The Pin Factory Blog

Thanksgiving is a US festival, and the ASI is a think tank based in the UK. Nevertheless, we have always celebrated Thanksgiving. Since it was founded in 1977, the Institute has marked Thanksgiving as a special occasion. The directors cook a meal for the staff. It is traditional stuff, with New England clam chowder, followed by roast turkey with chestnut stuffing and sweet potatoes, and a homemade pumpkin pie finishes the meal.

We celebrate, as the early settlers did, our deliverance from tyranny and persecution. Britain was in a bad way in 1977, with a largely state-owned and state-controlled economy under the thumb of union bully-boys. Under the leadership of Margaret Thatcher, and inspired by her determination, it took only a few years to turn things around.

The UK and the world face difficult times once more, and there are threats to freedom no less real and no less imminent. But we have much to be thankful for, and what was done before can be done again, provided the same insights and the same qualities of character are brought to bear.

We celebrate Thanksgiving, and we wish a happy celebration to our US friends on their special day. To those travelling, we wish a safe journey and may you all enjoy happy times with family and friends.

This talk was given on Tuesday night. I've read Detlev's book and it's a smash – a terrific explanation of the Mises-Hayek Austrian business cycle theory, the ruinous history of state fiat money systems, and the most cogent application of these ideas to our current situation. I highly recommend it, and will write a review sometime soon. In the meantime, judge for yourself by watching the video above. If you enjoy it, you can buy the book here.

As a member of the Church of England I have been appalled by the stance that the Church takes towards the role of the state, attitudes which have been brought into sharp relief by recent events. The rights and wrongs of the Church’s particular actions over the protest camp at St Paul’s are too complex and, frankly, farcical to rehearse here. The Church’s response to the protesters – whilst ambiguous in some respects – has exhibited two consistent features (i) a scepticism towards capitalism and (ii) a high degree of support for state intervention in markets and provision of welfare.

The CofE – or at least its leadership – has exhibited the same sort of confused attitudes towards ‘capitalism’ that the protesters share. There is a deep contradiction at the heart of this mode of thinking. Classical liberals would argue that many of the negative outcomes of contemporary ‘capitalism’ are caused by the very high levels of state intervention. However, critics of the evidently terrible damage that this has wrought on society and upon the functions of the market economy fail to recognise this situation – instead arguing for more state intervention!

This applies especially to the Archbishop of Canterbury – a very learned man, no doubt, but a very deeply misled one. His support for the Robin Hood/Tobin Tax is both wrongheaded but also particularly dangerous. Robin Hood, after all, robbed from tax collectors and political figures to feed those impoverished by them. The Tobin Tax would merely rob from consumers of financial products such as pensioners as well as destroying jobs and economic activity. The attack on bankers’ and executives’ remuneration as ‘greedy’ is merely the commission of another sin – envy. Clergy should be preaching moderation and mutual respect, not urging on the mob.

It would be far more logical for the CofE to support civil society and free markets. From a consequentialist perspective, the most compelling reason for this is that these produce the optimal results. Free markets are also more appropriate from an ethical standpoint. The CofE is fond of pointing out that we need ‘morality’ and not just free markets. However, morality is best determined at an individual level and not by state diktat. In the absence of discretion – which is what state intervention delivers – we simply cannot make genuine moral choices. Moreover, free markets are entirely dependent upon personal morality such as honesty, trust and respect to function. Not only do markets require these virtues, but they also instil them. http://www.iea.org.uk/publications/research/economy-and-virtue Markets also teach the very Christian virtues of thrift and hard work.

From a theological perspective there is a convincing case against state intervention. The message of Christ is one of liberation and freedom, as Karl Popper reminds us in The Open Society and Its Enemies. The Gospels frequently stress Christ’s opposition to the oppressive role of established teaching and the power of state and theological authority. Sadly, Christian Socialism and ‘left’ Christianity have generally attracted much more attention and support. It should also be observed that Christ was put to death by the (Roman) state largely at the behest of the Sanhredin, the religious authorities. In answer to the question voiced by the protestors ‘What would Jesus do?’ I think we can safely answer that He would not recommend promoting an authoritarian state.

From the point of view of the Church itself, it stands to gain from a reduction of the role of the state. As an institution of civil society the Church is exactly the sort of institution that ought to be filling the gaps in welfare provision, education and social capital that would arise if the state were rolled back. Even non-Christian libertarians would – I suspect - prefer to see the Church fulfilling these roles rather than the state because the Church would be one choice among many rather than the monopolistic provision of the state. It may be coincidental, but there is a strong correlation between the decline in Church attendance and the growth of state intervention in welfare provision. Naturally, it would be a poor case to build Church attendance upon access to welfare, which is what occurs under the present system as parents attend churches to enrol their children in CofE schools. Instead the Church would be fulfilling its proper mission of charity and would cement its function as a vital social institution.

The CofE is, literally, a Catholic Church which contains many diverse congregations. As the Established Church it also has a very privileged relationship with the state. Whilst active membership is relatively low, the CofE still exercises a role within the Constitution and has an influential voice stemming from its historical and cultural importance. It is, therefore, beholden upon its senior clergy to exercise caution and moderation when expressing views regarding matters of political economy. More importantly, perhaps, certain prominent individuals need to think a lot more carefully about the consequences of state intervention before they advocate it, as well as the benefits of a freer society. 

On Monday, David Cameron announced a new policy on housing designed to partially underwrite mortgage loans for first time buyers in order to make it easier for them to buy and own a house. The idea is to make new buyers provide only a 5% deposit for buying a new home, instead of up to 20%, which the banks are demanding now. It is supposed to make the “homeownership dream” a reality for young people. The government and the construction firms will together underwrite a part of the loan creating an incentive to the banks to relax lending standards. This is aimed to help 100,000 new possible homebuyers who are excluded from the market due to high loan-to-value ratio’s.

The PM cleverly offered a caveat to potential critics by saying this policy won’t result in another asset bubble like it did in the US, since it is only focused on people buying new houses. It is supposed to create jobs in the construction industry as well as making it easier to own a home.

This essentially means that no matter what the current supply of housing is in the UK, because the government is worried with low rates in housing construction, it is willing to distort the housing market by increasing the supply of new homes.

The policy such as this one comes closest to the Community Reinvestment Act (CRA) instituted in the US, more particularly its amendment in 1995. For those unfamiliar with the CRA, it forced the banks to offer more loans and weaker lending standards to underprivileged groups in the society (minorities for example). It was a popular political move that was guided under the idea that everyone is entitled to a home, and if they can’t provide it by themselves, the government should do it instead.

As an effect, encouraging homeownership added to an artificial created demand for housing in the US which combined with a few other presumptions led to the boom and bust of the housing market. Houses became available to many of whom were unable to afford them, underwritten by the government controlled enterprises. Lending standards were decreasing due to short run interests of the politicians to remain in power. A populist policy such as “let’s make more people own a home” sounds good to the median voter, and may even win some favours for the politician in power, but its effect can only be an artificial demand and suboptimal provision of an asset.

I do understand the difficult situation the PM and his Chancellor are finding themselves in as their growth strategy isn’t delivering any results. I might understand the political need for a politically motivated act that will create a (temporary) artificial boost in housing and build some new homes for the people. However, it seems that every move they make to boost short-run growth further undermines their long-run growth path. Every new populist policy will simply detach them from their fiscal stabilization goal and make the UK more vulnerable to outside shocks of investor sentiment. I fail to see how increasing spending via credit easing programs or subsidizing homeownership can overturn a deficit. There will be no aggregate demand created either, since household incomes are locked-in and it is unlikely for the people to start spending on houses all of a sudden. The effects cannot be immediate, they can only distort the economy in the long run. It all sounds more like an expensive political trick used to buy votes.

Haven’t they learned anything from the eurozone sovereign debt crisis? A welfare state used to fund populist policies to finance political self-preservation leads to disaster.

The so-reasonable sounding Sir Christopher Kelly has today pronounced on the funding of political parties and their election campaign. The big donors are to be cut back to a maximum of £10,000 each. Since he only proposes a cut it election costs of 15% that leaves a big gap (about £50M or so for each election) to be filled by, guess whom, the taxpayer. Needless to say, MPs will decide the matter with no say in the matter for the electorate. No referendum on this.

Of course, if the politicians could persuade more of us taxpayers to contribute [more] to their parties, as the Americans do, that would be another matter. If we liked our politicians we would be happy to pay for their election but the truth is that we don’t. So why should taxes be imposed upon us without our agreement?

Direct contributions are to be encouraged by [gift aid] tax relief as for charities. That’s a good idea but it is limited to the first £1,000 of the £10,000. How daft is that? The whole point of the change is to encourage personal giving.

Parties will get £3 per vote in Westminster elections and £1.50 for European ones based on the previous results. In other words, if a party comes in with a landslide, and then proves, disastrous it will receive far more funding than the parties the electorate now wishes to vote for.

There’s a simple solution to all this. Make donations subject to tax relief by all means but otherwise if MPs cannot persuade us to pay for their campaigns, then they do not deserve office. We’d be better off without them. 

Christian Guy says there is no war on drugs. Perhaps he’s not familiar with a little country called the United States of America. Over the past 40 years, it has spent more than $1trn fighting its ‘war on drugs’. It currently has more than half a million people behind bars for drug offences (up 1100 percent since 1980), and is making nearly two million more drug arrests every year (up more than 300 percent in the last 25 years).

I guess he’s not familiar with Mexico either. Since President Felipe Calderon launched his own drug war in 2006, 45,000 people have been killed. On present trends, Mexico’s war on drugs will claim 55,000 lives by the time Calderon leaves office in 2012. That’s greater than the number of Americans killed in the Vietnam War, in a country with not much more than one-third of the USA’s population. And just look at what has happened to Mexico’s murder rate since the army were first deployed (graph from Cato-at-Liberty):

Human Rights Watch has also suggested that the Mexican security forces have participated in ‘more than 170 cases of torture, 39 “disappearances,” and 24 extrajudicial killings since Calderón took office’, which represents a terrible regression in a country that had been making significant progress on human rights. If this isn’t a dirty, vicious drug war, I don’t know what would be.

And what have been the results? In the US, the use, misuse and abuse of drugs is as prevalent as ever. In Mexico, significantly less marijuana and heroin is being seized than ten years ago. And while it is possible that a little less cocaine is making its way through the country, that isn’t being reflected in higher street prices in the US. On the other hand, black Americans are 10 times more likely to be incarcerated than white Americans, and Mexico’s economically vital reputation as a tourist destination is being systematically trashed. Did somebody mention the law of unintended consequences?

These are just some of the specifics which make me regard Christian Guy’s suggestions that we need to “start planning and co-ordinating a proper fight” and that “our law enforcement strategy should be intensified” as dangerous and wrong. But it is easy to construct a general case against drug prohibition too.

Firstly, it hands control of a trade worth tens of billions each year to criminals. The more you try to stamp that trade out, the higher the ‘illegality premium’ on drugs rises, and the more violent the cartels battling to control that trade become. This is precisely what happened with alcohol when American banned it in 1919. Repealing that prohibition replaced Al Capone with Anheuser-Busch. The same thing would happen if we ended the drug war.

Secondly, that illegality premium – which some people put at 90 percent of the street price of drugs – is what drives drug addicts to crime to support their habits. The comparison with alcohol is instructive: how many alcoholics would rob you because they can’t otherwise afford another can of Special Brew?

Thirdly, prohibition makes drugs more dangerous. Drugs become stronger and more concentrated because illegality forces traffickers to pack as much potency into a given volume as possible. So heroin replaces opium, crack replaces powdered cocaine, and new synthetic drugs like Crystal Meth emerge on the market. And drugs are ‘cut’ with all manner of other substances so that dealers can maximise their profits. Being illegal, drugs are not branded or labelled. So users don’t know what strength or purity they’re getting, and overdoses and poisonings are the result. Again, the exact same thing happened with alcohol – America went from drinking beer to drinking adulterated whisky, and as a result 50,000 people died from poisoning in the first seven years of prohibition.

Ultimately, it is hard to think of any contemporary policy which has failed so thoroughly and catastrophically as the war on drugs, and at such great human cost. This war – and please, let’s not fool ourselves by pretending that no such war has been fought – has failed to reduce drug use, has made drugs more dangerous, has unnecessarily criminalized millions of people, has sunk countless poor communities into violence and degradation, and has pushed whole countries to the verge of civil war.

The rational, moral, social, and economic case for ending the war on drugs is overwhelming. Drugs should be legalized. They should be legalized globally. And they should be legalized now.

The High Pay Commission sounds like an official body. That's the whole idea, and that may be why it is being so widely reported. But in fact it is not a government body. It was established by Compass (slogan: 'Direction for the Democratic Left'). Its Chair, Deborah Hargreaves, who has been doing all the media on it, is a former Guardian business journalist. The panel of six also included one LibDem peer, the TUC General Secretary, two fund managers (no friends of high executive pay they) and the former Director of Christian Aid.

So it is maybe no surprise that this crew complain about bosses' pay. It's risen 40 times since 1980, they claim (except they say 4,000%, because it sounds a lot more), and FTSE chief executives now earn a hundred and more times that of the average worker. This is 'corrosive' they say and at this rate we will create 'inequalities last seen in the Victorian era'. So this 'Commission' is not exactly a restrained and objective survey, then.

But let's not forget that the world has changed since 1980, and rather dramatically at that. We had the big bang, for a start, which transformed the UK's rather sleepy capital markets into a global financial force. That gave businesses here the power to expand and to become truly global. More than half of the investment in the FTSE 100 now comes from overseas. The FTSE index is not a UK index any more, but an index of global companies that just happen to be listed on the London Stock Exchange precisely because our capital market is so vibrant. And it hardly needs saying that if you want someone to run a massive international company, you need to pay them a lot more than someone running a small UK-focused company. It's chalk and cheese.

Bosses make the argument that if they weren't paid telephone-number salaries, they would all go abroad. Ms Hargreaves retorts that in fact, we don't see much movement abroad, and very few would. Well, if we are paying competitively, and people don't (at present) have to jump ship, how does she know? And in any case, the real problem is not so much people going abroad as people simply refusing to come to the UK. At present, FTSE companies attract talent from all over the world. If you can't pay that talent, that international edge will...er...corrode.

Ok, so you may not like high pay, but what is to be done about it? Ms Hargreaves' panel says companies should publish their pay multiples, that shareholders should vote on remuneration, and that workers should sit on remuneration committees. Oh, and there should be a new quango to 'monitor' high pay. Spare me.

The underlying agenda here is that there should be official curbs on high pay. There's no point in setting up bodies to 'monitor' something if you are not going to do something about what they monitor. But I would much prefer for companies to be deciding the pay of their staff rather than Vince Cable or some quango putting caps on it, which would be the next inevitable populist measure if we went down this road.

Still, I do agree that there is much that is rotten about executive pay in the UK. But that is mostly because we have too much boardroom regulation, not because we have too little. Following various other – official this time – commissions on corporate governance, executive pay is now decided by remuneration committees run by non-executive directors. Non-execs, of course, are often directors of other companies. So the impact of this regulation is a 'you sit on my committee and vote for my pay rise, and I'll sit on your committee and vote for yours' culture. Putting some shop steward on these committees to try to make them feel guilty won't do any good. The bosses will just decide everything over coffee beforehand and rubber-stamp it at the meeting. You know how committees work.

And yes, shareholders should have a lot more power, including the power to decide future pay policy rather than just complain about what has been. Again, corporate law gives far too much power to executives and far too little to shareholders. And shareholdings are, these days, dominated by investment funds who may not want to rock the boat and so damage their quarterly returns. So is it any wonder that executives pay themselves handsomely? Don't try to cure the symptoms, though. Cure the disease. Prescribe not more regulation, but more competition and better governance.

Update: This article initially said that the High Pay Commission was funded by the Joseph Rowntree Foundation. In fact, it is funded by the Joseph Rowntree Charitable Trust and the reference has now been removed.

Now here's an interesting mini-point. We all know that wind turbines don't work when the wind isn't blowing, which can be pretty annoying if you want to cook your Christmas dinner and the country is beset by an eery calm. So you need to maintain other methods of generating electricity to step in when the blades aren't turning. Right now, that generally means fossil-fuel generation – gas or coal. You turn it on when the wind isn't blowing, and off when the turbines are making juice. Simple and efficient, eh?

Not quite. Bentek Energy, an energy market analytics and data company in Colorado, points out that you can't just turn a fossil-fuel power station on and off. If you do, you find that the emissions caused by the thermal inefficiencies when you are warming up and cooling down outweigh the reductions in emissions from the wind generators themselves. You would be better to run the coal-fire stations at their efficient level all the time.

So you might think that wind turbines are a good way to reduce carbon emissions. Actually, they are a good way to increase carbon emissions!

Everyone is against red tape and vows to cut it back. Yet, year after year, there’s more red tape, regulation and form-filling than ever before. The trouble is that each instance of red tape and its ilk is usually tiny in the greater scheme of things and is spun strand by strand by otherwise insignificant busybodies nagged by vested interests. Over the long run, though, these strands together hold down the greater Gulliver.

We wish the British government all the best in cutting through this tangled web - call us when the job’s done. In the meantime, here’s a piece of advice to make things easier. While you’re hacking away, make sure the minions behind you aren’t spinning more tape.

The Guardian reported last week that HMRC is planning raids on fashion companies to ferret out interns “at ‘high risk’ of abuse under national minimum wage laws.” It seems HMRC has convened a 12-person “dynamic response” unit to make unannounced inspections of businesses where interns are being used as workers rather than just shadowing staff.

We all know where this is headed. The threat of raids will mean companies stopping internships whether these companies are “abusive” or not. What small company needs the hassle of proving innocence or defending alleged guilt?

Pretty soon, the cry will go out that there’s no internships in the land and a national “intern partnership” with business will be launched, complete with legislation, regulations, budgets, ministers and bureaucrats. It won’t take long for someone to learn that access to internships isn’t “fair” so more regulations will dictate that daddy’s friend can’t take on his daughter for the summer. Then someone will notice that the quality of internships is a “post code lottery” so there’ll be equalising funds for the intern-challenged regions. And let’s not forget the massed ranks of equality champions, seeking for new pastures.

HMRC commando raids to rescue intern hostages just don’t seem like a top priority. Nobody has snatched the interns off the street, bound and gagged them - they’re free to drift away and slump in front of daytime TV anytime they want. But they choose not to because they’re having more fun, learning something useful about the real world and slowly building an interesting resumé. Meanwhile, the businesses get a cheap’n’cheerful way to assess potential employees at minimal cost. That’s become more important as getting rid of bad workers grows harder due to more onerous “rights” granted to new hires.

Youth unemployment is, indeed, a problem. The cost of red tape and regulation on small business is one cause as is an uneconomic minimum wage. Call off the HMRC hounds before they make matters worse.

This little snippet makes me rather angry. Irate even:

Grant Thornton, the accountancy firm, says that if wages increase at the rate predicted by government economists there will be a record 5.5 million higher rate taxpayers by 2015.

Even if wages grow at a more conservative 2.5 per cent, more than 700,000 people will become higher or additional rate taxpayers in the same period.

At present, anyone earning more than £42,475 pays higher rate tax at 40 per cent, while those earning more than £150,000 pay additional rate tax at 50 per cent. The Chancellor announced a three-year freeze on tax thresholds last June. Mike Warburton, senior tax adviser at Grant Thornton, said the freeze, coupled with wage growth, would create twice as many higher rate taxpayers by 2015 as there were in 1997. 

For governments of all stripes have been playing this little game all along. It's called "fiscal drag" and it's part of the pernicious hidden side of the tax system.

We're all pretty hot on knowing the rate of tax that we pay: it's a fairly easy thing to spot. What's much more difficult is figuring out how much of our income that tax rate is being applied to: more specifically, whether there's been a change over time. We can all see that tax rates have come down but if that rate is being applied to more of our income then it's not so clear cut, is it? And the specific point at issue here is the personal allowance and the tax bands.

Looking at historic tax rates and then feeding them though a prices and average wages calculator, we can see that in 1973 you started paying income tax when you earned £595 for the year. If that number had kept up with wages growth it would now be £8,700 a year: but it isn't, it's £7,475. So the poor are being sucked into the tax net simply by not updating the tax system properly.

It gets worse at the other end of the tax system though. You started paying the higher rate when you were earning £5,000 back then. If that was upgraded properly it would be £73,000 now. As above, it's a shade over £42,000 now. What was a tax band that affected the top 2 or 3% back then is about to become one that affects the top 20% of earners.

This process is terribly attractive to politicians, of course. For they get to tax ever more people ever more money without actually having to put up tax rates and take the political pain for having done so. But if we let it continue on for another generation we're going to get close to the paper round being more than the personal allowance and anyone working full time will be on higher rate tax as they're "rich". Even defenders of progressive taxation would blanch at that, wouldn't they?