Lies, damned lies, and Labour budgets

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It was all meant to be about tax cuts, wasn't it? And yet it turned out that Alistair Darling's so-called tax cuts were little more than a political smokescreen designed to wrong-foot his Conservative opponents and obscure his real agenda – which is more spending, more borrowing and more tax.

Look at the tax announcements we actually got, as opposed to what the government has been spinning:

  • A temporary fall in VAT to 15 percent.
  • No increase in the corporation tax rate for small businesses.
  • People who lost out when the government abolished the 10p tax rate are going to continue to get a rebate.
  • Retrospective rises in vehicle excise duty are going to be phased in, rather then implemented in one go.
  • Increased taxes on petrol, alcohol and tobacco.
  • A new higher-rate tax of 45 percent for those earning more than £150,000.
  • A 0.5 percent increase in national insurance contributions (an income tax rise in everything but name).

So basically, we get one temporary tax cut, along with a whole raft of tax rises. Great.

Of course, taxes aren't even the real story here. What we should really be worried about is the fact that government borrowing and public debt are going to skyrocket. We're looking at budget deficits in the region of 8-9 percent of GDP, as the government borrows north of £100bn a year. Taxpayers already shell out £30bn a year servicing government debt, but on these figures Fraser Nelson is predicting that "debt interest payments will eclipse not only defence [spending] like it does now, but schools and policing too".

All this so the government can test to destruction (again) the Keynesian fallacy that public spending increases economic growth. It's never worked before and it's not going to work now. Japan spent the nineties doing it, and all they got in return were debts amounting to 180 percent of GDP.

The government may truly believe that yesterday's pre-budget report is the first step on the road to economic recovery, but history will judge it far more harshly.

The cultural politics of the BBC

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The cultural politics of the BBC's so-called "Sachsgate" scandal are fascinating. I discern a sea change. Under attack for its "standards" not being worthy of the licence fee, the debate has opened up many cracks in the status quo. Those who see the Beeb as a dinosaur have in the past had to make the attack on disbanding it, but now the BBC is forced to mount a defence its position.

And for me at least that position is indefensible. Can the Beeb claim that it offers a shared cultural experience? Not when a large part of its audience is howling in dissent about the lowbrow antics of the Sachsgate players. Can the Beeb claim that it has to provide a seamless robe of programming? Well, it can – but the split among licence payers shows that many don't want to pay for what others want. Can it be proud of its dedication to public service programming? Yes, but what about the dross from Ross and Co?

And sniping from the sides are those who see the lumbering dinosaur poaching markets on-line, in digital and from your local press. 

At last the BBC's incumbency of access to the public purse is being seriously questioned. The micro-politics of change in such a cultural icon is ever so slow – our politicians are too entwined in the Whitehall media village to want to act on any principle – but I think we have reached a point of no return. The BBC's fee-protected bigness is now being seen as a problem not an answer, audiences are fragmented and paying for what they want more and more.

I still believe the BBC will end up dying slowly, cut by cut it will lose out on other media channels that grow up around it. What a pity that the politicians cannot just get to grips with privatizing it and letting it win or lose in its markets. My bet is that there is enough talent in its corridors that it would end up even larger than it is now, but serving subscription paying customers in a competitive marketplace that brought out the best of its genius.

A handful of dust

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It has been revealed that women with ID cards who change their name after marriage could face fines of up to £1000 if they fail to inform the government. Fines will also be forced upon those who fail to report a change of address to the relevant authorities. The world has turned upside down. It will soon be you who has to prove you are the person in the government’s database, not the other way around. Welcome to Britain, the year is 2008.

As the subtly titled "ID cards for foreigners" are instituted, more facts are revealed about this Gestapo inspired project. We are on a very slippery slope. The 21st century offers many new challenges. Not from terrorism, but from those employed to protect us. Terrorism has long existed, but the quest for absolute security is now being used as a pretext for absolute control of the people.

This loss doesn’t come cheap. As public debt reaches astronomical levels, the government is committing us to shelling out in excess of £5 billion over the next ten years. As John Stepek makes clear, ignoring the civil liberties argument, the practical arguments in favour of an ID cards just don’t add up.

As the wheels of bureaucracy grind ever onwards, the freedom that we once knew is turning to dust. It is impossible to say if and when the people of this country will stand up to the political class. The French recently stood up to Sarkozy’s vision of a police state, why cannot the people of this country round on this Blair-Brown dystopia? Legislation needs to be introduced to protect the individual. Certainly this should cover the threat posed by other private individuals and companies; but the real threat to liberty comes from that most traditional enemy: the politicians.

Blog Review 789

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It's often said that corporate culture cannot be changed....just another reason why GM should be allowed to go bust then?

Something that perhaps economists don't pay enough attention to: the weather.

Time for a scalpel....or perhaps a machete? That might depend on whether you think you can cut 10% out of this or 50%.

One thing President-elect Obama should certainly be congratulated on. Proving Naomi Klein entirely wrong.

Media outrage as a poltician visits a turkey slaughtering plant and turkeys are....being slaughtered.

Not a good sign: markets rise because a politician is appointed to office. Do we really want the economy to depend upon the (highly variable, to be polite) quality of those who seek office? Or would we prefer that the economy were insulated from the (highly variable, to be polite) quality of those who seek office?

And finally, what those names on the map really mean (no, not this set of meanings).

What's wrong with pimps?

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I have to admit that I'm getting very confused over these proposed changes in the law regarding prostitution. It's not just that they're going to be unworkable, or that they're clearly the result of a near deranged view of how morality should be imposed through the political system. Phillip outlines the basic liberal view that we should simply legalize transactions between consenting adults. Unity both has some fun creating a tagline for the proposed policies and details the farrago of nonsensical research upon which they are based. But over and above those critiques, what is confusing me is this:

And, crucially, her plan placed the duty on the punter to discover whether the prostitute is controlled by a pimp, a trafficker in human flesh or a drug dealer.

What's wrong with pimps?

A pimp isn't, contrary to what many believe, someone who holds a prostitute captive and steals whatever pitiful amount of cash she manages to earn by degrading herself. The relationship between the two is, rather, an economic one and a voluntary one at that. One which, like all voluntary exchanges, benefits both parties to it.

OK, so perhaps you'll not accept that statement from me but what about from Steven Levitt and Sudhir Alladi Venktash, two of the very few economists who have ever actually tried to understand the subject?

In Roseland, there are no pimps and women solicit customers from the street. Just a few blocks away in Pullman, all women work with pimps who locate customers and set-up tricks, so that the prostitutes rarely solicit on street corners. Under the pimp model, there are fewer transactions, but the prices charged are substantially higher and the clientele is different. Prostitutes who work with pimps appear to earn more, and are less likely to be arrested. It appears that the pimps choose to pay efficiency wages. Consistent with this hypothesis, many of the women who do not work with pimps are eager to work with pimps, and indeed we observe a few switches in that direction over the course of the sample. Pimps are limited by their ability to find customers, however, so they operate on a small scale.

Higher wages for less work and a reduction in risk. Pimps are therefore beneficial for the prostitutes which is why they choose to work with them.

So I ask again, what's wrong with pimps?

It's not as if politicians don't employ agents to promote their work, is it?

Time to raise the personal allowance

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In a new briefing paper, published today, I call on Alistair Darling to raise the personal income tax allowance to £12,000 in his pre-budget report (due to be delivered this afternoon).

A few points:

  • Raising the personal allowance to £12,000 would take 7 million low-paid workers out of the income tax net altogether. People earning the minimum wage or less would pay no income tax at all.
  • To the average worker, this would be like getting an extra £1,730 a year in gross pay, leaving them £100 per month better off and reversing the substantial falls in disposable income that have occurred over the last 12 months.
  • If the Chancellor wanted to give this measure retrospective effect for the current tax year, it would mean a one-off £1,800 'Christmas rebate' for the typical dual-earner family, plus £200 per month thereafter.
  • This tax cut would put almost £19bn per year back in people's pockets, allowing considerable additional spending and investment in the productive, private sector economy. This is the key to overcoming recession and restoring economic growth.
  • As well as stimulating the economy by giving people more disposable income to spend and invest, raising the personal allowance to £12,000 would strengthen incentives to work, help to eliminate the 'benefits trap' and make low-paid jobs more economic – greatly increasing opportunities for the unemployed.
  • If the higher rate threshold were kept at its current level, rather than raised in line with the personal allowance, this policy would cost the Exchequer just £18.9bn a year in lost revenue (it would cost £25bn if we raised the higher rate threshold too). Of course, this calculation is based on a static analysis, and because of the effects outlined above, the actual loss could turn out to be smaller.
  • Either way, I argue strongly against the government financing this tax cut with increased borrowing, suggesting they balance it by reducing public sector waste and cutting spending on non-essential programmes instead. The taxpayer already spends more than £30bn a year on servicing government debt, and we shouldn't add to that burden when there is so much fat to be trimmed elsewhere.

You can download a PDF of the briefing here

Quote of the week

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"What will destroy our country and us is not the financial crisis but the fact that liberals think the free market is some kind of sect or cult, which conservatives have asked Americans to take on faith. That's not what the free market is. The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too."

P.J. O'Rourke, We Blew It, The Weekly Standard

Blog Review 788

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You can find examples of spontaneous organisation, of industrial self-regulation, all over the place, for example in the porn industry.

No, this isn't a good time to be joining the euro....just as when economic times were better was not a good time.

Shock horror at the idea that the BNP is concentrated in urban (ie, Labour voting) areas. Umm, there's more of everything in more highly populated areas, isn't there? At least, more of every type of human, that's what more highly populated means isn't it?

Once again markets reveal the truth: this time it's that, no, recycling does not make sense.

A new game to play at Comment is Free. Comment cricket.

For students of perverse incentives. Now appears to be a great time to set up a bank.

And finally, though why set up a bank when you might get one free?

Bailing out the Big Three

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Should the Big Three (or as they are now, the Detroit Three, for they're no longer so big) automakers be bailed out with public money? Or allowed to go bankrupt? Or, at the very least, allowed to go into Chapter 11 bankruptcy  so as to reorganise?

Thomas Palley and other left leaning economists and commentators are insistent that they should be bailed out. I'm almost certain that he and they are wrong on this (although I certainly agree with this "the bosses of the Big Three automakers could never be convicted of an excess of imagination.").

However, the cost structure of these companies just seems to be appallingly wrong. Unless that is tackled a bailout will simply mean sending ever more money into a black hole. For example, their labour costs are hugely higher than their competitors in other parts of the United States. I can't see how they could ever return to profitability without cutting those.

Now there is some argument as to whether those labour  costs are a result of paying for their current workforce and their promised benefits or whether it's a result of the benefits promised to their now retired workforce. But for the purposes of my argument that doesn't actually matter. It could be that they cannot make a profit because they pay their current workforce too much and it could be that they can't make a profit because they promised their past workforce too much in deferred pay. So what, they still cannot make a profit at present and thus have to restructure. And they have to restructure by reducing what they pay their workforce, either past or present.

And to break those labour contracts they need to go into at least Chapter 11 bankruptcy. Yes, this does mean that the shareholders get wiped out and that the bondholders take a haircut. But this is the very purpose of this form of bankruptcy. To tear up the existing division of spoils and to examine the whole to see if it in fact creates value or not. If it doesn't, then liquidate in Chapter 7 proceedings. If it does, then create a new split of the spoils and relaunch under the new dispensation.

While I get the political angle of all of this I really don't get the logical one: what is the objection to a reorganisation inside bankruptcy? Don't people want to find out whether they do in fact create value within these companies or not? Or is it that there is a worry that we'll find out that they don't?

Please note that if they are in fact destroying value (and will continue to do so in the long term) then that does make us all poorer and thus we really do want them to be liquidated, whatever the short term chaos that would cause.

Decriminalize prostitution

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When an ordained priest of the Church of England writes that the government’s policy of criminalizing paying for sex then it is quite likely that those in power might be making a mistake.

As George Pitcher argues: “The first effect of such legislation would be to drive the "good" punters out of the market. Cosy, self-satisfied, middle-class observers may claim that there is no such beast as a good user of prostitutes. The prostitutes themselves would disagree." As such “The market for the oppressive, abusive and violent will expand, offering less protection for prostitutes, rather than the greater protection that is intended."

Pitcher hits the nail on the head: “laws made by legislators with an eye to the electorate, rather than care for the oppressed and vulnerable, can make lives considerably worse for those who most need our protection."

The motivations behind this government’s approach are clearly the perceived popularity of the tough stance, however the intellectual tradition, as Dr Belinda Brooks-Gordon states, “include the radical feminist thesis that all heterosexual sex is exploitation, a Marxist view that all work is exploitation, and a religious evangelism which argues that all non-procreational sex is wrong."

Dr Brooks-Gordon also has he solution: “ministers should scrap the prostitution laws and start again by following New Zealand's lead in decriminalising the industry, which empowered workers and reduced violence. It also led to better cooperation between the police and sex workers against coercion, something which will do more to help the victims of trafficking than any amount of wrong-headed government meddling."