The Pin Factory Blog

Many on the left often get frustrated by free marketeers’ obsession with economic growth rates – as they see it, we’re so infatuated with the free market that we ignore the individuals at the bottom. Realistic left-wingers usually accept that state spending will hurt the growth rate, but say that small losses are worth it to promote welfare now. But, as Tom pointed out on Friday, what seems like a small reduction in the growth rate will have a massive long-term impact.

Take the chart above as an example. From the same starting point (100), each line shows the 50-year growth of economies at 1.5%, 2.5%, 3.5%, 4.5% and 5.5%. The initial difference is minor, but over the 50-year period a huge divergence takes place. By the end of the period, the country growing at 5.5% has increased the size of its economy by almost fourteen times, while the country growing at 1.5% has barely doubled in size. Most African countries haven’t even managed that. 

The in-between scenarios tell a similar story – 2.5% growth multiplies the size of the economy by 3.3 times, 3.5% by 5.4 times and 4.5% by 8.6 times. Marginal increases in the rate of growth create massive benefits in long-term prosperity – the reverse implication being that dents to the growth trend now which seem small can have a hugely detrimental impact to people’s lives in the long-run. This long-run isn’t even that long – 50 years – and the divergence from the mean becomes pretty marked after just five or ten years. It’s not ideology that makes us preoccupied with growth so much as this realization that compound growth – like compound interest, as Einstein is reported to have said – is the most powerful force in the universe for ending poverty.

Baptists and bootleggers is a concept we often see: two wildly disparate groups agitating for the same policies. The Baptists thought Prohibition was great because it stopped people from getting the demon drink and bootleggers for they made huge profits supplying the demon drink.

There's an intruiging story of something similar happening in the US at the moment. One of the biggest lobbying groups over there is the life assurance industry. They seem to be lobbying hard for the revival of the estate tax. This is all rather strange until you realise that fully 10% of the industry's revenues come from selling people life assurance plans which aid in getting around the estate tax.

There's even a gentle hint (entirely unfounded I have no doubt) that Warren Buffett's enthusiasm for the estate tax is partially fuelled by his ownership of 6 life assurance companies.

Just another example of that old maxim about cui bono? It can defintitely be helpful to work out who is going to make money out of a proposal when evaluating who and why people are proposing it.

It is fitting that the United Nations Framework Convention on Climate Change is gathering this week and next in the tropical resort city of Cancun, Mexico. Far from a mecca of environmental activism, the lush party spot until recently consisted of mangrove swamps with no human development. The irony should not go unnoticed as the same technocrats who wish to stymie economic development take advantage of the resulting comforts while the US, UK and Europe freeze.

For a movement whose credibility has been effectively destroyed by proven false claims on melting Himalayan glaciers, polar bears becoming extinct and increasing natural disasters, you would think the climate elites might take a lesson on public relations. Those with a guilt complex granted to those benefiting from advances made in a carbon-based world seem to be unable to promote rational policies and instead continue to call for unrealistic and draconian measures like World War II style rationing. What we need instead is a mature, open discussion on climate change; without the Al Gore and International Protocol on Climate Change alarmism.

Back in 2007, Der Spiegel put together a balanced, responsible article on climate change. For as we have seen over the past billions of years, our climate will change; whether humans are making an impact or not. Indeed, this is what climates do. Further, there is no evidence that the status quo climate, what we have now, is the most ideal for the planet. Far too many questions remained unanswered to even consider imposing such concentrated costs today for a fool’s gamble on tomorrow.

The climate change crusaders now gathering in Cancun should work towards a more constructive, even-keel conversation about the potential effects, positive and negative, of the inevitable change. That is, of course, if preventing disastrous changes to the world’s climate is their primary motive.

Here's an interesting graph from that McKinsey report I mentioned yesterday. The dark blue line represents UK GDP to 2030, assuming trend (2.5%) growth. The mid-blue line shows what would happen if we had a double dip, followed by a return to trend growth in 2013. The light blue line shows what would happen with sustained, below trend growth.

What is interesting (and obvious) on this graph is how economic stagnation and sclerotic growth (think Japan) hurts the UK far more in the long run than a double-dip followed by renewed growth.

This is not just idle speculation either. There is a strong case for saying that efforts to prevent a double-dip recession (propping up failed banks, fiscal and monetary stimulus) prevent the market adjustments – liquidation of bad investments, restructuring of debt, reallocation of resources in line with changed consumer preferences, and so on –  that make a return to strong growth possible.

Reflationary policies (as favoured by Keynesians and most monetarists, but not by the Austrian school) may spare the short term pain of a double dip recession. But if you take the long term view, are they really doing us any favours?

An excellent brief video from Hans Rosling.

We can all argue (what fun!) about what exactly set this all off: the innate genius of the English that everyone else then just copied, capitalism, markets, liberal democracy, whatever, but there's no doubt at all that something changed those couple of hundred years ago. Something changed for the better of course: longer, richer, lives for all. 

There are many flavours of this liberal, market, capitalism thing, from Hong Kong style laissez faire to Swedish social democracy and China's current authoritarian fumblings towards the rule of law. But when you peer down into the figures that Rosling is visualising there one result stands out a mile. All those who got rich did so with one of those flavours of liberal market capitalism, all those who got rich did so as they adopted liberal market capitalism and no one has got rich without adopting some flavour of it.

So let's hear it for liberal market capitalism then: longer richer lives for all, 200 years and counting. 

Whilst the government's reforms of tuition fees may be generous (for instance, by increasing the repayment threshold from £15,000 to £21,000), the latest proposals fly in the face of any claims to "fairness". Welsh students are apparently to receive all the benefits of a more lenient repayment system, but without experiencing the higher tuition fees. This means that they will benefit just as much as English students from lower annual repayments, but will be able to repay their debt significantly faster. If any policies can be described as "unfair", surely they are those that discriminate against certain sectors of the population by law. In this case, this is grossly "unfair" to English students in that they will receive a less generous deal than Welsh students.

Whilst the coalition government appears to be presenting the proposals along similar lines to those I have proposed in previous blogs, they have missed a golden opportunity with regard to this new innovation. If the government had kept tuition fees at the current level in Wales whilst preventing them from benefiting from the increase in the repayment threshold, we may have seen protests in Wales against keeping the system the same rather than changing it. Protests in Wales demanding the same overly generous repayment deal that English students will get would have flown in the face of the National Union of Students that has been misleading students with regards to increased student debt.

On a more positive note, students have started to organise themselves against socialist misinformation. A fast-growing Facebook group of students in support of the general thrust of the coalition's reforms – Students FOR Tuition Fees Reform – has been set up in the past few days, already expanding to well over 500 followers. Hopefully, more students will bother to read the coalition's proposals and reject NUS scare-mongering as a result of it. Perhaps Liberal Democrat MPs may take heart from the fact that some students have bothered to listen to them and vote for the reforms. It is up to those of us who favour these reforms to show our support by "liking" the Facebook page, writing to Liberal Democrat MPs, and showing them that not all students will protest a fall in their annual repayments that improves university standards.

An interesting point from McKinsey's report From austerity to prosperity: Seven priorities for the long term:

Recent MGI [McKinsey Global Institute] research has demonstrated that deleveraging has followed nearly every major financial crisis since World War II and that this is usually a long and difficult process. Although there are instances of economies deleveraging through default, high inflation or by simply growing out of debt, the most common type of post-crisis deleveraging is belt-tightening. MGI analysis shows that such efforts have lasted an average of six to seven years and reduced total debt to GDP by about 25 percentage points. In nearly every episode MGI examined, GDP growth declined in the first one to two years of the deleveraging process but then rebounded, even while deleveraging continued.

An earlier McKinsey report revealed that Britain had become the second most-indebted nation in the developed world, second only to Japan. Combined public-private debt reached c.460% of GDP in the second quarter of 2009, up from c.210% in 1990. So this is clearly a very real economic issue.

I'd suggest that this deleveraging is very much a good thing in the long run. Recessions are all about economies adapting to changed circumstances, and laying foundations for future growth – that is, for real, sustainable recovery, not just re-inflation through fiscal and monetary expansion. David Simpson put the general case well in his excellent Adam Smith Institute report The Recession:

The alternative, classical, view is that boom and bust are an inseparable part of the growing market economy. From this perspective the recession is the remedial phase of the cycle in which relative prices, having been distorted by the boom, return to normal. In other words, the recession is a necessary period of adjustment to the distortions created by the boom.

I’ve already written at length on the Irish bailout, but now that it’s been finalized, it’s worth reflecting on just what it means for Ireland and the UK. The final sum was around €85bn – €35bn for the banks, €50bn for the Irish government (though much of that was to fill the Irish coffers that had already gone towards the banks). The Irish government was forced to put up their €15bn sovereign wealth fund – the National Pension Reserve Fund – as collateral against the loan, so that if they default they lose that money. This was canny on the part of the EU and IMF, and very stupid on the part of the Irish government, but it is unlikely to be enough to prevent an Irish default.

Worst of all for the Irish, the bailout will have to be repaid at an average annual rate of 5.8%, which is hardly better than what the Irish could have borrowed at conventionally before the current conflagration, without having to stake their sovereign wealth fund on the borrowings. The interest rate is so high because the EU wants to put other countries off resorting to it, but it will cripple Ireland. The cost of the bailout will be nearly €60,000 per household, but on top of this, each household will have to pay an extra €2,000 in tax to pay for the interest alone – every year. The huge interest rate repayments will cripple the country. Unsurprisingly, bond markets haven’t been calmed by the bailout.

The important point about all this is that it is now exceedingly likely that the next Irish government will default on its borrowings, even if it loses the National Pension Reserve Fund. If that happens, the £7bn gambled by the British government will be gone – and with it, £300 per British household. The bailout means that the Irish banks are likely to become solvent, but it might cost the Irish government its solvency – which, in turn, would be far more destabilizing to Europe’s banks than senior bondholders of Anglo-Irish being burned. An Irish default is probably now the best option for Ireland, but the bailout has significantly upped the stakes for the rest of the EU.

The increasingly virtual world in which we live is creating a domain where the boundaries of law are unclear. There is currently a consultation going on to see whether granting the serious and organised crime agency (SOCA) the power to close domains which they consider to have criminal links. Once again, it seems that the police are taking the heavy-handed approach without any consideration for people’s right to free speech and private property.

Under the current proposals, there is no requirement for judicial services to be consulted before the sites are shut down. It is clear that the issue surrounding the legality of certain Internet sites is complicated, but that is no excuse for bulldozing the rights of those who legitimately use them. The maxim that people are innocent until proven guilty should have no less relevance when it comes to people’s digital property than their tangible property. By granting power to the police to violate digital property rights, we are moving towards a more controlling state.

Several lawyers specializing in information technology have stated that such a move is “deeply concerning”. Without a judicial review, the police hold all the power to decide which sites are legal and which are not. Simply looking at the police’s targeting of photographers with anti-terror legislation shows that they cannot be trusted to operate in good faith – the watchers need to be watched. In the free society in which we are supposed to live, police cannot be given control over which websites are and are not allowed to exist. Complicated though this issue may be, criminality on the Internet cannot be solved by giving the police the power to request that websites be shut down without judicial oversight.