Standards of probity

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The disclosures about expenses claims made by MPs have been met by the insistence that what they did was "within the rules" and that all the items were scrutinized and approved. This may be true, but it fails to answer the public concern at what has been going on. The nub of it is that MPs have deceived the public for many years by awarding themselves much higher salaries than they have admitted to. They did this by keeping the headline figure down, and awarding themselves a "stealth salary" of padded expenses to augment it.

MPs of all parties have connived in a system which reimburses them for items like bathplugs and barbecues which other people have to buy from taxed income. As the 'expenses' are tax-free, the effective salaries received by MPs are even higher. The public wants to know how MPs, who make laws telling other people how to behave, could behave so deceptively and dishonourably themselves. The answer seems to be that, like the bankers who give themselves multi-million bonuses to reward their failure, they do it because they can. They have the power to do it, and they regard that as a right.

There is a general feeling among the populace that people who occupy positions of authority should possess sufficient probity to restrain them from misusing their powers. They should have a sense of right and wrong sufficiently well-developed to keep them from tawdry and discreditable self-seeking. "With great power comes great responsibility," as Spiderman's uncle cautioned. The fact that MPs and bankers can award themselves unmerited sums of other people's money does not mean that they should. On the contrary, their occupation of those high seats of authority means that they should not. And the higher the office, the greater is the standard of moral correctness required.

The problem for both MPs and bankers is that they have not shown the moral stature required to accompany those positions.

Liberty vs. the State

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In the United Kingdom, of our national Gross Domestic Product, which is to say, of all wealth created by all people through the course of the year, we finally find now that the part confiscated and consumed by the State exceeds 50%.

Rarely invoked is a phrase so loaded with import yet so perfectly tuned to pass unnoticed upon the mind.

Of our lives, the first twenty or so years passes in growth and education. There then follows about fourty-five years of work, as we accumulate sufficient wealth that we can finally retire and live free.

Well, now, consider; for of those fourty-five years of work, half, that is to say, twenty-two and a half years of our lives, have the wealth we produce fully taken from us by the State.

That is what 50% of GDP means. It means 50% of your working life.

The State requires us by threat of judicial penalty to accept its provision of services; and by forcing us to accept, the State forces us to pay its price; and that price is twenty years of our lives.

Was this ever the deal? Was this ever what we signed up for?

The fact is, we all past and present were never asked and we never agreed to any of this. We all, past and present, were merely born; into a world where the unchosen State already exists.

The State is an inherited historical accident; it was never chosen, ever, by anyone.

The fact that our current arrangement of State permits us every four years to vote for one of a few parties and so potentially change the Government of the State does not mean we agreed to this arrangement of affairs. Being granted a vote by a State we never chose is not legitimization; that we are not permitted to opt out of the services the State so expensively compels us to accept reveals our subservience.

We owe the State nothing for we never chose it; and we work our lives till but ten years from death, because of the State.

Blog Review 958

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One of the oddities of those oh so socially democratic Nordic countries is that in many ways they're not what would be called social democratic in UK terms. School vouchers, no inheritance tax, postcode lotteries for medical care....

Speaking of school vouchers, Obama's children don't attend the public school system but they're shutting down the voucher scheme that would enable others to make that same choice. Obama signed off on that restriction of other peoples' choices too.

Paul Krugman is indeed Paul Krugman, but he's still right on trade.

The libel law just got a whole lot more difficult for journalists and bloggers.

The ID cards mess just had yet another twist of spin added to it.

Why the American banking system won't go the way of the Japanese one.

And finally, physicists prove that vampires cannot exist.

Pondering on Mises

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I'm feeling a bit wet – intellectually – and I need some robust Austrian School economists to dry me out.

I've been boning up on the great Austrian economist, Ludwig von Mises, for a short book on him I'm writing for the excellent Institute of Economic Affairs. Mises got notoriously irritated with people who questioned the need for a gold standard or thought that fractional reserve banking was a good thing. Er...like me.

On gold, i can see the point that once you let politicians print money, you're asking for trouble. And we've certainly got it. But do we really want the world's money to depend on the production of some metal – particularly one that Russia controls so much of? Russia bullies other countries over oil for political reasons: would we really expect it to act as an honest banker to a world dependent on its gold?

Friedman tried to solve this by suggesting a monetary rule – that the money supply should expand at an even pace, roughly in line with production – or by a commodity currency, backed not by a single metal but by a basket of goods. But such rules are only practical if the politicians do indeed stick to them. So that's not promising. But it seems to me that if we can work out a way to get such rules to work, it's better than having the entire world monetary system rooted in a single commodity that just a few countries control. Shouldn't we focus our intellectual energy on that, rather than on restoring gold?

Fractional reserve banking is the system whereby banks don't keep all of your savings in their vaults – they lend the money out to people who need it to build businesses and the like, keeping enough on hand to assure savers that they can withdraw what they want, when they want it. It doesn't work, of course, if all savers all want their money out at the same time: and the fear that the bank might not be able to immediately pay back savers in full leads to a 'run on the bank' that produces exactly that effect.

One solution to this is free banking, where banks issue their own notes. If people are concerned about the probity of a particular bank, they will agree to take its notes only at a discount – accepting its dollars only for 95 cents, say. It may not prevent bank failures entirely, but it sends early warning signals to the bank that it needs to mend its ways.

Personally, I'd prefer that my money was being lent out to create new businesses, and earning interest for me, rather than sitting in a vault with the bank charging me to look after it. So two cheers for fractional reserve banking. You don't need 100% of your cash sitting in the vault. What you do need is some insurance for when lots of savers all want their money out on the same day. Your house doesn't burn down every day: you simply want insurance for when such bad things happen. The same is true with your savings in the bank.

Again, this isn't easy. When the financial sector goes into spasm as it did last year, then the traditional insurers are in spasm too because the two markets are so closely interdependent. The old idea was that the central bank should be the 'lender of last resort' in these circumstances. If, like Mises, you don't like central banks much either, the same question persists. Shouldn't we be applying our brains to creating some insurance system to back up the fractional reserve banking system, rather than demanding that the banks lock their savers' cash in unproductive vaults?

Optimism

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Writing in the Telegraph, Angela Monaghan and Edmund Conway give us ten reasons to be optimistic about the economy. Considering there was so much Armageddon-speak only a few months ago, this itself is good news. They list the weaker pound helping exports at number one, with markets correcting as they do the imbalances between currencies (except in the Euro zone where one exchange rate fits all).

They point to rising equities, increased business confidence, and US banks coming off better than feared in their stress tests. Low interest and mortgage rates are another plus, creating the conditions for recovery. They are impressed by the Chinese economy's unexpected resilience, and by the fact the both UK and US housing markets may be bottoming out. The point to the benefits of falling utility bills, and finally list the coming summer with its feel-good warm weather lifting people's spirits.

Even if you don't agree with all of their pointers, it's an impressive list. The last one is important and they are right to list it. Optimism points to recovery as people begin to make plans to invest, to expand, and to plan purchases. This is one reason why Obama's message of hope is probably more important than anything he actually does.

On the whole the authors are probably right. This was not the end of market economics, but a cyclical downturn made worse by the smoothing of previous downturns with massive credit expansion. Downturns pass, unless unwise governments turn them into depressions.

After this one the real fight starts over what lessons can be learned. France and Germany are leading the EU charge to learn the wrong ones by introducing more restrictive regulations that would leave politicians driving business decisions. The right lesson might be for governments to stop doing the things which led businesses into making wrong decisions in the first place.

Nothing to fear, oh really?

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altHave you signed a petition on the Number 10 website? Did you sign this one: We the undersigned petition the Prime Minister to…resign? (As of Friday lunchtime there were currently 54,672 signatures). You could be in for a surprise in the future.

In an article on Marginal Revolution, Alex Tabarrok brings attention to a recent report from Venezuela that examined the wages of the millions of signatories to a petition calling for Hugo Chavez to be removed from office. Unfortunately for them in the proceeding election, Chavez triumphed and their names were added to a database that was distributed across government agencies. The report finds that those who signed the petition and: “...were identified as Chavez opponents experienced a 5 percent drop in earnings and a 1.5 percentage point drop in employment rates after the voter list was released. A back-of-the-envelope calculation suggests that the loss aggregate TFP (Total Factor Productivity) from the misallocation of workers across jobs was substantial, on the order of 3 percent of GDP."

Whilst this specific instance may have taken place overseas it highlights that governments can’t be trusted, especially with private data. Whilst it is hard for people to imagine something similar taking place in this country, we are singularly blind to human nature, it is entirely possible. Should Gordon Brown win the next election (hypothetically speaking) there is little to stop him implementing a subtle tweak to tax credits, or the tax system that would leave the majority of the signatories to the online petition worse off. The database state is not your friend, at some point you are very likely to become a victim of a politician disposed with a weaker human nature.

Thankfully though on this occasion, it looks likely that signatories of this petition are in the majority!

Obituary: Professor Norman Gash

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We are sad to report the death of Professor Norman Gash, former Professor of Modern History in the University of St.Andrews, at the age of 97.

Norman Gash was known to the world as a fine historian of the Nineteenth Century, and in particular the leading expert on the life and times of Sir Robert Peel – on whom he wrote a definitive two-volume biography. His thoroughly researched books on Peel, the Duke of Wellington, Lord Liverpool, and the politics of their age continue to command respect within the academic community.

Gash was also a leading Conservative intellectual, and at St.Andrews did much to encourage the thriving group of student activists whose members would go on to become MPs – such as Michael Fallon, Michael Forsyth, Robert B Jones – or active in the world of policy formation – such as Madsen Pirie and Eamonn Butler of the Adam Smith Institute and Stuart Butler of the Heritage Foundation.

EU wants to run the internet

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Daniel Hannan MEP, has informed us all that the EU seems rather upset that the US "runs" the internet and is keen to do something about it. They want ICANN to be taken over by the G12 so that they can run it "for everyone". The internet was invented (by a British man) because of the American effort to protect itself in case of a nuclear attack. The EU expects the US to hand over the keys to a strategic asset merely because it offends their anti-American sensibilities. "If it ain't broke don't fix it" does not resonate with them much either it seems.

Hannan quotes this gem: "In the long run, it is not defendable that the government department of only one country has oversight of an internet function which is used by hundreds of millions of people in countries all over the world."

Obama might be keen to suck up to the Europeans, but even he would not be stupid enough to grant this request. I doubt most in the UK would be too keen on this idea eithe.