Young Writer on Liberty: Incentives matter

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As the Telegraph picks over the bones of MPs already stained reputations, perhaps only one thing can be learned: financial incentives matter. As such, in order to ensure we get the very best entrants to the Young Writer on Liberty competition we have decided to increase the prize money. As such, as well as the winner getting £500, the second and third prize entrants will receive £250 and £100 respectively.

Remember, this is not one of those prizes that go to your school; instead the money will be given to you in brown envelope to spend on whatever you want, whether that be bathplugs, moats and tennis courts etc.

For more information click here

All entries should be sent to: andrew@old.adamsmith.org

Competittion closes: 15th June 2009

Blog Review 959

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The reason that capitalist do so much better than politicians do in matters economic is that capitalists have long term incentives and politicians short. Incentives do matter, after all.

Explaining Joanna Lumley's attatchment to the Gurkhas.

If we just get the prices right then we don't have to worry about doing the near impossible, proper life cycle analyses.

No, prohibition really doesn't work.

However, freeing schools from the dead hands of the unions and the State really does seem to work.

It's been a recession with a nasty banking crash thrown in, not a prelude to a second Depression.

And finally, a book recommendation.

The exodus begins

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altLondon's Evening Standard reports that the flight of financiers from the new 50 percent tax rate is gathering pace. The Chairman of Terra Firma Capital Partners is said to have moved to Guernsey, and the head of Odey Asset Management hedge fund has threatened to move his firm offshore. He is quoted as saying, "Everyone is thinking of leaving."

While the ones who can go probably will go, the majority will not enjoy this mobility. What they will do, however, is to make every possible use of shelters to lower their exposure to the tax. Many people who paid it at 40 percent will move heaven and earth to avoid paying it at 50 percent. This is one reason why I publicly predicted on CNBC as the tax was announced that it will raise less money than was yielded by 40 percent. The other reason, apart from avoidance, is that the reduced incentive the new tax offers will shrink the tax base. If people have to give nearly two-thirds of any extra income to be squandered by the government, they will simply not make great efforts to earn any. Any adding in National Insurance and pension allowance changes mean that many people will be keeping only just over a third of any extra they earn.

The upshot is that Britain has moved into the unenviable league of top tax nations, and probably without gaining any extra revenue by doing so. This was the most dreadful feature of a truly contemptible budget.

Equality and the free market

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It's official: Britain is now a more unequal country than any time since modern records began in the early 1960s. The incomes of the poorest people have not just failed to keep pace with economic growth, or even inflation. They have actually fallen. Since the last election, the poorest 10% of households have suffered a £9 cut in their average income of £147. The second-bottom 10% have seen their income fall by about £4 a week. 
 
This is why all those folk who talk about Mrs Thatcher or 'free markets' making Britain more unequal make me puke. The fact is that market economies are more equal than any. Not just in terms of incomes, but in terms of power. In centrally controlled economies, if you are not one of the ruling clique – and that can mean not a member of the right race or the right family – you've had it. And there's nothing you can do about it. In market economies, you rise on the back of your talent and hard work. Not everyone has talent, but application will take you places. That's why market economies are more socially mobile than others.
 
A socialist government can make early 'equality' gains by redistributing income and using the wealth created by a market economy. But it all takes money, and the more you confiscate in taxation, the less incentive is there for anyone to take risks and succeed. When your taxes reach the threatened UK levels of 50%+, there's less incentive even for people of skill or application to stay in the country. So the redistributive policy poisons itself, like yeast creating alcohol in the wine vat.

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?