The Pin Factory Blog

Today is the 235th anniversary of the publication of The Wealth of Nations by Adam Smith. For a quarter of the last millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for most of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market.

The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live. Yes, it's very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. And yet it is the book which took economics out of its primitive phase and made it distinctly modern. We can understand what Smith says because it is all around us today.

The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country's wealth is what it produces. He had invented the idea of gross national product. And the wealth of the citizens of that country depends on how many there are. He had invented the idea of GDP per capita. And so it goes on.

But surely his greatest breakthrough was the realisation that we do not have to grow or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world.

And so, much like of the opening scenes of an apocalyptic movie, science has reached a great milestone: on May 20th, Doctor Craig Venter and Doctor Hamilton Smith announced the creation of a bacterium with an artificial genome, the first living organism with a synthetic DNA able to reproduce. The era of bioengineered creatures has officially begun, bringing with it the end of disease, hunger and maybe even poverty.

But in all apocalyptic movies the great invention inevitably goes wrong. The environmentalists seem to have picked up on this: only a few days have passed since the discovery was revealed and they are already demanding a ban on synthetic biology. Enter regulation, the obvious answer to all of mankind’s problems.

Yes, bioengineering has negative externalities and poses a threat if misused. However, prohibitions are rarely effective and instead induce markets to go underground. Bans require reinforcement, which some countries do better than others. If someone were planning to use the technology for evil ends, they could very well do so and easily get away with it. Bioterror knows no barriers: viruses can spread in the blink of an eye.

The fact is that the technology is already out there: we would only make ourselves vulnerable by closing our eyes to it. As this Economist article argues, “knowledge cannot be unlearned, so the best way to oppose the villains is to have lots of heroes on your side”. Some regulation and monitoring maybe necessary to discourage the occasional hooligan or two, but further research is crucial so that we can better understand the benefits as well as the dangers of this technology.

Also, quite selfishly, I’m looking forward to a stroll around Jurassic Park.

Take pity on Ramsay Scott, a 21 year-old man sentenced on Wednesday to 3 years and 9 months in prison for firearms possession. The student, who has been diagnosed as suffering from Asperger’s Syndrome or a schizoid personality disorder, had bought £20,000 worth of gun components on the internet, and amassed a collection including pistols, sub-machine gun parts and ammunition.

There is no evidence whatsoever that Scott had ever harmed anyone else with these weapons, nor that he had any intention of doing so. As Lord Uist remarked to the High Court in Edinburgh on sentencing him:

It is probably impossible to say what, if anything, you would have done with the weapons had the police not intervened.

He explained that Scott was guilty not because he had actually hurt someone else, but because:

There must have been at least the possibility that you would have used them to cause injury to others.

The law that supports this judgment is grossly unfair in three respects.

Firstly, no free society should lock up its citizens unless it can prove that they have harmed, or intend to harm, others. It is not enough for politicians and judges to talk about the ‘danger of guns’ or the ‘good of society’; they must justify making a free individual, Ramsay Scott, a man who has harmed no one, into a captive of the state for almost four years. If this principle is lost, then many of our freedoms go with it.

Secondly, if the government is going to lock up people for owning harmful objects, it should arrest anyone who has a carving knife, a petrol can or a pair of fists. It is not enough to argue that guns are ‘weapons’ or ‘designed to kill’: the evidence suggests that to Scott they were nothing more than a hobby; they were no more a weapon than his cricket bat.

Thirdly, the punishment is far severer than those handed down to terrible men who have actually harmed others. On the same day as Scott received his sentence, an unnamed 15-year old boy was sentenced to two years by Sheffield Crown Court after punching a man and killing him for not giving him a cigarette, while in Northern Ireland, Ciaran McFall was jailed for three years and 6 months by Antrim Crown Court for sexually assaulting a 13-year old girl.

The Firearms Act should be repealed.

Lost in the noise of Wednesday’s news that the UK has slipped into a double-dip recession was the report Tuesday on the government’s financial performance for its fiscal year ending March 31. A picture is said to be worth a thousand words so here’s 3,000 words of pictures and 51 of comment.

Cumulative public sector net borrowing

As a percentage of GDP, the UK government’s net borrowing comes to 8.3%, about the same as Spain’s 8.5%.

Net debt as a percentage of GDP excluding financial interventions

As a percentage of GDP, the UK government’s public sector net debt come to 66%, up from 60.5% a year ago and about the same as Spain’s.

UK Central Government current expenditure

Spending cuts? What spending cuts?

Governor Jon Huntsman Jr. of Utah is bringing radical change to his state next month. Currently state employees work eight hours a day, five days a week. Starting in August, they will work ten hours a day, four days a week. The idea is to help employees save on gas and to reduce the state’s energy bills. By closing hundreds of buildings for an extra day of the week, the state will save $3 million a year.

Unfortunately, when politicians try to solve problems they usually make them worse. But this idea shows a keen understanding of supply and demand. Tariffs, taxes, minimum wages, and price controls distort markets because they work against supply and demand. But a four-hour workweek will help 16,000 state employees.

Further, the money workers save will be spent in other sectors of the market and the $3m the state saves can be invested in infrastructure, schools, or given back as tax breaks. In March, Utah was named the best-managed state in America and last year it had the most economic growth and it continues to perform well even as the economy slows.

Creativity, intelligence, and an understanding of economics. Imagine the possibilities.

So now the talk is of government departments being told to look at cuts of 40%. Naturally, every public-sector trade unionist in the land is in high dudgeon about front-line services being butchered. What rot.

In the first place, the only definite thing, as outlined in the Budget, is that most departments will have to face budget cuts of 25%. And that, of course, is over five years. As I explained in the Guardian last week, that's pretty small bear, easily absorbed out of natural turnover as people leave or retire.

The command for ministers to look at 40% cuts is no more than exploring the options. Philip Hammond, who nearly became the man in charge of public spending, said he doesn't expect 40% cuts anywhere. The idea is simply to look at the effect of cuts that size if the worst came to the worst. That's perfectly sensible: let's see what the impact of a 40% cut would be, and if it is tiny...well, why are we spending all that money in the first place.

Of course, promises have been made to protect the health budget and to keep cuts in education and defence modest. Which means the potential elsewhere – culture, business, justice, transport – have to be that much more. Why is this needed at all? Because the national debt has doubled in ten years and will double in the next five, and quadruple by 2040. Debt interest alone on that amount would absorb a third of government spending...money you couldn't then spend on public services. The choice is not make cuts or carry on, but make cuts now or even bigger cuts in the future.

Is there enough 'fat in the system' to achieve this. Yes, but if you think you will make savings by making the public sector more efficient, forget it. The only solution is to get the government out of things it doesn't have to do at all. Like paying tax credits to families on £66,000 a year, or subsidising middle-class students or art lovers, paying gold-plated pensions to civil servants, or employing an army of tax inspectors because our tax system is far too cumbersome. We really do need a complete re-think of what government is there for. And that means exploring what would happen if several things were just cut out entirely.

It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.

Harold Wilson 'Wilson defends 'pound in your pocket' BBC (1967).

There comes a point under every tax rate where raising taxes will cause less money to be raised. Those who can afford to do so may work less, because the trade-off of work to leisure becomes less profitable, increase their tax evasion efforts, or move to a different tax regime altogether. This isn’t a libertarian or “right-wing” argument, it’s a simple statement that if government wishes to raise as much revenue as possible, it should recognise that more is sometimes less. And then there’s the growth rate. Higher taxes mean lower growth, so the government should try to strike a balance between paying for itself and not being too much of a burden on private enterprise.

Our new report, The Revenue and Growth Effects of Britain’s High Personal Taxes (PDF), argues that Britain’s current income tax regime is too high. It looks at international comparisons of tax rates and notes that, in a ranking of the marginal tax rates of the 86 largest economies in the world, Britain comes 83rd. In other words, only three other large economies have higher marginal tax rates than Britain.

Surveys of businesses suggest that many are thinking about moving overseas. We saw that this week in the news that HSBC, which paid £1.2 billion in tax last year and did not receive any bailout cash, may be relocating its HQ out of London (though HSBC deny the rumours). There has been a 28% increase in the numbers of bankers moving to Zurich and, as Jan blogged on Monday, some hedge funds are moving to Malta. It’s hard to know exactly how many high earners will leave, but the fact that 1% of the country pays 24% of the tax means that even a relatively small number of people leaving can have big implications for the country’s revenues.

When Nigel Lawson cut the upper tax rate in the 1980s, revenues rose dramatically as the economy grew. As this report argues, the paradox that cutting taxes can sometimes boost revenues applies to Britain today, and the budget later this month should reflect this. If the Chancellor wants to to cut the deficit, he’ll need to cut taxes first.

You can download the report here.

Among the most fun things I did this year was the series of short videos about economics.  My book Economics Made Simple was published in January, so I decided to upload some YouTube videos to put across its basic ideas in a snappy way, taking only about 3 minutes for each. They were not really scripted, except that they were based on the book.

Xander stepped in, and there were just two of us.  I was presenter and he handled cameras, lights, sound, filming, cutting, editing and graphics.  We recorded them over a three-week period, doing several per day.  I picked up whatever was to hand at the last minute to use as a prop. For the first one I collected the office bell on the way up to the mezzanine overlooking the street, and rang the bell for each error.  We deliberately tried to keep them user-friendly and with an amateur look to them, instead of a slick finish. I wore a different T-shirt for each of the 20 videos.

The series took off well, and we advertised them on Guido's site to keep up the momentum.  The total views now exceed 50,000, and we've had many invitations to give talks to schools from teachers who've seen them.  We called the series "Economics is Fun," and it was.  It's much better than calling it "the dismal science."

According to a new ICM poll for POWER2010, 68 percent of English voters believe that England should have its own Parliament, with similar powers to the Scottish one. An even larger number (70 percent) supported the idea of ‘English votes for English laws’, whereby laws that only affected England could only be voted on by MPs representing English constituencies. Plainly the West Lothian Question, first posed by Labour MP Tim Dalyell in 1977, is long overdue an answer:

For how long will English constituencies and English Honourable members tolerate... at least 119 Honourable Members from Scotland, Wales and Northern Ireland exercising an important, and probably often decisive, effect on English politics while they themselves have no say in the same matters in Scotland, Wales and Northern Ireland?

My own preference is for an English Parliament, creating a federal United Kingdom, combined with a decisive shift towards fiscal autonomy in each of the Home Nations – i.e. each national assembly or parliament should itself raise the money it spends. This system would not just be vastly fairer than the asymmetric devolution we have now, but would also place a check on the unsustainable growth of government in Scotland, Wales and Northern Ireland.

Moving to this sort of arrangement would actually be fairly simple. First, constitute the English MPs in the House of Commons as an English Parliament with its own first minister and executive, sitting in the House of Commons for two weeks of every month. Then give them the same powers as the Scottish Parliament. This would be far less costly than creating an entirely separate Parliament, and besides, do we really want more politicians?

The UK Parliament would remain responsible UK-wide matters and would control the various departments in charge of them: security and immigration, foreign affairs, international development, defence, employment and social security, energy, constitutional affairs, and aspects of tax economic policy. All the other departments currently serving the UK government would be transferred to the new English one.

Step two: fiscal autonomy. The UK Parliament would retain VAT and National Insurance Contributions, while all other taxes (income tax, corporation tax, excise duties, etc) would be devolved to the national parliaments/assemblies. As well as encouraging greater fiscal responsibility, this arrangement might also encourage intra-UK tax competition – a welcome development for those of us who like lower taxes.

But I suppose the details are less important at this stage than the simple fact that English people are overwhelmingly fed up with a constitutional set-up that disadvantages them at every turn. POWER2010’s poll is another indication that the time is ripe for change. Happy St. George’s Day everyone!