Click for the full-sized strip. (Via The Big Picture).
"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
Click for the full-sized strip. (Via The Big Picture).
People on the left sometimes accuse us of misrepresenting Adam Smith who, they say, was in favour of progressive taxation and certain other state interventions. On his (rather excellent) blog, David Friedman has convincingly refuted this error. An extract:
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state." (Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations)
Taxation in proportion to revenue isn't progressive taxation, it's proportional taxation—in modern terminology, a flat tax. The quote not only isn't evidence for the claim, it's evidence against it—important evidence, since it is the first of the maxims of taxation with which Smith introduces his discussion of possible taxes.
Quite an important difference – progressive taxation is, by definition, a disproportionate system. What about the idea that Smith favoured a public school system? Back to Friedman:
The web page quotes (from another web page):
"For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education."
Smith has a long discussion of possible ways of organizing and funding education, in the course of which he argues both for and against a variety of alternatives, so it is easy enough to select out a passage which appears to be for government provision, such as this one. For an example on the other side:
"Those parts of education, it is to be observed, for the teaching of which there are no public institutions, are generally the best taught."
His final summary statement on the subject, however, is:
The expense of the institutions for education and religious instruction is likewise, no doubt, beneficial to the whole society, and may, therefore, without injustice, be defrayed by the general contribution of the whole society. This expense, however, might perhaps with equal propriety, and even with some advantage, be defrayed altogether by those who receive the immediate benefit of such education and instruction, or by the voluntary contribution of those who think they have occasion for either the one or the other.
Or in other words, some public funding of schooling is not unjust, but an entirely private system is also not unjust and might even be preferable.
Obviously, Adam Smith was wrong about many things (such as the labour theory of value he subscribed to), and none of this proves that the systems we tend to advocate are good. But it does give the lie to the idea that Smith was some sort of proto-socialist being cruelly misappropriated by classical liberals.
There are two insights about human behaviour that are pretty fundamental to economics:
1. People respond to incentives.
2. Knowledge is limited.
These sound elementary, and they are, but it's often astonishing how easily they're forgotten. Here's an example, carried in yesterday's Financial Times:
Total, the French oil and gas group, and one of the biggest producers in the UK, has become the latest company to warn about the effect of last week’s Budget tax rise on future exploration investment in the North Sea. . . .
Meanwhile, Valiant Petroleum, the explorer, said it had put on hold a £93m project. Centrica, the utility, said it was seeking meetings with the government in order to press its case for gas to be excluded from the tax increase. On Tuesday, Statoil, the Norwegian oil and gas group, said it was postponing $10bn (£6.2bn) worth of investment in two projects after the chancellor raised the supplementary tax on production from 20 per cent to 32 per cent.
People respond to incentives. (Stephen Landsburg thinks that this statement alone summarizes most of economics.) If government makes the incentives to do something worse then, other things being equal, people will do less of it. So it is with the North Sea oil companies – tax them more, and some of them will leave if there are better opportunities in operating elsewhere. That means less tax revenue overall.
It's not as simple as that, of course, because the precise response is hard to pinpoint. They might cut their profits. Or they might pass on the cost of business to their customers. The BBC's Stephanie Flanders wondered about this too:
I asked Chief Secretary to the Treasury, Danny Alexander, what would stop the oil companies passing on the cost of the extra tax onto consumers, at the pump. His answer, give or take, was that he didn't think they would, but they'd be looking out for it. Hmmm.
Knowledge is limited. It's hard to predict the consequences of any action that we take in our own lives. Now think about a society with millions of people, each with their own goals and preferences (which are constantly shifting). Governments hire armies of economists and other consultants to try to figure this sort of thing out, but they're still naked in the dark. Even small government actions can have big unforeseen consequences, because only individuals know their precise response to a change in circumstances – and even then, they only know in their actions.
People respond to incentives. Knowledge is limited. They're almost self-evidently true, but politicians (and quite a few economists) don't seem to recognise this. We can't make water run uphill and we can't design a chaotic, cloud-like system like society. I wish our rulers would stop trying to do so.
"Paternalism" is an unfortunate name for the policies that lead to this governmental micro-management of what ought to be private affairs. It suggests that, as in real families, the costs are borne by the parents. But they are not. Our political parents simply arrange for the costs to be paid by some of the children for the benefit others. More importantly, the term directs attention away from the demeaning consequences of these policies. They would be better called infantilism.
Jamie Whyte, "Adults of the world, unite!" – Wall Street Journal
No doubt, as the Coalition government intended, press coverage of the Budget has focused on the many measures to promote economic growth. The Treasury has been spooked by the lacklustre GDP figure in the final quarter of 2010 and the expected outcome of just 1.7% growth for 2010/11 – well below the projected 2.1%. Such a shortfall has implications for the growth of public sector net debt (PSND), which is now around £1 trillion.
In terms of public sector net borrowing (PSNB), the comparisons with the November 2010 forecasts are striking. From 2012/13 onwards, PSNB figures are now around £10 billion higher as the impact of debt interest payments – boosted by higher than anticipated inflation – kicks in. By 2015/16, debt interest payments are forecast to be an astonishing £66.8 billion. Such a scenario only serves to underline that the overwhelming priority should be to cut public expenditure. The inflation-related rise in the £170 billion social security budget partly explains the higher borrowing projections.
The Government should tackle this massive budget with vigour. It should adopt a ‘shrinkage’ policy, eliminating the least deserving - perhaps 5% - of claimants from their current eligibility whilst also cutting the value of many benefits by a similar figure. In doing so, the social security budget would fall by several billion pounds – not rise. A renewed assault is required on the MOD’s procurement budget, which is nearly out of control.
Given the amount of money involved, why aren’t more defence suppliers announcing major cuts both in MOD orders and in margins, as other public sector suppliers have? For those who think the cuts programme is complete, the reality is that the necessary cuts have barely started. It will take years of sustained pressure on the public sector to drive down total public spending, which will enable the private sector to deliver the necessary growth.
The UK economy is now firmly in 'put it off' mode. A profit warning from Dixons and Thomas Cook's reports of lower bookings are strong signs that consumers are putting off their purchase of things they can wait for, like gadgets and getaways. Up to now, they've been living on hope, but now the reality of harder times is making consumers putt off what spending they can. They are waiting until things look better.
That's bad news for ministers, who of course want us all to go out and spend money, in the hope that it will revive business and get us growing again. But it now the Bank of England's quantitative easing – the tech-age term for printing money – is over, cash isn't so plentiful. And what cash people have is being whittled away by inflation and low interest rates.
Our politicians, though, have added to the "put off" mentality. The Budget tax hike on North Sea oil companies has led Norwegian company Statoil to put off the development of two new oil and gas fields worth up to £10bn. Valliant Petrolium has cancelled a £93m project. And Centrica says it is reviewing its project. Meanwhile, high-fliers are jetting off to low-tax Switzerland, rather than see the UK government take over half their earnings with its 50p tax. Even more are thinking about it, according to a recent YouGov poll. And among those who have stayed, many are simply keeping money in their businesses for now; aiming to take it out again when the 50p tax goes.
Decades ago, industries and consumers were tax captives. There were fewer luxuries, and the vast bulk of each family's budget was swallowed up by essentials. There was little spending that consumers could put off. Likewise, businesses were rooted in big, immobile factories and machines. Today we have a people economy, and people are mobile. Even physical production is more easily outsourced abroad, thanks to modern communications.
Governments, therefore, are facing new limits on their power to tax. We can simply put off spending, put off drawing income, or move production abroad, until the taxes come down again. And people know that those taxes must inevitably come down, precisely because of these so-called dynamic effects – precisely because of our ability to put things off.
The latest McKinsey Global Institute report (PDF), released yesterday, focuses on the importance of cities to economic growth and development. A fifth of the world’s population live in just 600 cities, generating over 60% of the world’s GDP. Over the next fifteen years, huge numbers of people in the developing world will migrate to cities, creating enormous economic progress. Even accounting for the great leaps in communications technology in the last few decades, cities allow for much deeper divisions of labour and agglomeration economies (such as economies of scale and complexity).
The report emphasises the shift in the world’s wealth from the Western world to the East and South:
Over the next 15 years, the makeup of the group of top 600 cities will change as the center of gravity of the urban world moves south and, even more decisively, east. One of every three developed market cities will no longer make the top 600, and one out of every 20 cities in emerging markets is likely to see its rank drop out of the top 600. By 2025, we expect 136 new cities to enter the top 600, all of them from the developing world and overwhelmingly (100 new cities) from China.
The top 600 cities will generate around 60% of the economic growth in the next 15 years – the bulk of which will be in poor countries. As Tom discussed last week, there is no fundamental reason for this to cause alarm. Growth is a positive sum game, so the urbanization and economic development of the East is good for them and good for us.
But there is still a big potential danger to British cities and others in the Western world. So far, economic centres like London have used their wealth, greater quality of life and political stability to avoid losing businesses to the developing world. As the cities of the East and South catch up, we’re not going to be able to rest on our coattails – bad economic policies (like heavy regulation) will become untenable, and the best people and businesses will leave.
Within the UK, great industrial cities of the north like Sheffield, Newcastle and Liverpool have decayed, as regulation designed to suit London and the South imposed economic sclerosis on those places. In a flatter world, where Guangzhou rivals Tokyo and Mumbai rivals London, we can’t afford to rest on our laurels.
City-based localism that allows cities to set their own rules and regulations in order to attract talent is urgently needed both to revitalize the north and to preserve London’s status as a world economic centre. Fifteen years is a short space of time – policymakers need to think radically about how to free cities from central government so that we reap the benefits of urban growth.
The government spends money like there is no tomorrow – mainly because it is not their money but ours. This is most clearly seen in the enormous deficit run over the last few years. What could we do to avoid these budget deficits in future? In democracies that have written constitutions, balanced budget amendments have been proposed and have succeeded. This could work well in Britain.
In 2009, the German constitution was amended to stop the federal and state governments from running budget deficits. The plan in Germany has been set over an eleven-year period. From 2016, governments won’t be able to run a deficit of more than 0.35% of GDP and from 2020 a deficit won’t be allowed to run at all. In America, 49 states have some form of a balanced budget provision (the exception is Vermont). In Oregon, the law forbids a state surplus of more than 2% of GDP. If there is one, anything above this threshold is refunded to taxpayers. The Federal government does not have a cap on its spending at all, but there have been various balanced budget proposed. This has been brought to Congress within the 1991-1992, 2001-2002 and 2005-2006 sessions. These have failed due to the difficulty to pass amendments, which needs a two-thirds majority in both houses in Congress and three-quarters of states ratifying it.
The UK, like the US Federal Government does not have a balanced budget amendment. Parliament can pass a law without a supermajority as an act of parliament, only needing a simple majority. If there was a balanced budget bill, it will need to be like the German amendment. It will need to phase out deficits over a period of time and by the end of the time allocated, the Chancellor cannot spend more than he gets in, just like a normal household budget.
Obviously, Parliament can repeal a law just as easily as it can enact it – but experience has shown that this can be quite difficult for governments. At the very least, the law would be a roadblock to deficit spending. By passing a law banning deficits, we may see our government finances being put into place.
The term “jumping the shark” describes the moment that a TV series becomes a parody of itself, condemning itself to irrelevance. The origin of the phrase comes from an episode of Happy Days where the Fonz jumped over a leaping shark in a surfing competition. In all likelihood, Saturday will come to be remembered as the day that the anti-cuts movement jumped the shark, parodying itself so ridiculously that it can no longer be seen as a serious political force.
Consider the speeches given to the TUC march. PJ Byrne has written a fine article on the errors within these speeches, but even on a superficial level the speeches were ridiculous. Ed Miliband’s invocation of the suffragette, US Civil Rights and anti-apartheid movements only served to underline the speciousness his own cause. Where those groups had fought for freedom against government oppression, Miliband defended community centres and jobs for life in the public sector. The comparison is self-evidently ludicrous. Archbishop Cranmer's headline neatly summed it up: “Ed Miliband: I am Emmeline Pankhurst! I am Martin Luther King! I am Nelson Mandela!”
How unbecoming it was to see the British left, with its roots in honourable struggles for peace, universal suffrage and better conditions for the working poor, now little more than a mouthpiece for public sector unions. So, when did the British left stop caring about the poor and start caring about civil servants? When unions stopped representing the working poor and became a preserve of state workers. Today, only 15% of private sector workers are in a trade union, while 56% of public sector workers are (PDF source). The left can’t claim to be concerned about the poor while it's trying to protect relatively well-paid state workers from redundancy, which is a fact of life for workers in the private sector.
And, of course, there was UK Uncut's “occupation” of Fortnum & Mason and vandalizing of businesses around Piccadilly Circus. As Tim Worstall pointed out, Fortnum & Mason is owned by a charitable trust that donates about £40m every year to charity. Even the “tax avoidance” allegations against Vodafone and Boots are silly – tax avoidance is, by definition, legal. There's a good argument to be made in favour of simplifying the tax code to reduce avoidance, but to blame private companies themselves for acting lawfully is absurd. But the real point was class warfare, which is why the Ritz was also targeted. UK Uncut showed itself once again to be made of spoilt Marxist wannabes.
The campaign against the cuts was always unrealistic, but Saturday showed how much of the anti-cuts movement has lost its grip on reality altogether. The government should worry less about it, and cut faster and deeper without fear.
As this Saturday was the first in a while that I've had to myself, I woke up early and resolved to make a particularly special effort to spend the day doing things that make me happy. One of these is to take a walk in Hyde Park around the Serpentine, maybe with a cup of tea, as my father and I sometimes do when he visits. When I got there, however, I discovered – to my horror – that the park was completely overrun with thousands of trade unionists. After turning down some free socialist literature (and hearing some uninspiring speeches blaming the banks for everything from sour milk to the Spanish Inquisition), to my surprise Ed Miliband appeared, looking, to his credit, pretty sharp and leader-like. So I stuck around.
After his introduction, met with boos and cheers in equal measure, he began to speak – and while his speech was easily the best on offer, trade union gatherings are not exactly known for brilliant, soaring oratory. Mr. Miliband tried to break that mold. He proclaimed that the day's protesters came "in the tradition of... the suffragettes who fought for votes for women – and won; the civil rights movement in America that fought against racism – and won; the anti-apartheid movement that fought the horror of that system – and won. The cause may be different but... we are standing on the shoulders of those who have marched and struggled for great causes in the past." The purpose of the day, he declared, was to "preserve, protect and defend the things we value" – those "things" being, specifically: "libraries, the Citizens Advice Bureau, the community centre," children's centres, and public sector jobs, "the fabric of our communities." [Continue reading]