The car industry, the bailout and the taxpayer

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On Wednesday, UK Business Secretary Lord Mandelson went some way in bailing out the carmakers by giving them credit, though you might think that it was too much credit that got us all into this mess in the first place, but put that aside for one moment.

The real issue is where this cash is going to come from. Our leaders like to suggest that it's just some bookkeeping entry at the Bank, but every pound lent to a potential car customer has to come from somewhere. And indeed, it comes from taxpayers. Hairdressers in Harwich have to pay higher taxes so that Sloane Rangers can buy a new Jag or a new Lexus.

Yes, that could save lots of jobs, possibly thousands, in carmaking. But only by putting jobs under threat everywhere else. Shops, cafes, and other businesses that are struggling to pay their National Insurance or their Business Rates will have to pay even more. They will start retrenching and firing staff – or not filling vacancies. Every job saved in carmaking is a job destroyed somewhere else. They might only be lost in ones and twos, but it is thousands of ones and twos. The tragedy is that politicians only notice the big numbers.

UK carmaking has been reeling since the 1970s, largely because it's cheaper to make cars elsewhere, thanks to our high labour, tax, and regulation costs. The Brown boom has disguised the fact, because we've all felt rich enough to carry on buying. But now the reality is sinking in, and we've stopped.

The galling thing is that most UK carmaking is foreign-owned. Why should I pay higher taxes to help the Indian billionaire who owns Jaguar? And why risk taxpayers' money on an industry, when tomorrow Detroit or Tokyo could pull the plug on most of it?

First the banks, now this. Pretty soon the whole country will be bailing itself out, at its own expense. A better policy would be to make ourselves more competitive. Cut out government waste. Cut taxes. Reduce our social costs. Encourage entrepreneurs instead of blaming them. Then we – carmakers included – might just have a chance.

The archaeological pirates

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It’s cold, it’s wet and it’s muddy and you are wandering around a field with a pair of earphones on, waving a metal wand in your hand waiting for that special beeping noise that indicates that you may have struck gold...well metal anyway. This is the life of a metal detectorist, searching for the “holy grail", though not literally, of course. On Monday night a Time Team programme on Channel 4 shone some light on the trials and tribulations that the metal detectorists face.

The show was advertised as a, “report on a secret archaeological investigation into the site of a possible Viking boat burial in Yorkshire following a major discovery of coins, silver and swords." The discovery was made by a pair of humble detectorists, who, it transpired, had been detecting on the site for a number of years but had only reported a small proportion of their finds. They wished for the site to remain a secret so as to protect their “hunting grounds" and also any undiscovered artefacts. It became evident as the programme progressed as to why many detectorists act as they do towards the authorities.

There are guidelines to a code of conduct on the National Council for Metal Detecting that explain that all “unusual historical" finds are to be reported to the landowner, and the authorities. But as was witnessed last night there is little incentive to do so when the DCMS undervalues finds that come under the Treasure Act of 1996 to the tune of 800%.

Once a landowner has given permission to others to search his land, then those involved in the contract should be able to sell any finds on the open market. Whilst there should be some duty (self-regulated) to pass information to archaeologists to allow them access as well, so as to increase historical knowledge. There should be no room for the government, unless the find occurs on common land. All parties involved need to disconnect with the archaeological pirate that is otherwise known as government, and free up the market so that it runs more efficiently.

Debt, debt, and more debt

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The Spectator's Pete Hoskin has been at the Institute of Fiscal Studies today, covering their 'Green Budget' launch. He blogs about it here and here.

The scariest statistics are on debt. The IFS is forecasting that the UK's debt-GDP ratio is going to get close to 60 percent in the next few years, and that its going to take until 2032 to get it back to 40 percent (which was the maximum allowed under Gordon Brown's now-discarded golden rule).

As Pete notes though, that's the optimistic forecast. The pessimists are saying debt could reach 90 percent of GDP – which is a pretty horrifying prospect.

My biggest worry is what future governments might do to pay off all this debt. It's easy to imagine them unable to squeeze any more revenue out of taxes, but unwilling to dismantle the welfare state. Chances are they would then turn to printing money, devaluing the currency, and inflating their way out of it. Needless to say, that would obliterate people's savings and retirement funds, and eviscerate their disposable incomes.

Blog Review 854

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All this death of capitalism stuff. Worth looking at this chart. Capitalism is the only economic system ever to manage this, a consistent and long lasting rise in the average standard of living.

As an example, it wasn't the introduction of capitalism that killed Russians but the dying of communism.

Big government didn't work so well for Bush. So perhaps big government won't work for Obama, either?

Oh dear, it seems that Thatcher's lesson hasn't been learnt. To cut government you need to cut what government does, not just try to govern more efficiently.

And the evidence against The Shock Doctrine is now approaching that of The Population Bomb.

If you want a temporary stimulus why have one that isn't temporary and doesn't stimulate?

And finally, a blogger being sued for libel. Worth seeing if you can help perhaps, despite Dave's rather odd economic and political views.

Thatcher's recession and Brown's recession

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In 1979, Margaret Thatcher came to power in Britain, pledging to end the raging inflation of the time, curb the growth of public spending and borrowing, and balance the government's books. She did all of that, though she could not spare Britain the recession that inevitably followed the collapse of the inflationary boom.

Indeed, the depth of the economic collapse took the government by surprise. Mrs Thatcher had read her Milton Friedman. Inflation was the Number One enemy, because it eroded confidence in money, made real price movements impossible for entrepreneurs to spot, and so generally messed up the market process. It was like a drug: you needed larger and larger doses to get the same stimulating effect. When you came off it, you would have a nasty hangover of unemployment. But better to get that with over earlier rather than later.

But the government was unprepared for the scale of the downturn. Indeed, many ministers got cold feet. Rather than the pain being spread evenly across the economy, some industries simply collapsed, with huge job losses.

Mrs Thatcher should have been reading her Hayek. For Austrian Economics explained what was happening. Money, said Hayek, was like honey pouring onto a table. It formed a mound where it went into the economy. Turn off the supply, and the central mound collapses, but more of it reaches the outer edges. When Mrs Thatcher turned off the money supply, those industries that had relied on the boom – the heavy state industries in particular, but also luxury goods manufacture, travel, holidays, housebuilding – simply collapsed. But new industries further away from the central boom – the new computer industries for example – actually did just fine.

I don't know that the Thatcher Administration ever quite got it. But having killed inflation, the economy roared back into life, and they wiped their brows and carried on.

In the current recession, we are seeing much the same phenomenon. The firms that are suffering most are the heavy industries and luxuries, like steelmaking, carmaking, housebuilding, and travel. Any retailer selling to customers who can put off their purchases until times improve – people selling anything except food, almost – are also having a hard time. But other sectors are doing much better.

The difference this time, perhaps, is that potentially rising industries – if I knew what they were I'd be rich, but I mean the modern equivalent of the 1980s computer pioneers – are finding it hard to get any of the honey because bank credit has dried up. So it's going to be bad. But maybe not as bad as all the job losses from the big heavy industries might make you think.

Energy independence: wind between the ears

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There seems to be a vast desert between the POTUS’ ears upon which he plans to erect wind turbines and solar panels to wean America off the drug that is known as ‘black gold’’. In his first weekly address Mr Obama has called for the US to be energy ‘independent’. His intentions are to double the amount of energy produced from renewable sources, raising it from 7% (2007 fig.) to 14% of total consumed energy. The claim that global warming and the reliance on foreign oil are a threat to the US are hollow.

Energy dependence not independence is what is needed, as David Henderson recently pointed out in an issue of The Freeman . Put simply the cost to the average US citizen of Obama's policies will be exorbitant. With oil prices currently as low as they are it seems facile (to a rational person) to push towards becoming self-reliant in energy production. If someone is producing a good cheaper than you can, why would you not want to purchase it from them. As David Henderson points out, the cost to the American consumer of following the energy independence policy could be as much $1.20 on a gallon of gas (this figure would be based on the removal of all foreign oil).

The proclaimed savings of $2billion, by attempting to make the government offices more energy efficient, are more than offset elsewhere. During these testing times, leveraging these costs onto US consumers is not going to help the economy out of recession. It will merely cause it to stretch out that little bit more.  The President could perhaps do with a quick chat with Larry Summers about the basics of economics.

Adam Scavette joins the ASI

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Greetings. My name is Adam and I began my internship with the ASI on Monday. I am an international student from the United States, and I am currently studying at City University of London for the semester. I plan to finish my bachelor’s degree in economics next May at Villanova University, a small university in the suburbs of Philadelphia. After I receive my degree I hope to enter a graduate program in public policy. Some of my interests besides economics include music making, film, and literature. I hope that my time spent at the Adam Smith Institute will allow me to gain a new perspective on current economic issues.

Transatlantic carbon trading

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The European Union is keen to link up with the United States and produce a transAtlantic carbon trading system. David Cameron's party has also welcomed the idea of setting up a world system. It's a bad idea.

You know me. I believe markets are the solution to just about everything, from traffic congestion to better healthcare, smarter education, and faster mail delivery. And when tax is debated, my opening bid is to oppose any tax, of any kind, or any size, at any time, for any purpose.

But the trouble with carbon trading 'markets' is that they are run by governments and officials. The European system has always been a complete dog's breakfast. Because to set up such a scheme, you have to negotiate who is going to get what quotas. So from Day One, you're immersed in politics, not markets. Europe was hugely keen to show its good intentions and get Russia into its emissions trading scheme. But the Russians were tough negotiators and ended up with billions of dollars' worth of quotas which they could then sell to others. Were the quotas given to other countries any fairer? I doubt it.

Then at a more micro level, the exact operation of the scheme depends on bureaucrats assessing the outputs of individual producers. The whole structure is based on political horse-trading and bureaucratic judgement. That's no way to run a market. No, I hate to say it, but a carbon tax would be a lot easier.

Blog Review 853

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Yes, of course markets fail but then so, for very much the same reasons plus others, do governments.

As a minor example, those who insist upon planning seem not to understand, umm, planning.

One reason might be the paucity of explanation and depth we get from the public service broadcaster.

Do we really think that government, for example, knows more about the car industry than Toyota?

Does Will Hutton know how to run a business....or even a charity?

A most amusing and not entirely mad method of dealing with current problems.

And finally, a bank run in cyberspace.

At what point does it become communism?

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According to new research for The Sunday Times by the Centre for Economics and Business Research, state spending as a percentage of GDP has now reached 49% for the UK as a whole.

That's bad enough as it is – the government now controls practically half of the UK economy – but when you look at the regional figures the picture is even worse.

In the Northeast, state spending is 66.4% of GDP. In Wales, it's 71.6%. And in Northern Ireland, it's a whopping 77.6%.

I don't think the Soviet Republics ever managed to achieve quite that degree of state dominance.