One way to know that you're doing the right thing

Is to look at peoples' reactions to what you're doing. If, for example, you decided that you wanted to clean up the MPs' expenses system and every MP then started howling about how we mere ignorant citizenry aren't supposed to control them then we'd know that we were on the right track. Similarly, if every criminal in the country (to the extent that this is a different group from MPs) starts to complain about the length of sentences after just and righteous trials then you would at least begin to suspect that you might have created sentences which have a deterrent effect.

And when you're doing supply side reforms to the economy if you start to hear loud wailing from those suppliers being reformed then you've got a pretty good indication that you are achieving your goal. As with this letter to the Telegraph

As doctors and health-care workers, we are concerned about the Government’s proposed secondary legislation (under Section 75 of the Health and Social Care Act) to force virtually every part of the English NHS to be opened up to the private sector to bid for its contracts. These regulations were proposed on February 13 and will become law on April 1 unless MPs first insist on a debate and then vote them down. Parliament does not normally debate or vote on this type of regulation, but it is possible. We urge parliamentarians to force a debate and vote on this issue to prevent another nail in the coffin of a publicly provided NHS free from the motive of corporate profit.

There then follows 1,000 or so signatures. Which is, as I say, a signal that something is going right. The aim and point of the NHS reforms is indeed to introduce a market. Competition among suppliers that is. The reason for doing this is that in the absence of competition the producer interest will dominate, not that of the consumer. This is why we insist upon more than one electricity supplier in the economy, welcome that there are many sources of food (whether trivially in shops or more importantly from many different farmers and producers), sell off four licenses for mobile telephony at a time, not just one.

We desire to have this competition because it stops that producer interest from ossifying and then taking over the entire system. Very much to the detriment of the consumer who is the person we're actually concerned with.

As a result we've got those producers howling about how just ghastly it is that people will be able to compete with them. Screaming about how undignified it is that such august personages might have to consider what consumers want rather than what producers might deign to provide.

Great eh? It's working!

The Bank of Dave and our broken banking laws

Channel 4's follow-up to the "Bank of Dave" made for highly enjoyable viewing. The programme was subtitled 'Fighting the Fat Cats', but it was bureaucrats rather than Fat Cats that caused the problems.

The show followed the experience of Dave Fishwick's Burnley Savings and Loans community bank. The bank offers 5% AER to savers and small loans to local businesses, with profits given to local charities. In many ways, the concept has much in common with the old Credit Unions, Mutuals and Co-ops as well as the German Sparkasse (which, as the programme showed, have had similar struggles with regulation). Without knowing the full details of the business, it seems that Fishwick had a very successful model and a very low rate of non-performing loans.

As the programme portrayed it, however, Fishwick was lucky to survive a heavy-handed assault by the FSA. The regulator appeared to object to the simple business model and tried to impose a greater level of complexity of the savings accounts. This is typical - regulators want all banking institutions to conform to a chosen model, which may well be inappropriate. How is a regulator to know what customers want and which is the best means for suppliers to provide that? Fortunately, Fishwick is a charismatic character and was able to motivate public support and win some influential backing, particularly the support of the excellent Steve Baker MP.

This serves to demonstrate exactly why there is so little competition in the UK retail banking sector and why there have been so many financial scandals (PPI, Libor). In banking, as in any other market, regulation creates barriers to entry to small businesses. Not every small bank is lucky enough to have a crusading Dave Fishwick, but they should not need to. The regulatory barriers to entry drive consolidation and prevent small businesses entering and outcompeting established players. It is this which allows uncompetitive practices and harms the consumer. Big businesses have a symbiotic relationship with regulators and there is frequently a revolving door between the two. This is why we have ended up with banks that are too big to fail, but yet we still have the cry of 'more regulation'.

We should remember that, with the possible exception of energy, banking is the most heavily regulated sector of the UK economy. Moreover, it is one of the few sectors where the prices are controlled by the state - the nominally independent Bank of England in this case. It is ironic that populist demagogues such as Vince Cable and Ed Balls jumped on the Fishwick bandwagon, as it is they who advocate heavier regulation of the banking sector.

Competition in banking, as in any area of the economy, can only come from deregulation. Lowering barriers to entry, allowing small banks to enter and allowing caveat emptor by both savers and lenders (together with the re-introduction of sound money and privatisation of the Bank of England) is the only way to fix the broken banking sector. 

Freedom Forum 2013

It's that time of year again. After the roaring success of last year's inaugural conference, the Liberty League Freedom Forum 2013 is only weeks away.

For just £35 per ticket, they've booked out the UCL School of Pharmacy in central London, and will be providing your accommodation, meals, drink and books for the entire weekend, as well as giving you the chance to meet other young pro-liberty activists from all over the UK. If you're based in London, it's £25 without accommodation.

You'll have the chance to meet and debate some of the liberty movement's best speakers, and take part in seminars and lectures with topics such as Bleeding Heart Libertarianism, free-banking and currency reform, the feasibility and desirability of anarcho-capitalism, why healthcare costs seem to always rise, whether the private sector can really build the roads, how innovation undermines Leviathan, libertarian conceptions of the law, free market environmentalism, out-innovating dictatorships, and a whole lot more too.

This will be alongside activism and training sessions exploring and improving skills in journalism, public relations, public speaking, and how to set up and run pro-liberty student societies on campus.

With even more speakers to be announced over the next few days, the list already includes Sam Bowman, Research Director of the Adam Smith Institute, along with Mark Littlewood, Dr Richard Wellings, Brendan O'Neill, Steve Baker MP, Douglas Carswell MP, Abebe Gellaw, Dr Anders Sandberg, Dr Terence Kealey, Dr Kevin Dowd, Professor Mark Pennington, Chris Snowdon, Dr Steve Davies, Linda Whetstone, JP Floru, Wolf von Laer, Professor Randy Barnett, Mark Wallace, Alex Singleton, and Jamie Whyte.

Date: 5th-7th April

Venue: UCL School of Pharmacy, and Generator Hostel, London.

Check out full details all of the sessions and speakers, and book your ticket right away by clicking here: http://uklibertyleague.org/2013/01/14/llff13/

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Legalize pepper spray

Imagine a world where possession and use of fire extinguishers was banned. Let us suppose that a terrible tragedy — a child accidentally asphyxiated while playing with one — caused widespread media fuelled outrage. In a grand parliamentary review it was decided that there would be a blanket ban on all future possession of fire extinguishers except by trained health and safety professionals.

“But you need fire extinguishers to put out fires!” protested the few curmudgeons opposed to this new law. “Fire extinguishers are the first line of defense against fires. Without fire extinguishers there will be more house burnings.”

“So you support child asphyxiations then, do you?” chimed a newly popular strawman in response. “Besides, that's what firefighters are for.”

Within a year house burnings have more than doubled. Instead of questioning the law (now firmly embedded in general approval), a new lobby group is on the streets shouting that the recent outbreak of house burnings was caused by dilapidated fire stations and government austerity.

The moral of this story alludes to a very real problem. 80,000 women are raped every year in the UK. That's not even to mention the 400,000 who are sexually assaulted, every year, according to the government's Action Plan on Violence Against Women and Girls (2010-2011). And one of the most proven and minimally violent methods of deterring sexual crimes is completely banned in the UK.

Pepper spray, or oloresin capiscum, was prohibted under section 5 of the Firearms Act of 1965, which classifies pepper spray in league with automatic firearms and rocket launchers. Pepper spray is also banned under similar grounds across most European countries, except, typically, Switzerland where it is classified as a self defence device- not a weapon- and can be carried by all.

In Switzerland there are on average about 150 incidents of rape per year. Adjusted for population, Switzerland has proportionally 84 times fewer rape victims every year than the UK. This really is a staggering figure.

Oloresin capiscum is an inflammatory agent that causes temporary blindness. It can temporarily incapacitate an aggressor in a relatively safe and non-violent manner. The compound used in pepper spray is almost identical to tear gas, used by riot police to control mobs.

This raises interesting though rarely considered questions about the inequality of power between the state and its citizens. Why always must the state be the sole exception to its own laws?

But putting aside such abstract considerations, what if tomorrow parliament completely legalized this relatively tame form of self defence? What if every pocket and handbag in the nation was equipped with pepper spray? I believe the evidence indicates that cases of rape and violent crime would plummet considerably.

As always, there are the unintended consequences of state prohibitions. The only self defence devices available on the market are mini alarms and so called “criminal identification spray” which brands the aggressor and makes them easily identifiable to the police (for what purpose seems to be unclear, given the truly shameful rates of rape convictions). But since these products don't actually deter the criminal or give any window of escape, using them would most likely only aggravate the situation even further.

There is no such thing as a miracle cure, but putting the power of self defence back into the hands of citizens is not only right in theory, it is highly effective in practise. Better to extinguish the fire at the source, then to wait half an hour for the state to deal with the smouldering rubble and ruined lives left behind. 

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A libertarian solution to the welfare state we’re in

The Coalition's welfare reforms are too timid, says economist Peter Hill. Welfare-to-work schemes have failed, and adding more state intervention will only compound the problems. What is needed is a reform package that time limits out of work benefits, turns benefits into a genuine unemployment insurance scheme, and more.

Given all the bold statements of Iain Duncan-Smith about restoring fairness and making work pay one could easily be swept away by the hype.  The reforms set out by the coalition include the introduction of the ‘Universal Credit’ in an effort to streamline the cacophony of benefits and tax credits inherited from Labour, the introduction of a benefit cap of £26,000 for families on benefits, and a tightening of conditionality surrounding disability to ensure that all those capable of work do seek it.

With this swathe of seemingly radical reform taking place one would expect spending by the Department for Work and Pensions to soon reverse from the relentless upward trends seen under Labour.  Sadly, this will not be the case with spending set to increase by an average of £4.29 billion per annum over the course of this Parliament comparing on marginally better than £4.43 billion per annum increase during Labour’s time in office.  According to ONS data unemployment has also only fallen from 2.51 million to 2.49 million since the coalition came to power and growth remains stagnant.

Read this article.

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Uncertainty for Italy means uncertainty for us, too

The political crisis in Italy will just deepen the eurozone's resolve to move faster and deeper into real economic and banking union. With no clear winner emerging, a large vote against austerity measures, and the prospect of another election in weeks, markets already have the jitters. The European Central Bank (ECB) will find itself, inevitably, being drawn in to try to calm them.

Italy is a big country, the third largest European economy. It is not going to be rescued by a few Greek-style bail-outs that are annoying and irritating, but bearable for the other eurozone countries (and for non-euro countries like the UK, which have got sucked into some of the bailouts). Italy really is too big to be allowed to fail. If it did, there would be monetary chaos throughout the eurozone, and beyond. And although a considerable number of Italians gave pro-euro politicians the thumbs down last weekend, the country seems to have no real intention of pulling out of the euro and getting the lira back. Indeed, it went to very strenuous efforts to get into the euro when it was created, and the other eurozone countries were keen to bend the rules and get Italy in (as they did with Greece, so they only have themselves to blame).

Over to you Mario Draghi. He has already indicated that he will do whatever is necessary to keep the euro show on the road. With Italy looking shaky, that can only mean one thing: creating new money and flooding the markets with liquidity until (hopefully) the problem goes away. Quantitative easing, euro-style. It is something that Germany and others have long resisted, some fearing the inflation it could cause and others fearing the enormous power that the ECB would be acquiring. But what is the (politically realistic) alternative?

But such money-creation will probably do little more than it has done in the UK. The new money will go to the commercial banks of the eurozone, who will buy 'safe' assets (like government bonds) with them in order to strengthen their balance sheets in advance of the next Basel deadline. Financial asset prices will rise, but little of the stimulus will get into the real economy and make a real difference to growth.

Which is bad news for the UK too. Continued uncertainty and low growth among our nearest customers is not the way to grow ourselves out of the recession. George Osborne's overview of economic conditions in his budget in three week's time will be... interesting.

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Capital Gains Tax hike led to falling revenues

The Adam Smith Institute is calling on the government today to slash CGT rates in next month’s Budget in order to boost revenue and economic growth. 2010-11 figures now released by HM Revenue & Customs (HMRC)  show that the rise in Capital Gains Tax (CGT) was a failure. Meant to raise more revenue, in fact it raised less.

CGT was raised from 18% to 28% for most taxpayers (entrepreneurs’ relief stayed at 10%) in June 2010, nearly three months deep into the tax year. This unusual timing allows economists to see the impact of the rate changes during the year.

Comparing the 78 days from 6th April 2010 to 22nd June 2010, and the 287 days from 23rd June 2010 to 5th April 2011, shows a marked fall in revenues. The annual equivalent CGT revenues under each system are:

There was a 76% drop in normal disposals (taking 18% and 28% together for post-23rd June figures, because figures are not available for the equivalent split for pre-June). Clearly, many people sought to realise gains before the rate increased, knowing that the Coalition Agreement committed the Government to a sharp increase in CGT rate.  There was also a 34% drop in 10% ER disposals, probably because entrepreneurs feared further tightening.

However, this highlights the fact that CGT is effectively a voluntary tax, paid only when people choose to dispose of assets. If they perceive rates to be too high, they choose to keep assets rather than dispose of them.  Only a few people are forced to sell assets – many of them elderly people who build up assets throughout their lives and then cash them in to live on.

High CGT rates depress economic activity and prevent the flow of capital to where it can be most productively used. This lowers both economic growth and government revenue.  This is why the Adam Smith Institute is urging the government to slash CGT rates to their pre-2010 levels, which would raise more revenue for the Treasury and also stimulate growth.

For example, if someone owns a buy-to-let flat and is thinking about selling it to raise seed money for a new business, the fact that a large chunk of the proceeds has to be paid in tax will deter them.  They may well decide to keep the flat and not start the business, thus depriving the state not only of the CGT revenue, but also the taxes that would be paid by the new business and its employees.

People’s reluctance to pay a large cheque to the state is increased by the knowledge that much of their capital gain is actually due to inflation. Indeed, roughly half of taxable gains are attributable to inflation .

Dr Eamonn Butler, Director of the Adam Smith Institute says: “The coalition policy of a sharp increase in CGT rates has failed.  Not only has it raised less revenue, it has also reduced the available capital in the economy. That is the last thing businesses need at a time when bank loans are so difficult to get.”

Is Moody's downgrade such a bad thing?

Moody's downgrade of UK government bonds from AAA to AA1 status isn't necessarily a bad thing. Sure, it is likely raise long-term (15 to 20-year) borrowing costs slightly, and that will affect the government's finances, though it won't affect ordinary households much, as they generally borrow on much shorter terms. But is it a dire comment on the UK government's economic policy?

Hardly. Moody's said a year ago that it was putting the UK on watch, so it has taken some time for the slippage actually to occur. America has already been downgraded, as have all the other G7 countries except Germany (which should be) and good ol' conservative Canada. In the great scheme of things, the UK doesn't look in too bad shape.

And those advocating that the Chancellor of the Exchequer, George Osborne, should do a U-turn and give the economy a bit of fiscal stimulus cannot take comfort from Moody's position – which is that the UK needs not to spend more, but to get its debt under firmer control. Indeed, it is telling the Chancellor to stick to his plan of getting the books back into balance, and indeed to speed up the process if he can.

It is not altogether good news for those of us advocating tax cuts, especially tax cuts on business, as a way of reducing the risks faced by entrepreneurs at the moment and thereby stimulating hiring and investment and growth. With Moody's watching UK debt so hawkishly, there is little room to add more, even if it might stimulate growth a year or two into the future. Still, as we will argue in a paper next week, there remains plenty of scope to reduce some taxes, like capital gains tax, where the rates are so high that the Treasury is actually losing money. A cut in CGT in the Budget would cost nothing, because investment would be liberated and businesses would not have to spend so much effort working out how to keep their money out of the Chancellor's hands.

And for those of us who want to see more of a growth agenda, with deregulation that would again reduce the risks of taking on employees, it must be good news. We will see what the Budget brings.

That falling labour share of income: it's really not because the profit share is rising you know

The more terminally geeky of readers here might recall that I started shouting at the TUC back here. They were telling us that the labour share of income was falling, thus the profit share must be rising, ergo tax the rich! I pointed out that while the labour share was indeed falling the profit share wasn't rising: the actual change was happening as a result of an increase in taxes and subsidies to production. That is, the labour share would improve if we lowered that.

And now for something from my favourite Kurdo-Swedish economist. He's found that exactly the same thing is true of the Swedish economy. Yes, people there are complaining that the labour share has fallen. Which indeed it has. But not because the profit share has risen. Nope, because:

What is happening is that the share of income allocated to the category “Taxes on Production and Imports - Subsidies” have risen sharply in Sweden. In 1980 this was 10.6% of GDP, and in 2011 it was 19.2% of GDP. This includes Moms, the Swedish VAT, which has risen significantly. Obviously net wages going down because the government is taking in more taxes is not the same thing as capital taking a bigger share of the pie. Tax revenue is mostly spent on workers.

Quite.

Now, what is so lovely about this is that the EU insists that all member states must present their GDP statistics in the same format. For example, when we measure it using the income approach we do indeed get the labour share, capital share, taxes on consumption and so on laid out in exactly the same manner. Which leads, in a rather narrow and very geektastic sense of course, to the possibility of doing something interesting here. If there's a technically competent economist out there with time on her hands, do get in touch. For there's a paper to be written. We've had a number of VAT changes across the EU 27 over the past few decades. And we've got the stats for how labour, capital etc shares have changed over those years. It should be possible to thoroughly explore how those shares have changed. And I would be willing to make a reasonably large bet that the change in the labour share is correlated to the change in the VAT rate rather than the capital share. Which would be an interesting result, wouldn't it?

Do you think we could surcharge John Prescott for this?

This is something I don't actually know. Is it possible to surcharge a Cabinet Minister for the losses to the taxpayer caused by their own gargantuan stupidity? Or is it only local councillors we can go after in that manner? I rather assume that we can't go after Ministers because I note that there's at least some of them who are not bankrupt at present: but it would be interesting to know.

The reason for this musing is this story from Liverpool:

UP TO 400 people have already shown interest in buying homes in Liverpool for just £1. And with only 20 homes so far earmarked for the rock bottom price deal there will be stiff competition between the competing buyers. Liverpool city bosses have yet to confirm what the criteria for deciding who will be sold the houses will be, but it is understood they are keen to prioritise people who have links to the area and will commit to living there for five years. Many of the houses in Kensington and the “Granby Triangle” have been boarded up and empty for years because successive regeneration schemes have fallen through.

OK, so we've empty and derelict properties owned by the council. A council which cannot actually manage to renovate them itself. So, yes, why the heck not? Flog 'em off for anything at all and allow the little platoons to do them up and then live in them. Or rent, them, sell, them, do absolutely anything they want to with them really.

But why would I want to surcharge John Prescott over this? Well, for this reason:

Many of the Liverpool homes bought up under the failed Housing Market Renewal scheme cost the council around £70,000 each to compulsory purchase.

We really are seeing the gargantuan stupidity of government planning here, aren't we? These are Victorian two ups two downs in Liverpool. And they managed to pay £70,000 for each of them? I mean, what? If something is worth £70k in Liverpool then it's not actually derelict or in need of regeneration is it? And then we find that even having done that they cannot manage the regeneration so thus have to, to all intents and purposes, give them away. This isn't government's most shining hour.

And as to John Prescott: this was part of his "Pathfinder" scheme. The basis of which was that to increase the amount of low cost housing in the country we should buy up 400,000 low cost houses and destroy them. And there in Liverpool we're seeing the scrag end of exactly that plan. At which point my call for being able to surcharge Prescott himself. It was clearly and obviously an entirely lunatic plan in the first place and much taxpayers' money has been wasted in the process. i think we should be able to claw back the losses from those who initiated such a monstrosity.

There's only one real problem here (leaving aside whether we can in fact surcharge a Minister) and that's well, why should it only be Prescott? We've this thing called collective ministerial culpability and at least some of the last lot were nominally adults so why should they get off scott free for allowing this plan to go through?

Bankrupt the lot of 'em pour encourager les autres. But only bankrupt them mind: the Royal Navy no longer has enough quarterdecks to take more traditional measures on.