Blog Review 814

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What type of fiscal boost increases GDP the most? Correct! Tax cuts!

Why Bayou is going to make the Madoff untangling even worse than we thought. Plus, the person who made the most may have been the person we all think has lost the most. And Ms. Horlick does have a question or two to answer.

How to build a really customer centric company.

How BP became a cropper in Russia.

Rum goings on at ACPO. You'd rather like the police themselves to be a tad more truthful, wouldn't you?

Netsmith has been to trade shows that felt like this.

And finally, the next investment craze.

Also known as...

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It's called fractional reserve banking. Banks assume that their depositors won't all want their money out at the same time, so don't keep enough cash in their vaults to pay them all. Most times that is just fine, but if savers think that the bank is in trouble, and they do all come in at once to close their accounts – Northern Rock style – it causes problems.

If you can be pretty confident that there won't be a run on the bank, then it makes sense for banks to lend out the money, where it can create businesses and jobs, rather than keep it locked impotently in their vaults. But a surprising number of people have put the case to me recently that this policy, though rational, is in fact another name for trading while insolvent.

Of course, if the banks can call in their loans as quickly as savers could demand their money back, there would be no problem (except to the borrowers - who would know from their lending agreement that the bank could foreclose on them suddenly, and who would therefore have to be prepared for it). Ideally, a bank should match the length of its loans to the notice period on its savings accounts, so that it can pay its 90-day depositors by calling in 90-day loans. But many banks give mortgages of twenty years and more, while their depositors don't want to be locked in for anything like that time. So the banks just have to pray that savers don't all want their cash at once.

Right now, the government is pulling the banks in different directions. They've lent too much, came a cropper, and now they are trying to build up their reserves. So they're keeping loans hard to get. But the government wants us all to borrow and spend more so that we stave off recession, and are pressuring the banks to lend a lot more. Well, that's what got us into this mess in the first place. Despite everything, I think that bankers are probably better at running banks than are politicians.

Free to work

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The European Parliament has voted to end national opt-outs on the 48-hour week, setting up a clash with member states. MEPs voted by 421 to 273 that the opt-outs should end by 2011.

Ignoring the increasing insidious usurpation of accountable democratic power by these tin-pot dicto-bureaucrats, and not even touching upon the fact that these are chains that no other human should ever burden another with, this act shows how utterly out of touch the passengers on the Euro-gravy-train are from the recession that is now striking the people of Europe.

While most people across Europe feel lucky if they still have a job, the European Parliament has once again voted against the interests of the man or woman on the street. Of course union leaders such as Unite’s joint general secretary Tony Woodley are very happy with this turn of events. It would help bring down the more productive non-unionized workers to the level of the unionized workers. Unions are paid to represent the workers, not the rest of us.

France scrapped its 35-hour week for very good reasons. The IMF sums up as follows:

In sum, the 35-hour workweek appears to have had a mainly negative impact. It failed to create more jobs and generated a significant—and mostly negative—reaction both from companies and workers as they tried to neutralize the law's effect on hours of work and monthly wages.

John Cridland, CBI Deputy Director is spot on when he states that this will "replace opportunity with obstruction". The question for Cridland and all right-thinking people is: "If your partner has lost their job, should Brussels stop you from putting in extra overtime to support your family?" Exactly.

The worst films of 2008

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Given the lack of interesting policy news this time of year, I'm going to use the holidays to indulge another interest on this blog. Specifically: movies. Having been to the cinema more than 50 times this year (I know, misspent youth...), I feel I can do the subject some justice. So in the run up to the New Year, I'm going to be counting down my top ten films of the year, starting on December 21 and concluding on New Year's Eve. But before we get to that, here's a round up of the three worst films I've sat through in 2008:

#3: RocknRolla is Guy Ritchie's third stinker in a row (after Swept Away and Revolver). It was so bad I almost walked out more than once. Incoherent and populated by deeply annoying characters, RocknRolla is a far cry from Ritchie's Brit-gangster classic, Snatch. Shame too, because you can tell he's really trying.

#2: Zack and Miri make a Porno is every bit as bad as the title suggests. It's too long, too crude, and not remotely funny – a pretty serious flaw for a supposed comedy.

#1: Righteous Kill should have been great. Al Pacino and Robert DeNiro in the same film? How can you go wrong? Well, a woefully bad script is a good start, and a complete lack of suspense (this is meant to be a thriller) coupled with a monumentally stupid plot twist seals the deal. Just watch Heat again instead.

Blog Review 813

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On the stupidity of the new law on "extreme pornography".

Car sales are down, yes, but might this simply be because consumers are poorer than they used to be?

Yet more on Madoff. If it was anything other than a Ponzi scheme then he would have, alone, been trading more options than there are options....

Good grief! Al Gore actually gets something right!

On why we actually get the Nanny State in the first place.

This GCSE question is an excellent piece of public choice economics. Unfortunately it's a science paper.

And finally, what is meant by "undivided attention".

No time for the Euro

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Now that the pound has fallen so dramatically against the Euro, there are a lot of people saying how much better off we'd have been had we joined it years ago. And there are even more others who are saying that we should join it now so that we'd have a currency with at least some value left in it. And there are yet others who say that now, when the pound is low and our exports are cheap, would be the ideal time to join, because then our exports would stay cheaper than other members', and we'd coin it. All these views are wrong.

You can only have one interest rate in a currency area, so if we joined the Euro, we would have handed the control of interest rates over to the European Central Bank. Their interest rates have been lower than ours: indeed, one of the 1990s arguments for joining used to be that we'd have lower interest rates so mortgages would be cheaper. In other words, if we had joined the Euro years ago, we'd have had an even bigger (but equally fake) boom than we in fact had, house prices would be even more astronomical, and the inevitable bust would have been even more painful than it's now going to be.

We're lucky not to be in the Euro, because at least we can let our exchange rate take the strain of the adjustment we now need to make. Things are bad, so the pound is falling, but that does indeed make our exports cheaper and perhaps we might just be able to sell a few goods and services to any other country out there which is still buying. If our currency had remained high at Euro levels, we'd be locking up more factories and closing down more insurance companies and language schools, because our prices, seen from other currencies, would have remained higher.

But while a cheap currency can get you out of a hole by making your exports cheaper, it can't save you forever. The other side of the balance is that your imports are more expensive. Much of what we import is used to make what we export, so that's not good. A lot is food and energy, which it's hard to live without, so that's not good either. And if we start making things inefficiently at home because it's too expensive to buy from efficient producers overseas, that's neither good for us nor them.

No, it's not the right time to join the Euro. Given the diversity of Europe's economies and ours, I'm not sure it ever will be.

A year of Clegg

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Today is Nick Clegg's first anniversary as leader of the Lib Dems. He may not want to celebrate it too loudly: the party is not doing much better in the polls now than it did under Clegg's predecessor Sir Ming Campbell. And with the partial exception of Vince Cable MP, the Lib Dems still struggles to make themselves heard in the political debate. Indeed, come election time the Lib Dems will probably struggle to keep the parliamentary seats they've got – a far cry from the electoral breakthrough that has occasionally seemed possible in the past.

That said, there have certainly been good things about Clegg's leadership. Most importantly, he has successfully repositioned the party on the issue of tax and public spending. Clegg has embraced a higher personal allowance and lower taxes for those on low-mid incomes, tax simplification at the wealthier end of the spectrum, and small reductions in public spending. It's not perfect policy – Lib Dem proposals to reform capital gains tax would hamper wealth creation, and the party could and should be much more radical about cutting spending – but it's a good start.

The Lib Dems have also been saying good things on education (where they now advocate school choice) and on health (where they would expand direct payments and personal budgets, and give people 'vouchers' to go private if the NHS can't treat them within a set time).

On a theoretical level, meanwhile, Clegg has pushed the party back towards its classically liberal roots – something I think is very welcome. He's still got a long way to go, but it is better than nothing. Britain would benefit from a genuinely liberal mainstream political party, like the German Free Democrats or Ireland's Progressive Democrats, if only to counteract the big-government paternalism that too often comes from both sides of the House.

Blog Review 812

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It might be that we are all acting like Keynesians now but are we wise to be doing so?

Creating green jobs is indeed a cost: for environmental policy can change the mix of jobs but not the overall number.

Bjorn Lomborg on what we ought to be doing about green jobs.

Introducing an entirely new concept. Charity porn.

Plausibility calculations or, don't you know enough to see that that answer is obviously wrong?

Half a millenium of European history in only 15 years.

And finally, the best of five years of Iowahawk.

Failure, failure, failure

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Bernard Madoff making off with $50bn of other people's money; public sector pensions being overpaid; a 'stupendously incompetent' efficiency drive at the Department of Transport. A pattern is emerging here.

The point of having regulators is so that swindlers like Bernard Madoff get found out. As they say on Wall Street, when the tide goes out, you can see who's been swimming naked. But the point of regulation is that you shouldn't have to wait for the next recession to be confident that your money is safe. It turns out that the Securities and Exchange Commission hadn't actually examined Madoff's hedge fund since he registered it in September 2006; his audits were done by an obscure accounting firm in a tiny office; and frankly, the list goes on. Sure, it's fraud. But it's fraud that was allowed to happen because of a failure of regulation.

Meanwhile, the UK government says it's accidently been overpaying public sector pensions since the 1970s. But that's all right - no public sector workers will be asked to repay any of the money. That's in contrast to all the folk in the private sector who have yet to see compensation for pension fund collapses (brought about largely by Gordon Brown's tax and regulation of them); or the farmers who had to wait up to two years to get the farm payments they were promised; or all the families on tax credits who were asked for immediate repayment when the Revenue messed up and overpaid them. That's a failure of officialdom, and worse, it's civil servants protecting only their own.

Now we learn that an efficiency drive designed to save £57m has ended up costing taxpayers a net £81m. The scheme's computer system was not put out to tender, nor tested, and was unusable, and pretty much everything else was mismanaged too. That's a failure of government.

And this is just one day's news. All these people demanding more regulation and more government should be eating their hats. We don't want more regulation, lulling us into believing that things are properly policed when they are not. We don't want a more bloated civil service. We want smarter regulation and smarter government. Which probably means less of both.

Heads we lose, tails we lose

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Earlier this year we had Paul Ormerod speak at ISOS. Given his reputation, we were certainly pleased he was there to talk to the 200 young people gathered about the ability of governments to implement successful policies. This was no theoretical trek or rhetorical rant, but a simple look at the statistical case of Britain. Although statistics have come in for some stick of late, when not in the hands of self-serving politicians, but a consummate economist, there can be little doubt that most government policies have failed.
 
Much of Ormerod's speech was taken from chapter 3 his excellent work Why Most Things Fail. There isn't space or time to cover all that the book has to offer, but for our purposes chapter 3 offers a devastating attack upon public policy as practised since the end of the WWII.
 
When chewing the fat with statist friends, they nearly always accept the failure of government policies, but still have faith in the ability of it to be turned around if only government had more of our money or was directed in a slightly different way. When pushed and prodded they mostly fall into arguing that even with the ubiquitous failure evidenced, the state should continue as is. This is a quasi-religious deontological approach to public policy. In truth a rational consequentialist approach is much better suited to the task.
 
So where does a consequentialist approach lead us? Well here we move away from the failure brought out in Ormerod's excellent book and go back to the genius of Milton Friedman. If you have an hour to spare it is worth sitting at the feet of the Mahatma of Markets. So what is the consequence of most government policies? More harm than good.