Madsen's right about regulation and small business

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Well, I mean of course Madsen's right about regulation and small business. But I have more evidence to back me up on this than just the usual desire to agree with my boss. Here's John Robertson at the Atlanta Fed.

The situation in the US is the same as it is in the UK. It just isn't big business which produces the growth in jobs: in fact, big business usually sheds jobs in any one year. The engine of job growth, as well as the engine of innovation, in the economy is not even small business: it's new business. New people trying out things in new ways, that's really what drives the whole system forward.

And in the US at least we can see that there's been a decline in the rate of new business formation. There's also been a decline in the size (ie, the number of jobs created by those new businesses) of the new businesses created.

This is not a macroeconomic problem, not one to be explained by boom and bust, lack of aggregate demand nor even the rate of taxation or of government spending. This is purely a microeconomic problem: something is wrong with the basic job creation and innovation engine of the economy. And microeconomic problems have microeconomic solutions.

Now I have set up businesses: in several different countries at various times. Like most who do so I've never had a big hit, I'm not some multi-millionaire, but I do have real experience of the hoops and loopholes that you've got to get through to get a business up off the ground. In some respects the UK is just great: it's £20 to register an LLP for example and registering for VAT is simplicity itself. In others, in the regulations around the employment of staff (as Madsen points out) we're burdening the weary entrepreneur and thus dissuading them from doing so. This might shock some but I've great sympathy for many who operate their businesses entirely illegally: I've worked in a country where that was the only way it was in fact possible to run a business, simply by entirely ignoring the State and its rules.

No, I don't desire that for the UK: not yet at least. But if we want to get the Great Jobs Engine moving again then we do really need to cut the regulations on new business. That bonfire of the red tape which we've been promised but which still hasn't arrived. In essence, we need a bit more of that capitalism, red in tooth and claw, rather than the endless paperwork of social democracy.

The gun debate fires off

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gunAfter the looting, public confidence in police, society and law has been severely shaken. So shaken, in fact, that the taboo on the gun debate appears to have been lifted. Along with outlandish calls for national service, curfews and media bans, many are now seriously asking why we trust such a small police-force to defend a largely unarmed population. During the riots themselves, those who did not band together in large numbers to protect their own communities, like the residents of Enfield, or the Sikhs or Turks, found themselves questioning why they must be so helpless.

Many in the UK are puzzled by the extraordinary popularity of guns in the US. Along with appeals to the Second Amendment of their Constitution, totally irrelevant in this country, the intelligent pro-gun advocate's position may be summed up by a quotation from science-fiction writer Robert Heinlein: "An armed society is a polite society".

In essence, a well-armed population is not only able to defend itself from foreign aggressors or its own government's potential tyranny, but it works as an effective deterrent from crime, and allows self-defence regardless of strength. You don't try to mug even the weediest guy who could pull a gun out on you. However, pro-gun advocates have to take an all-or-nothing approach in order to get as close to the ambiguity and high risk required for a deterrent to be effective: not only do they argue for widespread possession, but for the right to carry weapons with them at all times, and the right to carry concealed weapons.

After all, if guns are only allowed in the home, then street criminals are hardly going to be dissuaded, though burglars (and looters) might. If guns can be carried, but must be revealed, then criminals need only look at their potential victim before deciding to attack. And finally, it guns are legal yet uncommon, then the chances are that only criminals will purchase them with intent. To this end, some push for a culture of gun-owning, as well as ambiguity.

There are many good counter-arguments. Some cite culture as being a necessary precondition: not every country is like Switzerland (where gun ownership is more or less compulsory, and may explain why it has never been invaded), so gang culture can be a concern. Others reject the usual mantra "guns don't kill, people do" to say that tragic crimes 'of passion' are more likely to occur when the drunk or furious have immediate access to firearms. Finally, some just don't want to live in a country that is armed to the teeth, no matter how polite, just as one wouldn't replace seat-belts with a metal spike pointing at drivers' hearts to promote safer driving. Whatever your position, the taboo has lifted: the debate needs to be a serious one.

Anton Howes is Director of the Liberty League.

The resurgence of inflation

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One of the most potent economic lessons of the last century was the dreadful impact of inflation, most dramatically demonstrated in Weimar Germany in the 1920s. The UK’s last serious encounter with seemingly uncontrollable inflation was back in the 1970s when the rate reached 26.9%. Such high levels of inflation, though holding undoubted attractions for debtors, seriously distort the equilibrium of the economy. Moreover, once ingrained in the system, inflation is very difficult to eradicate.

In recent months, the Bank of England’s anti-inflation stance has been remarkably laid back, especially given the MPC’s remit on controlling general price levels. Tuesday’s CPI figures were not good. Inflation reached 4.4% in July and may exceed 5% shortly, especially since three major ingredients – food, utilities and transport – all have further price increases in the system. Worldwide agricultural prices continue to rise, whilst the ‘big six’ utility companies are pushing through double-figure price increases, primarily due to higher input costs and massive investment requirements. Furthermore, July’s CPI figure, to which many rail fares are linked, will cause the latter to rise by some 8%.

High inflation seriously dissuades saving; it particularly impacts retired people. Although they may not shout too loudly about it, the reality is that, since the financial crisis in 2008 and the subsequent recession brought about ultra-low interest rates, returns to savers have been minimal. Many will argue that raising interest rates now will damage the UK’s already lacklustre growth rate. Perhaps so. The basic lesson, though, is never lose control of public borrowing as happened under the previous Government. Similar comments apply to inflation.

After the huge borrowing splurge of the last decade, it will take many years – perhaps even a decade - to re-create an economy, based on high growth, low borrowing and minimal inflation. Despite the weak economy, rising inflation should not be regarded, as is so often the case, as tomorrow’s problem.

A small step to a big improvement

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taxThe government has correctly realized it cannot spend its way out of debt. It has not, however, paid sufficient attention yet to the supply side, to helping create the right climate and conditions for economic growth. The debt, big though it is, will look smaller in a larger economy.

There is one simply supply side measure that could boost growth rapidly. It is to make life easier for small businesses so they can be established, grow and expand, and create the new jobs that will cut unemployment and dependency.

The record of small businesses is there for all to see. Companies with fewer than 100 employees create roughly two-thirds of all new jobs. Yet life is by no means easy for them. These firms, which account for nearly half of all employment in the UK, have to spend time calculating PAYE tax returns and National Insurance for their employees, when they would rather be out generating more business and creating more jobs. And they have to cope with a swathe of regulations that take time to comply with and hamper their ability to expand.

The one big supply side measure to unleash them would be to allow those who work for small businesses to be registered as self-employed. The employers would not then face the burdens of paperwork. They would not have to cope with statutory sick pay, holiday pay, maternity and paternity leave and a host of other regulatory requirements. Big firms can set up departments to deal with this, but the small employer who hires a handful of people gets bogged down in a quagmire of costly red tape.

Of course the Treasury will resist. They have spent 20 years trying to force self-employed people into 'employed' status so they can collect tax from them more readily. The Chancellor should force his Treasury to look at the supply side. New jobs mean people being paid wages and spending money, some of it in High Streets. They mean people coming off benefit. They mean a growing economy and a broader tax base.

Small businesses could simply send the names and contact details of their staff to HM Revenue and Customs, and pay their staff as self-employed people under contract. It would be a simple reform, and one that could give the economy a jump start where it matters most – in the sector that creates the new jobs and growth.

We live in reactionary times

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We live in reactionary times. Curfews, national service, and the suppression of an entire medium of communication have all been seriously suggested over the past week in response to the riots. While the prospect of these measures being enacted are thankfully still slim, the fact that they were considered, let alone voiced should be alarming.

Curfews were among the stupider ideas. Creating yet another victimless crime, and lowering respect for the law with a silly and oppressive rule, it would have lent itself to corruption too. You also can't get much more nanny-state than a bedtime. Even setting the ideological case for civil liberty aside, curfews would have been impossibly impractical, requiring a myriad of special exemptions, damaging the economy, and causing huge inconvenience to millions of innocent people.

Wild calls for national service meet similar problems. For a start, it fails to address the problem: authority and enforced 'community engagement' are not the answer to a culture of unjustified entitlement and social atomisation encouraged by the impersonal entitlement state. You also don't encourage a culture of volunteering and socialising by enforcing it, a contradiction in terms.

Even for its own sake, the measure would display a worrying and growing tendency for the state to assume that it owns your time. This is before we even get into the huge impracticalities of any national service scheme, along with the opportunity cost of taking the time out to perform it. Lastly, it would be the culmination of a renewed tendency for demonising entire groups, in this case all young people, regardless of individual circumstance. As a policy that sees only groups, doesn't solve any problems, inconveniences millions, tries to artificially create communities by force, and allows the state to claim ownership of your time, I cannot think of a more stereotypically socialist measure.

Lastly, the blame laid at the feet of social media could not be more absurd. Shooting the messenger has never been the way to win any war, and the 'war against gangs' is no different. By David Cameron's logic, as Charlie Brooker puts it, "perhaps the government could issue us with gags we could slip over our mouths the moment the sirens start wailing".

Anton Howes is Director of the Liberty League.

Madsen on inheritance

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Madsen featured on the Radio 4 programme "Iconoclasts" last night (the repeat broadcast is on Saturday August 20th). Julian Le Grand, LSE Professor of Social Policy and one of the thinkers behind New Labour, was arguing the case for Inheritance Tax to promote equality of opportunity. He wanted the money raised from it to be set aside to fund 'baby bonds' with£3,000 for every child.

Madsen took the view that opportunity is more important than equality. He pointed to the benign effect of inherited wealth in encouraging parents to create wealth to give their children more opportunities in life than they had themselves. He said that the death tax can destroy businesses and dissipate the pools of capital available for investment in the new businesses that generate economic growth and so many of the new jobs. Family businesses, built up and passed down through the generations, were a vital part of the economy.

'Baby bonds' themselves were a good idea, said Madsen, but should not be financed by government from death duties. Instead the tax laws should be changed so that parents, grandparents and other relatives could pay tax-sheltered funds into the child's account to help boost its future opportunities.

The many e-mails that came in to the programme showed how many people regard the death tax as unfair and unacceptable.

Executive summary: The Tobin tax – reason or treason?

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tobin

As European leaders discuss an EU-wide Tobin tax intended to reduce market volatility and "Robin Hood Tax" campaigners propose a similar tax to raise revenues, we publish a briefing paper on the Tobin tax that assesses these arguments and examines the historical case for and against a Tobin tax. The paper is free to download here, with the executive summary reproduced below for your convenience.

Executive Summary

1. FX turnover in the City of London reached over $1.8 trillion every day in 2010, accounting for 36.7% of the global total. The City is vital to Britain’s economic interests.

2. A Tobin tax is a proportional tax on all spot conversions from one currency into another. There are now calls for a Tobin tax to be introduced into Britain.

3. A sole implementation of a Tobin tax by the UK would be economic suicide. Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden’s attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross-border arbitrage can occur would spell disaster for the UK.

4. Sweden is the only country to have tried a “pure” Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after eight years. The taxes sparked an exodus of financial activity from Sweden. By 1990 60% of the trading volume for the top 11 most traded Swedish stocks had moved to London. Trading for over 50% of Swedish equities had moved to London by 1990.

5. There is a consistent lack of evidence that transaction taxes increase market stability. The UK’s experience with stamp duty suggests that the opposite is true. Numerous studies found a significant reduction in equity turnover following the stamp duty introduction, with a significant (-3.3%) fall in the FTSE All Share Index returns witnessed in the 1% rate rise in 1974.

6. A cross-study, consistent, empirically convincing causal link, either statistical or econometric, has yet to be found between an increase in transaction costs and a reduction in volatility. In both equity and foreign exchange markets, a large number of empirical studies reveal a positive relationship between increasing transaction costs and higher levels of volatility.

7. This is usually accompanied by significant declines in turnover, stock prices and a migration of trading activity. A Tobin tax could drive a significant proportion of the financial sector out of Britain.

8. The worst cases of speculation usually cited by Tobin tax advocates occur in emerging markets. However a Tobin tax would provide little deterrence to investors in these markets, where often short-term movements of 2% – 5% are expected. In the worst cases of currency crises and manias (i.e. where investors expect short- term devaluations of over, say, 10%) a Tobin tax would be an almost irrelevant deterrence to speculators.

9. The claim by supporters of a “Robin Hood Tax” that £20 billion annually can be removed from the UK financial sector without causing significant disruption is ill-informed and reckless. This recklessness is augmented by the fact that we are emerging from one of the most accentuated cycles of boom and bust to date.

10. Employment in the UK financial services sector stands at over 1 million; 4% of the UK total. A Tobin-style tax would result in job losses both within the financial sector and also within supporting industries through employment spillover effects.

Download PDF

Selected media coverage:

Reuters – "Flawed" financial tax plan could raise volatility - UK think tank

The Sun – City levy "suicide"

The Telegraph – Government would veto tax on financial transactions

City AM – Tobin tax would be suicide, report says

The Guardian – European markets hit by eurozone Robin Hood tax plans

Daily Mail – Sarkozy and Merkel plot £13bn tax raid on the UK to save euro

New Bureaucracy Zones will boost the economy

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The government has announced that new ‘bureaucracy zones’ will be set up all over the UK in order to boost economic growth. The initiative was developed by James Nanni, Professor of Keynesian Economics at Cambridge University in his book ‘The Big Standstill’. It is planned that 13,558 new jobs will be created in each bureaucracy zone. Nine constituencies are thought to have applied for bureaucracy zone status. The move has been welcomed by the leisure industry, and will be part financed from European Structural Funds.

Chris Huhne MP, the new Bureaucracy Czar, said: ‘It’s all planned. Thousands of diversity managers, NHS administrators, communication officers and outreach workers will be taken on to manage the queues of people lining up from outside the zones’.

Labour Leader Ed Milliband said: 'Once again, the government is copying Labour Party policies. During its time in office, Labour increased bureaucracy by far more than this government ever will. This is just an excuse for savage cuts, which will hurt bureaucrats'.

In a statement, the Taxpayers’ Alliance said it was ‘outraged’ by the initiative. Its criticism was brushed aside by the new Community Investment Office. ‘This is not spending. Instead we are investing in communities and hard working families. It will be entirely self-financing through the creation of growth by the state out of nowhere. The purchasing power of those thousands of new bureaucrats will give a boost to the economy, like a snake eating its own tail’ (surely not? ed.).

‘It’s all free’, Professor Nanni confirmed. ‘Free money from the European Union, free money from the redirection of existing spending commitments, and free money from partnerships with communities and private companies. A £45 billion contract with the IT industry has been signed, to design a completely new suite of software for each zone’.

Activity in the bureaucracy zone will include new form shops, a Health and Safety Academy, and the new Blog Permit Authority for the approval of individual blog entries. One of the new infrastructure projects is a new high speed bridge, leading to nowhere. When it is almost ready it will be destroyed and rebuilt again.

The new initiative is thought to have received interest from Venezuela, Greece and Brussels.

What price justice?

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Courts are working around the clock to bring justice to the looters. However, at a time when the nature of society itself seems to be up for debate, we should call into question the way we do justice in this country. Instead of having a system balancing restitution, retribution and rehabilitation, we appear to have focussed on the penal effects of prisons to the exclusion of both sense and cost.

Laying down the law as a deterrent is all well and good, but it comes at a cost: is it really worth spending around £10,000 to lock up a man for 3 months, convicted of opportunistically grabbing nothing but £3.50-worth of bottled water? That is not to excuse his actions, but to question the sense in asking the taxpayer to pay even more for this person. Just as many on the 'left' are willing to say their latest pet project should be provided whatever the cost, those on the authoritarian 'right' are equally willing to fetishise justice.

Part of the problem right now is the furious demand for revenge. Rather than identify the underlying causes of the riots, the government seems to be sticking its fingers in its ears and screaming that any attempt to offer an explanation is to excuse criminality. At the same time, it seems to forget the extent to which short prison sentences are akin to criminal training courses - with a recidivism rate of around two thirds, the government is making large numbers of people into fully-fledged criminals.

The truth is that most people are opportunistic. Along with the capability for good and bad, we act according to perceived benefit and cost. Those who looted were not only caught up in mob hysteria, but judged the costs of breaking the law to be lowered by the lack of a police presence. What was alarming, however, was that for so many, they were lowered so much further by the lack of any social constraints on their behaviour. Humiliation and ostracism, along with education and tradition are usually sufficient to stop people attacking one another as we are naturally social beings.

But the momentary collapse in state-enforced law and order revealed the extent to which these social constraints had been hollowed out. Part of this is due to the subsidisation of particular behaviours, and part is due to the crowding out of social and family bonds by the Entitlement State. We must find a way to stop these social constraints from being undermined, and re-examine our unhealthy obsession with retribution at any cost.

Anton Howes is Director of the Liberty League.

Read the bills!

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examThere’s a fun meme on Twitter at the moment, asking what three things you would change about how the country’s run if you had the chance. Playing the game – so dispensing with the big “privatize everything” things that I’d actually do – is fun, because it focuses the mind on the really big issues that face us. I chose (1) Introducing a free banking system (that is, by banning bank bailouts, get rid of regulations and the state money supply), (2) replacing state schools with a voucher system, and (3) abolishing the urban planning system, including the green belt. Drug legalization and leaving the European Union (in order to introduce unilateral free trade) were two that just missed the cut. Do suggest your own three in the comments, or on Twitter including the "#3things" hashtag.

Ok, so those are my big, radical priorities, but I also thought about a small change that might be more effective than we think: requiring MPs and peers to read all of the bills they vote on before they vote. Yes, this would be impossible to enforce perfectly – many politicians would lie. But you could make the cost of lying higher, by making them swear to a legally-backed oath that they’d read the bill, or giving them a test about the bill’s contents. If they fail, their salary could be docked, or they could just be stopped from voting on this bill.

A “read the bills” law would slow down legislation, so blockbuster bills drafted by a few wonkish civil servants and read by nobody would be harder to force through Parliament. It would probably make bills simpler and shorter. And comprehension exams would make politicians more accountable for the ludicrous harmful bills that they pass at the party whips’ behest. I highly doubt that a bill as mangled and wrongheaded as the Digital Economy Act, passed in the "wash-up" at the end of the last Parliament, would have made it through if MPs had been forced to take the time to read and understand it.

As the campaign for a "Read the Bills Act" like this in the US says, “Ignorance of the law is no excuse for citizens. Neither should it be in Congress.” A Read the Bills Act for the UK would be a sensible, if imperfect, step towards slowing down Parliament and making MPs a little bit more accountable to their electorates rather than their party whips. It would never pass for precisely that reason, but I can dream. The least we should expect of our lawmakers is that they understand the laws they're making.