G20: What can be achieved?

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I don't know what the G20 world leaders expect to achieve in under five hours of talking. My only hope is that they do as little harm as possible. But I'm not optimistic that they will succeed.

The one good thing is that there's going to be no agreement on hare-brained Keynesian spending packages. Countries like Germany feel they're quite indebted enough, and have no wish to borrow more. And for all the G20 leaders, the needs of voters at home are more pressing than Gordon Brown's need to be seen producing some agreed wheeze to 'save the world'. So I'm glad, because government job-creation plans actually cost jobs. They take money from where the market says it should be and put it to where politicians think that, possibly, it might give the appearance of doing good. And a bit disappears into the pockets of the civil-servants along the way. The Keynesian multiplier is really a minus.

But you can't stage a big event like this, with 10,000 extra police shifts and vast other costs, without having something to show at the end of it. So there will be agreement to look at global regulation. With luck, it won't go much beyond looking, because the last big regulatory initiative, Basel II, was ten years in the making but proved worse than useless – adding to the banks' problems – on its first outing. If our regulators had actually enforced the existing rules, we'd have been better off than we will be with lots of new ones.

And they'll agree that tax havens have to go. Which is a pity, because it means the end of effective tax competition between governments. The fact that people can shift their capital somewhere else is a good discipline on governments to run a tight ship. If they're trapped, because every state is a high-tax state, then the politicians can all relax. And that's not healthy.

I suppose there is a twenty percent chance that our world leaders might do one thing that would help us out of this pit they've dug for us, and that is to re-commit to the Doha free trade round. Global export markets have plummeted in this recession – exports are risky and hard to finance, especially now – and protectionism is rising. Easier world trade won't solve our problems, but it will certainly help, and help the developing countries in particular. But I suppose there's only a one percent chance of that twenty percent chance actually happening.

Dr Eamonn Butler's new book The Rotten State of Britain is published this month. Click here to find out more.

Blog Review 916

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One to watch: is there really one rule for them and another for the rest of us? Just what will the Vice President's daughter get for taking cocaine?

A ringing declaration of what it is to be a liberal. The sadness is that all too many of those proclaiming themselves liberals are no such thing.

Now the free movement of capital is being blamed. But please do compare the effects of it (if true) to not having the free movement of capital.

This late in the day it's simply appalling how many don't understand the simplest things about capital markets.

The true meaning of that Dan Hannan video.

Hurrah! A decent idea for government.

And finally, a decent piece of conceptual art (is that even possible?).

The Spirit Level

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There's yet another attempt to show us that inequality is the root of all that is wrong with society. That if only we were more equal in incomes then, well, apparently bunnies would be fluffy and there would be a pony for every little child.

Now it is true that they can show a correlation between economic inequality and a variety of effects and yet, yet:

Wilkinson draws on some eclectic illustrations. When monkeys are kept in a hierarchical environment, those at the bottom self-medicate with more cocaine; a caste gap opens in the performance of Hindu children when they have to announce their caste before exams; the stress hormone, cortisol, rises most when people face the evaluation of others; and so on.

Those are all the results of a status heirarchy, not an economic one.

Wilkinson believes the answer lies in the psycho-social areas of hierarchy and status.

Well, quite. Which leaves us with an interesting question. Is the economic inequality actually the important point here? Further, can the ill effects of heirarchy and status be wiped out by reducing the economic inequality?

Allow me to put forward an alternative thesis, one that matches the correlation but reverses the causation.

Some societies are, for whatever reason, more egalitarian than others. Sweden, say, is more so culturally than the UK is. This leads to, amongst other things, their acceptance of a taxation system that reduces economic inequality. That same egalitarianism also leads to less heirarchy and status competition, leading to fewer of the harmful effects the authors say those have. But it is not the economic equalising that performs this, it's that both are inherent in the society itself.

I don't insist that this is true of course, merely propose it as an alternative explanation. But if it is this way around then the attempted economic equalising won't clear up those ill effects. We'll just get the same problems but at a lower general standard of living as we carry the deadweight costs of the taxation.

One of the things that makes me suspect that matters are my way around is looking at England itself. We certainly have heriarchy and status, we also have a certain amount of economic inequality. But no one who has ever even vaguely looked at the English class system is going to assume, even in jest, that status or your position in the heirarchy depend upon the amount of money you've got. Shifting the money around isn't going to have all that much effect on status then, is it?

The end of newspapers?

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There is a generally held truth that the days of newspapers are numbered as people increasingly turn to the internet for their news. There is clearly some truth in this and a number of papers will go to the wall accordingly. But instead of trying to turn papers digital, owners would be better advised to look to the past to find a model for the future.

Whatever your political predilection, the standard of your paper in this country is invariably poor. A search of articles in newspaper archives shows a cavernous gap in the quality of journalism between past and present. Much of our current papers are full of vacuous opinions that would fail to challenge the intelligence and opinions of a twelve-year-old child.

Clearly in the age of instant information newspapers will no longer be the place people turn to in order learn about what is going on in the world. However, this need not be the end of newspapers. They have a place for investigative reporting and considered analysis of the news. The model for this is not to try to copy what independent blogs do so well, but to look to the past where journalism was of a higher standard and less inclined to unthinking reactions to current events.

With the declining sales of newspapers it is probably not the time to consider the viabiliity for starting a new paper. However, as there always exists opportunity in adversity, perhaps it is worth some consideration. No paper at present caters for believers in both economic and social freedoms. There might just be room for one on the UK market...

The Rates, the Poll Tax and Council Tax

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This April marks the twentieth anniversary of the Community Charge – universally known today as the Poll Tax. Or 'the ill-fated Poll Tax', because its implementation led to violent demonstrations in Glasgow and London, and it was quickly replaced. Arguably, it was the turning point for the Thatcher Administration.

We have to fess up to some involvement. It was an ASI report Revising the Rating System, written by my colleague, the late Douglas Mason, that put the idea on the public agenda. Mason recommended a flat-rate, per capita charge for local services, balanced by improvements in welfare benefits for those who would face the charge for the same time. He recommended gradual introduction, and lengthy testing. In the event, none of that happened. If anything sunk the poll tax, it was disastrously bad implementation, rather than the idea itself.

Everyone agreed the rates system – a local tax based on property values – was unfair. A house occupied by a large family with teenage kids, using lots of health, education and other services, paid the same as an identical house occupied by a single pensioner. Worse, only a minority actually paid the tax – just one in seven in Scotland. So the other six voted with impunity for high-spending local authorities. Councillors became unaccountable, and extremism took hold. Spending rose, the higher rates drove out local businesses, unemployment increased, social services were expanded, and rates rose again in an unbreakable cycle.

There had been various government commissions to review alternatives – a sales tax, a local income tax, and even a flat charge. They were all flawed. But Mason's report plumped firmly for the per capital charge as the least of several evils, and eventually that idea came through.

Scottish Conservatives, knowing that the scheduled rates revaluation would be electorally disastrous, insisted that the Poll Tax should be introduced right away, before its problems were ironed out. There were some welfare changes to help those paying for the first time, as Mason had proposed – but they were introduced a year earlier, and by the time the tax came in, everyone had forgotten about them, and the new tax was still a shock. There were problems with students and other mobile people. And some unscrupulous councils used the tax change to increase their total budgets – by up to 30% in one case – and then blame the government.

So the Poll Tax was scrapped and a compromise Council Tax introduced. Even that is getting to be as unpopular as the rates. Everyone knows that, if we are to revive local communities, more money needs to be spent and raised locally, instead of being handed out by Whitehall on their terms. So we really do need a better system of local taxation. No system is perfect, so, getting there will be painful. But until we find something that reflects Mason's ideals – a charge that reflects the volume of local services that people actually consume, but protects the poor, then we will continue to muddle along, with an over-mighty government in London dictating exactly what happens at the local level.

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

What went wrong?

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Dr Gordon Brown and his G20 colleagues have made the wrong diagnoses about the financial crisis and will end up prescribing the wrong cures that will probably make the patient even worse. That's according to the leading financial analyst Miles Saltiel in a new Briefing paper for the Adam Smith Institute.

In the paper, What Went Wrong? An Agenda for the G20, Saltiel identifies a number of the wrong diagnoses. Among them are the arguments that China's saving and America's spending made trade balances unsustainable; that financial derivatives had become unfathomably complicated; that bank deregulation is to blame; and that excessive bonuses promoted excessive risk. These and other false explanations he dismisses with concise rebuttals.

Much more probable explanations, he concludes, were the US and UK's loose monetary policy and their hubristic social engineering that forced banks to make bad mortgage deal. And the fact that regulation had created banks 'too big to fail' – not helped by the inept Basel protocols. These, and other explanations, are what the G20 should be concentrating on. But they probably won't.

To read What Went Wrong? click here

Blog Review 915

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It doesn't do to be too cynical. But then you do have to be sufficiently cynical about regulation and the regulators.

A look at the latest proposals for solving everything from the left.

Get the couch and the popcorn ready. This fight could be interesting. More here.

Too good not to note: a journalist who once declined to give Netsmith some work gets a kicking.

Econ geek joke. If you're not an econ geek, don't worry. Even when explained, it's not all that funny an econ geek joke.

What we really need to fear rather than fear itself is progressive corporatism.

And finally, politics is show business for ugly people, right? Well, not entirely. But how far would Ms. Bonk get in UK politics?

G20: probably a waste of time

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I've done a few media spots lately talking about the forthcoming G20 Summit, and its possible implications for Gordon Brown and British politics. The main point I've been making is that political commentators are making too big a deal out of the summit: outside the Westminster bubble, no one is really expecting anything useful to come out of it, so its not likely to do Gordon Brown much damage even if, as most people assume, meaningful agreement proves hard to come by.

The other point is that even though I don't expect anything particularly helpful to come out of the G20, I'm sure they'll be able to cobble together enough points of agreement to make the whole jamboree look worthwhile.

Funding for the IMF is likely to be increased, and then there will be a host of populist measures to get the media's attention. I expect the G20 will agree to regulate hedge funds and private equity groups (something old Europe has wanted for ages), even though they are almost entirely un-implicated in the current crisis. They'll probably announce a pointlessly harsh crackdown on tax havens, which (again) had absolutely nothing to do with this mess, as well. And there's almost certain to be some bland declaration of the G20's commitment to free trade, accompanied by absolutely no action whatsoever.

One area where there doesn't look like being any agreement is on the co-ordinated fiscal stimulus that Brown and the Americans have been pushing for. The other EU member states are, for the most part, strongly opposed, arguing that they'll already done a fiscal stimulus and a monetary stimulus, and that these things take time to work through the system and have an effect. There's no point running up huge deficits just for the sake of it, they say. And if Gordon Brown can't convince his own finance minister, or the Governor of the Bank of England, I doubt he's going to be successful with the G20.

Quite right too: the IMF says our budget deficit is going to by the highest in the G20 by 2010, at 11 percent of GDP, so the earth is scorched enough already.

The IMF and reserve currencies

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The pound bought it long ago, and with the dollar looking ropy, does the world need a new reserve currency – something stable that people can retreat into when they feel the need?

Well yes, of course it does. Almost all currencies, in fact, should be a lot more stable than they are. It's the willingness of politicians and monetary authorities to debauch them and enjoy a short-term boom that gets us into pickles like the one we are in today. But given that you can't trust Washington, London or Frankfurt to restrain themselves, what options are left?

China's central bank governor Zhou Xiachuan has suggested a supra-sovereign reserve currency, with the IMF running it. All the emerging BRIC countries (Russia, Brazil and India too) have backed the idea. And – shock – a punch-drunk US Treasury Secretary Tim Geithner said he was quite open to the idea (though the dollar slid sickeningly at that news, forcing him into a quick retreat).

Could the IMF become the world's central bank? Well, to some extent it already is. It already runs Special Drawing Rights, based on a basket of major currencies, which countries can use when they need to. If those became a generally accepted means of payment, it's effectively a new world currency. And since the IMF would be independent of governments, some stability might be restored.

Possibly. The IMF still wouldn't be creating a new, stable world currency – the SDRs would rest on other people's washed-out dollars, or pounds, or euros. Well, maybe not too many dollars, which could be further bad news for the Americans. And is the IMF the right institution to be managing anything like this, anyway? The Chinese, who hold nearly a third of the world's dollar reserves, quite reasonably say that they are under-represented in the IMF's decision-making. But the problems are deeper than that. The IMF is a 1940s Keynesian institution. It's small, ineffective, outdated, and carries endless baggage. The world monetary system has moved on. So should we.

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

Those shock GDP numbers

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No, I'm not about to start saying that everything is just peachy, even I'm not that optimistic. But can we at least have a little bit of proportion here?

Economists were expecting GDP to have contracted by 1.5pc in the final quarter of last year – in line with the preliminary estimate – but the Office of National Statistics had to revise the figure downwards to 1.6pc.

It is the biggest quarterly fall in GDP since 1980 and the biggest annual fall since the last recession in 1991.

That proportion being that the economy has indeed just shrunk. All the way back to the size it was in, ooh, say, March or April of last year. Yes, it might indeed get worse again as well but there's just about no one who thinks that it's going to shrink as far as, say, the level of 1999. If it did that would be a Great Depression sized fall and there are very very few who are predicting that.

As I say, I'm not trying to insist that everything's just fine, nor that a lot of people are going to actively enjoy the downturn. But I would like a little more proportion.

The one defining characteristic of this liberal capitalism shtick is that it delivers, consistently, over time and for the average person, a rise in the general standard of living. The other name for this is economic growth. As the major report on climate change notes:

The global economy expands at an average annual rate of about 3% to 2100, reaching around US$550 trillion (all dollar amounts herein are expressed in 1990 dollars, unless stated otherwise). This is approximately the same as average global growth since 1850, although the conditions that lead to this global growth in productivity and per capita incomes in the scenario are unparalleled in history.

We think that trend growth, the possible or even likely long term growth rate, for the UK is 2.5% to 3%. A 1.6% fall in GDP is thus we've lost that year's growth and retreated 8 months. This isn't, I'd like to posit, the disaster that most seem to be saying that this is.

It certainly isn't enough of a disaster for us to throw out that only economic system ever uncovered that provides that 3% growth over the long term.

So before we decide that capitalism is dead and we're off to bury it in regulation and stagnation, could we just make sure that we really do want to stop the occasional hiccup at the cost of never again having that 3% growth?

Oh, and yes, you do know that that 3% average growth over the century includes the falls at times like the Depression? That this is the growth rate after the hiccups?