The Pin Factory Blog

“Higher-than-expected inflation defies City forecasts” (The Guardian, August 2009)

“Inflation pushed to 14-month high
” (The Telegraph, February 2010)

“UK inflation higher than expected in August” (ITN, September 2010)

“Inflation unexpectedly hits six-month high” (Reuters, December 2010)

For the last 12 months inflation has been above target, and consistently seems to have been higher than expected. This has been accepted on the basis that the Bank of England’s medium term forecasts have shown inflation falling to more tolerable levels. We are told each month that high inflation “will be temporary”, that the causes were just momentary changes in supply, and to rejoice that we are avoiding deflation. Yet, a long run trend seems to be forming.

Though Charles Bean, deputy governor of the Bank of England, says the Bank’s economists are watching inflation “like proverbial hawks”, the threat of huge monetary ‘stimulus’ remains.

Many will simply disregard these figures; what’s a percentage point here or there? But inflation is hugely damaging to savers. Taking the current RPI inflation rate of 4.7%, if one were to hold savings of £10,000 for 15 years, perhaps for the children or retirement, it would lose half of its real value. If inflation rises and wages fail to keep up then wages fall in real terms. Moreover, inflation increases costs for companies as they must adjust to artificial changes in prices.

Even worse, though less immediately noticeable, is the effect of inflation on the long term stability of the economy. Artificially low interest rates, and increases in the money supply may distort the market, giving false signals that we have large stocks of savings. This can in turn lead to misdirected and unsustainable investment. With many prices actually declining (think plasma televisions and Chinese-produced manufactures), the full extent of inflation in certain markets can be disguised. Though the inflation may lead to what appears to be strong growth, eventually, the unsustainable misdirection of resources must end. The result is bust.

Caution is needed, or the Monetary Policy Committee’s reputation may face a similar destruction to that of Brown’s Treasury, with us all paying the (greatly inflated) price.

Well, yes, this is going to be a fairly obvious point from someone at the ASI. Competition improves production.

As and when there are a number of competing producers of something then they will be competing to produce something better, or lower priced, or faster, or whatever is is that the buyer desires. Pretty simple stuff, but the great failure of British politics is that there are those whio insist that this isn't true of vast areas of the British economy.

You know, that thing where having large numbers of private sector landlords is bad, while having the State, and the State alone, as the provider of housing for the working classes will drive standards up. Where State schooling would get better if only there wern't private schools to show them up? Quite, where the near ludicrous idea that a zero competition monopoly will have better standards, better service, than someone or something that has to compete for customers?

Aye, the argument that the State provision of non-competetive, of non-competing, health services is wondrous, the very envy of the world:

We find strong evidence that hospitals that perceive to be facing more rivals are much better managed than those that consider fewer potential alternatives for patients to choose...

That the Government runs an insurance scheme, tax paid, that scrapes me up off the road when I'm hit by a car, I'm happy enough about. Delighted in fact.

But I do want it to be the best system possible, which means competition among hospitals, a market, in essence, the end of the NHS as currently organised.

We don't want competition in the NHS to make profits for companies, we want it so as to make the NHS better.

The thing about these smoking bans is that whether they are justifiable (no, this is different from justified) or not is that they depend upon the effects of smoking upon non-smokers.

If I wish to pollute my lungs and, on a statistical basis at least, shorten my life that's just, well, that's just up to me. It isn't just that I should be allowed to do so, it's that I have a right, as the owner of my own body, to do as I wish with it.

So we've had the "anti-smokers" telling us that my smoking has a huge effect, an externality, upon others who do not smoke. This justifies restrictions upon what I do to my lungs.

Now if that were true, this would at least be an arguable reason for smoking restrictions. But is it actually true?

As an example, did deaths by heart attacks fall when the inside a room smoking ban was introduced? Umnm, no, actually, such deaths increased. Yes, those telling us different really are lying to us.

OK, let us really go further. Perhaps this ban on smoking in company will reduce primary smoking and there will be health benefits from that?

Umm, no. The various controls and bans on smoking in Ireland have actually increased smoking. And there is anecdotal evidence that everyone piling out of the pub for a puff has led to an increase in sexually transmitted diseases as those who would formerly not have met do in fact meet and hook up.

The classical liberal position is that it is my (or your) body to pollute as I (or you) wish. The more modern position is that there is more to think about than that.

Yes, and when we consider more than that it appears that smoking bans don't work, doesn't it?

Julian Assange's fate is inevitable. It started with his attempted kidnapping by the Swedish state. No matter that under Sweden's enthusiastic rape laws it seems that even if your sexual activity is consensual, you can be put in the slammer should you forget to give your partner a twenty-minute talk on the fundamentals of human reproduction, or neglect to make a nice cup of tea afterwards. No matter that Assange's lawyers insist that he has given every cooperation to the Swedish police in their investigations. It's just that Assange likes to move around for his own security, while the Swedish authorities find it more convenient to have him in one place while investigations continue.

Well now he is rooted to one place, thanks to the wonders of GPS technology and Robert Peel's finest. Which also makes it much easier for any other country with a grudge to slap and extradition order on him. Luckily for the United States, it couldn't be easier to extradite someone from the UK. Under a post-9/11 agreement between the UK and US, terrorist suspects can be 'fast tracked' to America. It took the US Congress some time to reciprocate and consent to send people the other way (and they did that only when it looked as if Parliament might actually renege on the one-sided agreement), and to agree to actually provide some grounds for suspicion before they demanded British residents should be hauled off to US jurisdiction. But let that pass. The fast-track system has been used many times – almost always to extradite businesspeople, like the NatWest Three, whom the US has suspected of fraud, even if the offence was not committed in the US.

Once you are hauled off through this judicial imperialism, you are sunk. You will be held in custody, and your bank accounts frozen, so you can't even mount a defence. You will be hit with the most severe charges the US can muster, such as 'racketeering', originally designed to get mafia members jailed for thirty years and more, but commonly used as a threat so that you will avoid the risk of being convicted plead guilty to some lesser charge, notching up a 'success' for the prosecutor. This is what passes for justice in the US.

Assange may be extradited – no, inevitably will be extradited – to the US on some charge like conspiracy to steal secret documents. But once on US soil, the full might of America's anti-terrorist laws will be thrown against him. Maybe that is right, since his actions – like publishing lists of sensitive potential terrorist targets – put US lives at risk; but some people might think there's a big difference between that and actually blowing up skyscrapers full of people. Whatever the rights and wrongs, the UK authorities will meekly hand him over. They would do the same for you and me. But this is what passes for justice in the UK.

It’s a pity politicians rarely discover their zeal for individual liberty while in power. Bob Ainsworth's call yesterday for the legalization of all drugs allows him to join the club of politicians whose conversions came after it stopped mattering. By waiting until the twilight of his career he's wasted his chance to do the right thing on drugs.

Ainsworth is right that drug prohibition is about as effective as alcohol prohibition was – not at all – and that the War on Drugs is exceptionally harmful to drug users and society in general. Many point to the damage caused to countries like Mexico and Guinea-Bissau by the War on Drugs, but even at home it makes the drug problem worse by an order of magnitude.

Counterintuitively, the worst thing about the War on Drugs is how much it drives up the cost of drugs. Many addicts live in poverty and commit crimes to pay for the expensive drugs they crave, but that expense is a direct consequence of the government’s prohibition laws. Fears that drug legalization would lead to people becoming addicted and be driven to crime to pay for their addictions ignore this.

Some might not like the thought of cheaper drugs, but if it means less crime then it's not really anybody else's business. And nearly everybody who has looked at this issue from a ‘harm reduction’ standpoint agrees that the prohibition laws are the worst possible option for drug users and society.

Furthermore, the Telegraph report linked to above says that drug-related crime costs the economy £13bn every year, and most crime lords make their money from drug trafficking. If you legalized drugs and prostitution, it’s hard to see how organized crime would make any money at all.

Bob Ainsworth’s intervention is welcome and might encourage other politicians to come out of the closet in their open-mindedness about drug legalization. But in waiting until his opinion is largely irrelevant and – a cynic might suggest – using this to grab some attention for himself as his profile wanes, he has thrown away a chance to be brave and effect real change. An anti-prohibition speech an ex-minister might be interesting, but from the minister responsible for crime prevention it might have been decisive. Still, better late than never.

Just over six months into the Coalition Government – much disliked in the Westminster village but more popular outside it – some welcome economic stability has been achieved.

The 10-year gilt yield – currently at 3.6% - is well down on the figure at the May General Election. And, in the meantime, the eurozone has had a torrid time. But 2011 will be challenging for the UK economy – to achieve a 2% growth rate next year will not be easy. In particular, the decision to raise VAT to 20% is bound to impact retail sales. Furthermore, the disarray in the eurozone will hit exports. High job losses - many directly due to the Comprehensive Spending Review (CSR) - will also hold back retail sales.

Undoubtedly, the Christmas ‘like-for-like’ trading figures of the major retail chains will be carefully scrutinised. Many, especially outside the food sector, are expected to report lacklustre sales – a scenario that is unlikely to improve in early 2011. All this negative news would slow down the Government’s efforts, through the CSR, to reduce Public Sector Net Debt (PSND). The latest cost-cutting initiative hits straight at local government through a substantially reduced level of grant – a policy that should be unequivocably applauded.

For decades, much of local government and many public bodies have been desperately inefficient – the scope for savings is formidable. Salaries, too, at the highest levels need to be cut sharply. 

The Government will also be disappointed that bank shares remain weak. Having ‘invested’ a quite staggering £45.5 billion in Royal Bank of Scotland - for whose unparalleled plight no-one is apparently being held accountable – it is unlikely that any substantial sell-down of the Government’s 83% stake will be feasible in 2011. Currently, the ‘investment’ is over £8 billion ‘underwater.’

2011 will be very testing. Is the Coalition strong enough to hold its nerve?

Most market sympathisers know that lower are overall taxes, the smaller is government and the higher are living standards, but for support they concentrate on statistical evidence such as the adverse relationship between economic growth and the level of overall taxes. This evidence is very strong, but an underlying theory showing WHY this is the case would make it far stronger.

Naturally such a theory exists, but it is little known nowadays outside Adam Smith aficionados and the Austrian School of Economics to which both Ludwig von Mises and F. A. Hayek belonged. Even then, I have yet to see a simple and arresting explanation. In The Constitution of Liberty, Hayek refers to the effects of taxation, including “the frequent restriction or reduction of the division of labour”. The Institute of Directors’ Graeme Leach refers to the “deadweight loss” as the loss of output that would have occurred in the absence of the tax – a loss of economic welfare above and beyond the tax revenues collected.

These observations are absolutely correct, but it is probably fair to say that they do not describe in layman’s terms the simple mechanism at work. We must remember what we are up against in the shape of government and the public sector in general (including many schoolteachers and lecturers); the last thing they want is to have their cover blown.

It is nothing short of a scandal that generally respected commentators can still promote government spending as a major plank in getting out of the current recession when (in addition to the fact that such spending was a major plank in creating the recession) it will inevitably reduce output even further. Such a level of ignorance could not possibly exist were it not for the state’s iron grip on the education system via a nationalised school system including a national curriculum. And you certainly won’t find a mention of the topic on the website of the “National School of Government”, the Civil Service training college.

Read the whole article.

Peter Wilby writes a broadly convincing argument in TES against taking the Pisa results too seriously. As the former editor of the New Statesman suggests, comparisons can be misleading. A few potential sampling errors are pointed to, some more convincing than others, but whatever the merit of each, overall his thesis is persuasive. For anyone familiar with the fallibilities of the sciences, none of this should come as too much of a surprise.

Mr Wilby is hoist by his own petard, though. After much sound reasoning he ends by using the Pisa results to attack the US and neoliberalism. Quite why he does this after everything written before is surprising to say the least. I think as a rule one should try not to contradict oneself in the same article, while contradictions between articles should always be forgiven. After all, people have been known to change their minds.

Yet Mr Wilby’s point stands. With headlines and policy cobbled together from some tentative results, it would have been much better if these tests had not received so much attention, or perhaps not taken place at all. Like so much public policy, education has lurched from one failed silver bullet to the next. Today it is teachers’ qualifications, while yesterday it was class sizes. The behemoth of the state is tying itself in a knot, leaving no room for innovation. That governments still have such a uniform model of education within its borders is a sign of how stilted things are – Pisa is a sign of how far we have to go.

Rather than rely on the tentative, much better to build upon surer ground. There can be no doubting that the private sector does stuff better and cheaper than government run and regulated stuff – therefore, in education we should keep government to an absolute minimum, only interfering when we can be as certain as we can be that we are not making things worse.

John Redwood MP has asked a series of parliamentary questions to see how well the coalition government is doing with its 'one in, one out' policy on regulation, and put the results on his blog. As the table below shows, things could be going better:

I'm reminded of one of my favourite Bastiat quotes: "Government, a vast, organized, living body, naturally tends to grow. It feels cramped within its supervisory mission. By now, its growth is hardly possible without a succession of encroachments upon the field of individual rights."

The trouble is that deregulating is much more difficult than regulating, which is why I've never been convinced that the 'one in, one out' idea would prove a particularly good one. Regulation is a serious business, and dealing with it requires a proper strategy.

Our 2005 paper Deregulation, by Tim Ambler and Keith Boyfield, proposed a nine-point strategy for fighting the regulatory state. For each main source of regulation (the EU, Whitehall, the Regulatory Agencies) you should first stem the flow of new regulation, then cut the burden of existing regulation, then try to minimize compliance and enforcement costs.

A recent McKinsey report suggested another sensible approach: review regulation sector-by-sector, and then eliminate any barriers to competition, productivity, and growth.

Done properly, deregulation should be a win-win for politicians: it will boost growth and cut the cost of the state. But it doesn't happen by itself – a real, long-term concentrated effort is needed if deregulation is going to get anywhere. Will this government succeed where so many before it have failed?