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"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

Bitcoin is poised to shake the world- are you paying attention?

Written by Michael Taylor | Thursday 07 November 2013

If you thought technology was already disruptive enough, here’s the news. We’re just getting started.

The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.

There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?

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Rare sensible move from Mario Draghi and ECB

Written by Ben Southwood | Thursday 07 November 2013

Nominal interest rates cannot be brought below zero, because non-cash assets can be sold for cash, which always effectively bears an interest rate of zero. Monetary policy affects the economy through changing nominal interest rates, which given somewhat sticky inflation changes real interest rates, which affects spending, saving and investment decisions—a cut in the interest rate makes saving more expensive and investment cheaper. Essentially working on these two facts (there are much more complex versions, but this is the core) New Keynesian economists argue there is a "zero lower bound" on monetary policy. The Fed cannot support demand by targeting a Fed Funds rate lower than zero, the Bank of England cannot support demand by lowering Bank Rate any further than zero, and the same for the European Central Bank. This means, they say, fiscal policy is necessary to stabilise demand when the interest rate that would be needed to do falls below zero.

Now I think this argument is false. Monetary policy does not mainly work through interest rates. Monetary policy mainly works through affecting consumers' and firms' expectations about future demand conditions. But even if this argument were true, the simple Keynesian story—that fiscal policy must be employed to get the Eurozone out of recession because monetary policy is ineffective at the zero lower bound—will not fly. Why? Because the ECB, headed by Mario Draghi, cut interest rates by 0.25% today, bringing them from 0.5% to 0.25%. The ECB was not yet at the zero lower bound.

Monetary policy doesn't seem to need long and variable lags of the type typically assumed in models. As I write, the Euro is down 1.4% against the dollar 1% against the pound and 0.7% against the yen. The Bloomberg 500 measure of European stocks is up 1% and the Euro Stoxx 50 measure is up 1.3%. That means the value of the Euro has already fallen. That means that money is already slightly easier. If there were a good measure of nominal income expectations—the best definition of money easiness or tightness—I'd wager that that would be up.

It's true that this is unlikely to be enough. Nominal GDP is not growing at pre-trend rates, never mind catching up to the pre-recession trend. The ECB is letting the euro area slip into deflation when it is barely out of its double-dip recession. Sovereign debts have grown to eye-watering levels despite very tight fiscal policies in many of the hardest-hit member nations. And none of this is to mention the excessive regulation and badly-designed tax systems that contribute to low long-run productivity growth and high rates of unemployment even in good times. But it's both a step in the right direction, and evidence against the simplistic Keynesian arguments that get trotted out all too often in macroeconomic debate.

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Woo time on tax poverty

Written by Tim Worstall | Thursday 07 November 2013

Yes, it's still tax poverty week and the claims about moving from the current minimum wage to the living wage are coming in thick and fast. The latest piece of woo on offer is this:

Unlike previous research, today’s Landman Economics Report looks at what would happen to the jobs market as a result of the stimulus to the economy from raising the pay of millions of low paid workers to the Living Wage. More people spending money in local shops and a reduction in the amount the government needs to spend on in-work benefits. The report finds that, when you take this into account, shifting the NMW up to the Living Wage could create an extra 58,000 jobs.

Howard Reed manages to reach this amazing conclusion, that raising the price of labour will lead to an increase in the demand for labour, by simply assuming away the effect that raising the price of labour will have.

For these two reasons, I have assumed here that the short-run impact of reduced profits on consumer demand is zero.

There won't be any bad effects because I have assumed in my workings that there won't be any bad effects. That's bringing the eonomist who assumes a can opener into disrepute.

I have to admit that I much prefer this point made by my fellow Fellow, Gavin Kennedy:

Employee tax payments go to the government, so removing them for the ‘Living Wage’ does no affect employment because the total wage cost remains the same, and does not have detrimental employment affects.

The argument against raising the minimum wage is that yes, there really will be unemployment effects. The argument in favour of reducing the tax bill on those in employment is that it will still increase their incomes but it will have no effect whatsoever on unemployment. Indeed, removing, as Gavin points out, the employers' NI would probably increase employment.

As before, we do not have a problem with low wages in this country, we have a problem with taxes being too high on the lowly paid. It is all a matter of tax poverty, nothing else.

And now for the ritual conclusion: if you want the lowly paid to have more money then just stop taxing them so damn much.

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The value to us of Sainsbury's is not the amount of tax that they pay

Written by Tim Worstall | Wednesday 06 November 2013

This is a slightly strange thing for a businessman to be saying:

Justin King, chief executive of J Sainsbury, has challenged business leaders to “stand up” and reveal their tax practices, arguing that “tax is a moral issue” for British companies.

The supermarket boss argued that “consumers have every right to ask” how much a company is putting back into the country where they operate and make their profits. Speaking on a panel about Business Trust at the CBI annual conference he said that he “strongly disagreed” with those - including the CBI - who have said that company tax bills should be based on the letter of the law, not social responsibility.

He told the CBI conference: “How we do business, how we put back into the community of which we are a part, put back into the society from which we draw our revenues is a moral issue and it’s one that our consumers have every right to ask us.”

How Sainsbury's put back into the society they draw their revenues from is by drawing those revenues. Their job is to be a grocer for goodness sake: to provide us with somewhere we can attain nirvana with 15 brands of baked beans and 17 of toilet paper. That's the point of them, the only point of them. If we didn't think we gained more value from their existence and services than we would from their absence then we wouldn't shop there. Thus, given that we do shop there we must value their existence and the services they provide.

And that really is the end of it I'm afraid. How many people they employ to provide these services, what profits they make, what bite the government takes out of their revenues or profits are all entirely irrelevant things. The contribution Sainsbury's makes to our society is that we have somehwere to get beans and bogroll from.

Nowt else.

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Yes, it's still tax poverty, not a Living Wage

Written by Tim Worstall | Tuesday 05 November 2013

So we've had the announcement of the new Living Wage rate: that level of income which allows a full year, full time, worker to earn and not be in poverty in the UK. That definition being, rightly, what people think people should be able to do and not be in poverty: as with Adam Smith's linen shirt.

That number that has been announced? 7.65 an hour.

But as I have been shouting for years that is a pre-tax number: that's the earnings before the State gets its grubby mitts on these paltry earnings of the working poor.

If you do work full time full year at that Living Wage rate you'll get 14,917.50 over the course of the year. I don't think that's a large amount and I'm sure that you don't either. Which is why it is so appalling that at this low level of income said Living Wage worker will be charged 1,095.50 in income tax and 1,110.00 in employees' national insurance. For a net income of 12,712.00

Compare and contrast this with the 12,304.50 that someone would earn on the national minimum wage of 6.31 an hour, if no tax were charged on it, and we can see that what we have here is not wages which are too low, it is taxes which are too high.

And of course there is also employers' NI of a further 1,100 or so: opinions differ as to how much of that is really carried by the employee, most to possibly all being the general view.

The reason that the national minimum wage is not a living wage is because government taxes the working poor too much. We do not have a low wage problem at all, we have instead tax poverty.

And, as is ritual now on this point, if you want the working poor to have more money just stop taxing them so damn much.

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Curb the ministerial credit card

Written by Ian Byatt | Monday 04 November 2013

Attention has focused on energy bills, but Britain’s water industry has its own troubles –drought orders, hosepipe bans, and tariff hikes.  The new management at water regulator Ofwat should focus on changing the counter-productive incentives that are damaging efficiency and choice.

Because companies are regional monopolies, regulation involves careful balancing between enabling companies to finance investment, and protecting customers from higher prices. It’s now time to tip the scales: the drive towards attaining ever-increasing water and environmental quality at an ever-increasing cost must come to an end.

Following reductions in real incomes, the 2014 Ofwat price review should set below-inflation price limits that would give nominal stability to the tariffs paid by customers.

The focus on environmental improvement has driven up costs for consumers and choked supply. Massive investment has been financed by rising tariffs. Now it is time to intensify the search for more cost-effective – and less capital intensive – methods.

Ministers have treated regulatory financing arrangements as an environmental credit card, with too little concern for those paying the bills. Take the Thames Tideway – a major new sewer under the Thames at an estimated cost of £4bn, the need for which may arise from neglect of sewer maintenance. The objectives of dealing with storm water could be dealt with much more cheaply than by a grandiose tunnel project.

More use should be made of markets. Retail competition – along Scottish lines - should be extended . There should be more trading of raw and bulk water, including supplies from independent providers.

Existing company networks should be linked to enable water to be transferred, by trading, from the water rich North to the thirsty South, reducing the incidence of hosepipe bans, giving choice to customers, and incentives to companies. Extension of metering should be linked to the use of pre-payment devices that would reduce bad debt by helping customers to budget for their water bills.

And water companies, especially when private equity owned, need to improve their governance: footloose global money has now acquired ownership, and should behave more responsibility to its customers.

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Chart of the week: Deflation risk as Eurozone inflation falls to 4-year low

Written by Gabriel Stein | Monday 04 November 2013

Summary: Euro area inflation is at a 4-year low; a bout of falling prices in 2014 is possible

What the chart shows: The chart shows the twelve-month per cent euro area inflation, headline and core,

Why the chart is important: Deflation, like rapid inflation, is bad for countries. This is even more the case when there is a debt overhang, as there currently is in many euro area countries. A number of factors highlight the risk of falling prices in the EA in 2014. Broad money growth is once again slowing. There are large and persistent negative output gaps in all EA countries, showing substantial slack in the economy. The euro is now more likely to rise than to fall. And, finally, the scope for further increases in taxes and administered prices is limited. In theory, the ECB could easily avert deflation by boosting broad money growth. But technical problems and a disinflationary bias mean that this is unlikely to happen. The most we are likely to see are, in order of likelihood, a cut in the policy interest rate; the introduction of negative interest rates for bank reserves held with central banks; and attempts to talk down the euro. The first and the third will have little effect, the second may prove somewhat useful. 

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Libertarian film screening of V for Vendetta

Written by Blog Editor | Monday 04 November 2013

Tom Stringer has arranged a really fun Monday evening outing on Monday November 4th.  It's a showing of the movie "V for Vendetta" at the Bowler Bar and Pub in Clarkenwell. The screening starts at 7, but people can arrive from 6pm onwards and there'll be plenty of time to chat with fellow libertarians. There's an amply stocked bar and what's more there is a free drink for every attendee courtesy of EzyOrder when you arrive (all you need to do is download their app onto your smartphones).

You can purchase your tickets here.

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Welcome To Tax Poverty Week

Written by Tim Worstall | Monday 04 November 2013

 

Someone or other has decided that this is Living Wage Week. A far better name, one that properly describes the reality, is Tax Poverty Week.

I've a long piece here laying out the basic argument. Cutting to the chase the core arguiment is very simple. The sugggested Living Wage of 7.20 an hour is a pre-tax wage. Once you've taken off the tax and NI due on that sum the resulting post-tax income is only 50 pounds a year different from what the minimum wage untaxed would be. Therefore the minimum wage is indeed the living wage except for the depredations that government makes into the pocketbooks of the poor.

That is, the poor are being taxed into poverty, it isn't that employers are paying too little. So let's start calling it what it is: tax poverty.

So my suggestion for this coming week is that every time someone mentions the living wage we should just replace that mention with the phrase "tax poverty".

And then we've got a truly ludicrous suggestion:

Miliband will pledge that in the first year of a Labour government firms which sign up to the living wage will receive a tax rebate of up to £1,000 for every low-paid worker who gets a pay rise, funded by tax and national insurance revenue from the higher wages.

You what? Someone is suggesting that we make sure the working poor have more money by taking more off them in tax?

Eh?

It's really terribly, terribly simple. The UK tax system dips into incomes too far down the scale. Thus if you want the working poor to have more money please, just stop taxing them so damn much.

Intending to tax them more is an insanity worthy of a lunatic asylum.

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So, does competition work in health care or not?

Written by Tim Worstall | Sunday 03 November 2013

We can all refer to theory about whether competition, markets, works in health care or not. There are still those who insist that competition and markets never work at all (yes, sadly, still some antediluvians out there) and even I will agree that there are areas of life where markets, pure and unadorned, are not the optimal solution. The question is though, well, do markets improve heatlh care provision or not?

Fortunately, we've an answer. This is the final version of a paper that looks at what happened in NHS England a few years back, at a time when NHS Wales and Scotland did not take the same market opening path. We can thus compare and contrast what happened in England against the other two, further we can look at those areas where there was more competition in England and see what happened. Interesting results:

The effect of competition on the quality of health care remains a contested issue. Most empirical estimates rely on inference from nonexperimental data. In contrast, this paper exploits a procompetitive policy reform to provide estimates of the impact of competition on hospital outcomes. The English government introduced a policy in 2006 to promote competition between hospitals. Using this policy to implement a difference-in-differences research design, we estimate the impact of the introduction of competition on not only clinical outcomes but also productivity and expenditure. We find that the effect of competition is to save lives without raising costs.

That seems pretty clear, doesn't it? Lives saved with no more money expended simply by bringing in a bit of market discipline?

We'd probably better have some more of that market discipline, hadn't we?

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