Blog Review 940

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How can we use fewer resources? You know, this walking more lightly upon the earth thing? How about just make the economy grow faster?

There's a certain disconnect between what journalists write about matters economic and what economists write about matters economic. Yes, even at the FT.

Netsmith does wonder though, whether alternative history as written by economists will catch on.

No wonder there is still controversy about what to do about finance: there's still controversy about what happened.

Good grief, a politician with interesting and admirable ideas.

It matters what the law says, not what was the original intention. And the unions aren't helping.

And finally, it appears that menu costs aren't really menu costs.

 

The biggest budget deficit ever

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£175,000,000,000. That's how much extra debt Darling proposes to load onto us this year, in the biggest Budget deficit ever.

Brown accused the Tories of unfunded tax cuts in the argument over reform of inheritance tax. But their doubtfully-funded proposals amounted to £2 billion. What about £175 billion of unfunded spending - over a quarter of all government expenditure?

Worse, Darling proposes a further £173 billion deficit next year. And that's assuming that we come out of recession before Christmas; if not, the deficit will probably be more than £200 billion.

Nor is this a short-term problem caused by the recession.

The recession has exposed a long-term problem that had been hidden by the previous boom. As I said yesterday, Brown presided over an enormous increase in government spending (to little discernable benefit), which even the huge tax receipts from the City and the property industry during the boom were not enough to fund.

And what does Darling propose doing to get us out of this problem? Nothing.

The proposed 50% tax rate for the rich (more on that shortly) serves no purpose other than Brown's political manoeuvres. Even on the Treasury's optimistic assumptions it will raise only £1.8 billion per year, a trivial 1% of the deficit.

No, the only thing he can do is fiddle with the figures. By increasing his estimate of long-term growth, claiming that he expects the economy to grow by 3.25% per year after next year, Darling was able to say that the public accounts would eventually be brought back into line. But that growth level looks unrealistic; in 2002, Gordon Brown's estimate of long-term growth was just 1.75%. Have things really got so much better now?

So we are faced with deficits for the foreseeable future. Over the next five years the government plans to borrow more than £700 billion. Anyone who intends to stay in the UK after that is going to have to pay for this folly.

Correction Mr. Darling: countries cannot inflate their way out of recession

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Somewhere in the hour-long spectacle that was today’s Budget Statement, Alistair Darling made a very interesting claim: “This Government, and others, have learnt from the historic economic mistakes of the interwar period, that countries cannot deflate their way out of recession."

This is a fascinating statement for two reasons. Firstly, because history proves no such thing. In fact, I can think of very few, if any, examples where actively deflating the economy has been attempted. By comparison, inflation has been the stock response by governments across the globe for three quarters of a century, and the results have included the Winter of Discontent and Japan’s “Lost Decade".

As for the inter-war period itself, a salutary lesson is provided by comparing the not-so-great depression of 1921-3 (Remember that one?) with the far longer and deeper Great Depression of 1929-1941. The economist Murray N Rothbard strongly argues that the crucial difference was that President Coolidge allowed the economy to rationalise itself and re-establish equilibrium pricing, whereas Presidents Hoover and Franklin Roosevelt sought to re-inflate the economy.

The second reason that it is a fascinating statement is that the opposition does not appear to be saying otherwise. David Cameron may have worked for the previous Tory administration, but there is no sign of him adopting its fiscal and monetary policies; nor is George Osborne a budding Geoffrey Howe. The Liberal Democrats’ Vince Cable publically advocates Keynesian economics. There is, in fact, no debate at all about whether “Quantitative Easing" and “Fiscal Stimuli" are the correct policies to follow – at least, not in Westminster.

And this demonstrates more powerfully than anything else the stifling consensus that seems to have settled on parliament. For an opposition to look emasculated in the face of a booming economy is understandable: it is hard to convince the revellers that the party cannot last. But as the UK suffers its worst recession since the War, one would have thought that somebody in opposition would suggest that the fault lay with the basic economic model underpinning Labour’s 12 years in office.

If so, one would be naïve.

Until the pips squeak

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It has taken a while, but the Labour Party has reverted to type. In putting the top rate of tax up to 50% for those earning in excess of £150,000 gross from next April, Brown and Darling have decided to turn the clock back to the 70s; going a fair way to undoing the brave work of Thatcher and Lawson.

As wrongheaded as such a socialist policy would be, this budget is not about the redistribution of money from rich to poor, but from private entrepreneurs to the public sector. Even in a deflationary period the size and cost of government is continuing to grow. If they can’t cut the cost of government now, how can we trust them to do so in the future?

Hiking up the top rate of tax is of course a massive disincentive for those earning over £150,000 gross to stay in the country. Although we are unlikely to see a massive exodus of people (after all many have already left), it is entirely likely that enough will leave to ensure that this policy will result in less money in the pockets of this improvident government than they would otherwise have got. Also, in times such as these, the government more than ever needs to back off and give wealth creators the room to set this country on the path to recovery: this government needs reminding that wealth is not created, but destroyed in the corridors of Westminster.

This certainly leaves the Conservatives in an interesting position. They will want to focus on government debt for now, but if in power there will be pressure for them to once again undo this tax hike on the highest earners and at least start the task tackling the most bloated government departments. Only time will tell if they have the leadership to do this.

Markets in methane

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After witnessing the hoards of climate change activists protesting at the G20 meeting recently, it became clear there is a public consensus that a large powerful state (and vast government spending and taxation) is the only tool for combating environmental damage.

This scheme being started in Sweden, albeit on a meso-scale, is evidence that market solutions to climate change exist where profit incentives benefit all concerned. These farmers are tapping the methane produced by their fertilizer before it is spread onto the fields. Reports suggest that from the eighteen farmers (who’s farms produce 130,000 tonnes of fertilizer) participating, the equivalent of 2.1million litres of petrol could be produced. Enough to power 30 trucks, 30 busses and 250 cars per year.

The essence of these market based solutions to climate change is that the farmers are driven by profit incentives rather than a government induced social conscience. As one farmer said:

Well I hope that I will be able to make loads of money. I hope that I will become a proper oil sheikh.

One of the greatest assets of this scheme is that it benefits both society and the farmers with relatively little costs to either – The fertilizer is a natural by-product of pastoral agriculture, and if the methane was not utilised in this way, would only escape into the atmosphere anyway. These types of schemes are highly sustainable as they do not rely upon government funding and are not plagued by top-down government interference, while the profit incentive will make them much more efficient than government projects designed to be high-profile vote-chasers.

Put simply, environmental goals cannot be achieved by simply throwing large sums of public money around.

Blog Review 939

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If you think the troughing and corruption here, in Westminster, is bad, have a look at how lucrative the US Senate can be.

The problem being that it is big government itself which breeds such corruption.

Bypass such short term trivialities for a moment and celebrate that as the world gets richer it also gets cleaner.

While it may not ne true that blogging is the route to riches it is at least fun, no?

We've all absorbed the idea that there's a liquidity crisis out there. But who is it with the crisis and why?

Why problems in the NHS don't get solved: look at the way they treat whistleblowers.

And finally, the state of the Labour Party today.

 

What Alistair Darling should do

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There are stories circulating in Westminster that the Chancellor has stood up to the Prime Minister and resisted demands for more fiscal stimulus. It is to be hoped this is true because there has been too much of that already. Cash is being scattered like confetti, and billions tossed around like bread on the water. The burden of that debt will fall heavily on the next generation, restricting what they can do and cutting into the wealth they might earn.

What is needed now is more pull and less push. The Budget provides a chance for the government to create spaces into which business and entrepreneurial activity can move. That means creating some of the conditions under which business flourishes, and that means a more benign tax system and more sympathetic regulation. There is talk of tax increases to finance the government's spending commitment, but what is actually needed is a reduction in that spending and in the taxes needed to sustain it.

Far from raising the rates on high earners, the Chancellor should be reducing them to give more incentives to high achievers to live and work in the UK, and for entrepreneurs to aspire and work to join them. Government has to cut its waste and its spending, and boost its efficiency. It is what businesses do when they encounter a rough patch, and it is what governments should do.

The odds must be against it, given this government's record. There has been talk of money being pushed at people to buy more houses and more cars, whereas what government should be doing is removing some of the obstacles which inhibit business activity and expansion. Those obstacles were put there by government in the first place.

 

Today's budget in context

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As we head towards the UK government's biggest Budget deficit ever, a black hole of at least £118 billion, can anything be done about it?

No, raising taxes on the rich is the wrong answer (I will blog later about why). The problem is simply that government spending has grown out of control.

For a while Brown's booming spending was almost hidden by the booming economy, which almost raised the taxes to pay for it. But now the boom has turned to bust the true state of the public finances is revealed.

In 2000, when we were already three years into the Labour government, the government spent £343 billion. This year it plans to spend £653 billion: nearly twice as much.

Just what are they spending all that extra money on? What useful things does the government do now that it didn't do in 2000?

If spending has nearly doubled, are schools educating twice as many pupils? Are hospitals treating twice as many patients?  Are the police catching twice as many criminals? Of course the government has statistics to suggest that various things have improved, but most of us who actually use public services would say that overall they are much the same as in 2000.

But if little has changed, why has the cost doubled?

Even if we allowed for inflation since 2000, government spending would now be just £407 billion - £246 billion less than this year's proposal. That's enough to wipe out the deficit, abolish VAT entirely, cut corporation tax to match Ireland's 12.5%, and abolish Council Tax, and still have £10 billion spare.

So you can have today's public services, today's taxes, and a government debt that will cripple our economy for a generation. Or we could have the public services we had in 2000, pay no VAT or Council Tax, have no deficit, and have one of the most competitive economies in Europe. Do you even need time to think about it?