Transatlantic carbon trading


The European Union is keen to link up with the United States and produce a transAtlantic carbon trading system. David Cameron's party has also welcomed the idea of setting up a world system. It's a bad idea.

You know me. I believe markets are the solution to just about everything, from traffic congestion to better healthcare, smarter education, and faster mail delivery. And when tax is debated, my opening bid is to oppose any tax, of any kind, or any size, at any time, for any purpose.

But the trouble with carbon trading 'markets' is that they are run by governments and officials. The European system has always been a complete dog's breakfast. Because to set up such a scheme, you have to negotiate who is going to get what quotas. So from Day One, you're immersed in politics, not markets. Europe was hugely keen to show its good intentions and get Russia into its emissions trading scheme. But the Russians were tough negotiators and ended up with billions of dollars' worth of quotas which they could then sell to others. Were the quotas given to other countries any fairer? I doubt it.

Then at a more micro level, the exact operation of the scheme depends on bureaucrats assessing the outputs of individual producers. The whole structure is based on political horse-trading and bureaucratic judgement. That's no way to run a market. No, I hate to say it, but a carbon tax would be a lot easier.

Thatcher's recession and Brown's recession


In 1979, Margaret Thatcher came to power in Britain, pledging to end the raging inflation of the time, curb the growth of public spending and borrowing, and balance the government's books. She did all of that, though she could not spare Britain the recession that inevitably followed the collapse of the inflationary boom.

Indeed, the depth of the economic collapse took the government by surprise. Mrs Thatcher had read her Milton Friedman. Inflation was the Number One enemy, because it eroded confidence in money, made real price movements impossible for entrepreneurs to spot, and so generally messed up the market process. It was like a drug: you needed larger and larger doses to get the same stimulating effect. When you came off it, you would have a nasty hangover of unemployment. But better to get that with over earlier rather than later.

But the government was unprepared for the scale of the downturn. Indeed, many ministers got cold feet. Rather than the pain being spread evenly across the economy, some industries simply collapsed, with huge job losses.

Mrs Thatcher should have been reading her Hayek. For Austrian Economics explained what was happening. Money, said Hayek, was like honey pouring onto a table. It formed a mound where it went into the economy. Turn off the supply, and the central mound collapses, but more of it reaches the outer edges. When Mrs Thatcher turned off the money supply, those industries that had relied on the boom – the heavy state industries in particular, but also luxury goods manufacture, travel, holidays, housebuilding – simply collapsed. But new industries further away from the central boom – the new computer industries for example – actually did just fine.

I don't know that the Thatcher Administration ever quite got it. But having killed inflation, the economy roared back into life, and they wiped their brows and carried on.

In the current recession, we are seeing much the same phenomenon. The firms that are suffering most are the heavy industries and luxuries, like steelmaking, carmaking, housebuilding, and travel. Any retailer selling to customers who can put off their purchases until times improve – people selling anything except food, almost – are also having a hard time. But other sectors are doing much better.

The difference this time, perhaps, is that potentially rising industries – if I knew what they were I'd be rich, but I mean the modern equivalent of the 1980s computer pioneers – are finding it hard to get any of the honey because bank credit has dried up. So it's going to be bad. But maybe not as bad as all the job losses from the big heavy industries might make you think.

Energy independence: wind between the ears


There seems to be a vast desert between the POTUS’ ears upon which he plans to erect wind turbines and solar panels to wean America off the drug that is known as ‘black gold’’. In his first weekly address Mr Obama has called for the US to be energy ‘independent’. His intentions are to double the amount of energy produced from renewable sources, raising it from 7% (2007 fig.) to 14% of total consumed energy. The claim that global warming and the reliance on foreign oil are a threat to the US are hollow.

Energy dependence not independence is what is needed, as David Henderson recently pointed out in an issue of The Freeman . Put simply the cost to the average US citizen of Obama's policies will be exorbitant. With oil prices currently as low as they are it seems facile (to a rational person) to push towards becoming self-reliant in energy production. If someone is producing a good cheaper than you can, why would you not want to purchase it from them. As David Henderson points out, the cost to the American consumer of following the energy independence policy could be as much $1.20 on a gallon of gas (this figure would be based on the removal of all foreign oil).

The proclaimed savings of $2billion, by attempting to make the government offices more energy efficient, are more than offset elsewhere. During these testing times, leveraging these costs onto US consumers is not going to help the economy out of recession. It will merely cause it to stretch out that little bit more.  The President could perhaps do with a quick chat with Larry Summers about the basics of economics.

Adam Scavette joins the ASI


Greetings. My name is Adam and I began my internship with the ASI on Monday. I am an international student from the United States, and I am currently studying at City University of London for the semester. I plan to finish my bachelor’s degree in economics next May at Villanova University, a small university in the suburbs of Philadelphia. After I receive my degree I hope to enter a graduate program in public policy. Some of my interests besides economics include music making, film, and literature. I hope that my time spent at the Adam Smith Institute will allow me to gain a new perspective on current economic issues.

Blog Review 853


Yes, of course markets fail but then so, for very much the same reasons plus others, do governments.

As a minor example, those who insist upon planning seem not to understand, umm, planning.

One reason might be the paucity of explanation and depth we get from the public service broadcaster.

Do we really think that government, for example, knows more about the car industry than Toyota?

Does Will Hutton know how to run a business....or even a charity?

A most amusing and not entirely mad method of dealing with current problems.

And finally, a bank run in cyberspace.

At what point does it become communism?


According to new research for The Sunday Times by the Centre for Economics and Business Research, state spending as a percentage of GDP has now reached 49% for the UK as a whole.

That's bad enough as it is – the government now controls practically half of the UK economy – but when you look at the regional figures the picture is even worse.

In the Northeast, state spending is 66.4% of GDP. In Wales, it's 71.6%. And in Northern Ireland, it's a whopping 77.6%.

I don't think the Soviet Republics ever managed to achieve quite that degree of state dominance.

Parliament of Whores


At the weekend The Sunday Times broke a big story: an undercover investigation found four Labour peers who were prepared to sell amendments to government bills, for sums up to £120,000. Cash-for-laws, if you like.

Needless to say, this has led to renewed calls for reforming the House of Lords. But frankly, I don't see what difference electing the Upper House would make. As PJ O'Rourke put it, " When buying and selling are subject to legislation, the first things to be bought and sold are the legislators." It doesn't matter whether they appointed, elected, or chosen by lot. So long as you give them power to interfere in the private affairs of others, corruption will be an inescapable part of the political system.

It's as simple as that.

Managing the taxpayer's money


The Tories released a new plan for 'disciplined spending in government' yesterday. It isn't exactly scintillating reading, but it does contain some good stuff. The main proposals are as follows:

  • Senior civil servants will have a fiduciary duty to taxpayers
  • Financial performance measures to be established for the civil service, with pay and recognition linked to these measures.
  • Finance Directors will become the second most senior people in government departments, reporting to a central Office of Financial Management. (At the time of the last National Audit Office report, six departments with a combined budget of £45bn did not even have a Finance Director).
  • Details of all items of public spending (over a certain level) to be published online.

I think the last point is the most important one: having to publish public spending online will make public (and parliamentary) scrutiny much easier and more effective, and give government departments a real incentive to avoid waste. At the moment, if you want to find out how your money is being spent, you're probably going to be reliant on parliamentary questions or Freedom of Information requests – a significant barrier to proper accountability.

The Conservatives' paper also contains one real gem, which pretty much sums up the mindset behind 'financial management' in the civil service:

The National School of Government teaches a course for civil servants involved in finance and accounting called Managing Public Money. The stated organisational benefits of the programme are:

  • To avoid a Department being disadvantaged in the public expenditure process
  • To protect the Accounting Officer’s position

There is no reference to the taxpayer or how to deliver value for money in the course objectives.

The NSG says “this well-established programme enjoys a prestigious reputation and provides the essential knowledge all finance staff need".'

Says it all, really.

Chinese New Year


With the Chinese New Year starting yesterday it is worth considering how far the country has come since the death of Mao. Booksmith has just started reading The Elephant and the Dragon by Robyn Meredith. So far it is proving an interesting read. In the opening chapter she gives a vivid description of life before Deng Xiaoping's reforms: very unpleasant. However, life is now considerably better for most following the relative economic freedoms now permitted in much of China. Lets hope political freedoms follow.

Blog Review 852


A fun time to be a central banker at the moment, don't you think? Although the Zimbabwean one seems to be having more fun than most.

What could it be that would make a magistrate so cynical?

Certain Labour Lords have a record of certain types of actions. That might explain at least some of the cynicism.

It might be stretching things to say that only ill thought out regulation caused the current events, but there certainly were some ill thought out regulations that contributed.

A useful political rubric. If everyone's in agreement then they're wrong.

As an example: even Keynes thought that infrastructure was not a good method of providing a fiscal stimulus.

And finally, what the UN spends our money on.