Another argument against regulation


Chris Dillow continues to earn his label of the thinking man's lefty. He points out something that many miss:

In other words, all of the US’s massive stock market boom between the early 70s and late 90s came because of new firms. Aggregate economic growth occurs not so much because existing firms expand, but because new ones enter.

This is, in a way, simply a restatement of Schumpeter's creative destruction argument. It's the inventions and innovations of new products, new ways of organising things, which drive economic growth over the longer term.

The implications of this though are profound for how we want to organise our economy.  For example, the burden of bureaucracy in such areas as diversity (racial or gender), health and safety absurdities, manic form filling, the strictures of the REACH Directive, these all weigh more lightly on large firms than small and new entrants. For those large firms already have considerable bureaucracies able to deal with them, resources that the typical start up of two men and a dog simply doesn't have access to.

There's also such seeming trivialities as company registration documents. I've seen in Portugal that you have to say what it is that you're going to do as a company when you form one. And it can take some months to change such permissions if you decide to do something different. Here in the UK documents with the same purpose are so broadly written as to allow you to do anything at all that isn't already specifically illegal.

If Chris' point is indeed correct (as I take it to be) then we've got another argument for attacking that mess of restrictive regulation. It's not that it's just a cost to business, one that has to be passed on, it's that it is a restriction upon market entry. And it is by allowing and encouraging market entry that we will make our children richer than we are, as we all desire.

Share the proceeds of saving


Some time, the Tories' policy on tax has been to 'share the proceeds of growth'. As the economy grew, the additional tax proceeds that resulted would be shared between higher spending on public services and lower taxes. When the economy was actually growing, it seemed like a sensible policy. Over a couple of parliaments, it could have substantially reduced the state's share of GDP, without drawing any criticism for 'cutting services' – a sensitive subject for David Cameron's 'compassionate conservatives'.

Unfortunately, a looming recession has upset the Tories' best-laid plans. Given the likelihood of there being no growth to share the proceeds of, people have started to wonder whether a Conservative government would actually raise taxes to meet its spending plans.

I hope not. Yes, a downturn will depress tax receipts and unemployment may drive up social budgets. But there is plenty of fat to trim from the British state. More than enough, in fact, to be able to 'share the proceeds of saving' between lowering taxes and reducing public debt, without compromising core services. The Tories may be right not to offer up-front tax cuts at this stage, but they should also be clear that taxes will only go one way on their watch, and that's down.

Still, I am pleased the Cameron and George Osborne, his shadow chancellor, have declared themselves deficit hawks, rather than supply-siders. Yes, I strongly believe in the Laffer curve, the idea that tax cuts can spark economic growth and thereby offset revenue loss. But it's not a panacea. Firstly, not all tax cuts have equal dynamic effects. The most pro-growth are those on capital gains, corporate profits, and high-income individuals – all of which are a tough sell when people are struggling to make ends meet. Secondly, the 'crowding out' of private capital by excessive public spending is a much greater drag on the economy than tax rates are.

Cutting taxes and running up deficits to finance continued spending, while blindly hoping that economic growth will fill in the gaps, is terrible policy. Spending has to be brought under control first.

Don’t knock the system: politics caused this crisis of capitalism

Dr Eamonn Butler argues that the crisis was not caused by a “failure of capitalism” and that market economies will flourish if politicians and regulators act responsibly.

With turmoil in the world’s markets, politicians and commentators have been demanding for more regulation and control of the financial sector. Their reaction is entirely predictable — but entirely wrong.

This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel.

Indeed, one can date its origin precisely, to October 12, 1977, when U.S. President Jimmy Carter signed the “anti-redlining” law. Before then, lenders generally denied loans to people in poor neighborhoods, believing that the local mix of low incomes and a weak housing market would lead to many people defaulting.

But the politicians — with good intent — wanted to make home ownership available to all Americans. So lenders were forced into giving out risky mortgages: what we now call “subprime” loans.

By 1985, this torrent of bad business had nearly bankrupted America’s Saving & Loan institutions. So the government took on their bad debt and encouraged them to consolidate — unwittingly making them too big to be allowed to fail.

Meanwhile, several other problems worried the monetary authorities. In 1987, the U.S. stock market plummeted, fearing that other lenders could collapse. Asia’s markets sank.

Mexico, Argentina and even Russia defaulted on their loans. Overvalued dotcom stocks crashed. And then there was 9/11. Each time, Western authorities responded by flooding the markets with cash.

After 9/11, the Federal Reserve took U.S. interest rates down from 6.25 percent to just 1 percent, fearing this blow to investor confidence could sink the markets. But again, their action boosted the wrong market by sustaining the credit bubble. With loans now six times cheaper, mortgage applications soared.

Lenders, awash with the Fed’s cash, happily issued more subprime loans. With more people buying homes, house prices soared. Buying a house seemed a certain money-maker, so more people got more loans and bought more houses, continuing the spiral.

In London, that other great financial center, a decade of government overspending saw public debt soaring. Private debt and house prices soared even faster.

So for 10 years, economies boomed, the champagne flowed and everyone had a great party. But it was financed by fake money — printed by the authorities solely to keep the party going. When the dawn of realization broke, the long party turned into the inevitable hangover we suffer today.

The regulators, meanwhile, were unconscious on the floor. The U.S. mortgage institutions, Fannie Mae and Freddie Mac, had 200 regulators on their case but still went bust for $5 trillion.

These semi-governmental companies allowed investors to believe the bad mortgages were guaranteed by the government, causing credit rating agencies to give their dodgy bonds high scores.

Mortgage lenders re-packaged these bad debts round the world but nobody cried foul. Institutions were lending 30 times their asset base.

Though the Bank of England knew that the huge mortgage lender Northern Rock was failing, the 2,500 staff of Britain’s financial regulator seemed to do nothing until it actually collapsed six months later. Even then, they had no coherent plan.

When the government is persuading the casino to hand out free chips and the regulators are standing drinks at the bar, you shouldn’t be surprised if the customers place a few risky bets.

It’s the management and not the system that deserves our scorn for breaking the basic rules of economics: There is no such thing as a free lunch.

Any sustainable solution has to get finance back to those basics. But the U.S. bailout package includes so many treats for special interests that it could save the culprits without helping the victims.

But it’s a big world out there. China, now the world’s fourth biggest economy, continues to grow at nearly 10 percent. India and other emerging economies are expanding too. Even with the West in recession, world growth next year will probably be near 4 percent. That’s pretty good.

Western capitalism has been dealt a severe blow by inept politicians and officials. But global capitalism continues to pull hundreds of millions of people out of poverty. It’s a great system. Let’s not break it.

Blog Review 739


Some are still carrying on the fight....the bailout will make the problems worse, not better.

Defending speculators and short sellers.

Hayek might have over egged the pudding, that the NHS would inevitably lead to facism: but an increase in the power of the State does indeed lead to a diminution of freedom and liberty.

This big government and planning thing: it might be something that we can afford (although would rather do without) but poor countries simply cannot carry the cost of it.

Explaining corporate taxes the Basil Fawlty way.

An extremely odd judgement from Scotland. How can you have an expectation of privacy in a public place?

And finally, the professionals consider the bloggers....those darned amateurs, stealing the bread from our mouths (cont. pg 94)

Markets in Education


I  fear that Melissa Benn doesn't understand one of the reasons that we like markets so much.

And there is now a surprising amount of agreement across the political spectrum about what constitutes a good school.......There is widespread recognition of the need for human scale institutions, be it smaller classes and now smaller schools. It's also widely agreed that we need good order in the classroom; more engaging teaching; strong, autonomous heads, and more spending on those with the greatest needs; the so-called "pupil premium".

That these things are now agreed right across the politicl specturm means, according to Ms. Benn, that all schools should thus be like this in one rigid system. Which is to miss one of the basic reasons why we have markets at all: they're the way that we can have innovation, the way that people can try new things and see what works.

Leave aside the point that what everyone now agrees makes a good school was exactly what everyone agreed did not make a good one in former decades, leave aside education itself in fact. We don't presume that we now make the very best computers that anyone will ever make, there are any number pointing out that cars need to be powered differently, there are, you might have noted, those who wonder whether our method of financial regulation is quite the best one that could ever be devised. And how are people to try out the possible new ways of doing things? By doing them of course and seeing what works, what people actually want at the price that it can be done. In a market in other words.

Exactly the same is true of schools and education: it's the height of hubris to assume that we, now, have had the revelation denied to all previous generations as to how a perfect school system should be run, that those who follow us will not devise better methods. And for them to test what may or may not work we need a market in alternative methods of education organisation rather than one huge system devised from the centre.

After all, it was the fact that we did not have a single rigid system, that there were alternatives to central State control, that led us to overturn the previous orthodoxy and agree now on the above list of things that does make a good school. Arguing that we should now abolish such markets in organisation to to argue that we abolish the very thing that allowed us to uncover this precious knowledge.

Streamlining government


Yesterday I noted that Gordon Brown has created three new departments as Prime Minister, and abolished none. That means there are now 27 separate ministerial departments in Whitehall, which strikes me as a truly ludicrous number.

On Friday I came up with a non-ideological list of the functions government could realistically be restricted to, now that people are starting to realize savings need to be made.

I'm still in a list-writing mood, so here's a run-down of the small number of departments we would actually need if we scaled back government:

  • Office of the Prime Minister & Cabinet (merging Number 10 and the Cabinet Office)
  • HM Treasury
  • Foreign & Commonwealth Office
  • Home Office
  • Ministry of Defence
  • Ministry of Justice (encompassing all the law offices)
  • Department of Health & Social Services
  • Department of Social Security (handling welfare and pensions)
  • Department of Education
  • Department of Infrastructure (overseeing energy and transport)

I suppose the Leader of the House of Commons would continue to need an office to support their work, but it would not be on anything like the scale of the other departments.

Streamlining Whitehall like this would have another major benefit, quite apart from saving money. It would also allow the restoration of proper cabinet government and collective decision-making. It is no wonder that British government has become so presidential – with decisions being taken informally on sofas in Downing Street – when 31 people attend cabinet. It's a wonder they can even fit them around the table.

Fighting the drug war on a high


My position on drugs should be fairly apparent to our more regular readers. A quick reminder: they should be legalized. But the Advisory Council for the Misuse of Drugs Council is seeking to shuffle the goalposts slightly by reclassifying ecstasy from a Class A drug to A Class B drug. This is predominately based on a comparison of the amount of harm that a drug has on a person, heroin and cocaine being the most harmful.

It is time that we had an adult debate on the issue, rather than engage this tireless practice of moving drugs back-and-forth within the classes of illegality.

Due to ecstasy's close relation to 'amphetamine' it was already banned in the UK before its usage really took off in the 1980s. But despite it being a banned, today more than 250,000 people take it every month in the UK alone. And almost 5 percent of 10-25 year olds have tried it. Despite this large number of users only 97 people have died whilst under the influence of the drug. [And most of these deaths though could probably have been avoided had the user been properly informed – see Drugscope for more information]

The debate needs to turn away from the ossifying reclassification and pointless arguing amongst politicians. Whether it is an A or a B Class drug is irrelevant. If it were legal, regular users would be fully aware of their actions and those that turned to it would have the information readily available so as to help them make an informed choice. Ultimately, the only way we can win the drug war is by ending it.

P.S. For an excellent insight into herion usage, see Martin Samuel in The Times.

Blog Review 738


At last, an explanation! The reason that statistics and journalism don't mix is because journalists are no good with numbers. If they were, they'd be doing something that paid better.

If it costs so much money to give all those addicts methadone, why not just give them heroin instead?

It's amazing how complex and wasteful things can get once a legislature gets their hands on it, isn't it?

This would fix another problem without the intervention of the legislature.

On the myths of food miles.

The way things used to be: can't they be that way again?

And finally, the mackerel economy.

Those temporary government programs


As Milton Friedman pointed out, there's nothing so permanent as a temporary government program. Once again we see the proof of this.

Consumer groups hit out at the European Commission after it moved to extend anti-dumping tariffs on shoes imported from China and Vietnam, arguing that the duties raised prices for their ailing members.

Ths duties were originally imposed for two years but they are now being extended. We know why, of course. Those who would benefit from the lifting of them are all of us. A highly dispersed constituency and one that's also not all that interested as we don't actually see the cost nor is it very high individually.

Those complaints came as the Commission formally announced an extension of the duties, imposed two years ago, under pressure from Italian shoe manufacturers.

However, those shoe manufacturers are very interested indeed and are those motivated to lobby for the protections at our expense. The nett effect is a transfer of wealth, from us the consumers to those shoe manufacturers. And as long as we have a politically driven system that decides upon such tariffs then we'll always have such groups attempting to get such legislative picking of our pockets and many of them will succeed.

It's one of the arguments for free trade of course: that if the power to shaft the consumer via import restrictions just isn't there then the consumer won't get shafted by such import restrictions.