Near-zero interest rates won’t refloat the economy

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SIR – We shouldn’t bank on lower interest rates getting us out of the credit crunch.

They may encourage consumers to borrow and spend more, and make it cheaper for businesses to expand. But there are more savers than borrowers in Britain, and they have seen the income from their savings cut by four-fifths. Savers aren’t rushing out to spend — indeed, they are cutting back.

Secondly, lower interest rates drive down the pound. The Government needs to borrow huge sums to fund its bank bail-outs, but with money so scarce at home, much of that will have to come from abroad. A weak pound makes that borrowing hugely expensive.

Thirdly, interest rates at 1 per cent dent confidence, as people fear that the Government is running out of weapons to combat recession. A decade of near-zero interest rates in Japan has not solved their banking crisis.

The British economy might be refloated by lower taxes and cuts in business regulation, but not by lower interest rates.

Dr Eamonn Butler
Director, Adam Smith Institute

The Telegraph, Letters (7 February 2009)

Blog Review 864

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Do you remember when $30 billion was a lot of money?

Wasn't the problem that we didn't know what the correct prices were in the first place? To find out that the government overpaid is not all that much of a surprise is it?

Explaining AIG using the ever popular two cows method.

An excellent solution to the American problems with the trial lawyers.

Now really is not the time to be increasing statutory redudancy payments.

One way to get the housing market moving.

And finally, yes, there is such a thing as too much time on your hands.

Two minor problems here

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Camilla Cavendish doesn't spot the two minor problems we have with this dash for green energy.

Going low-carbon is no longer a seminar subject for caring greens. It's a real live competition to beat the oil regimes and make profits, in which the new environmentalists will be alpha males.

The first is of course that there are no profits here. If there were profits then that would mean that, entirely unaided by taxation, cap and trade or legislation/regulation, energy sources other than fossil fuels would be cheaper or more convenient than those fossil fuels. Our very problem about the whole issue is that this is not true. There are no profits in green energy systems, there are only losses. We might disguise those losses via regulation and or legislation, cap and trade or taxes, but they are losses all the same, not profits.

The second problem is that Britain risks being "left behind" in some manner. We must therefore, as the US subsidizes massively, subsidize so here as well, for we are in competition. Which is the very opposite of the truth. At present there are only losses, as above. Now it might be that after spending some billions, perhaps even trillions, a better and cheaper energy generation system will be designed. But the correct reaction from ourselves should be that once someone has indeed designed such we go and buy it from them.

There's absolutely no reason at all that we should be gouging ourselves as taxpayers to make such subsidies when the Americans seem so happy to pay for it themselves.

Bank bonuses

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The fuss about bank bonuses will run and run. The Royal Bank of Scotland, recipient of £20bn of taxpayers' money, is planning to give bonuses to its senior bankers and City traders that might well run into millions for some of them. And the Treasury seems to have agreed, provoking much public outrage. Why should a failed bank, especially a state-owned one, pay bonuses at all?

But there's a great deal of misapprehension about bonuses. They are actually a way in which banks, and other businesses that face upswings and downswings, manage their wage bills. For most companies who pay staff bonuses, it's a way to manage wages, not inflate them. Bonuses are tied to the performance of the individual or the company. So if times have been hard, the wage bill can be reduced, and when times are good, it's made up again.

Sure, there's a lag, because you can't calculate the bonus until your accounts are done and dusted, which might be nine months later. And these are contractual obligations: because things are bad now doesn't mean you can just tear up contracts for the sake of political correctness.

There is also the point that bonus payments incentivize people. When traders are paid according to the business they generate for a company, they are incentivized to generate more.  If people are bringing in billions' of pounds' worth of business, isn't that indeed worth millions? Of course, you need to make sure that they are bringing in good business, and not just selling more mortgages to people who can't afford them. And some bank executives have certainly made mistakes on that front. Incentives need to be carefully managed (as Gordon Brown should know: witness all those people waiting in ambulances and corridors because the A&E department don't want to go over their target time for treating people whom they admit).

The fourth plinth waiting game

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Will Trafalgar Square ever see a permanent resident to it’s vacant fourth plinth? I say vacant, it’s currently supporting a model that the pigeons have adopted as a dance club! Later in 2009, Anthony Gormley will be asking 2,400 people to stand on the plinth, 100 per hour (you can apply here). Following him will be “Victory in a Bottle" by Yinka Shonibare, which is exactly what it says on the tin. But perhaps the time has come to move away from the concept of placing modern art on there, it’s become somewhat staid. Modern art is supposed to push the envelope and it’s proven that.

However, the plinth is there for a statue to be placed on it, completing the square if you will, and recently there have been two very good proposals. The first, which is currently in the planning application stages would see RAF hero, Sir Keith Park overlooking the square. It would be in keeping with the military theme and would bring the area up-to-date by rightly immortalizing a Second World War flyer. The second is nothing more than a rumour that circulated in the press late last year, but one that is in fact a very noble idea: a statue of the Queen on horseback. The one drawback is that it would be unveiled after her passing (which could be a long way hence). Perhaps we shouldn’t wait. Why not set the goal of having it erected by 2012, 60 years after her ascension to the throne and also in the Olympic year?

What needs to be undertaken is a drive to erect something permanent there to stop us from enduring the rather public death of modern art. Modern art need not be constricted to one site in the corner of a square, it should be interspersed throughout the city so that it becomes a daily interaction that enlivens us. Rather than a drab reminder of where pigeons go to party.

Blog Review 863

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Further proof that protectionism really isn't all that wise.

And other political ideas are even less sensible.

This talk about green shoots of recovery. Might it actually be true?

Although this might not be true in every country.

Climate change and global warming.

Wouldn't it be terrible if families just sorted it out themselves? Whatever it is?

And finally, a stimulus proposal we can really get behind!

Don't do it, President Obama

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Dr Helen Evans, an ASI Fellow and Director of Nurses for Reform, has written an excellent new briefing paper for the Washington-based Heritage Foundation, titled Comparative Effectiveness in Health Care Reform: Lessons from Abroad. It assesses President Obama's proposals for the creation of an 'Institute for Comparative Effectiveness' (sounds sinister, doesn't it?) in the light of the British, Danish and German experience.

The key point that Helen makes is that the idea that government is intrinsically superior to a spontaneous and free market in healthcare is groundless – and that you only have to look at the UK's socialized system to see why. In particular, the government's reliance on coercion and 'cost effectiveness' has led to a system of rationing that most Americans would be appalled by.

It's an interesting paper, and well worth a read. It is clear to me that the US healthcare system is definitely in need of reform, but it's also clear that Obama's ideas are not the right ones. The real key to bringing down costs – and thereby widen coverage – is to stengthen market forces (allowing interstate competition, for instance, and introducing individual, rather than corporate, tax credits), not putting big government in charge.

The reins of power

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On this day, February 6, back in 1952, Elizabeth II became Queen of the United Kingdom after the death of her father George VI. Britain was on the cusp between 'postwar austerity' and (in the words of a future Prime Minister, Harold Macmillan) 'you've never had it so good'. There was much talk of a new beginning; a new Elizabethan Age presided over by the young Queen.

It was a year of some interest. Prime Minister Winston Churchill announced that the UK had an atomic bomb. The Americans tested their own versions in the Nevada Desert. Nehru became leader of India. The Mau Mau uprising in Kenya led to martial law being declared. Former general Dwight D Eisenhower became President of the United States. The Mousetrap opened in London (it's still running).

One of the signs that Britain was indeed changing, however, was the abolition of Identity Cards. They had been introduced during the Second World War as an aid to national security. And people imagined that they would be ditched soon after. But the postwar Labour government of Clement Atlee found all sorts of reasons to keep them – mostly their ability to make life easier for state officials. Police would routinely ask for ID any time they stopped or questioned a motorist, for example, but in 1951 the Lord Chief Justice ruled that this was contrary to the purpose of ID Cards, and in March 1952, they went.

The last rationing, which had also hung on too long, went a few years later. Governments are never quick to give up their controls over our lives. But Churchill's government should be congratulated for doing so.

Cabinet Crisis

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Tom Daschle and Nancy Killefer will not be joining Obama’s bipartisan cabinet crew due to their failure to comply with American tax code. Is the American tax code too complex that not even two successful and presumably intelligent politicians can figure out on what items they need to pay taxes?

Daschle is a former US senator and Killefer is an MIT graduate, they seem pretty capable to me. Or maybe it is too easy to cheat on them, it surely took the IRS a long enough time to catch these high profile figures. In Daschle’s case, it is difficult to believe his initial response of naivety to the tax dilemma. His combined failure to pay taxes on a car service, income on consulting work, in addition to an overstatement of tax breaks from charitable contributions trap him in a run of peculiar “oversights."

But maybe the tax code really is too difficult to follow, especially for citizens with above average expenditures. Nancy Killefer failed to pay unemployment taxes on domestic help in 2005, which added up to about $1000. For a top-level executive like Killefer, it is hard to believe that she would risk the future of her career to intentionally evade one thousand dollars in taxes.

A simplification of the US tax code could make life easier on both sides. Politicians will be able to properly account for all aspects of their extravagant lifestyles, and the IRS will have an easier time tracking them down when they do decide to cheat Uncle Sam. It’s a Win Win!