Bad news all round


European leaders were all looking smug earlier this week as they pumped another $250 billion into the markets and announced that the financial crisis was officially over. None more smug than Gordon Brown, of course, whose plan they had adopted.

The fact that they had been able to get together and decide anything at all gave the markets a brief boost. But now the European stockmarkets are sliding again, and our great leaders seem unusually shy about media appearances once again.

Investors know that the $250 billion will have to come from somewhere, and of course it will come from bigger borrowing, bigger deficits, rising taxes and cutbacks. The recession that everyone was waiting for has suddenly got worse. And because Europe and the US aren't going to be expanding so fast, other countries are being hit too, particularly those like Russia which produce the oil, gas, minerals and other commodities that fuel Western economic growth. The downturn just got global.

Meanwhile the bail-out plan is not alloyed good news for bank investors. It came with the price of some political demands, like banning dividends and bonuses. So banks will find themselves losing their best people to other sectors, and anyone who has any cash left will be looking for dividends elsewhere.

Given the amount of money that goes through the markets each day, $250 billion looks a modest sum. Can it really stop the rot? It seems to me that you really can't buck the market. But you can use an awful lot of taxpayers' money trying.

Various thoughts


New research from the Pensions Policy Institute has found that the cost to the taxpayer of public sector pensions is likely to rise by 40 percent (as a share of GDP) over the next 20 years. Aren't we lucky to have had Gordon Brown, that saviour of the world economy, as Chancellor of the Exchequer for all those years? His infamous pensions raid cost savers more than £100bn and destroyed the best private pension system in Europe, but don't worry: he and his gold-plated, public sector cronies will be just fine.

Speaking of the public sector, couldn't our lot follow Ireland's example? (Hat-tip to Guido) The president is taking a 10 percent pay cut, government ministers are taking a 10 percent pay cut, opposition politicians are taking a 5 percent cut, the governor of the Bank of Ireland and the Irish Financial Services Agency has volunteered for a 10 percent cut... Even the top six executives at RTE, Ireland's state broadcaster are promising a "significant reduction" in pay.

Speaking of which, good luck to Tory MP Christopher Chope, whose Broadcasting (Television Licence Fee Abolition) Bill gets its second reading in the House of Commons today. In a multi-channel, digital age the television licence is truly an anachronism. Why should I have to pay for the BBC's so-called 'public service broadcasting' when I would much rather watch Sky? And as for the TV licensing authority, who isn't sick of their crypto-fascist bully tactics?

Binning Barnett


According to The Times, Sir Kenneth Calman, the chairman of the commission on Scotland’s constitutional future, has said that the Barnett formula, which used to calculate the level of public spending in Scotland, needs to change.

He's right. The existing formula is not so much a needs-based assessment of public spending requirements as it is a bribe to keep Scottish voters quiet. That's why Scotland gets more government money per head than relatively poorer parts of England.

But the best change would be to abolish the formula altogether, and make the Scottish Executive fiscally autonomous. The money they spend, they should raise themselves.

I'd apply the same principle to every level of government in the UK. When politicians rely on their own electorates for money, they are likely to be held much more closely to account. Such a system also encourages tax competition between jurisdictions – a good way of keeping rates low and government lean.

Blog Review 750


More on Krugman's Nobel. His essay upon development economics.

Krugman himself explains his work that led to the prize.

Yes, it really is all obvious or trivial: but only after someone has explained it.

On Blog Action Day, using Adam Smith to explain poverty.

Again for the day, some ideas on what we might do about poverty.

You can't trust government statistics and you can't trust the way they present them.

And finally, possibly the best newspaper in the country.


Save health savings accounts

Adding insurance to the mix creates a whole host of problems. First of all, it imposes significant administrative costs, which often exceed the price of the actual medical service. Secondly, insurance gives both the doctor and the patient an incentive to maximise costs – the patient because he's paid his dues and wants his money's worth, the doctor because he wants to increase his income. Thirdly, it blunts incentives to keep yourself healthy, because that's what you've got insurance for.

Moving to a more rational system, where people pay their doctors directly for routine services and insurance is confined to its natural role, is the key to reforming healthcare the world over – to keep costs under control, free doctors and empower patients. I hope policymakers realize that.

For a more detailed explanation of the benefits of health savings accounts, have a look our 2001 report Medical Savings Accounts


According to the Investor's Business Daily, a Democrat controlled US Congress could attempt to drive Health Savings Accounts (HSAs) out of the market. They won't roll them up overnight, the article says, but they could tie them down with lots of regulation and paperwork, and cap the tax deductibility of savings at a low level – essentially rendering them useless. Given that healthcare is meant to be one the Democrats' priorities, it is hard to think of a more counterproductive step they could take.

According to a presentation I saw from the (US) National Business Group on Health a couple of weeks ago, 27 percent of large employers already offer health plans including HSAs, with a further 9 percent intending to do so for 2009. The reason for this is simple: consumer-directed health plans or CDHPs (which tend to include a savings/direct payment element and high-deductible insurance) are much more cost-effective than traditional group insurance options, coming in at an average $5970 a year compared with $7120 for health maintenance organizations (HMOs), $7252 for preferred provider organizations (PPOs), and $7714 for point of service (POS) plans. CDHPs, which are used in one guise or another by 55 percent of large businesses, can produce 3-year total savings of $1m per 1000 workers without compromising quality of care. In an era of uncontrolled medical inflation, that is nothing to be sniffed at.

The reason HSAs are so important is that unlike most proposed reforms they actually address the fundamental problem with healthcare today – the absurd overuse of comprehensive insurance. This applies as much to government systems like Britain's NHS as it does to mixed or private systems elsewhere in the world. Think of it like this: insurance is very useful for protecting us against unanticipated and costly occurrences, but is completely ill suited to the funding of predictable expenses. Why rely on insurance for a run-of-the-mill doctors visit or a bog-standard prescription? You know these things are going to happen from time to time, so you can plan for them. [Click 'read more' to continue]

Don’t tread on me


Jacqui Smith has revealed that the government is considering creating a single, centralized database containing records of all telephone numbers called, time and location of calls, websites visited and e-mail addresses used by UK citizens. If this goes ahead, it will be yet another incursion by the state into the private sphere of the individual.

The reactions from Conservatives and the Liberal Democrats have been swift and correct. Dominic Grieve, the Shadow Home Secretary, said: "The Government must justify the case for any such massive increase in state acquisition, sharing and retention of data, spell out the safeguards to prevent abuse and – given its appalling record – explain how it will protect the integrity of any database holding sensitive personal data." Chris Huhne, the Liberal Democrat home affairs spokesman, said: "Ministers simply can't be trusted with confidential data of this sort, as it has shown again and again."

These disagreements are focussed on concerns for the practicality of the scheme. In fact, most of the arguments I have heard and read on this scheme ignore the disturbing ideology behind it. It would be nice to hear politicians refer to the principles of freedom and liberty, instead of simply banging on about the propensity the government seems to have for losing things (relevant as that is). Even if the scheme could catch more criminals and the government was able to protect the information, the essential point still stands that a centralized database of this sort gives powers to the state that they should simply never be allowed to have.

There is a great appetite for greater freedom in the UK, but no major party that is offering to give it to us to any meaningful degree. One reason for this is the ubiquitous demand for politicians to solve all problems and the delusion that leads them to claim that they can. When power is finally taken from Gordon Brown's Stalinist hands, there will be a real opportunity to roll back the frontiers of the state. However, the very real risk is that there will be no one in government with the will or gumption to do it.

Buy books via the ASI blog


As you may have noticed, I've changed the right hand column of the blog. While RSS feeds, category archives and so on can now be found in the left column, the right column is a collection of recommended books. If you click on an image, it will take you to an page, and if you buy the book, we get a cut of the sale price. So please – shop away! And if there are any good political/economic books you think we should link to, email them to or leave a comment below.

On a related note, I've added paypal functionality to our online shop, so buying Adam Smith busts, ties and medallions has never been more convenient. Remember to think of us when it's time to do the Christmas shopping!

Blog Review 749


Somewhat in contradiction to Naomi Klein's thesis in The Shock Doctrine, crisis seems to bring on an expansion of State power....or at least, attempts to do so.

On which subject, no, we've not really tried having tax cuts, not yet.

Assuming a recession but no depression, the finance boom will have given us more than it will cost.

What happens when you really don't trust the banks.

Some sense amongst the nonsense about drugs.

The fruits of innovation: ain't capitalism great?

And finally, the journalistic cliche crash.

What next for the Republicans?


The smart money says November is not going to be much fun for the US Republican. The Democrats are going to do very well in the House and Senate elections, and in the last month or so Barack Obama has assumed a commanding – and probably decisive – lead in the presidential polls.

Most of the blame can be laid at the feet of the Bush presidency. On domestic policy, ambitious plans to reform social security and immigration failed abysmally, while Bush's allegedly conservative administration nationalized public education (No Child Left Behind), created a massive new entitlement programme (the prescription drug benefit), and became the biggest-spending government since LBJ's 'Great Society'. And as for foreign policy...

However, you can't blame Bush for everything. John McCain must take some responsibility too. At its best, his campaign has been lacklustre. At its worst, it has been downright nasty and cynical.

Perhaps though, spending some time out of power might be the best thing for the Republicans. Like most political movements that have spent too long with their snouts in the government trough, they have lost sight of what they stand for and what their purpose is. Until they recover their political raison d'etre, no amount of clever campaign strategy is likely to help them.

What kind of party will emerge from such a period of reflection? At this point, it's hard to predict. Given the decentralized nature of US politics, various brands of conservatism will be trialled in the various states before, eventually, a coherent new message is developed at the national level. That may be some years away.

That said, there are a number of obvious possibilities. The Republicans could shift in an even more populist, big government direction, moving to the left on economic issues and to the right on social 'wedge' issues. Or they might move to the centre, adopting something akin to David Cameron's 'liberal conservatism'. They could even go back to their roots and become a party of limited government, individual freedom and personal responsibility.

Time will tell.



So the BBC reports that hospitals are already allowing top-up healthcare. Frankly, most people have known this for a long time, but politicians and the media have largely ignored it, in much the same way that they have ignored the costly failure of the NHS.

Of course, professor Mike Richards will present his review of co-payments at the end of this month. Given the pressure coming from the general public, one can only assume that this will formally allow them.

The results of this will be twofold. Firstly, it will finally lay to rest the hugely misguided idea that government could ever provide a comprehensive health service completely free at the point of use. Secondly, it will transform NHS care from an open-ended entitlement to a defined benefit. The inevitable spread of co-payments and private top-up insurance that follows will surely lead to a revaluation of the future role the NHS.

Certainly, a safety net should always exist to guarantee a basic standard of healthcare for all UK citizens, but beyond that minimal guarantee the state, and politics, needs to be taken out of healthcare altogether. People should be free to take control of their own healthcare by redirecting largely wasted taxes into personal health saving accounts, and paying their doctors directly for services rendered. That would be far more efficient, and far more likely to encourage healthy living, than the bureaucratic monolith we have at the moment.
Systemic NHS failure is starting to force the hand of politicians, yet they are not keeping up with events. Labour has poured money into healthcare to little effect, the Conservative’s are not prepared to rock the boat, while the Liberal Democrats have a long way to go in their tentative exploration market based solutions.

In fact it is the Liberal Democrats who are best placed to put healthcare reforms on the agenda. With the Conservatives focussing on the less divisive educational reforms, health reform could (and should) form the central pillar to sell the party to the nation. Now where did that orange book go?