The Pin Factory Blog

I'm in City AM this morning writing about the new French Tobin Tax, something we're particularly interested in here at the ASI:

WHEN Napoleon Bonaparte’s regime executed an aristocrat on trumped-up charges of treason, stirring up bloody memories of the Revolution, his chief of police is said to have remarked that it was “worse than a crime; it was a blunder”.

The same could be said of this week’s introduction of a Tobin Tax in France. The measure imposes a 0.2 per cent tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading.

This is a form of the EU-wide Tobin Tax on all securities exchanges proposed by Nicholas Sarkozy last year. Though less disastrous than that would have been, the unintended consequences of this tax may leave President Francois Hollande wishing he had let these proposals die along with the Sarkozy government.

Read the whole thing.

Last Saturday’s Wall Street Journal (US edition) carried an essay by David Wessel, author of the forthcoming book, “Red Ink: Inside the High-Stakes Politics of the Federal Budget”. It provides an excellent breakdown of the budget crisis looming over the US federal government.

Perhaps the most striking fact contained in the essay is that 63 percent of the US federal budget is on auto-pilot: “Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds.” In technical jargon, this is non-discretionary spending – unless Congress actively stops it, such spending continues every year without the need for any further authorization. Throw in an ageing population and inexorably rising healthcare costs, and it becomes clear that such spending is only heading in one direction – skywards.

What is most worrying is that the US federal government currently only funds 66 percent of its spending through taxes. For the rest, it has to borrow. And while that may be bearable in the short-term, as nervous investors around the world pile into US Treasuries and push bond yields to record lows, it spells big trouble in the medium- to long-term. Every cent the government borrows now means more debt interest payments – and even more non-discretionary spending – in the future.

For an idea of just how bad it could get, take a look at this 2010 working paper from the Bank of International Settlements (BIS). Its projections indicate that without a policy shift, US public debt would rise to more than 400 percent of GDP by 2040. That would translate into annual debt interest payments equaling 23 percent of GDP – well in excess of total federal tax revenues, which have averaged a little over 18 percent of GDP since the Second World War. Such a scenario is plainly impossible: the US would be forced to default on its obligations long before things reached that point.

The policy implication here is straightforward enough: non-discretionary spending programs like Social Security, Medicare and Medicaid need urgent, drastic reform to put them on a more sustainable footing. The problem is politics: neither party is really serious about dealing with this fiscal time-bomb. Politicians’ electorally-driven time horizons are just too short to permit the sort of significant, structural changes that are required.  Perhaps a rise Treasury yields will force the issue. Maybe another showdown over the debt ceiling will do the trick. But I won’t be holding my breath. As Detlev Schlichter puts it, when it comes to debt, governments around the world are determined to “extend and pretend”.  Sadly, it is only a matter of time before reality catches up with them.

Tom Clougherty is managing editor at Reason Foundation, a libertarian think tank with offices in Los Angeles and Washington, DC. This article was originally published at reason.org.

Is Barack Obama right that entrepreneurs 'didn't build it' when they look at their own achievements? No, says Stephen MacLean - he should re-read his Adam Smith.

Friday the thirteenth wasn’t kind to Barack Obama.  In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world:  ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.

Obama privileges ‘corporate’ co-operation at the expense of individual achievement.  It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing.  No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’

Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy.  By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’  Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Commonwealth’ (which occasions opprobrium from contemporary libertarians).  Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected.

Read this article.

As former Federal Reserve Chairman Alan Greenspan put it: "There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people."

He was talking about Milton Friedman, Nobel-winning economist, libertarian policy advocate, great communicator and author of the Free to Choose book and TV series – born on this day, exactly a century ago, to Hungarian Jewish immigrant parents in Brooklyn, New York.

And Greenspan was right. For most of Friedman's professional career, from the 1930s to the 1980s, the world was dominated by government planning, economic management and control. But at last a new approach came to dominate – Friedman's approach of free markets, open trade, personal liberty and capitalism. And these things are now part of the everyday life of billions of the world's citizens.

When the Berlin Wall fell, tiny Estonia took Friedman's ideas wholesale – and reversed 1,000% inflation, a 30% drop in the economy and 35% unemployment as a result, becoming the 'Baltic Tiger'. Its young prime minister, Mart Laar, explained that Free to Choose was about the only Western economics book he could get his hands on in the Soviet times, and he did not have, as the West had, hordes of mainstream economists around to gainsay it.

After Mao's death, China opened up to Friedman's economic thinking too. The reformist Deng Xiaoping invited him to lecture there on the use of market mechanisms. Today, China's adoption of market principles is improving the lives of hundreds of millions of its citizens. India too, after decades of socialist failure, liberalised its economy in 1991, ending price controls, cutting taxes, scrapping regulations and abolishing public monopolies. Again, hundreds of millions there now enjoy rising literacy, life expectancy, and economic prospects. The people of India and China may not realize it, commented Nobel economist Gary Becker, but “the person they are most indebted to for the improvement of their situation is Milton Friedman.”

In South America too, Friedman's influence can be seen in Chile. Though he was no supporter of the dictator Augusto Pinochet, young economists who had learned under him at the University of Chicago came to dominate Chile's economic policy during those years. They cut import tariffs, replaced the ailing state pension system with one based on personal accounts, privatized farms, stabilized the currency and liberalised the financial sector. Chile became Latin America's most successful, open and competitive economy.

Ever the optimist, Friedman was confident that his ideas would, in the end, win – as they did. But for decades he was in a very small minority. From the New Deal, through the Keynesian intervention, exchange controls, nationalization and planning of the postwar years, most Western economists and politicians simply assumed that government economic management was both essential and inevitable. Meanwhile, the Soviet Union dominated Eastern Europe and exported international socialism to Asia, Africa and Latin America. It often seemed hopeless to resist. But Friedman relished the argument, winning over even his sternest opponents with his cheerful, commonsense, optimistic approach. A naturally brilliant teacher and communicator, he spoke to the wider public in his popular books, magazine columns and interviews, and of course through his hugely influential Free to Choose TV series.

Friedman addressed all the great public issues of the day – the importance of sound money, the damage done by trade barriers, the baleful effect of regulation, the folly of wage and price controls, the need for competition in the provision of education, the benefits of flat taxes, the poverty of state pension systems, the advantages of a negative income tax, and how the greatest harm done by drugs is the result of their being illegal.

He became, in fact, the world's leading exponent of personal and economic freedom – ideas that were once scorned and dismissed, but which now shape the lives of billions. Milton Friedman was the economist who changed everything.

Eamonn Butler is author of Milton Friedman: A Concise Guide.

Hopefully, David Cameron’s summer vacation takes him over the Dartford Crossing over the Thames River downstream from London. With luck, the toll queue on the Queen Elizabeth II Bridge will let the Prime Minister take in the stunning views in all directions - the panorama will instil more pride in the nation and inspiration for new policies than the opening ceremony of the Olympic Games.

That ceremony might have encouraged Mr Cameron to return us to a rural idyll that never was, to imprison all wealth-generating industrialists, to beatify the NHS as the country’s official religion and to ban all culture except pop. The Dartford Crossing, though, is the real-world antidote to that view of Britain and suggests some good ideas to restore the economic growth needed to pay for the flights of fancy on show at the Olympic Stadium.

Start with the sheer volume of traffic that is utterly breath-taking – thousands upon thousands of cars, vans and trucks streaming across in both directions heading to all points of the compass. Mr Cameron should take pride in the fact that the majority of the world’s major carmakers – Ford, General Motors, Toyota, Honda, Nissan, BMW, Tata - continue to  make their cars in this land and that those cars are good enough to export anywhere. And he should be proud that so many of the lorries are registered in lands as far away as Turkey, hauling goods to and from every nook and cranny of the nation.

However, Mr Cameron should also recognize that Britain’s roads are far more critical to the economy’s health than any prestige rail projects like the high speed link from London to Birmingham and Manchester. A crowded Britain will live or die by an efficient road network where the vast majority of economic traffic isn’t between the centres of big cities. Road infrastructure offers many opportunities for creative thinking - privatisation of major trunk routes, tolls and road pricing where the money stays within the industry for consistent upkeep, modernisation, expansion and even dismantling as required by a dynamically changing economy. Handle this right and little taxpayer funding will be required.

Mr Cameron should also recognize that Britain’s historic economic success is so clearly underscored by those foreign-registered lorries – foreign trade. At every summit, at every meeting with every foreign dignitary, at every trade show on every continent, Mr Cameron must shout out the virtues of trade, starting with the EU’s own reluctance to implement the directive on free trade in services. Conveniently, such evangelism doesn’t need any additional taxpayer funding.

Just upstream from the Dartford Crossing is the sprawling Littlebrook Power Station and another testament to Britain’s strengths and weaknesses. The nation has a proud history of energy innovation and development with its skills in the field exported around the world. Littlebrook is oil-fired, though, and incessant dithering about long-term energy supply is bordering on the criminal. So let’s cut through the crap and dash for gas to exploit the nation’s skills, significantly reduce if not eliminate carbon emissions and secure energy supplies for the foreseeable future. It’s another opportunity to enhance growth prospects without hitting up taxpayers.

Downstream from the Dartford Crossing is the Thames Estuary, the proposed dream site of a new futuristic airport for London and there’s no escaping the need for more airport capacity in the southeast if Britain has any intention of sustaining economic growth in the decades ahead. An airport in the Estuary would be a huge challenge but Britain’s engineering industry is second to none in the world. The country’s problem isn’t building things – it’s being unable to decide to build anything. So, Mr Cameron, push the button for this airport if you want a real legacy, especially if you can finally get Whitehall to negotiate proper public-private financing initiatives.

Let’s hope the Olympics opening ceremony was the last hurrah of New Labour’s delusions and that Mr Cameron can recognise it as such. For a sense of the real world, he should spend £1.50 for the adrenalin rush of the Dartford Crossing.

So some swarthy foreigner sidles up to you and offers a deal on something you desire. A very good deal, real cheap. Clearly the correct response is to take the deal: you're getting what you want cheaper than you can elsewhere and are thus being made richer. If this swarth foreigner was an agent of the Sultan of Constantinople and was being subsidised by hte Sultan in order to create work for his subjects to do: the answer is still the same. Take the deal for it is a deal. Your own resources have been increased and you are richer.

Your delight at being offered such an opportunity would be even greater if it was being offered on something that you just must have. Imagine, for example, that the oceans would boil and Flipper be left floundering on a desolate shore if you did not immediately install solar PV in order to generate the electricity you need (need note) to be able to watch a Simon Cowell program for the opportunity to sneer. One would, and one would expect our politicians to agree, take such an offer in an instant and be very happy with it. So what's happening here?

Solarworld AG (SWV), Germany’s biggest solar-panel maker, led a group of manufacturers asking the European Commission to investigate whether Chinese competitors dumped their products on the region’s market.

The so-called EU ProSun group filed the anti-dumping complaint in Brussels after a similar request in the U.S. resulted in duties on solar imports from China. The group has 25 members including companies from Italy and Spain, and Germany’s Sovello GmbH, EU ProSun President Milan Nitzschke said today.

“A majority of the European solar industry backs the complaint,” Nitzschke said by e-mail. “Chinese companies are offering their products below manufacturing costs despite their own massive losses.”

Strangely, I was in the Solarworld offices a few weeks back but I didn't need to be in order to work out what is happening here.

As Adam Smith pointed out the purpose of all production is consumption. We the consumers desire cheaper solar panels and if we're to get them by bankrupting Solarworld and sucking subsidies out of the Chinese taxpayer then that's all well and good. We're better off and the Chinese government is foolish for gouging its own citizens to make us so.

What is going on here is that trade policy is being made to suit the interests of the producers, not the consumers: and that ain't the point of it at all. The correct response to this "suit" is to reject it with the words "Tough luck Sonny". The aim and point of trade policy is to improve the life of the consumer, yea even if that means accepting foreign subsidies.

That it won't work out this way we also know but then that's what's so wrong with the trade policy we have. In fact, that's what's so wrong with any trade policy other than unilateral free trade: we're trying to make life better for you and me and all who want to buy things, not the producers of anything at all.

One of the things that people often miss (or at the very least, underappreciate) is how the mechanisation of daily tasks in the past century has made us both hugely richer and also increased our leisure time. Further, it's less the mechanisation of industrial tasks that has done so: the mechanisation of the household has probably had more to do with it than anything else. In one of the few things that he's observably got right even Ha Joon Chang has cottoned on to this. That possibly the greatest labour saving device, the greatest contribution to female emancipation, has been the domestic washing machine.

Now, the thing is that these machines do depend upon the basic infrastructure of our society. Electricity, piped water and so on. They're also, while incredibly cheap for the time they free up, expensive for people in the poorer parts of the world. Which is where this little invention comes in:

"The GiraDora is a blue bucket that conceals a spinning mechanism that washes clothes and then partially dries them. It’s operated by a foot pedal, while the user sits on the lid to stabilize the rapidly churning contents. Sitting alleviates lower-back pain associated with hand-washing clothes, and frees up the washer to pursue other tasks. It’s portable, so it can be placed nearby a water source, or even inside on a rainy day."

The freeing of the distaff side from the monotony of hand washing clothes is quite possibly an even greater contribution to human utility than the concurrent freeing of men from those boring and repetitive tasks in a pin factory. Mechanisation of such routine tasks leads to the ability to do something more interesting and more remunerative with ones' time.

The London 2012 Olympic Games have been a triumph of wastefulness, nannying government, corporatism, deceit and incompetence. Our writer Lawsmith asks, how could our political class have gotten it so wrong?

The first and only time I've met Boris Johnson was when we were on our bicycles at the traffic light at the bottom of King William Street in the City. I stammered: "Uh, good morning, Mr. Mayor." Play it cool. After a brief (and awkward) exchange, he pushed off, away from my sight and into eternity.

Months later, as the tangible effects of the Olympic Movement's month-long occupation of central London started to make themselves felt, my thoughts once again turned to my cycling buddy. After reminding yourself for a moment that Boris once gave some constructive criticism to the city of Portsmouth by saying it was "too full of drugs, obesity, underachievement and Labour MPs," and that barely two months ago he referred to the BBC – which, like that brainchild of the Blairite Labour Party, the 2012 Olympics, is state-run – as “corporatist, defeatist, anti-business, Europhile and… overwhelmingly biased to the Left”, I take the view that BoJo -- currently the Games' biggest cheerleader -- would be doing one thing, and one thing only if he were in opposition (if he were so inclined).

He would tear the government, the media, and anyone even remotely associated with bringing the Olympics here to shreds.

In his absence, others have tried. Most have failed to make a dent. Dominic Lawson, writing for the Independent, fired the opening salvo of reason against Olympics fever last month — writing a fairly broad-brush piece which covered most of the general criticisms of this circus (cost, inconvenience, armed police), he scored his best points at the ‘leftist’ BBC's expense: "[news coverage of the Games] really does make one feel as if this is North Korea,” he wrote, “rather than a country supposedly characterised by individualism and nonconformity."

Read this article.

Let’s say that I’m a manufacturer of any product. Let’s take pins, as a good Smithian example. There is an oversupply of pins in the market, due in part to domestic and overseas producers being able to manufacture pins more efficiently than before. As a result, prices for pins fall. This means that consumers are able to buy pins more cheaply. Because many pins are used in further stages of manufacturing such as clothes production, prices of clothes fall as well.

This means that consumers are able to buy more or better quality clothes or, by keeping their spending on clothing the same, divert the surplus into other areas of consumption or better yet, to save the surplus thus generating capital formation and future growth.

Some pin manufacturers will find that their concerns are no longer profitable at the new price level. This means that they must either reduce their own costs of production or go out of business. However, pin manufacturers going out of business should not be looked upon in a negative light as their resources can be redeployed more efficiently elsewhere and to satisfy other demands for consumption. If the reductions in cost are caused by foreign producers able to supply pins more cheaply, we should see this as a demonstration of comparative advantage and the benefits of free trade to all.

It may well be that the overseas pin manufacturers are in developing countries which benefit enormously from the additional employment and economic growth created in their economies. Of course, this is only the case if overseas pin manufacturers weren’t subsidised and protected by their own governments but the fact that they may be does not justify my government in doing so.

Let’s take another situation. I’m a dairy farmer, and the price which buyers are willing to pay for my milk falls. I realise that I can no longer make a profit in dairy farming. Do I accept that I should redirect my land, capital and labour into another area where I could make profit? No, it seems instead that I should exploit a bizarre political situation where farmers are somehow held up as sacrosanct and in which many people believe that we need to be self-sufficient in food production (as if the UK is somehow preparing for a future autarky).

Instead, I disrupt the supply chains of dairy processing plants and launch a campaign attacking supermarkets and other purchasers of milk in an attempt to force them to either reduce their profit margins, punishing their shareholders who are likely to be the pension and insurance funds of British savers, or – more likely – pass the additional costs of artificially increasing the price of milk onto consumers via other means.

Moreover, instead of accepting that I am imposing a cost on all consumers which they may not all wish to pay, I protest and instead revert to using political and lobbying techniques in an attempt to coerce purchasers of my milk to raise prices. Fortunately, politicians have so far resisted the temptation to interfere too far, or rather too much further, into the marketplace. Instead of redirecting resources to different forms of production which consumers may now be able to afford, I attempt to redirect their spending decisions whether they like it or not.

It must be added, of course, that there are gross distortions in the marketplace. Interventions in the shape of the CAP on the supply side and the various mechanisms by which government drives integration in the retail sectors on the demand side must be viewed as contributors to the way in which the industry is structured. As we must continually point out, if there is not a free market then there cannot be a market price reflecting supply and demand – in other words a ‘fair’ price.

Nevertheless, the attempted use of political means to artificially inflate prices above the market rate – to create an ‘unfair’ price rather than accept that rate is a troubling and problematical response. What makes farmers special and privileged above other producers in the economy? Farmers must recognise that they must serve consumers and not the other way around.