It was all those greedy bankers, wasn't it?

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It's the cry of the day: the financial system was brought to its knees by the greed of he bankers! This leads to the simple thought that if we stop the bankers from being able to be greedy then we'll have solved the problem.

The problem with this simple thought is, well, apart from the fact that it is simple minded, is that there appears to be no empirical evidence whatsoever that it is in fact true. Jeffrey Friedman pointed this out last week. Given that Richard Fulds of Lehman lost a billion dollars (yes, $1,000,000,000) when the firm went belly up it's difficult to accuse him of risking the shareholders' gelt for his own gain by knowingly taking excessive risk. In fact, the research shows that those banks where the senior executives held more stock did worse than those where they held less.

Further, about those toxic assets: the banks were holding the higher rated (and thus less profitable) AAA tranches rather than the AA ones. They were deliberately, at least as far as they understood matters, eschewing both risk and potential profit.

These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.

If that is true (and no one has as yet offered any proof that it isn't: nothing beyond the "well, everyone knows, don't they?" level at least) then the concentration upon bankers' pay and bonuses is simply Naomi Klein's "Shock Doctrine" as it usually works rather than as she described it. A crisis is when those who would extend State power extend it: when the politicians gather more power to themselves rather than dispersing it to you and I in the markets.

But much more importantly, if that is true then changing the mode of bankers' remuneration will not reduce the risk of it all happening again for it was not the cause this time around. That's much more dangerous than any shortfall at a Chelsea Bentley dealership: the thought that by misidentifying the causes of the problem we assuage populist anger than actually solving the problem itself.

Perhaps instead of the bankers' pay it was indeed cock-eyed regulation? Shouldn't it be more important to fix that, perhaps the real cause of the problem, than please the baying mob?

Methodological individualism

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I'm getting worried about methodological individualism. Yes, I know that 'society' has no life or will or organizing mind of its own, as Marx seemed to assume, and that it is just the aggregation of individuals' decisions and actions. I know that the 'price level' does not affect 'aggregate supply' or 'aggregate demand', and that these are mere statistics, summing individuals' reactions to particular prices. And I don't fall the the scientist guff that 'we can predict the behaviour of a piece of a gas, even though we don't know what any particular molecule is doing', because I know that the 'molecules' that social science deals with are individuals who are themselves so complex that their behaviour would fry the brain of the average chemist. And yet...

Former UK Prime Minister Margaret Thatcher famously (or infamously) told Women's Own magazine that "there is no such thing as society", and yes, I see her point. But she went on to say: "There are individual men and women, and there are families." Aye, there's the rub. Are we methodological individualists (the term was, I think, coined by Schumpeter, who I wrote about here recently) obliged to insist that everything comes down to the minds, thoughts, values, and actions of individuals alone? Or can we admit that relationships between individuals, like family ties, are pretty basic too? And what about culture, or history, or religion, or even class? These all shape and constrain our individual thoughts and actions. But to admit them as significant is the thin end of the methodological wedge, because these are social phenomena.

An analogy, if I may. A physicist could describe a football match in terms of kinetic energy, friction, and the forces on the ball that sent it in this direction or that. It would be a perfectly correct description, but a pretty dull one: most of us would prefer to hear the commentator talking about the skill of the players, the positioning of the teams, the tactics and strategy, the chances taken and the goals scored. The physicist's account might be the right way to talk about the workings of the Large Hadron Collider, but it's not much good for a ball game. Likewise, an individualist account of economic or social phenomena may be true in a trivial sense; but to understand what's going on, you do need to know that culture, or history, or religion do in fact shape how people act.

And again, if we do detect statistical relationships between social phenomena like a price index and a money supply figure, isn't that actually rather useful, even if only up to a point? Yes, I know that unless we refer to the individuals, we will make mistakes. A Martian observer may note that every Monday to Friday morning, Grand Central Station becomes packed with Earthlings, and predict this as a scientific law. Except that, one Monday, no Earthlings show up at all. The Martian's 'law' did not account for the fact it was a public holiday. But then, this is how science works – we make a hypothesis, then have to revise it when the unexpected happens. Sure, if we understand the motives of the actors, our predictions will be better. But just because we can't do that very easily, do we still have to throw out statistics that seem to work?

Question time

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Question Time's top comedy moments.

Yes, let’s tax home ownership

Vince Cable’s proposed ‘mansion tax’ on high-value homes has come in for a lot of flak. But is it justified?

Vince Cable’s proposed ‘mansion tax’ on high-value homes has come in for a lot of flak, including from the ASI blog. But is it justified? Despite all the debate, I have still not seen a good argument against it that does not apply equally to parts of our existing tax system.

I agree that’s probably a sign that our entire tax system is in dire need of fundamental reform – but that’s not likely to happen. The question is not whether a homeowner tax is a good thing in itself, but whether it could – with the money used to reduce income tax – be an improvement on the existing system.

Yes there are some problems with Cable’s proposal – by taxing only high-value homes and using the money to raise the personal allowance, it is a redistribution primarily from a minority living in the south east (mainly but not all wealthy) to workers on below-average incomes.

But let’s look at the general principle rather than this particular design. What are the main objections to this type of tax, and how valid are they?

• It’s a wealth tax, and wealth taxes are bad

Yes, it looks like a wealth tax. But economically it’s more like an approximate income tax on the annual benefit of living in the house – taxing the return on your investment. And Cable’s proposed 0.5% charge is effectively around 15% of the likely rental value – quite low by UK income tax standards.

• It will discourage purchasers and so reduce property prices

Yes, but that’s a general objection to income tax – taxing anything discourages that activity. We currently tax, and therefore discourage, employment, entrepreneurship and investment – surely that’s worse. The homeowner tax will equalise the treatment of different investments, and if the money is used to reduce the income tax rate it will reduce the disincentive to work and save.

• It’s my property – why should I have to pay tax on it?

Yes, but again that’s a general objection to income tax. Your investments, your work, your business ideas are being taxed now.

• I worked hard to buy it – I shouldn’t be taxed now

Yes, but again that applies to all income tax. Is it any more unfair than taxing the salary you worked hard for in order to pay the mortgage?

• The house was paid for out of taxed income – this is double taxation

Yes, it is economic double taxation. But we already do the same thing to investment income. If double-taxing home ownership is bad, surely it’s even worse to do it to investment in productive businesses.

• It’s unfair on the ‘asset rich, cash poor’ elderly

Yes, it will disadvantage them compared to the current system. But the current system disadvantages the ‘asset poor’, primarily young families who are trying to buy a house. Getting a mortgage to buy an average house needs a salary of around £50,000 – which means you’ll be paying higher rate tax. Is one really more unfair than the other?

• It can’t be an income tax – there’s no income

Yes, you don’t get any cash from your home. But by living rent-free there is an advantage equivalent to an income. And there’s nothing new about taxing non-cash benefits – we’ve done it to employees for decades (company cars, health insurance and many other ‘benefits in kind’); this just extends the same practise to property.

• It’s difficult to collect

Yes, but that’s a tax collectors’ objection, not a principle. The Treasury loves taxing salaries because it hopes that we won’t notice how much they are grabbing through PAYE, but supporters of low taxes should be encouraging tax visibility. The few really problematic cases, such as the elderly widow with no income living in the ancestral manor, can be dealt with through a postponement system with the Treasury taking a charge on the property to be redeemed on her death.

• It’s based on an estimate

Yes, and so there will be inaccuracies, costs and disputes. This is probably the strongest argument against the property tax, but taxing estimated property values is nothing new. Houses are already valued into fairly narrow bands for council tax, and expensive homes frequently have to be valued for inheritance tax.

So I can’t see any objection that wouldn’t also mean abolishing income tax (which might not be a bad thing, but isn’t going to happen any time soon). Indeed we could go further than Dr Cable, and integrate the homeowner tax into the income tax system. Instead of a half percent tax on values over half a million, we could estimate a notional rent for all owner-occupied housing and add it to the occupiers’ taxable income. But only, repeat only, if the money raised is all used to reduce income tax.

How much money are we talking about? The LibDems expect their proposal to raise £1 billion, but a fully integrated homeowner tax, at full income tax rates and with no threshold, should bring in about £25 billion. That’s enough to reduce income tax by 5p, cutting tax rates from 20% and 40% to 15% and 35%.

Effectively it’s the same approach that Lawson applied to business tax – broaden the tax base in order to cut the tax rate. Yes, overall we’d be paying the same amount of tax, so there would be winners and losers. But crucially the marginal rates – the tax paid on extra effort, each additional pound earned or saved – would be significantly reduced, which should boost the economy. And our competitive position within Europe, weakened by a decade of Brown stagnation, would be restored.

I know; I hate recommending new taxes. But this one could actually work.

The Kuznets Curve and inequality

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Simon Kuznets predicted that as an economy develops inequality will rise and then, at a certain stage of development naturally begin to fall back again.

It would seem that he was reasonably correct as well. These estimations of historical income inequality indicate that the Gini was around 51, 52 for the UK in 1801. Current day income inequality in the UK is again around 51, 52 as measured by that same Gini. Those for Sweden and the US are similarly around 48 at present. Now, of course, it is possible to change that inequality of market income through the tax and benefits system and every country does so by various means, lowering the outcome inequality. Some more than others as we know.

However, if that rise in inequality is indeed part of the development process it means that worrying about rises in inequality in China, or India, at their current stages of development is a little silly. We'd do better to not worry about such things (as all too many "in development" do) and concern ourselves with the growth which itself will lower the inequality.

There's another point to be made here as well: which is that the current measures of inequality, by income, grossly overcount the amount of inequality that we do have. Way back when a Gini of 52 meant that some would eat well and others would starve. Now it means that some shop at Fortnums and others at Spar. The difference between having cheaper food than the rich and having no food unlike the rich is a measure of vastly lesser inequality in the modern day. It wasn't until the 1970s that the majority of British households had a fridge: the difference between having one of Comet's best and £8,000 worth of Smeg is hugely smaller than that between a larder or an icebox and a fridge.

We both overmeasure the inequality in our own society and worry overmuch about it in others. Time perhaps that we stopped doing so.

Brown and Labour: Not adding up

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Gordon Brown, and the Labour Party have some big problems coming their way in the coming elections. Many within Labour have already given up on the next election and some are even calling for Brown to resign for the sake of the Party. Both the Prime Minister and his Party are sinking further in popularity, but don’t seem to be doing much about it.

Brown has tried to rally support through international efforts such as the G20 meetings, but this has been greatly frustrated with the latest meeting of the U.N. and rumors of President Obama’s snubbing of the Prime Minister. Although U.S. President Obama may not have intentionally snubbed Gordon Brown, the media coverage did not help him, nor did the Prime Minister himself in responding to the allegations at all. Brown’s futile attempts to meet with Obama looked more like an unpopular adolescent during middle school, trying to appear ‘cool’ by being seen with the ‘in group’.

The problem that Brown faces is that he is not seen as someone the people can trust. The latest polls from the Guardian show that less than 14% of the population feels that the Labour Party is honest and upfront about the economy. Brown himself is sporting a remarkably low 26% approval rating. The Party just doesn’t seem to be able to add or subtract; if £5 goes in £20 can’t come out. Individuals are expected to balance their own budgets and they have a right to expect their government to do the same. Cries to either decrease spending or even to increase taxes have fallen on deaf ears within the governing party, and it appears Brown may be more concerned about building his own popularity abroad than mending fences at home.

Piling on the guilt

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Across the steaming bitumen the tyres' tread whispered. Atop this charging mechanised steed sits the lumpen mass of a middle-aged, doe eyed, lycra clad enviro-warrior. Safely cocooned within their bubble of immunity they fly through red lights, relentlessly ignore no entry signs and attempt to run down the slow and stupid on pavements. A vision of the not to distant future if government proposals are to be believed. Life on the streets will be subject to a cycling blitzkrieg; the non-cyclists amongst us will be forced to flee or dive into the nearest government building for sanctuary.

Following on from the pronouncement on cyclists being permitted to ignore no entry signs, comes this consideration: a plan to blame all drivers in accidents with cyclists. Why do we wish to contemplate such a policy? Because of 'climate change'. If we don't take up the mantra that, 'two wheels good, four wheels bad' then we shall all suffer the ill effects of the supposed harmful warming planet.

This idea is counter to the car scrappage scheme. This encourages people to drive, through government sponsored car purchasing. (Mainly introduced at the behest of the influential UK car manufacturers). If they'd have thought it through properly they could have nationalized bicycle production in the UK and regaled us with the factory output figures on an annual/monthly/weekly or even daily basis. These government designed bicycles could then have been foisted upon us, 'for free'. This announcement is yet another clear indictment of a government that doesn't know it's saddle from it's disc brake.

Singing the blues

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"Oh, no, not that song. I can't stand that song."

Tractor production in the Soviet Union

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The Department for Environment, Food and Rural Affairs has just published a 48-page strategy document called Safeguarding our Soils. The driving concern behind the document, as Hilary Benn explains, is that: “good quality soils are essential to achieve Defra’s goals of a thriving farming sector and a sustainable, healthy food supply".

The government plans to sort things out by “improving our evidence base, providing information and guidance to those who are actively managing our soils, and using regulation and incentives". Rarely will you find a worse example of governmental idiocy, arrogance, meddling and incompetence.

It is idiotic because farmers do not need regulation and incentives to encourage them to look after their soil. They have a pretty good reason to do so already – because they have to grow stuff in it.

It is arrogant because the government feign to know more about soil than farmers themselves. Farmers are in the best position to determine the optimal usage of their land, bearing in mind the costs and benefits of different strategies in particular circumstances. If further research is needed, then the farmers who stand to benefit will fund it.

It is meddlesome because the government have no right to tell landowners what to do with their land. If I want to dig up all the fertile, healthy soil in my field and replace it with salty, lifeless dust then that’s my business alone.

And it is incompetent because the farming regulations are an insanely complicated bureaucratic muddle. This new strategy comes on top of the EU Thematic Strategy on Soil Protection, CAP cross compliance, Environmental Stewardship, the England Catchment Sensitive Farming Delivery Initiative and the new Code of Good Agricultural Practice.

Central planning of food production failed in Soviet Russia, it failed in Maoist China and it fails today in Stalinist North Korea. The best thing the government can do to safeguard our soil is to do nothing at all, and in the words of Arthur Young, let “the magic of property turn sand to gold".

The class of '97

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Back in 1997 many felt the country was on the up, over the past 12 years of New Labour many things have certainly gone in that direction. Our debt levels have climbed from £357bn to £613bn, government expenditure has rocketed from £318.3bn to £631.3bn. There is though one area we can excuse the sarcasm, and that is with GDP which has risen from £815.9bn to £1.439tr (or £497.6bn to £844.2bn excluding government expenditure). How much of that GDP growth is natural or down to the governments pro- active business attitude over the past three administrations is difficult to measure. Back in 1997 if Mystic Meg had gazed into her lottery crystal ball and announced a 101% rise in government spending and a 72% rise in the level of debt would we have sought to constrain their future prolificacy somehow?

It seems that when you appropriate efficient sources of wealth creation and term it as 'investment' few people mind. After all the thieves are promising that the imposed cost will be compensated by the supply of 'world class' services in return. And when these services don't arrive the promise is that more needs to be taken to ensure their delivery. This ends with the word 'cut' being made to sound evil. Yet it would be nothing more than justified compensation for the failure of the past 12 years. Cutting government spending on public services by 50% over the next 12 years will have the same affect as increasing it by 101%: it will be negligible and hardly noticed.

The debt and expenditure has only succeeded in inhibiting progress. Where would this country be now if the government had spent the past 12 years living within their means, not increasing taxation, leaving us to live our lives? The next government should strive to cut taxes and rein in spending, it's the only way to increase government revenues and begin to clear the debt without retarding the populace any more.

These won't be cuts to public spending. They will be compensation payments to the taxpayer for the lies, ineptitude and waste of the New Labour years.