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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

Does anyone remember 2002?

Written by Nikhil Arora | Thursday 10 May 2012

I certainly do. And I have to say that life wasn’t THAT different. I mean, I was revising for my GCSEs instead of a Masters, wore a school uniform every day and didn’t yet know how to drive, but overall, I’d be willing to wager that most people's lives aren’t that drastically different now than they were 10 years ago.

Crucially, the Government spent money on much the same things it does today – welfare, the NHS, defence, education, policing. It’s not like I am asking you to remember how things used to be in the 1920s when things were radically different.

Looking at Sam’s chart on Monday made me think of something.

In 2002, the UK Government was spending €442bn.

Last year, the government spent €739bn, and it seems likely that the figure in cash terms will be similar or higher in 2012.

It was conceded that the figures in that chart don’t account for inflation, so I have tried to do that myself below. I appreciate that this is a back-of-the-envelope way to do things, and I am not a trained economist, but I also think that my estimates of 4% annually and 3% annually are potentially on the high side, seeing as the Bank of England insist that inflation was kept under control for most of the last 10 years. (Even if quantitative easing may have left us in a situation where recent inflation is quite a bit higher than the “ideal” 2%)

Therefore I have a simple proposition: Return us to the level of spending we were at in 2002, adjusted for inflation and population growth.

Doing that would save, by my rough and ready calculation, between £68bn and £116bn. With that saving, we could abolish or drastically cut Employee Contributions to National Insurance, raise the Income Tax threshold to £12,500 (to correlate with a £6/hour minimum wage for a 40 hour week, so nobody on the minimum wage pays income tax), and abolish Inheritance Tax. If the inflation rate was at the lower end of my estimates, we’d still have a significant sum left over to reduce the deficit.

This would make it drastically cheaper to hire new staff, and would let people on low and middle incomes keep more of their own money, creating big incentives to work. It would also abolish one of the least popular taxes.

Most reasonable people intuitively know that life wasn’t that much worse in 2002, if it was worse at all. If we could have 2002 levels of government spending, along with all the benefits above, I reckon most people would vote for it.

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Free Market Fairness

Written by Sam Bowman | Thursday 10 May 2012

In the video above, Professor John Tomasi talks about his new book, Free Market Fairness. His central thesis is that social justice can and should be the moral basis for classical liberalism and libertarianism. The idea that a society is judged best by how the people at the bottom fare is typically associated with social democrats, but Tomasi argues that this kind of thinking is Hayekian and lends itself well to advocacy for free markets. Free Market Fairness is available now.

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Paul Krugman's junk statistics

Written by Sam Bowman | Thursday 10 May 2012

Paul Krugman posted the graph above on his New York Times blog the other day. It charts change in GDP against austerity as % of GDP in European countries. Krugman claims that this proves that austerity is directly related to GDP contractions, making the basis error of confusing a correlation for a causation.

The big problem is that Krugman assumes that spending cuts have taken place independent of lower or negative GDP growth, and then tries to prove that austerity has caused lower GDP growth by showing a correlation between more austerity and less growth. But, obviously, you could make the reverse claim – the countries (like Greece and Ireland) implementing the harshest austerity packages are doing so precisely because they have had shrinking economies. Greece is cutting back expenditure more quickly and deeply than Germany is. Greece has to, Germany doesn't.

There is a relationship between GDP contraction and austerity, but it could run either or both ways. It would be interesting to see some time series that tried to see whether austerity has followed or lead economic recessions. That might tell us something interesting, but this doesn't. I don't know whether to assume Krugman's being silly or deceptive by pretending this graph is "proof" of anything significant at all.

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Licensing creep

Written by Sam Bowman | Friday 11 May 2012

The Institute for Justice, an American libertarian think tank that focuses on legal issues, has just released a superb report on occupational licensure. Charting how many occupations require state permission in each state, the most striking result is how regulated low-skilled parts of the market are, and how high the barriers are. 

On average among the 102 professions surveyed, government licenses require applicants to "spend nine months in education or training, pass one exam and pay more than $200 in fees. One third of the licenses take more than one year to earn. At least one exam is required for 79 of the occupations."

The most likely explanation is that licensed professions have successfully lobbied the government to restrict access to the market to inhibit competition. It might inititally seem more outrageous that manicurists are more heavily regulated than pre-school teachers, but this might be a blessing in disguise.

As David Friedman has written, the likely outcome of licensing professions is lower quality and higher prices. To paraphrase Friedman: Regulate manicurists, and we'll presumably have longer nails. Regulate pre-school teachers, and we'll presumably have more ignorant children.

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Does devaluation help?

Written by Sam Bowman | Friday 11 May 2012

A pamphlet by John Mills arguing for currency devaluation was recently sent to the "3,000 most influential Britons" (whoever they are). Thankfully, Prof Kevin Dowd and Gordon Kerr of Cobden Partners (Helping Nations Solve Banking Crises) and author of our paper The Law of Opposites have penned a short response rebutting the points made in the pamphlet:

"Devaluation (or at least unexpected devaluation) does produce one-off boosts to exporters (whilst also penalising importers: what about them?), but any 'benefits' it produces are only temporary, and cannot form the basis of a sustained policy without disaster. Moreover (contrary to Mills' assertions) there is no credible evidence - in the 1930s, post Bretton Woods, or any over any other period, anywhere - where a policy of sustained or repeated devaluation actually produced the benefits claimed for it. If it did, Argentina would be a role model.

"In essence, Mills fails to appreciate that any benefits it produces are only temporary, and if engaged in repeatedly will obviously rapidly debase the currency. I would argue that in the UK over the last 18 or so years the steady reductions in interest rates, followed by QE has indeed been exactly what Mills sets out as a policy of competitive devaluation.  Repeatedly the authorities have claimed (on every brief GDP or balance of payments uptick) that this policy has been working, yet we are clearly in dire economic circumstances.  For how many more years should this failed experiment continue?

"Devaluation is only the external manifestation of a currency losing its value, the internal manifestation being the old enemy, inflation. Devaluation and inflation are two sides of the same coin.

"Look at it another way: it is a basic fallacy to believe that simply tinkering with money (i.e., printing more of it) can possibly solve underlying real economic problems that require underling structural changes.

"In the 1970s the UK enjoyed the Barber Boom experiment - which worked too until we ended up with stagflation, the economy on the brink of collapse, the legitimate government brought down by Arthur Scargill and the Hard Left ready to institute a siege economy. But thankfully, the Goverment was forced into rehab and the policy was abandoned temporarily.

"Debasing the currency is never a long term answer and never works long term. It has produced disaster after disaster, and has been condemned by historians for thousands of years. Yes, concerns over unemployment, costs, etc are very real, but these have other (free market) solutions. As per William J. McKinley, the former US President and a firm advocate of the gold standard: "Good money never made times hard".  I would also refer Mr Mills to the attached brief WSJ piece on the high price of a cheap pound by my Cobden Partners colleague Jamie Whyte."

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The glory of this neoliberal globalisation thing

Written by Tim Worstall | Saturday 12 May 2012

We do all, at least occasionally, need to poke our heads up from the readings of our own dogmas and do a little reality check. Have a look at the real world and make sure that the effects are indeed as we would have theory predict. That neoliberal globalisation thing then, perhaps that application of the Washington Consensus to the abject poverty of Africa, how's that working out then? We saw last week that increased openness to trade leads to economic growth: but as we know, economic growth does not necessarily leads to an improvement in the lives of the poorest. Perhaps we should, as so many NGOs advise us, change our tactics?

Maybe and maybe not:

That is the annual change in child mortality in those selected countries. No country, no group of countries, has ever seen anything like this, it simply has not happened so quickly anywhere else at all. Something, blessedly, is going very right indeed in this world. My suggestion is that we keep doing exactly what it is that we are currently doing: we might call it globalisation, foreign direct investment, openness to trade or as Madsen puts it, buying things made by poor people in poor countries. But it's working, isn't it?

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The new Limits to Growth report for the Club of Rome

Written by Tim Worstall | Sunday 13 May 2012

I was able to snag a copy of the new Limits to Growth report to the Club of Rome. The 40 year update of that one that said we'd all be dead already, our skeletons rocking gently in the winds that whip a shattered planet.

This new report does have its pluses, They manage to get the metals thing right for example. We'll recycle more as prices rise and we're most unlikely to run out of any. It's also amusing to have Jonathan Porritt giving his "nuclear is bad, M'Kay" speech instead of the full body condoms for all one. There are some very questionable assumptions to: the population forecast is based on a fall in fertility levels to one per woman per lifetime. Something extraordinarily hard to imagine.

But I'm afraid that I do have my doubts:

Capitalism has done wonders for global wealth creation over the last centuries,
and this system for allocation of human activity dominates the current
world economy. Capitalism has successfully focused attention and capital on
organizations that are able to provide goods and services to customers who
are willing and able to pay. Whenever demand shifts, the capitalistic system
reallocates, again and again, thereby contributing to a continuing restructuring
and growth of the societal pie.

That's not capitalism. That's the market system. Capitalism is a description of how productive assets are owned, not a description of how capital is allocated among different potential uses.

And, if we're going to be frank about it, if someone trying to predict the global economy for the next 40 years gets this sort of thing wrong, well, there's not all that much hope for the rest of his predictions, is there?

My verdict: not as bad as the last report but still not very good.

 

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Why I don't worry about Facebook using my data

Written by Sam Bowman | Monday 14 May 2012

David Henderson makes the crucial point about privacy concerns about Facebook versus government agencies:

[Blog commenter] figleaf is right that FB is contemptuous of privacy. I'm not sure that the U.S. Census Bureau is less contemptuous. Its handing over Census data to the Secret Service so the federal government could round up Japanese Americans and imprison them was pretty contemptuous of privacy, to put it mildly.

But let's grant, for the sake of this discussion, that FB is quite contemptuous of privacy and that the Census Bureau is less so. Here's the difference. Every single person who signs up with Facebook does so voluntarily. If FB had committed to guarding your privacy, then it would be breeching a contract by doing so. But I've never seen FB make that commitment.

The U.S. Census Bureau, by contrast, uses the threat of force to get its information. That's a pretty big difference. It's not one that I would expect, say, the New York Times, to point out. But it is a distinction that I would have expected from someone who calls himself a bleeding heart libertarian.

This is why I don't care very much about sites like Facebook collecting my data, but care very much about the government doing so, and can't stand the privacy brigade's calls for the government to regulate how websites use your data.

The double irony is that, as Henderson notes, governments (even democratic ones) have a terrible track-record of abusing their people the more they know about them. Whether by incompetence (government agencies reported 445 data losses between 2007-2010, compared to 288 in the private sector) or malice (Henderson's internment example), the government is the last organization I want to know about me.

When you sign up to Facebook, the burden is on you as an adult to check the terms of use if you're concerned about privacy issues. If you don't bother to read them, you value your time more than your privacy. Facebook doesn't sign a contract with you when you sign up — you're on the site at its pleasure, and if you don't like that, don't sign up. When it comes to private contracts between consenting adults, ignorance and laziness are no excuse.

This should be straightforward enough, but it hasn't stopped the snowball of government moves to regulate major web firms like Facebook and Google. There's this idea that people have a "right" to use social networking websites, so the government is entitled to impose certain standards on them. That mindset implies that the people at Facebook and Google are obliged to get up and work for you and that, if you don't like the terms they offer in exchange for you using their website, you have the right to appeal to state coercion to get your way. That socialist mindset should be long dead.

Unlike government, which is fundamentally coercive, nobody sticks a gun to your head and forces you to sign up. Unless people want to go down the path of seeing others as slaves to be pushed around by the government, they need to accept that contracts and mutual exchange are what should govern conduct between adults, not state diktat.

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Minimum alcohol pricing: health fascism is back

Written by Blog Editor | Monday 14 May 2012

In response to the announcement today on Scotland's minimum alcohol pricing, Sam Bowman, Head of Research at the Adam Smith Institute released the following comment:

"Minimum alcohol pricing is a miserable, Victorian-era measure that explicitly targets the poor and the frugal, leaving the more expensive drinks of the middle classes untouched. It's regressive and paternalistic, treating people as if they're children to be nannied by the government.

"To make things worse, all signs suggest that the minimum price will be successively raised once it's in place. This is what happened in the UK with alcohol and tobacco taxes, which are now among the highest in the world. It's like boiling a frog – bring in a low minimum price that only affects the most marginalized part of society, the poor, and raise it gradually every year without people noticing.

"The reality is that Britain does not have a drink problem. The definition of "binge drinking" has been redefined so that a grown man drinking more than two pints of lager is considered to be "binging". The number of diseases defined as "alcohol-related" has tripled in the last twenty-five years. In fact, we drink less than we did ten years ago, less than we did one hundred years ago, and far less than we did in the 19th Century. Hysteria about drinking alcohol is a red herring invented by the health lobby. Health fascism is back with a vengeance, and minimum alcohol pricing is just another brick in the wall."

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The Wages of Sin Taxes: The True Cost of Taxing Alcohol, Tobacco and Other "Vices"

Written by Blog Editor | Tuesday 15 May 2012

 

  • “Sin taxes” on cigarettes and alcohol are designed to boost revenue, not improve public health
  • Minimum alcohol pricing will exacerbate poverty and entrench inequality without discouraging binge drinking
  • Most of the costs of drinking and smoking fall on individual consumers, not the public. There is no economic justification for increasing taxes on smokers and drinkers.

In a report released today, The Wages of Sin Taxes (Download PDF) by Christopher Snowdon, the Adam Smith Institute condemns the government’s decision to increase taxes on cigarettes and alcohol this year and to introduce minimum alcohol pricing.

The report argues that ‘sin taxes’ (taxes on commodities seen as harmful to health) are ineffective in reducing consumption and are not necessary for recouping lost revenue. The taxes are highly regressive and force the poor to pay for the government’s mishandling of public finances.

The taxes don’t work

Cigarette taxes are now so high that increases drive smokers to the black market instead of discouraging consumption or raising more revenue. Sin taxes are more likely to deter moderate users than heavy users, whose demand for cigarettes and alcohol is relatively inelastic.

A heavy smoker or an alcoholic is unlikely to reduce consumption because of a price rise, making sin taxes an unreliable way of reducing consumption or improving public health.

The victims of cigarette and alcohol duty

Sin taxes hit moderate and heavy users alike. Research has shown that previous rises in cigarette tax have made only 2.3% of smokers quit, with the other 97.7% just paying more in tax.

Taxes on cigarettes and alcohol are regressive and hit the poor hardest. The average smoker spends £1660 a year on cigarettes – 20% of the bottom 10%’s income. Sin taxes are the most regressive indirect taxes, as they tend to target products that are disproportionately consumed by the poor.

Minimum alcohol pricing is also deeply regressive, only affecting the cheaper drinks consumed by the poor. Punishing poor people for enjoying a drink or a cigarette exacerbates poverty and treats the poor like children who need to be controlled by the state.

The public cost of smoking and drinking

Taxes on cigarettes and alcohol have often been justified by studies that claim to estimate the “social cost” of these vices. These studies include intangible costs borne by individual consumers, such as “emotional distress”, lost years of life, and individual expenditures on cigarettes and alcohol. These are personal costs, not social costs. They also fail to include the economic benefits the alcohol and cigarette industry gives to the UK in terms of employment and government revenue. Most of these studies should be relegated to the bin of junk statistics.

In fact, smokers and heavy drinkers do not cost the state more. Though smokers may cost more during their working lives, but non-smokers require greater expenditure in pensions, nursing care and welfare payments. Chronic diseases associated with old age are far more expensive than the lethal diseases associated with smoking and alcoholism. Smokers and drinkers are not a burden on the state, and the myth of saints subsidising sinners should not be used to justify tax rises.

The appeal of ‘sin taxes’

Despite the fact they hurt the poor and do not change consumer consumption, sin taxes have always been popular with governments as a source of revenue.

Sin taxes and minimum alcohol pricing should be recognised for what they really are - stealth taxes and paternalism designed to control the poor.

Chris Snowdon, author of the report and Adam Smith Institute fellow, says:

“Campaigners for sin taxes and minimum pricing often claim that “healthy citizens” are forced to bear the cost of other people’s lifestyles. In fact, the evidence shows that smokers take less from the communal pot than the average Briton and the money raised from alcohol duty comfortably pays for any burden drinking places on public services. If the aim of policy is to make individuals pay their way, the government should slash the beer tax and subsidise cigarettes. We are not seriously suggesting the government does this, but if politicians insist on increasing taxes on these products, they should admit that the purpose is to raise revenue. Essentially the government is forcing the people who are least likely to live to extreme old age to pay for the escalating costs of an ageing population.

“As we show in the report, amongst EU countries there is no relationship between alcohol prices and alcohol related harm, nor is there an association between cigarette prices and smoking rates. The only significant effects that sin taxes have are to make the poor poorer and black marketeers richer.”

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