers. Both nationalists and localists are enemies of universal liberty, which must surely be our ideal. A patchwork of petty tyrannies informed by local ballot is not libertarian in the slightest.

Henry Hill is the winner of the 2011 Young Writer on Liberty Award. He blogs at http://dilettante11.blogspot.com/.

More essential reading from Detlev Schlichter:

I tell you what is wrong with the global economy: the global bureaucracy. That is what is wrong. Decades of rising taxation, increasing regulation, and persistent redistribution have fundamentally and structurally weakened the major economies of the world. Underneath the glittering razzmatazz of modern technology lies a society that has been sapped of its capitalist juices. For decades we have been eating into our capital stock.

To make matters worse, this persistent structural decline has been masked and indeed furthered by another evil the bureaucracy has bestowed on us: a constantly expanding supply of fiat money, astutely channelled through the banks and wider financial industry. For decades this has helped project an illusion of savings availability while it has simultaneously weakened the all-important propensity to save and to create lasting capital. A constantly expanding money supply, artificially low rates and cheap credit have encouraged borrowing, leverage and debt-accumulation on a gigantic scale, and have fed various asset bubbles, which in turn have further enhanced the illusion of wealth while diverting resources away from where they could have generated real prosperity. At the same time, a new generation has been raised on the belief that wealth comes from consumption, not saving and production, and that you can vote for it.

Detlev's book Paper Money Collapse is now available from Amazon.co.uk.

A new Adam Smith Institute briefing paper, out today, argues that:

• The Vickers report is a botched opportunity. It will not solve the errors of the past.
• The Independent Commision on Banking's (ICB) proposals will pile new levels of regulation when the problem was that former regulations were either poorly conceived, imperfectly enforced or went unheeded.
• The ICB proposals run the risk of institutionalising moral hazard by entrenching the expectation of bailouts.
• The ICB proposals also fail to get to grips with the systemic risk inherent in the deficiencies in international capital regulation.
• Ring-fencing should not have been be the ICB's priority. Instead the report should have concentrated on competition, transparency, and resolution regimes.
• Ring-fencing fails to address the problems in the banking system. In fact, the systemic risk in 2007 and 2008 stemmed from banks which would have complied with most of the report's ring-fencing criteria.
• Ring-fencing bank operations won't achieve the separation of risk the ICB claims. Difficulties in a non ring-fenced subsidiary would depress the stock price of the parent company and thus the scope to recapitalise the tier-one capital of the ring-fenced bank.
• The ICB's presentation of the history of why the banks failed is self-serving. It does not take into account the role policymakers had in encouraging regional banks to take on aggressive funding policies. It also includes irrelevant examples such as Lehman Brothers.  Vickers’ narrative ought to be robustly challenged (see p4 of the report).
• The UK banking system is oligopolistic. The implicit protection mandated by ring-fencing would be a further force against competition. The retail banking monopoly would be best addressed with a firm “no bailout” policy and, where necessary, anti-cartel regulation.
• We also need to introduce a culture of transparency on top of the macro-prudential reporting proposed by Vickers – with principles-based disclosure and regulation replacing the former regime of compliance by process-oriented box ticking.
• The report should have gone further in designing a resolution regime for the orderly winding-up of failed banks

Miles Saltiel, the author of the report and a fellow of the Adam Smith Institute, said:
 
“The Independent Commission on Banking’s final report has its priorities all wrong. Vickers’ central proposal – ring-fencing – addresses a problem the UK banks did not have during the crisis, and largely fails to deal with the real problems now and then. A stronger focus on competition and transparency would make many of the proposed reforms unnecessary.”
 
Tom Clougherty, executive director of the Adam Smith Institute, added:
 
“Vickers should have focused on getting rid of the government guarantees that encourage reckless behaviour, while also coming up with a credible plan for winding up failed banks. Only a clear “no bailout” policy will encourage more responsible banking and increase competition in the sector.”

Recently, there’s been criticism of companies such as Topshop and Vodafone for the practice of tax avoidance – minimising tax liability within the law; in other words, companies being based abroad but continuing their business in the country. An analogy can be made with companies shopping around to find the best deal or place to set up their operations.

Arguments have been put forward by groups such as UK Uncut, suggesting that tax avoidance is unfair for those facing public sector cuts in Britain. It is felt that, in this period of austerity, the rich and not the poor should be bearing the brunt of the deficit reduction programme – most potently indicated by the protest sit-in at Fortnum and Mason. But is clamping down on tax avoidance the only coice we have? No.

It seems that tax avoidance is a symptom of the problem of high corporation tax rates – 26% in the UK compared to Ireland’s 12.5% rate. This has lead to lower levels of unemployment and higher rates of GDP growth in Ireland thanks to many new businesses establishing themselves there. The Irish economy is now exporting strongly and this will help them to recover quickly from the effects of the recent recession.

The libertarian response to this issue should be helping companies find the best bargain – that is reducing the corporation tax rate which is certain to make Britain a more competitive place to do business. Furthermore, this response is more likely to help those less well off as real growth and employment benefits all, rather than resorting to ‘penny pinching’ the pockets of a few businessmen.

The solution is not to clamp down on tax avoidance but to make Britain a more competitive place to trade. Reducing the rate of corporation tax means that companies won’t have to go to drastic measures of basing their businesses abroad. It’s a simple method that offers prosperity for all and will continue to drive the best of British business.

Karishma Puri won third place in the 2011 Young Writer on Liberty Awards.

On Tuesday a man called Sean Duffy was jailed for 18 weeks for “internet trolling”. He was convicted of an offence under Section 1 of the Malicious Communications Act, which reads as follows:

(1) Any person who sends to another person—

(a) a letter, electronic communication or article of any description which conveys—

(i) a message which is indecent or grossly offensive;

(ii) a threat; or

(iii) information which is false and known or believed to be false by the sender; or

(b) any article or electronic communication which is, in whole or part, of an indecent or grossly offensive nature,

is guilty of an offence if his purpose, or one of his purposes, in sending it is that it should, so far as falling within paragraph (a) or (b) above, cause distress or anxiety to the recipient or to any other person to whom he intends that it or its contents or nature should be communicated.

Now, there is no doubt that Sean Duffy’s posts – so far as I’ve been able to ascertain their contents – were despicably vile. I do not wish to defend him or his comments. Indeed – subject to the slight caveat that he may suffer from Asperger's syndrome – he deserves all the condemnation and moral opprobrium that may be heaped on him.

But am I the only one who is rather disturbed by the breadth of this legislation? Surely behaviour like Duffy’s is better dealt with privately – offending parties ought to be socially stigmatized and voluntarily blacklisted by website owners and Internet Service Providers. Just because something is offensive, even morally repugnant, does not mean that it should be a crime.

The way I see it, there is no need to balance the allegedly ‘competing claims’ of freedom of speech and public protection. It is merely a question of letting people assert their property rights to punish or censure unacceptable behaviour. Indeed, I’d go further – it seems to me a sad sign of societal weakness that we are depending on the state to be our arbiter of decency.

Still, this story does raise another interesting issue. Why is it that people on the internet are, quite often, so unspeakably rude? Is it the sense of anonymity? Or is it just that the internet provides an outlet for certain maladjusted and socially inept individuals, who we would not usually encounter in our day-to-day lives? I honestly don’t know.

Whatever the reason, I just wish people would remember that good manners cost nothing, but count for a lot. Even on the internet.

An interesting post from the Cato Institute’s Dan Mitchell on the latest poverty stats in the US. Apparently poverty was declining in the US until LBJ launched his “war on poverty” which dramatically increased the scope and scale of the American welfare state.

Mitchell adds, “the so-called War on Poverty has undermined economic progress by trapping people in lives of dependency.” Note that the US uses an absolute rather than relative measure of poverty, so these statistics really are something to be concerned about.

A harsh dose of reality from the indispensible Kevin Dowd. The lecture above was given on Monday night. Dowd weaves together the strands of economic breakdown created by central banks, bailouts and high taxes into a tapestry of ruin. It's gripping and horrible, and essential viewing to anybody who thinks the worst is behind us. Dowd's message: you ain't seen nothing yet.

Kevin Dowd's most recent book is The Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System.

UK inflation rose last month, and seems to be heading up to 5% on the official CPI measure, more on the traditional RPI. And it's amazing how a few years of inflation can completely confuse people about market signals. Most people, for example, might imagine that house prices have fallen a tiny bit. In fact – as surveyor James Wyatt of estate agents John D Wood told a meeting of the Economic Research Council this week – house prices have fallen 22% in real terms over the last three years. Indeed they have fallen more in many parts of the country.

That is despite a real interest rate that is around -4.5%. But then part of the trouble is that, at these negative rates, the supply of people willing to lend money has dried up. Banks, for their part, see the money supply, M4, also going negative in a big way. They know that this is going to make the housing market even gloomier, and houses are people's main asset. As prices continue to fall, people are going to struggle to repay the loans they already have. No wonder the banks are hoarding cash instead of lending it: and the proposals for tougher capital requirements, both from Basel III and from the recent Vickers report, will simply increase that credit crunch.

And this falling market has a very interesting social effect, says Wyatt. The biggest losers are home owners round retirement age who want to downsize, since the value of larger homes has fallen particularly fast. It is on track to be the largest distribution of wealth between social groups in perhaps fifty years. Maybe it might make up for all those years of the retiring generation expanding its own benefits at the expense of future generations, thanks to the mechanism of public borrowing.

Central London, as usual, is defying the downward trend. That is because a crashing pound has made it much cheaper for foreigners to come in and snap up prime property in prime locations, and planning laws restrict new developments. The trouble is they can afford to hang on to their luxury London bolt-holes for decades, which reduces the supply of such property, and keeps the price high. And stamp duty, which makes it more expensive to move, is prompting people to extend their homes – upwards, outwards and downwards – instead of moving. And that means the rest of the market is pretty thin too. What a tangled web we weave when we mess around with money, interest rates and taxes.