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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

So why are the Chinese saving so much?

Written by Tim Worstall | Sunday 15 September 2013

I think we all know that China, or perhaps the Chinese, havs/have a mindbogglingly high savings rate. Something around 50% of GP as compared to our own few paltry percent. Don Boudreaux does a wonderful little piece of intellectual judo in explaining the implication of this:

If Haltom’s claim is correct, the high household savings in China today is evidence that government provision of welfare substitutes to some extent not only for private provision generally, but also for provision at the level of the household. People are neither as personally irresponsible nor as incapable of planning for and providing individually for their own needs as many today – “Progressives” and some conservatives alike – presume them to be.

Just to lay this out again in all its elegant simplicity.

We currently have a welfare system that provides unemployment pay, health care, pensions and so on. We also have a very low savings rate. That's fine, it just is that way. But when the cold hearted and callous like myself suggest that perhaps we might want to reduce some aspects of that welfare state the cry goes up, but bit, what will people do? There will be no pensions, the old will starve in the streets, there will be no health care, there will be a disaster!

And the answer is that we can actually see what happens when there is not that welfare state. It will be as it is in China. People will, in the absence of a decent welfare system, save their own money in order to provide those highly desirable services to themselves. As, actually, the British working classes did in great numbers through the friendly and provident societies before there was a welfare state.

This is not to say that private savings to provide these things is better than taxation provision of them. Nor that it is worse. And it's entirely possible to argue for a blended system (I certainly would argue for tax financing of catastrophic medical care for example). My point here is simply to show that there really are viable alternative systems: the proof being that such alternative systems do in fact exist.

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This isn't very liberal is it?

Written by Tim Worstall | Saturday 14 September 2013

We've just spent a couple of centuries enshrining in the law the idea that consenting adults can do, in matters sexual, pretty much whatever consenting adults wish to do. This is one of the great liberal victories. Yes, it's easy enough to point to those who make something of a mess of said freedoms but no one ever said that freedom and liberty were perfect, only that their presence is better than their  absence.

At which point we get this proposal:

A shake-up of the law to give extra legal rights to unmarried couples who separate is set to be backed by the Liberal Democrat conference. Supporters of the move say it is a widespread myth that cohabiting couples enjoy the same rights as if they had married. There are almost three million cohabiting couples in Britain. The Law Commission suggested six years ago that former partners who have lived together for two years should be able to make a financial claim if they break up. The amount awarded could reflect whether claimants suffered a financial loss – by giving up a job, for example – as a result of the relationship.

Last time I looked the Lib Dems were at least claiming to be something of a liberal party. So what is this illiberality? Why must cohabitation lead to financial rights? There's a perfectly good government mandated contract to take care of those issues if consenting adults should wish to use it. Called marriage and it's open to every possible legal pairing of a couple in matters sexual. Why must those who do not wish to avail themselves of this contract be corralled into something very similar just because they wish to have sex with someone for a few years?

It's a decidedly illiberal idea and goes entirely against the grain of everything that liberalism has managed to achieve in the sphere to date.

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On the tricky problem of benefits: pick any two from three

Written by Tim Worstall | Friday 13 September 2013

There's an old engineering saying, faster, better, cheaper, pick any two. Meaning that if you want your product to be better and developed faster, it's not going to be cheaper,  if you want it to be better and cheaper you're not going to get it faster and so on through the possible combinations. As Arnold Kling points out, this also applies to welfare systems:

1. Use “means testing” in order to provide a significant benefit that is aimed at the poor.

2. Keep the marginal tax rate low.

3. Keep the budget cost low.

If you've got a significant benefit to the poor and you want a low marginal tax rate as people earn their way out of the means test then the taper must be shallow, making the cost of the program high. If you've got that low taper and you also want a low budget cost with a means test then you cannot have a significant benefit and so on. Andrew Biggs tries to plot a way out of this:

a limited but universal government-provided retirement benefit, set at the poverty threshold and paid to every retiree regardless of income or work history. Since the plan is universal, there’s no phase-out and thus no implicit marginal tax. Since the benefit is relatively modest, the explicit taxes need to finance it are lower than what we currently pay for social security. And unlike the current program, which leaves around 9% of seniors in poverty, the universal benefit would essentially eliminate poverty in old age.

OK, he's talking about the US pension system only and he also agrees that it doesn't make Kling's problems go away. It's a balancing of the various options, that 's all.

Moving this over to here and then to a consideration of the basic idea of welfare at all I think I'd make the same sorts of trade offs. I think that it's the marginal tax rates (combined with benefit withdrawal of course) that make the problem so pernicious. We absolutely do have people stuck in situations where they're very definitely over the peak of the Laffer Curve. Heck, the budget documents themselves point out that there's millions who face tax and benefit rates of over 60%, some even of over 100%.

Which is why I find myself moving over to the idea of the citizens' basic income, or the universal basic income to taste. We're going to have a benefit system whatever else happens so we should have one which distorts the rest of the economy the least. And the only way to get rid of those high marginal rates, at a budget cost that is anything like possible, is to make it an unconditional income. Everyone gets that (low) amount no questions asked. Given a tax allowance on top of it we've thus got people facing marginal tax rates of zero: which would rather encourage people into work I would have thought.

For this to be palatable you do indeed need to be assuming that there's going to be redistribution and a welfare system run by government, come what may. But once you have, I put it to you that a cbi or ubi is going to be the least bad of possible options.

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The BBC and the licence fee will be tackled when hell freezes over

Written by JP Floru | Thursday 12 September 2013

In the light of the recent pay-off scandals at the BBC, one would expect there to be demands for the abolition of the licence fee and the excessive protection the BBC enjoys.  There have been some mutterings, but nothing serious.  Nor is it likely to.  Why is this?

Public Choice Theory, which explains human actions in terms of weighing the costs and benefits by each individual, offers a powerful explanation as to why the BBC continues to enjoy such widespread support.  It is important to keep in mind that the more an individual has to gain from a particular action, the harder he/she will fight for it.

The politician
Fighting the licence fee and the BBC:
                Cost: Very high. Death by BBC silence. Politicians live and breathe by media attention.
                Benefit: Low. A large part of the population believes in the BBC.
Standing up for the BBC:
                Cost: nil.  Will have political outlets to make his views known. The licence payer pays.
                Benefit: Very high. Becoming the Darling of the BBC. Re-elected.

The BBC employee
Fighting the licence fee and the BBC:
                Cost: Very high. Ostracised/unemployed/no leaving sweetener.
                Benefit: Nil. Unlikely to succeed – portrayed as disgruntled ex-employee.
Standing up for the BBC:
                Cost: Nil
                Benefit: Very high. Promotion?  High salary, cushy job, big sweetener when leaving.

The licence payer
Fighting the licence fee and the BBC:
                Cost: very high if one wants to make any impact at all, as virtually everybody has a reason to like the BBC (favourite nature programme, that soap, etc.).
                Benefit: £145.50 if the licence fee were to be abolished.

Standing up for the BBC:
                Cost: Little—join the club.
                Benefit: The BBC continues as before.

Observe that in all three cases the individuals involved have a personal vested interest in the continuation of the licence fee and the BBC as before.  Politicians and BBC employees have the strongest incentives and will therefore campaign extra hard.

So the BBC need not fear: neither the pay-off scandal, nor Jimmy Savile, nor BBC bias are likely to challenge the status quo.  The only chance of change is a Churchillian figure with a bee in his bonnet. Churchill famously abolished the BBC monopoly in favour of commercial TV.  He called the BBC tyrannical for having effectively banned him from the airwaves in the 1930s. John Reith, the BBC’s founding father, said that commercial television would be as disastrous for Britain as “dog racing, smallpox and bubonic plague”.  John Reith’s objection was probably the main reason why Churchill went for it.  One more Churchill might just do the trick tomorrow.

JP Floru is the author of What the Immigrant Saw and How to Create Mass Prosperity. On Saturday he will speak at the Conservative Renewal Conference about the abolition of the licence fee.

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Yes, the minimum wage really does reduce the number of jobs

Written by Tim Worstall | Thursday 12 September 2013

We're back to Bastiat and what is seen and unseen I'm afraid in this latest research into the effects of the minimum wage. It isn't that a rise in the minimum wage is going to immediately cause the mass unemployment of millions. Rather, that over time the rise in the minimum wage is going to lead to fewer jobs being created:

The findings are unequivocal: higher minimum wages lead to lower rates of job growth. Indeed, a ten percent increase in the minimum wage causes roughly half a percentage point reduction in the rate of job growth, a very large effect. The effect of this hypothetical increase is not permanent, though, since it is eroded by inflation and increases in the state’s comparison group. Our calculations show that this ten percent increase in a state’s real minimum wage, relative to its regional neighbours, causes a 1.2% reduction in total employment relative to what it would have been.

Now of course that's in the US, with their easy ability to relocate either production or labour across state lines.

But there's another point to this as well. If the major effect of a minimum wage is to reduce the creation of entry level jobs then the major group of people who will suffer from a minimum wage are those looking for entry level jobs. The young, the untrained and the unskilled: all of those who are already the poorest in our society. And it's also true that we can track the rising minimum wages, in both the UK and US, against rising teen and youth unemployment: they've been moving in near lockstep.

The takeaway point from that being to wonderwhy on earth there's so much political support for a minimum wage. Why do people support something whose major effect is to screw over their own children when it comes for the time for them to enter the labour market?

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Parliament goes hostile on climate change

Written by Alex Singleton | Wednesday 11 September 2013

Parliament’s cushy consensus over climate change is dead. In 2008, when the Climate Change Bill had its third reading in the Commons, only five MPs voted against. But with doomsday predictions failing to materialize, and the planet failing to warm, MPs are starting to get more skeptical.

On Tuesday, in a Commons Westminster Hall debate, the room was overwhelmingly hostile to the Act. One of those MPs who voted for it, David TC Davies, says that the evidence has made him change his mind:

I am sorry that I was not a member of the famous five who voted against the Act in 2008, but I hope I will now do something to put that right. I must confess that I was one of those who accepted the arguments that were made—I supported the Act when it was passed... I contend that, given what we now know about climate science, we have a strong argument for reconsidering the Act with a view to either revoking it completely or drastically amending it.

While the “famous five” in 2008 were exclusively Conservative, hostility to climate alarmists’ claims now crosses the political divide.  Graham Stringer, a Labour MP, attacked some of the most notable “science” behind climate change legislation. He quoted Lord Oxburgh’s Independent Panel on the Climategate scandal that found that methodology used was “turning centuries of science on its head” and was not replicable. Mr Stringer said that what had happened “was not science but writing narrative”.

Sammy Wilson, a DUP politician, attacked the excessive costs that the Climate Change Act is imposing on consumers and business. “All reason and self-critical analysis go out of the window when people address this subject,” he said.

Peter Lilley called for the Act to be scrapped, to much vocal support:

The Act is not just the most expensive, impractically ambitious and uncertainly based piece of legislation that I have ever known; it is unique in being legally binding and unilateral. No other country has followed us down that route. Since we went down that route, Canada and Japan have resiled from Kyoto, and Australia has just abandoned its carbon tax. It is time we looked critically at the Act, repealed or revised it, and do not allow ourselves to be slavishly, legally bound to continue doing something that no longer accords with the evidence or goes along with what the rest of the world is doing.

But one MP, Alan Whitehead, seemed flabbergasted by the views of his Parliamentary colleagues. “I really do not know where to start…”

“That’s cos you’ve been stuffed!” interjected Tory Philip Davies, to widespread amusement.

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We did something right in the 20 th century then

Written by Tim Worstall | Wednesday 11 September 2013

An interesting point being made by the economic historian, Brad Delong:

To put it another way: In 1870 the daily wages of an unskilled worker in London would have bought him (not her: women were paid less) about 5,000 calories worth of human, not horse food: not oats (although Scotsmen would disagree) but bread--5,000 wheat calories, about 2½ times what you need to live (if you are willing to have your teeth fall out and your nutritionist glower at you). In 1800 the daily wages would have bought him about 3,500 calories, and in 1600 2,500 calories. Karl Marx in 1850 was dumbfounded at the pace of the economic transition he saw around him. That was the transition that carried wages from 3500 calories per day-equivalent in 1800 to 5000 in 1870. Continue that for another two seventy-year periods, and we would today be at 10,000 calories per unskilled worker in the North Atlantic today per day. Today the daily wages of an unskilled worker in London would buy him or her 2,400,000 wheat human-food--potato--calories. Not 10,000. 2,400,000. That is the most important fact to grasp about the world economy of 1870. The economy then belonged, even for the richest countries, much more to its past of the Middle Ages than to its future of--well, of you reading this.

It's also worth noting that from Angus Maddison's figures GDP per capita in England in 1870 was about $3,200 (yes, of course, in inflation adjusted dollars). The living standard of roughly India or Nicaragua today.

It's a reminder of quite how poor our forefathers were: or how rich we are if you prefer. And also of quite how poor some other places still are. Along with, of course, the point that to get those other places rich, as we all should want to happen, is going to mean those other places following the same sort of economic path as we did. That strange mixture of capitalism and markets that propelled that North Atlantic world into unprecedented prosperity.

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Chart of the week: Japanese inflation rises to five-year high

Written by Gabriel Stein | Tuesday 10 September 2013

Summary: Japanese consumer prices are accelerating

What the chart shows: The chart shows the 12-month per cent change in the headline Japanese consumer price index

Why is the chart important: The Japanese government and the Bank of Japan are currently engaged in a major effort to break Japan’s two-decade long deflationary spiral. They aim to do this through three ‘arrows’ – a fiscal stimulus, a major monetary stimulus and – as yet not clearly spelled out – structural reform. A key goal is to reach 2% inflation by 2015. In the year to July, consumer prices rose by 0.7%. But, more importantly, in July itself, the CPI rose by a seasonally adjusted 0.4%, the highest rate in five years. Even if consumer prices were to remain unchanged from now on (which is highly unlikely), this would still take the twelve-month rate to 1% by early 2014. Prime Minister Abe’s government may not achieve all its targets. But it should successfully get inflation to 2% in 2015, if not before.

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Well if you ask the wrong question......

Written by Tim Worstall | Tuesday 10 September 2013

As someone who has gone through the nightmare process of registering a company in Portugal this research looks interesting. They're studying the effect of making such corporate registration easier:

Prior to 2005, starting a business in Portugal took 11 procedures, 20 forms and 78 days, and cost around 13.5 % of GDP per capita. In May 2005, however, a new government introduced the ‘On the Spot Firm’ (‘Empresa na Hora’) programme by which entrepreneurs could register a company at a one-stop shop within an hour, receiving the company identification card, the corporate taxpayer number and the social-security number in the same day and at a cost of 3% of GDP per capita.

That's excellent of course, for as they point out, jobs growth, innovation, these are driven by the new entrants into the market rather than by extant firms expanding or innovating. However, they then go on to ask the wrong question (in my ever so humble opinion of course):

The other current widespread policy concern in Europe is inequality, and so it is natural to ask how the easing of entry barriers to boost growth will affect different parts of society. Our research brings these two sets of concerns together, by asking how entry deregulation affects different groups of workers. Focussing on differences in workers’ education and skill levels, we find that on average more educated (skilled) workers certainly gain while less educated (skilled) ones probably lose.

Which isn't what we're interested in knowing of course. What we want to know is what has been the effect on consumers for as Adam Smith pointed out:

"Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer."

It's a rich data set they've got there, the Portuguese government certainly did the right thing. But the effect upon wages simply isn't what we're interested in: how did it help consumers, not producers is.

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We need competition in transport, not grand projects

Written by Dr. Eamonn Butler | Monday 09 September 2013

I've just done a Spectator podcast - online end of the week - on airport competition with Gatwick CEO Stewart Wingate and Margot James, member of the No 10 Parliamentary Advisory board. Let's face it, we need more airport capacity much more than we need a high-speed train that gets you to Manchester half an hour earlier. The Transport Department forecasts that demand will double, from 219m passengers per year, to 480m in 2015. We don't need one new runway, we need a whole slew of them, with extra capacity to encourage real competition.

Boris Island? I love it—big, shiny, high speed connections an all that—but at £96bn-odd and a 30-year planning and construction period, it seems a bit of a non-starter. The Houses of Parliament were built 150 years ago, and came in three times over budget and 27 years late, and that is about the norm for state-run infrastructure projects. So think more £300bn and 90 years. After all, it took nine years just to build a new terminal at Heathrow, not even a new runway.

How I wish that the Thatcher government had listened to us in our paper Airports For Sale back int the early 80s. Then, the state quango, British Airports Authority, ran all six major UK airports, three round London and three in Scotland. But no, they privatized BAA as a unit because it was easier. Since then, all the talk, and action, has been about building up Heathrow as a 'hub'. Typical monopolist talk – we need the biggest, the flagship facility. Nothing about customers being best served by competition. But now, in the last few years, with the (inevitable) forced break-up of BAA plc, we do have competition, and it is wonderful, if you are an air passenger, to see the individual airports vying for your business. Like trying to speed up queues in customs and immigration, and getting rail links to their airports that actually take account of the fact that you might have some luggage. And indeed, competing for the next runway.

Sir Howard Davies, who is reviewing all the options, has so far identified fifty different choices. Let's hope he realises that the most cost-effective solutions are the ones that focus on what customers, not politicians and airport planners, want. Use the market. Only about 7% or UK airline passengers are interlining, so let the airlines with that sort of traffic pay to go to the biggest hub, heathrow. Otherwise, develop capacity with new runways at Gatwick, City, Luton and you name it. As I say if only we'd had competition when ASI suggested it, passengers would have a much better experience than they get today.

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