Friedrich Hayek

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altOn this day in 1899, Friedrich Hayek was born. He went on to become a Nobel Laureate in Economics, and indeed he did groundbreaking early work on the economics of business cycles. He showed that it is governments that start business cycles. Thinking the economy (and no doubt their opinion polls) could use a boost, they create cheap credit. That makes it cheaper for producers to invest in productive processes that, in normal circumstances, would be unviable. Production expands, and more is produced and consumed. But it's a fake boom, and credit can't be kept artificially cheap and plentiful for ever. When it becomes scarce again, all those investments on marginal production processes are shown to be a mistake, and people suffer real losses as factories are closed and the economy re-adjusts back to reality. Prescient, you might think, of the fake boom that Gordon Brown and his colleagues created, and the pain of re-adjustment that we are now suffering.

But Hayek's main contribution was in political science rather than economics, with his development of the idea of the unplanned or spontaneous order. Human – and animal – societies demonstrate an amazing degree of order, without anyone necessarily ordering them. Flocks of geese fly in formation, but not because some head goose tells them which positions to take up. Human society has language with the most intricate grammar, but it evolved naturally – it was never planned out by some government or committee. The order comes, not because it is imposed from the top, but through the individuals following common rules. The geese fly at a sensible distance from one another, we use words in ways we can all understand, and in doing so, patterns or orders of social organization simply emerge.

Through this analysis, Hayek gave the world an intellectual understanding of the free society. Just because a society is not planned by politicians and officials does not mean that it is chaotic or inefficient. Indeed, the interactions of millions of individuals, responding to their local circumstances on the basis of general rules of action, employ far more information than the minds of planning officials could ever conceive. That is why the market responds far more quickly, and more rationally, than government planners; and why the free society is also a humane society.

Happy birthday, Hayek.

Dr Eamonn Butler's new book, The Rotten State of Britain, is now available to buy now. Click here to find out how.

The big four clubs

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alt“Andy Burnham, Culture secretary, is calling for an overhaul of English football finances to break the domination of the ‘Big Four’ clubs", The Times has reported. Why would the Government get involved in such a matter? Have they no more important issues to be worrying about? It is no surprise that the Culture Secretary is an Everton fan.

Undoubtedly, the top four teams have been hugely dominant for over a decade. Manchester United, Chelsea, Arsenal and Liverpool have been at the forefront of English football and because of this end up becoming richer every season. New and better players have consistently chosen these football havens as a place to learn their trade, ultimately leaving the ‘smaller clubs’.

It is understandable that this has become an issue as a mini league has now been created between these teams and the lesser teams fight for fifth place downwards. However, Burnham is demanding the top four redistribute their earnings from the Champions League. This ridiculous stipulation is both embarrassing and disgraceful. The Champions League is a competition where the best four teams from our country fantastically represent the Premier League and of course acquire extra revenue. Why should the teams who do not even play in this competition gain extra money for doing absolutely nothing? If Everton were part of the ‘Big Four’ would Mr Burnham be making such a fuss?

Once again people who seem to know very little of football and the beauty of the game are involving themselves in how it is run. Burnham also raised the issue of quotas for English players to help make the Premiership English. Nevertheless, there is a simple reason why there are so many foreigners in our League. We want to have the best League in the world; therefore, we attract the best players in the world. And alas, the best players in the world are too rarely English.
 

What Say the Reeds at Runnymede?

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A poem for our current band of politicians to read:

Rudyard Kipling (1865-1936)

At Runnymede, at Runnymede,
What say the reeds at Runnymede?
The lissom reeds that give and take,
That bend so far, but never break,
They keep the sleepy Thames awake
With tales of John at Runnymede.

At Runnymede, at Runnymede,
Oh, hear the reeds at Runnymede:
'You musn't sell, delay, deny,
A freeman's right or liberty.
It wakes the stubborn Englishry,
We saw 'em roused at Runnymede!

When through our ranks the Barons came,
With little thought of praise or blame,
But resolute to play the game,
They lumbered up to Runnymede;
And there they launched in solid line
The first attack on Right Divine,
The curt uncompromising "Sign!'
They settled John at Runnymede.

At Runnymede, at Runnymede,
Your rights were won at Runnymede!
No freeman shall be fined or bound,
Or dispossessed of freehold ground,
Except by lawful judgment found
And passed upon him by his peers.
Forget not, after all these years,
The Charter signed at Runnymede.'

And still when mob or Monarch lays
Too rude a hand on English ways,
The whisper wakes, the shudder plays,
Across the reeds at Runnymede.
And Thames, that knows the moods of kings,
And crowds and priests and suchlike things,
Rolls deep and dreadful as he brings
Their warning down from Runnymede!

Blog Review 954

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Ooooooh, yes, let's tax something to make it cheaper!

It would appear that the real cause of global warming is the US Post Office.

How to save the Indy: if anyone wants to, that is.

Contrary to popular belief, yes, you can buy advertisements on the BBC (and it has to be said that Netsmith has a sneaking admiration for the PR type that cooked this one up).

When people start to think that France is a better place to do business from: well, isn't it time to look at why they are?

If you investigate people for fraud, or at least if you investigate certain groups, then you have to compensate them because you are investigating them.

And finally, the names of those who support the Prime Minister are revealed!

The way forward

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altOver on the Spectator's CoffeeHouse blog yesterday, James Forsyth approvingly quoted from this column by New York Times' columnist David Brooks. But I think Brooks is only half-right.

He is certainly correct that the US Republicans are in trouble, and that they are not currently acting in a way that would enable them to win back Congress in the 2010 mid-terms, let alone the White House in 2012. But I think he is wrong in his prescriptions about what the Republicans should do about it.

Let me elaborate.

First of all, yes, the Republicans are not doing what they should be doing. There are a number of inter-connected issues here. The first is that the Republican brand is fundamentally broken – their party is now associated with incompetence (Iraq, Hurricane Katrina, etc), corruption (Tom DeLay, Scooter Libby, etc), and the complete betrayal of their principles (Bush's was the biggest spending government since Lyndon Johnson's). This is a brand that desperately needs to be re-invigorated, not reinforced.

The second point is that the Republicans are not going to rediscover electoral success solely by energizing their base: the US electorate has changed, and the Republicans need to tailor their message accordingly. Voters are increasingly youthful (new voters are heavily Democrat), or members of ethnic minorities (who also lean Democrat). Obsessing about social 'wedge' issues (like gay marriage) just isn't going to swing these voters.

The third point is that the Republicans can't redefine themselves solely in negative terms by being against whatever Obama does (however heinous it might seem) – they need a positive agenda of their own.

So far then, I'm with Brooks. But I think he goes awry when he argues that the Republicans need to give up on "freedom and maximum individual choice" and instead embrace "community and civic order". The truth is that Americans are no less individualist and entrepreneurial then they were a decade ago. It isn't the Republicans' principles that need to go. They just need to find a new way of communicating.

If you're sceptical, just compare Barry Goldwater (who lost 44 states) with Ronald Reagan (who won 49). It wasn't the principles that changed; it was the presentation. And ultimately, that's the challenge for all of us: showing why small government and individual liberty are still the way forward (and not just the way back).

Predicting the financial crisis

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Despite Alan Greenspan’s claim in a speech back in 2000 that “It is very hard to definitively identify a bubble until after the fact", contemporaneously economists affiliated to the Austrian School were doing just that: identifying the bubble that Greenspan and others had help create. Remember, this was at a time when nearly everyone was borrowing like headless bulls in china shop. In an incisive report on the increasingly popular mises.org, Mark Thornton brings to light the then largely ignored analysis (at least by the mainstream media).

For example, Thornton points to the fact that Christopher Meyer in 2000 stated that:

Looking back, future financial historians will likely relate the Glassman-Hassett thesis to Irving Fisher’s famous proclamation in 1929 that "stock prices have reached a permanent and high plateau." James Grant likes to say that there are three common features of a bubble: one part fundamental (i.e., a technological revolution), one part financial (i.e., a surge in money and credit) and one part psychological (i.e., a suspension of belief in traditional valuation measures). All the ingredients would appear to exist in the current bull market.

Similarly, Tony Deden of Sage Capital Management wrote in a paper entitled “Reflections on Prosperity" in 1999 that the growth in money and credit signalled that they were in the presence of a huge bubble; going on to draw attention to the cause of the current bubble:

Their cause is not the fault of capitalism as it has been suggested, but an excessive amount of money and credit created by central banks. Yet, this seems to escape the understanding of those who will, in one day, convene congressional hearings to determine what caused this destruction. The culprit is, as it always has been, the same organization, which professes interest in bringing about price stability and low inflation: The Federal Reserve Bank and its policies of money market intervention, credit creation and loose money.

Also, Sean Corrigan saw it coming, writing in 1999:

Monetary pumping on this order, as the Austrians will tell you, leads to serious distortions in the price structure of an economy which cannot be captured in crude, aggregate, index numbers. These distortions between the value of goods, present and future, lead to mal-investments and a clustering of false decisions. Factories built and productive processes put in train based on a market rate of interest artificially lowered by the effulgence of fiduciary media are not backed up by real savings and thus become misaligned with a propensity for consumption which has, if anything, intensified.

There are many others who saw that the economy had no clothes on; there are many who continue to do so. After all, governments are still pumping credit into the economy in the same way that the emperor continued his parade long after it was firmly established that he was naked.

It’s GCSE economics: high taxes don’t work

Dr Eamonn Butler explores the Chancellor’s lack of understanding of basic economic theory, whilst pin pointing, through basic science, why his policy on tax will have a harmful effect on the public.

The Chancellor would get a C for his new tax rises and fail history outright. He will also leave the Treasury worse off.

Given the damage that the new 50 per cent tax rate will probably inflict on the UK economy, the Chancellor seems to have been very cavalier about it. When the House of Commons Treasury Select Committee asked how he decided to impose the new rate on everyone earning £150,000 or more, he replied: “There was no science behind it. It was simply my judgment.”

No science? If there is one part of economics that lends itself to scientific analysis, it is tax policy. Taxation has been under the microscope ever since Adam Smith first distilled the principles of good and bad taxation in the 18th century. Two hundred years of evidence later the science is clear: high taxes don’t work. They bring the Treasury less revenue, not more. And on the way, they really mess up your economy.

It’s shocking that the Chancellor, in his desire to wrongfoot the Tories, has simply ignored this evidence. In the science of taxation, he wouldn’t merit a grade C at GCSE. And he would fail history outright, having completely forgotten the lessons of an earlier Labour Chancellor, Denis Healey.

Healey actually relished the “howls of anguish” from the 80,000 people rich enough to pay his top tax rates of 83 per cent – or even 98 per cent for those who lived off investments. But as capital took flight and brains drained from Britain, Healey was forced to go to the IMF for a bailout. Labour’s reputation never recovered and, 30 years ago this week, the country fell sobbing into the arms of Margaret Thatcher.

Despite these economic and political warnings, the Chancellor’s “judgment” is that it makes sense to impose higher taxes not on just 80,000 people but, according to Treasury figures, on 283,000 – the top 1 per cent of UK taxpayers. That’s a lot of folk.

And the tax rise is massive, too. It might sound like just another 10 per cent, but if you’re paying tax at 40 per cent and the rate goes up to 50 per cent, you are actually shelling out 25 per cent more than you did before.

Which means a lot of people face a lot more tax, and Darling’s unscientific tax rise will have a large – and damaging – effect, just as Healey’s did. A 25 per cent tax hike is well worth avoiding, even if you earn £150,000. People will simply hire expensive accountants to find ways round it, or do what Sir Michael Caine is threatening and shift themselves or their money abroad. Or take longer holidays and retire early.

In fact the Treasury itself thinks that 69 per cent of those hit by the new tax will find ways to escape it. That’s why the respected Institute for Fiscal Studies figures that the tax won’t raise anything like the £1.3 billion that Darling forecasts – if it raises anything at all. And the Centre for Economic and Business Research reckons that 25,000 entrepreneurs may simply emigrate, costing the UK £800 million.

Raising taxes, then, can leave the Treasury worse off – a simple piece of tax science popularised by the American economist Arthur Laffer with his “Laffer Curve”, and of which the Chancellor should be fully aware.

And contrariwise, scrapping high tax rates actually boosts both the economy and tax revenues. In 1979 the Conservative Chancellor Geoffrey Howe slashed the top rate from 83 per cent to 60 per cent. Before the cut, the top 1 per cent of taxpayers – Darling’s target group today – paid just 10 per cent of the total tax take. By 1988 they were paying 14 per cent of it.

Then Nigel Lawson cut top rates even more, from 60 per cent to 40 per cent and revenues surged again. By the time of the 1997 election, the top 1 per cent of earners paid a whopping 21 per cent of the total tax bill. By halving the top rate of tax, Howe and Lawson had doubled the amount paid by top earners.

Other countries back up this simple science. The United States has had four big tax cuts over the past century. In 1921, President Coolidge cut the top rate from 63 per cent to 25 per cent. Five years later the top earners (people on incomes over $100,000) were paying 86.3 per cent more than they had before. The economic boost fuelled the Roaring Twenties.

In 1964 President Kennedy cut the top rate from 91 per cent to 70 per cent. Two years later the top 5 per cent of earners were paying 7.7 per cent more in taxes, while the bottom half were paying 9.2 per cent less.

When President Reagan cut the top rate from 70 per cent to just 28 per cent between 1981 and 1988, the share of revenues paid by the top 1 per cent of taxpayers rocketed from 17.6 per cent to 27.5 per cent. He cut capital gains tax as well, from 28 per cent to 20 per cent – and again, revenues leapt by half, from $12.5 billion to $18.7 billion in only two years. The cuts launched the longest period of wealth creation the world has known. And under George Bush’s cuts too the wealthy ended up paying more, not less.

Nearer home, a dozen of the former Soviet countries, including Russia, Estonia and Latvia, have replaced their high, complicated, dysfunctional tax rates with a single-rate flat tax as low as 10 per cent. They enjoyed a huge economic boost as a result. Ivan Miklos, the former Finance Minister of Slovakia, told me that slashing taxes was the only decision he lost sleep over: but in fact his flat tax was a huge success, and Slovakia never looked back.

Alistair Darling, by contrast, has made several mistakes all at once. His new tax is so high that people will do their darnedest not to pay it. He won’t pull in the revenues he needs to pay off his spiralling public debts.

At the same time, his changes to allowances and national insurance further complicates a tax code that runs to 10,000 pages – great for accountants and tax bureaucrats, perhaps, but not for the rest of Britain.

Third, he has forgotten that “the rich” don’t just inherit their money any more. Most of them today earn it. His new tax on work will simply drive the UK’s entrepreneurial spirits – and their money – abroad.

It’s science, Mr Darling. But it’s not rocket science.

Dr Eamonn Butler is director of the Adam Smith Institute and author of The Rotten State of Britain

Published in The Times here

Blog Review 953

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How often does this have to be said? Incentives matter. And when will our rulers understand it?

So should the jobs of economists be protected? No, despite the desperate need for them.

Sweary but right. Political decisions, despite their lamentable quality,. be the decisions of politicians, not bureaucrats.

For example, look what happened the last time "the consensus" ruled.

It needs to be pointed out: just because someone made a lot of money that doesn't make them wise about money. It makes them wise about making money, something rather different.

Polly won't like this at all. Apparently mothers of the young working reduces the intelligence of the young.

And finally, a description of the politicians of today.