Cocaine, conifers and casinos

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Well, that was a depressing week what with the government’s Autumn Statement, the Bank of England’s Financial Stability Report and a public service workers’ strike. By the time Jeremy Paxman wrapped things up, you could hear the nation sobbing under its threadbare duvet. That other great Jeremy from the House of Clarkson tried to jolly us all up but underestimated the sanctimony of the thought police.

If it all led you to drink, you may have missed these developments from the real world.

Police drug experts report that 11% of banknotes in circulation in Britain are contaminated with cocaine, up from 4% in 2005. Bank of England stats show there were a total of 28.4 billion £5, £10 and £20 notes floating around in 2005. That’s risen to 38.8 billion such notes in circulation now and means some 4.3 billion (yes, billion) notes are currently contaminated with cocaine, up from 1.1 billion in 2005.

Lessons to be learnt? Cocaine consumption has quadrupled in six years and quantitative easing is more inflationary than previously believed. Or maybe there’s just a lot of dodgy statistics out there.

Meanwhile, there’s a shortage of tall Christmas conifers this year and it’s all the EU’s fault. Seven years ago, growers in Ireland and Denmark lost EU subsidies for tree plantations so they planted other crops that still attracted subsidies. The long-term consequences mean  there’s few trees now between seven and 10 feet tall. Even when the EU does the right thing, Britain loses. At least we know industry is still pretty good at responding to price signals.

Finally, those entrepreneurs at Westfield in Stratford have opened Britain’s biggest casino in Europe’s biggest in-town shopping centre. Some 120 souls were queued up at midnight on Dec. 1 for the grand opening, an encouraging sign as Britain makes a determined push for dominance in yet another industry. According to the European Casino Association, Britain had 141 casinos in 2010 pulling in revenues of €903 million, up over 11% on a year earlier, well behind France in the No. 1 spot with €2.32 billion but safely ahead of No. 3 Switzerland’s €700 million.

Prospects are good. With casino banking under assault, we may as well cut out the middlemen now and get straight to the gambling. Paltry returns for savers, high inflation and stifling taxes make casinos look good by comparison. Again, nice to see a rational response to prevailing market conditions but surely a signal to policymakers that saving and hard work need better rewards.

Why bureaucratic diktat just doesn't work

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What we have here, with the bureaucrats trying to make rules for us, is analogous with the security problems faced by computing devices. Yes, we can have lots of very clever people trying to stop us do something, trying to guide us into the path of righteousness, but there are billions of us and we'll almost always find a way around the rules being imposed upon us.

Thus computers still get infected with viruses and you can still get a toy with your Happy Meal in San Francisco. The background here is that the local politicians decided that having a toy with a hamburger meal was just tempting the little ones into having a hamburger. Naughty, tsk tsk.

So, they said you can no longer give away a toy with a hamburger meal.

The reaction has been that, OK, we won't give away a toy with a hamburger meal. You make a 10cent donation to charity alongside the purchase of a hamburger meal and you can have the toy. What a neat little solution you might think.

Except, it gets better than that. Previously, if you just wanted the toy and a salad (or something similarly defined as "healthy" for the little one) you could buy whatever food you wanted and also pay $2,18 for the toy. Cheap at the price as anyone with young children can tell you. However, now, you cannot: you can only have the toy for that 10 cents plus the price of the greasy hamburger meal that comes with it. It is now toy plus unhealthy food as the only option.

This isn't what the bureaucrats wanted at all. But it is what they got. And of course there's more than a sneaking suspicion that the new system has been deliberately designed to thumb a nose at the bureaucrats.

But the basic lesson is that we are, all together, in aggregate, cleverer than the bureaucrats. And so we will always win over whatever rules they come up with.Which is why they really should leave their prejudices at home, stop making such rules and allow us to get on with it as we wish in the first place.

Finally I understand the euro game: it's a game of chicken

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Apologies, it's taken me a long time to finally understand what is going on over in the eurozone. The curtains lifted when I saw this Greg Mankiw post. My conclusion is a little different, but the thought that there was a deal is what triggered my understanding.

For, you see, there's a very simple explanation for what is happening right now: they're mad or ignorant, one or the other. Leave aside all the stuff about banks, about government borrowing as well. What we're right in the middle of is a collapse in the money supply. And that's something we really don't want to have. It's not actually a necessary condition for a recession, depression, there are plenty of other ways those can come about. But it is a sufficient condition for such as Uncle Milt and Anna Schwartz showed in their analysis of the Great Depression.

Whatever else we're going to do, don't let the money supply fall!

And yet the money supply is falling, right across Southern Europe. We're getting falls of 10-20%, higher even in some countries. This is when a central bank should simply be printing money and buying any and every bond in sight. No, it doesn't matter about anything else, not in the midst of such a monetary contraction.

But this is exactly what the ECB refuses to do, the quantitative easing that both the BoE and the Fed have done, just as Friedman would insist they should (and Ben Bernanke has specifically made the point that the Fed isn't going to make the same mistake that Friedman identified they did in the 30s).

Now, I had thought that the ECB were simply ignorant of all of this but I've changed my mind now to thinking that they're mad. There's a deal afoot you see: the ECB is only going to start printing, buying bonds and monetizing the debt once everyone has signed up to the new Europe of coordinated budgets and strict fiscal policy. In one manner this is fine: the carrot and the stick to bring everyone into line. You agree to be good boys in the future and we'll take away the current economic pain.

There are however two problems with this deal. The first is that it's by no means certain that everyone will agree. The second is that it's almost impossible that they will agree in time: politics takes a long time to bring anything to fruition and this falling money supply matter is something that has to be dealt with in the next week or two.

So what we've really got here is a giant game of chicken: the ECB is driving the car of no monetisation, no QE, full tilt at the politicians coming the other way at full speed declining to agree to full fiscal union. One or other must flinch, turn away, or there will be the most almighty smash.

At which point I plump for the explanation that they're all mad. For I don't think it is possible for there to be the necessary political agreement before it will be too late to do the monetary easing.

Have a cheerful rest of the weekend.

ASI poll: public doesn't want to pay for political parties

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There's been a lot in the news lately about the prospect of the taxpayer funding political parties. Sir Christopher Kelly's committee on political funding recommended it last week, and there are reports that the Deputy Prime Minister is privately in favour as well. I can't think of a worse idea – it would massively entrench the current political class, apart from being pretty revolting to actually have to pay people to lie to us. An Adam Smith Institute-commissioned poll by ICM Research, released today, shows that the vast majority of the public agrees. We asked:

"Do you think that political party funding should come mainly from taxes or do you think it should remain as it is now, with funds from party members, businesses, trade unions and wealthy individuals."

The results were as follows (with the answers to the same question in 2002 in brackets):

Party funding should remain as it is now 71% (58%)
Party funding should come mainly from taxes 16% (26%)
Don't know 13% (16%)

In other words, the public were against the proposals in 2002 and are even more against them now. Well, good. If politicians want to persuade us to vote for them, let them do so using money they've raised through voluntary donations, not coercive taxation. Subsidies for existing parties would act as they do in the private sector – protecting them from new competitors and locking us in to the same parties we're stuck with right now indefinitely. I can't sympathise with the idea that politicians are like children, who can't be blamed for their own corruption – I want a stick to be used against wrongdoers, not a carrot to bribe them into good behaviour. Of course, free money is attractive, but with any luck, polling results like this should put this silly idea to bed for good.

ASI Senior Fellow Tim Ambler writes on this poll at ConservativeHome here.

Immigration policy is moving in the wrong direction

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When governments criminalise something they incur costs and lose revenue. The losses, therefore, are twofold.

Take the example of drugs. We make no duty, or VAT, on drugs; there are no drug companies paying corporation taxes, and no employees paying income tax. No shops or cafes are appearing on high streets. It isn’t a nice side-line for small pubs and off-licences.

And, the government has to pay the astonishing costs of policing the vast black market they have created, and then prosecuting the few people they do manage to catch, and then jailing the ones who are found guilty. And there are the border controls to pay for, and the NHS for people who overdose. And the effects of the crime that happens because of this black market probably lose the government more revenues.

This doesn’t make much sense. The rule of thumb is that prohibition costs money and limits opportunities. And this is equally true of immigration. Banning immigration is as silly as banning drug use: it doesn’t achieve what it says it will.

There are costs for border controls, detention, tribunal and appeals, policing, endless Home Office and Border Agency officials to do the administration – all spent to keep out people who would improve the economy.

And there’s more. We learned last week that the cost of detaining and deporting illegal immigrants has increased by 50% in four years. That is the wholly expected result of John Reid’s announcement four years’ ago yesterday that there was going to be a crack-down.

Detaining and removing illegal immigrants cost £35.5 million in 2006-07 and £51.7 million last year. The total cost since 2006 is £273 million. Small beer the anti-immigration Right would say. And that is true enough. We aren’t going to pay off the deficit by saving £200 million over four years.

But what about the lost revenue? We know that migrants diversify the labour market, allowing more specialism, enabling resident workers to earn more money – and to avoid doing the menial jobs they would rather avoid. We know that they contribute more in taxes than they use in services. We know that they make a significant contribution to GDP growth.

But the protectionist policy of limiting migration doesn’t stop there. If you come here legally to work the government requires you to have a minimum salary of £13,000 in order to bring any dependents over – such as your spouse. This is now being increased to reduce family migration by between 40% and 60%.
Despite the fact that a fifth of all the growth that occurred in 2004 and 2005 was solely attributable to immigrants, the government is making it harder for people to come here with their family.

All of this will lead to a reduction in people who would be net contributors to the economy, either through taxes, labour diversification, or contribution to growth. There is a slow recognition that banning drugs causes more problems than it solves. Hopefully people will be able to see that the same is true of restrictive immigration laws.

Henry writes the blog for Mulberry Finch.

Unfortunately, work subsidies don't actually work

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Within the autumn statement, one proposal in particular caught attention, and it was a policy earlier announced by the Deputy Prime Minister Nick Clegg. The UK government wants to subsidize businesses in hiring young unemployed workers, precisely from the ages of 16 to 24, by offering £1bn to the private sector to take young workers into apprentice schemes.

Under a typically political decision and explanation, youth unemployment is supposed to be tackled by offering money to private sector firms to take on temporary workers so that the young might get more experience. How this is supposed to create value for the private sector and how is such a policy sustainable in the long run, no one in the government knows or cares about.

The coalition is obviously desperate to cut youth unemployment as it fails to see the paradox in its claim that a subsidy to employ a young person is a way to create “lasting” jobs in the private sector. A temporary subsidy will be of just that effect – it will be temporary. Even if it does produce some youth jobs this won’t be due to an increase in real demand for workers, but due to an artificial increase in demand for workers.

A private sector business will be able to assess by itself the best whom to hire and how long to keep them. By creating a distorted incentive the government is directing the firms’ employment policies. In a crisis of confidence with many lay-offs it is natural that the young suffer the most. They lack the experience older laid-off workers possess and cannot compete with them. By creating a subsidy to employ only the youth, the government discourages hiring of older workers and distorts the labour market against them (discriminates against them). These are not just too old workers, but all those older than 24, meaning that younger workers, university graduates, still may get discriminated against. A subsidy, wherever it is enforced, will always yield similar effects – it will distort the market in favour of the subsidized and against every other market participant. In addition, the effect is always temporary and works only if the subsidies carry on indefinitely, which is of course extremely costly.

Subsidies create a political market for the companies to compete on. The difference is they don’t compete for customers, they compete for bureaucrats, or more precisely the favourability to bureaucrats in extorting funds.

A far better idea would be to create incentives for hiring temporary workers, not via subsidies but via decreased taxes and cutting employment regulations to encourage businesses to start hiring again. An NIC holiday for small businesses (actually proposed by the Chancellor) or removing it altogether, lower income taxes for the young, removing any regulatory confinements for hiring temporary workers and those on zero based contracts, reducing the rigidity of dismissal rules, removing financial repercussions for employers and further reform of the employment law. These are just some of the policies that would work much better than a subsidy.

First of all, they will cost less to implement. There will be no need to increase public spending and waste resources. Second, a tax cut creates a completely different incentive to the private sector business. Instead of competing for public money, it will decrease its costs by hiring another worker. It will lead to lowering of the entire unemployment rate and create more scope for businesses to make higher revenue. This will eventually decrease youth employment as well, as it will go down once the economy starts recovering with a higher pace.

In addition, if they really want to help the young get more working experience there is a particular policy decision preventing the young to do so – minimum wage. By removing the minimum wage for young workers the government will make it much more affordable for the private sector to offer them temporary jobs and work placements. The young are willing to work for a lower rate than the market rate to get some work experience. This is why they engage into internships and volunteering, hoping to get more experience and be more competitive on the market. Removing the minimum wage would yield exactly the effect Nick Clegg is hoping for – it will offer more jobs to more young people and help them get more experience. The subsidy, on the other hand, will fail to result in the same effect and is a prime example of wastefulness of the taxpayers’ money.

The planned chaos above us

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The House of Commons Transport Committee has called for evidence on the government's draft Civil Aviation Bill.

Well, here's my opinion. The first thing to note is that in a desperate bid to look 'green' for some reason, the government has decided not to go ahead with an extra runway at Heathrow but instead waste billions carving new high-speed rail lines through rural England (which doesn't seem to be too environmentally friendly either). And if you want to know what a bad proposition high-speed rail is, you need look no further than Nigel Hawkins's excellent ASI report on it, High Speed Fail.

Get real. London both needs and benefits from having a 'hub' airport at which people who are on their way to places – from the US to Europe and the Middle East, for example – can simply change planes without hassle. Sure, they are not coming into the city and spending vast amounts in the shops, but the business of handling all those planes and passengers is a nice little earner. Heathrow always occupied this hub-airport role in Europe. But now this business is moving out to other airports in France, Netherlands and Germany. London airport expansion has happened piecemeal, so as not to offend too many locals – and so we have Healthrow, Gatwick, Stansted and City Airport (and maybe even Luton if you like) rather than one big hub. And getting between them is a nightmare, so changing planes in London is becoming simply impossible on many journeys. So the first step is to build the new runway at Heathrow, to give breathing space while a new Thames Estuary airport is developed.

What the Bill won't say, of course, is that we should use the market to sort out the problem of congestion over London. Take-off and landing slots at Heathrow should simply be auctioned to the highest bidders. Then, the airlines and services that really needed to be at this full-to-capacity airport would get to be there, while others to whom the Heathrow location was marginal would up sticks and move to one of the other airports. Right now, British Airways occupies 40% or more of the take-off and landing slots at Heathrow, and will acquire even more if they acquire BMI through Lufthansa. Why should anyone pay good money for a heavily loss-making business like BMI? It makes no sense unless you can acquire more take-off and landing slots.

But at present, the whole business is opaque. We are not told what airlines pay for take-off and landing slots at Heathrow. Why not? The fact that British Airways moves heaven and earth to acquire new ones by buying decrepit airlines, and that it tries so hard to keep out other operators, and that it resists the idea of auctioning the slots so furiously, all suggests that the slots are worth many billions of pounds. If you can raise £22.5bn from auctioning mobile telephone licences, how much do you figure airport slots are worth?

The unions strike again

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The public sector strike today will be an inconvenience to many people – schools will be shut, university lecture halls will be even emptier than usual and most public servants’ jobs won’t be done. The reasons for striking are understandable – many people in the public sector will have to wait six years longer for their occupational pensions than they expected – but not exactly defensible. There’s no reason that public sector workers should, by default, have an easier ride than private sector workers. Being a nurse in a public hospital is difficult work, but surely no more difficult than being one in a private hospital.

Under current rules, working for the state brings with it quite a few benefits already: the biggest one is probably that your employer isn’t likely to go out of business. But the other big benefit is that the things your employer does are subject to public approval. Whereas a private company can lay off workers as it needs to, and negotiate benefits on a case-by-case basis without a huge worry about the PR impact it will have, the government’s actions are almost entirely driven by a quest for popularity. Argos can sack people as it has to in order to stay profitable, but sometimes governments prefer to go broke than do the unpopular but necessary thing.

For public sector unions, a strike is a great way of taking advantage of this strange situation. I have a bit more sympathy for the people marching today than, say, tube drivers on £50,000 a year demanding more or people marching against layoffs in general, because this pensions change will force a lot of people to reconsider their life plans. The change needs to be made, though – there isn’t any money left, and there’s no reason public sector workers should get an easier ride than private sector ones.

Really, the system is to blame: it is madness to have a pensions system that’s funded out of current expenditure. For that to work, it requires a constant influx of people either through immigration or fertility. Neither appear to be on the cards. A far better system would be one like Chile’s, where people save throughout their lives for their own pensions, which they own and can invest as they like. That’s robust to demographic changes and makes people less dependent on government as well. The real challenge is figuring out how you get from here to there – maybe that’s what the unions should be thinking about instead of spending their time trying to squeeze the current system for all it's worth.