The better option


The blogger, Harvard economist, and former chair of President Bush's Council of Economic Advisers, Greg Mankiw had an interesting piece on his blog yesterday regarding the relative merits of spending increases and tax cuts as ways of boosting the economy. In a nutshell, tax cuts are better:

Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey's research suggest a government spending multiplier of about 1.4…

...By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars.

Of course, I would argue that public spending doesn't really boost the economy at all, since it necessarily involves taking capital away from the (more productive) private sector in the form of taxes or borrowing. Public spending also crowds out private spending which, again, would probably have been more effective in boosting the economy. Still – even if you do accept that public spending is an economic stimulus, the research suggests tax cuts remain the better option.

Hat-tip to James Forsyth on Spectator CoffeeHouse

Blog Review 806


No, political corruption isn't that rare in the US: and as public choice theory tells us, we shouldn't expect it to be either.

So what, exactly, do the unemployed do with their time? Certainly, not a lot of it is spent looking for a job.

Explaining that Nobel acceptance speech.

An update on the Campaign to Abolish the TV Licence. 200,000 pledges so far....

Netsmith enjoys how much this news will enrage a certain type of Green. Walmart is becoming the greenest retailer in the US.

One explanation (and a very useful one) for what is happening in the markets these days:

There has been a massive crash in the risk tolerance of the globe’s investors.

And finally, the thinking behind that alcohol crackdown.

First, stop digging


Alistair Heath had an excellent 'Editor's Letter' in the City AM last week. His main point was that the UK economy is currently being hit by two separate problems: the credit crunch (and its consequent downturn) and a "devastating drop in long-term competitiveness".

I agree. And the problem is that in attempting to deal with the first problem (i.e. the recession) the government is almost certainly going to make the second problem even worse. That is to say the government is going to run up massive debts and (inevitably) raise marginal tax rates, damaging the UK's economic competitiveness and hindering its long-term recovery, in order to increase spending in a misguided attempt to stimulate the economy.

This spending isn't going to do much good because, as Russell Roberts puts it, the government "can no more stimulate the economy in the short run than you can make a child grow a foot in a week. Genuine growth takes time." The only thing government can do is "help create an environment for that growth to take place by unleashing the creativity inherent in a nation's people and those they trade with in other countries."

This is key point: there is going to be a recession, it is going to be unpleasant, and there is very little the government can do about it. Years of cheap credit fuelled an asset bubble, causing capital to be misallocated; now that bubble has burst, the economy inevitably needs to adjust. Nobody wants to see companies go out of business and jobs lost, but government interference will only store up more trouble for a few years down the line.

Ultimately, the only thing government can really determine at this point is what kind of shape we'll be in once the recession passes. Policy should be focused on the long-term health of the economy, not just motivated by a 'something must be done' mentality. For more detail on this, it's worth having a look at Reform's recent publication The Hole We're In, which is one of the best things I've read on the subject.

Dignity and privacy


Reading the words of Mary Ewert - the wife of Craig Ewert – one is struck by the intelligence and thought that clearly went into his decision to end his life. However, it is not only his decision to die that is causing a furore, but the decision for his death to be broadcast on Sky television.

I did not watch the documentary. This is simply because it was of little interest to me. As a (relatively) young and healthy person, I did not want to sit and watch the end of this man’s life. However, when father time, faulty genes or the pleasures of life catch up with me, if faced by a similar choice to Mr Ewert, this documentary will prove a rare and vital source of information.

Much has been written on this documentary breaking the taboo of death. Yet this documentary in fact breaks the much larger taboo of ignorance. Death is often degrading and unpleasant; those close to it are immersed in a blanket of silence and misinformation. This documentary allows people facing degenerative life to make their decision with the facts in mind.

It was surprising to hear on Radio 4 Phil Willis – Craig Ewert’s former MP – bemoaning the lack of privacy that this documentary shows. The point about privacy is that it is ours to do with as we wish. Willis’ convictions are his own, while the Ewert’s convictions are theirs. Politicians have a lot answer for in regards to protecting our privacy: a politician defending privacy is hypocrisy on stilts.

Those who were liable to be offended by the documentary should not have watched it. Unlike death and taxes, it could have been easily avoided.

Blog Review 805


You know, there might be a reason why the top people at Exxon are paid so much money. They at least didn't get taken in by the bubble.

Getting it the wrong way around. There are some areas of life and the economy too important for us not to use markets.

Explaining the green and scaly option.

Even in these hard times there are still some people making their fortunes. You might not want to help them do so though.

One banker explains why he shorted Merrill. Essentially, whatever the boo boo, they always seemed to end up getting the short end of the stick. So it's not quite shorting Merrill, rather betting that there would be a future boo boo.

(Serious bad language warning). How those Government consultation exercises work. They're more a consultation of government than a consultation by government.

And finally, explaining the auto bailout.

The fall of sterling


I'm just off to Brussels where a sandwich now costs about £500 because the pound is so low. Currencies have their ups and downs, but smooth those out and they're a pretty good indicator of how an economy is faring. Basically, if nobody is buying your stuff, they don't need to buy your currency to pay for it, and your currency collapses. Well, a huge wodge of the UK economy was banking and financial services – promoted enthusiastically from the moment that Tony Blair and Gordon Brown assumed office in 1997 – but that business has been stopped in its tracks. Nobody wants to buy stuff from a bunch of wallies who sail so close to the wind that they keel over and have to be bailed out by the government.

The stock market is bouncing up again, but it's a dead cat sort of bounce. There's no obvious reason for it, other than the fact that Obama is proposing to spend a trillion dollars giving America infrastructure it doesn't need. The FTSE 100 companies are highly international firms, and some are almost American, really, so that helps them. But it doesn't help the UK economy all that much. Maybe we'll get lucky and Obama will buy a few of our JCBs to dig his foundations.

No, the pound is the best indicator, and that's sliding downwards. A few years back, Britain was the world's fourth largest economy, though the rise of the huge economies of India and China booted it down to sixth. Then we were overhauled by Germany. There's a fair chance that when the books are closed on 2008 we'll turn out to be behind Russia and (horrors) France – and maybe even Brazil and Italy. How humiliating is that? I'm afraid that Gordon Brown's boast that Britain was better placed than most to survive the downturn stands exposed as a total lie. Ask the foreign exchange dealers.

A load of balls


So, Ed Balls has backed yet another brainless scheme, this time relating to child obesity. This latest plan is to ban fast food and takeaway restaurants from within 400m of every school, youth centre or park. As soon as I read about this proposed scheme the impracticalities of it became apparent.

Firstly, having only left sixth form this year, I would like to think I understand the psyche of the average school student better than Ed Balls. My school had a national ‘Healthy School Status’: as such there was an abundance of reasonably priced salads, fruit, nut-bars and low-fat yoghurts. But every day there were still hoards of my peers walking down the road to every type of takeaway restaurant imaginable. Clearly, forcing healthy food onto young people does not work. In fact, from my experience, it only created resentment towards our school canteen as we were being forced further away to find the choice of foods we wanted.

Quite apart from that though, the idiocy of this scheme is laughable. I am trying to think how far I would have to travel from my house to find an area which is at least 400m from a park, youth centre or school: it’s quite a way! And what would happen if a new youth centre was opened in a high street – would all the takeaway shops have to close their doors immediately?

According to the Federation of Small Businesses, this industry is worth £20bn a year, and Balls' scheme could significantly damage small firms. In the current economic climate, the government should be encouraging businesses and entrepreneurs rather than working to ensure their demise. This is yet another example of a poorly planned top-down scheme with little consideration for people, businesses or local issues. By all means let schools educate children about the dangers of obesity (although perhaps teaching them to read and write properly should be the priority). But then allow them or their parents to make their own free choices.

Sound familiar?


The German government yesterday denied any prior knowledge of the SS and Gestapo raids which killed 85 people on the "night of the long knives." In a statement Herr Hitler said, "This is a purely operational SS matter, and government policy remains one of non-intervention."  Fieldmarshall Goering said it would be wrong to intervene in an ongoing SS investigation. Reichsminister Goebbels accused those raising the issue of "a blatant attempt to intimidate the Gestapo and prevent it from carrying out its duties," while Herr Himmler announced that there would be an internal SS enquiry into the incident, chaired by himself.

Blog Review 804


This No2id video is a reminder of how people will be put in danger by the introduction of ID cards and the national database. We have in fact already had cases of people bribing their way into police and other databases to find those they mean harm to.

If you'd like to know how the modern art market works (at a level of sophistication a little higher than selling rotten sharks to financial sharks) a book recommendation for you.

Even the soft left are amazed at the economic ignorance of the hard left.

Professional defending his turf or a solution to what ails the NHS? Your choice.

Have councils stored up trouble for themselves by taking out interest rate swaps and or insurance?

Pompous writer at NY Times (now there's a surprise!) gets depomped.

And finally, the Charlie Mingus method of toilet training your cat.

Going off Obama


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.