Going off Obama

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I'm going off Obama and he isn't even in the White House yet. In response to the news that America lost half a million jobs in November, he's announced a massive spending programme of new roads, bridges, schools, internet cables, and much else. It's estimated at $700 billion, but it might even top a trillion, say some.

There are two problems with this. Firstly, where is all that dough going to come from? Well, it's going to come mostly from borrowing. With US interest rates at 1%, borrowing is cheap, for the government as for everyone else. But then it was cheap credit and too much borrowing that got us into this hole in the first place. Whatever the problem - the 1987 crash, the dotcom crash, 9/11 and now the 2008 meltdown - the federal government has thrown money and cheap credit at it. Yes, it prevented downturns in every case: but we all got hooked on the stuff. Just like a drug addict, it has taken larger and larger doses to keep the high going. We've been so high for so long that the inevitable comedown is now that much longer and more painful.

So what are we going to do? Inject ourselves with more of the same drug, and hope it will get us through the pain. Well it might, but only at the cost of more pain later on.

My second objection is that building programmes like this too often reinforce the economic ups and downs, rather than smoothing them. You can't just build roads, bridges and schools overnight. You need to work out the need for them, design them, specify them, get planning consents for them, tender them out, review possible contractors, hire in staff, fund them, build them. So it can be two years or more before any real cash starts to get paid out to all those currently-unemployed construction workers. By that time, the economy might have started to get going - so you're not spending in a depression a la Keynes, you're spending in an upswing and simply taking resources from that recovery.

Now that the financial sector is stabilized - well, a bit more stable - it's not a matter of having to intervene hard and big just to make sure confidence doesn't go through the floor and add to the crisis. It's a matter, sadly, of going through the hangover and getting on our feet again. But yet another dose of the money drug isn't going to help us kick the habit.

Thanks, Labour

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I spotted this story in The Times over the weekend. A new report from the Institute of Fiscal Studies has shown the effect of tax and benefit measures imposed by the Labour government (taking the measures in the pre-budget report into account), and it does not make happy reading.

According to the IFS's calculations:

  • By 2012, an average dual-earner couple with no children is set to be £2,208 a year worse off than they were in 1997.
  • A single earning couple with no children will be £1,684 worse off.
  • A dual-earner couple with children will be £1,466 worse off.
  • Employed single people will be £1,281 worse off.
  • The groups that will have benefited most from Labour's tax and benefit changes are no-earning couples with children (£2,901) and unemployed single parents (£2,491).

These figures speak for themselves: most of us have paid a high price for Labour government. Of course, they would probably just argue that these higher taxes have led to an extraordinary rise in standards in health and education, a better deal for pensioners, and more 'social justice' for the deprived. But I don't think that's true.

Certainly, people with children and little or no income get more money now (although perhaps this has had unintended consequences) and many pensioners are financially better off (not the ones who had private pensions though). But British schools have slipped down international league tables, and a massive increase in health spending has brought only marginal improvements. Meanwhile, we have seen no great regeneration of Britain's transport infrastructure.

Here's a thought experiment: what if we hadn't had a government since 1997, and everything had just been run as it was then? We would probably have eliminated the budget deficit and paid off most national debt. We would have considerably lower taxes. We would have the best private pensions system in Europe. The EU Social Chapter would not have effect in the UK (so no EU labour laws or health and safety nonsense). And we'd have fully-fledged internal markets in health and education. In short, it wouldn't be a perfect country, but it would be a lot better than it is now.

Can I have my money back, Gordon?

Blog Review 803

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One of the more startling rhetorical collisions of recent times. John Redwood channels Neil Kinnock.

So just why do people take out startlingly expensive short term loans? Because they benefit those who take them out perhaps?

Would you, in the current market, take out a 4 year, 123% loan to value, mortgage for $3,074, 239. Would anyone give you one?

Schadenfreude is the most glorious of human emotions.

It's very difficult indeed to see that any of the proposed climate change suggestions are economically efficient. Or even have their incentives correctly aligned.

Why world government is such an appalling idea.

And finally, yes, why not?

Do markets corrupt?

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Certainly, some seem to think so. That all this naked materialism, this incessant competition for the daily necessities of life darken, even blacken, our souls. However, consider the alternatives:

First, if the market corrupts, the various negations of the market corrupt absolutely. Look at fascism. And look at that other hatred of the market that preceded and followed it: communism. I doubt that anyone would posit communism as the fulfilment of character and soul for its victims or agents. Second, if these corruptions must be ranked, it is patently obvious that the communist or the fascist corruption through the negation of the market is significantly deeper, deadlier and more irreparable than the first. That was obvious for fascism from the start and it eventually became obvious for communism too.

The truth is of course that markets aren't the way in which we compete with each other. Not, at least, in the sense we do under either communism of facism, where we are competing for the set amount of political power over our fellows. Rather, markets are the way in which we cooperate with each other.

Finally, a third corollary: because the free market develops the qualities of taking initiative and making decisions, because it places individuals into relationships with each other, because it is a regime that makes sense only if its subjects relate to one another, the free market remains a factor promoting socialisation, a means of connecting human beings, even of creating fraternity or, in any case, mutual recognition. Hence, it is the opposite of corruption. We should read Emmanuel Levinas on the question of money. He argued that, far from isolating and atomising individuals, money is, in fact, the medium of their interchange. And so it is necessary to conclude that there are good uses for the market, since it is one of the means that human beings have found to resist the all-out war of everyone against everyone else, diagnosed first by Hobbes and then by Freud.

Quite so, markets are (and money simply facilitates) voluntary exchange, something which is at heart simply cooperation with those around you and those further away. Markets are many things of course, they are price discovery mechanisms, they are distribution mechanisms, but their basis is simply humans dealing with each other on a daily basis. And what could be corrupting to the soul about that?

Bashing banks

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I was meant to go on Radio 4 on Friday to talk about whether the government should force banks to pass on interest rate cuts to customers. In the end another story took its place, but here's what I would have said.

The banks are being pulled in two ways by the government. They've been told they have to become financially stronger and rebuild their asset sheets, and that's what they're doing.  But now the government wants them to lend more too – which it's doing for popular consumption rather than any business reason.

The government shouldn't be micromanaging banks. Bankers know they have to consolidate their businesses, so that we can trust them in the future, and that's what they're doing.

Plus, the banks probably figure more people are going to default on their mortgages, but now the government is forcing them, effectively, not to foreclose. So they need some padding to get through that. It may be bad for borrowers now, but it is good for the financial sector in the long term.

One big problem is that there's now much less competition in banking because recent forced mergers and acquisitions has reduced it. In the long run, we'll need much more competition in the sector because that will put more pressure on banks to operate efficiently and give customers the very best deal. A few well-managed banks have already passed on the cut. It's the others who have to rebuild themselves that haven't.

Ultimately, it's just not for the media or politicians to tell people how to run their businesses. If there is proper competition, customers will be protected. In a free market, you can choose a different institution that doesn't charge so much.

Blog Review 802

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Something a little strange is happening in the unemployment figures. More men than women are losing their jobs.

Of course, the absolute number of jobs lost in the US was very high: but then so was the absolute number of people in work.

Another case of when tax rate rises don't actually mean tax income rises.

More information on the nature v nuture debate: nature seems to count for quite a lot.

Are we absolutely certain that now is the time to reduce the transparency of the banking system?

Looking for someone to blame? How about this list of all rulers everywhere since 1700? Should do as a start, no?

And finally, perhaps psychics might forsee that trying to scam those who expose psychics might not be a good idea?

 

Might we have gone a little too far?

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As has been endlessly pointed out before WWI the average Englishman could live out his life having no more interaction with the State than that afforded by the postman and the local policeman. Some of the additions since then have indeed been worthwhile but I'm not sure that we can say that of all of them. Yes, I know this is from the Daily Mail but still:

The Solankis were found guilty of failing to comply with the bylaw and now have a criminal record. They were given a six-month conditional discharge.

What dark crime could they have committed for a conditional discharge to hacve made the national newspaper?

A Cambridgeshire bylaw states that all paperboys must have a work permit issued by the council and signed by the child's employer, headteacher and parents. Working children must also be over 13 and cannot start work until after 7am.

Had they been employing those underage? Or perhaps forcing them to work long before dawn?

All the boys concerned were between 13 and 16. Other than not having the correct paperwork, they were working legally.

So no, nothing terrible going on.

Prosecutor Simon Reeve told the court that the couple ignored letters and visits from a child employment officer. He said that although eight applications for work permits had been sent to the children's school, only three were signed.

They had even tried to comply with the paperwork.

Cambridgeshire County Council used the controversial Regulation of Investigatory Powers Act (RIPA) to spy on eight paperboys thought to be working without permits. It sent undercover council officers to lurk outside a Spar in the village of Melbourn and take notes on the movements of the boys.

To uncover this terrible breach of all that makes a society holy and worth preserving council officers used anti-terrorism laws and (one assumes that if they were undercover they had to wear disguises, which is amusing and at 7 am they were on overtime which is less so) staked out the local newsagent. All to discover that voluntary exchange was going on without their permission.

Yes, I know that pre-WWI world isn't coming back and I'm entirely happy with many of the innovations since then, unemployment pay, State old age pensions and the rest. But might I just float the suggestion, that while the law is the law the law can also be an ass, that we've gone too far and ought to be retreating, not advancing, the State's control over our lives?

 

Sarko's madcap plan

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Like Baldrick, French president Nicolas Sarkozy has a cunning plan. He's going to give €1000 to anyone buying a new car (assuming their old one is more than 10 years old, and they opt for an environmentally friendly model).

First of all, it strikes me as barmy for a government to borrow money, ramping up its budget deficit in the process, and then give it to people to spend on cars. What this really amounts to is future taxpayers subsidizing current taxpayers’ new cars – and it’s hard to see how any rational person would regard that as a good thing. Indeed, even Patrick Devedjian, the general secretary of Sarkozy's own party, the UMP, is against the idea.

It’s not going to do anything to boost the economy either – it will just encourage money to be invested in unproductive sectors. It’s true that car manufacturers are suffering, and maybe this could help them temporarily – but only at the expense of other areas of the economy. In the long run, the auto companies would be far better off restructuring than relying on government subsidies anyway. It's instructive to note that Sarkozy's idea is hardly new: they've already tried it three times, in 1994-5, 1995-6, and in 2007. And if it didn't work then, why should it work now?

Sarkozy could actually make a far greater difference to French industry if he got round to tackling the high taxes and restrictive labour laws that make it so difficult for French companies to compete in global markets. He did win the presidency promising a rupture with the past, after all.
 

Arguing about apprentices

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Apprenticeship schemes can be beneficial to the labour market, and in turn the economy as a whole. If run efficiently and led by firms they can produce highly skilled young people with a higher degree of specialisation in their field. This helps promote high quality domestic industries.

The reason these schemes tend to work is that firms know that they are investing in high quality staff who can be nurtured to suit their needs, creating a reliable and efficient workforce. So when the quality of the apprenticeship schemes becomes questionable, the entire system is undermined. This is the problem with the governments interference by proposing a quota of 400,000 places to be on offer by 2020.

By producing such a quota, the government is effectively artificially boosting the supply within the market for apprentices, consequently devaluing the benefits they bring to firms and the economy. By ensuring that there are always places available on these schemes, the government is disincentivizing young apprentices, making the market less competitive. The government needs to be aware of possible unintended consequences that could harm the long-term interests industry.

As this article says, these targets are facing some stiff opposition and may not actually come into play. Let's hope so. Apprentice schemes should be left in the hands of the private sector. Ultimately, they know that if they invest in young employees, educating and training them, they will reap the rewards later on.