Blog Review 912

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Yet another set of reasons why the Geithner plan might not work: incentives matter, remember?

On that graduate premium, yes, quality does matter.

Quangoes, like all bureacracies, find things for themselves to do. Wouldn´t it be rather better if we just didn´t have them than that they wasted our money on these sorts of campaigns?

A review of Paul Collier´s new book. As incentives matter we need to improve those for African political leaders.

It looks like the lawyer/client privilege has just been abolished in the UK.

How to discuss economic matters and don´t try this at home.

And finally, the cure for that too much time on your hands problem.

Moral capitalism

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Gordon Brown and David Cameron are riding the same hobby-horse right now – how we need to make capitalism 'more moral'.

Well, let me tell you: even without their kind intervention, capitalism is very much more moral than most of the snotrags in Parliament, who seem to spend most of the time working out how to fiddle their expenses. I don't think politicians have much to teach businesspeople about being moral, quite frankly.

People say that capitalism is based on greed, which must be restrained. No it isn't. It's built on self-interest – which is perfectly natural to us all, and beneficial to our community. Markets are about free people, voluntarily exchanging cash for goods or services. You can only prosper in the market if you give your customers what they want. In every transaction, both sides benefit – they wouldn't do if they didn't – and with millions of sales and purchases going on every day, that spreads benefit through the whole society.

Capitalism is a vast, worldwide collaborative system. It doesn't need political arguments to decide what should be done. It doesn't need force to make people produce things. It produces enormous variety and plenty without any conflict or coercion at all. It's deeply democratic - with people making millions of choices in shops and markets every day, rather than having just one choice at the ballot box every five years. And capitalist societies are more equal. Everyone can aspire to self-improvement – it doesn't depend on you being a member of the right party, or clan, or caste.

And capitalism can only survive within a framework of moral rules. Rules like the respect for property, for example. People won't build up productive businesses if politicians, robbers, or soldiers can simply march in and take everything from them. Capitalism needs a rule of law to survive. And it needs honesty too. Customers aren't going to go back to a supplier who swindles them, or treats them unfairly, or does not honour promises, or even offers poor value. If you want to survive in business, you need to serve your customers, treat them honestly, and win their trust.

Rather different from our monopoly public services, where people get paid whether they do a good job or not. No, capitalism doesn't need politicians to teach it about morality, thank you.
 

Dr Eamonn Butler's new book, The Rotten State of Britain, is now available to buy now. Click here to find out how.

Following through with Free Trade

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Protectionism harms and trade helps. Almost all the world’s leaders have come to accept this message, and many even champion it. However, as economies falter, little is actually being done to end the process of ‘beggar thy neighbour’. This may be extremely harmful.

For once, I actually agree with Gordon Brown who argues that, “we must tackle protectionism and not risk a spiral of trade collapse". However, while some of his rhetoric is promising, his actions are less so. Only time will tell whether he means what he says, and follows through on his catchphrases; the lessons of recent history suggest otherwise.

His focus remains on securing a ‘stimulus for trade’ rather than allowing genuine free trade, and his comments on British jobs for British workers are hardly reassuring. Free trade is the process that allows individuals to transact without interference from government. A ‘stimulus for trade’ as described seems less like a removal of barriers, and more like an international stimulus plan. If recent ‘stimuli’ are anything to go by, higher government spending supported by a wave of subsidies and barriers focused towards special interest groups are on the horizon.

This will do little for free trade, or all the people around the world who benefit from trade so significantly. The policy does not determine resource allocation by allowing free exchange between individuals based on comparative advantage. Subsidies, taxes, tariffs, and non-tariff barriers are protectionist even when they are disguised as stimuli.
If Brown is truly dedicated, he will push world leaders to lower their barriers, force the EU to lower the common external tariff towards zero, and if unsatisfactory progress is made, leave Europe altogether to join EFTA. This move would continue to allow the UK access to the single market, thus maintaining all the trade benefits with the EU. Additionally, it would allow us to pursue a much freer trade policy, leading the way forward to the benefit of the mass of consumers and producers in the UK, and to our partners across the world.

In times of economic woe, protecting free trade against special interests is even more vital.

Philadelphia Budget Balance

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Yesterday, the Economy League of Greater Philadelphia released a budget challenge in which all can participate. The goal of the challenge is to balance the city’s current 200 million dollar debt by either raising select taxes or cutting funding from city programs. All of the choices reflect current decisions being made in city government. Try to help Philadelphia get back on the right track. If you are an anarcho-capitalist this might prove rather easy.
 

A response to the Turner Review

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Keith Boyfield, a senior fellow of the ASI and chairman of our Regulatory Evaluation Group, has written a new think piece responding to Adair Turner's Regulatory Response to the Banking Crisis.

He argues that the last thing we want is more staff and more money for the FSA – whose failure is due much blame for the collapse of the UK financial sector. On the contrary, Keith makes the point that, "what is needed is not so much a stack of new regulation, but a regulatory regime that enforces the existing rulebook while eliminating regulations that are either unnecessary or unenforceable." Read the whole piece here.

Blog Review 911

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It´s not so much how much wealth flees from Africa as how much stays there: given the likelihood of its expropriation.

There´s nothing like giving a politician a right good kicking, is there?

Econ geek corner: are special drawing rights actually used to price anything?

More geekery...happiness theory butchers marginal utility theory.

For those saying we should just get on and nationalise the banks. That might not be quite so simple: it might be that some cannot be nationalised.

Well, no one said economists were entirely normal.

And finally, The Guardian appeals to your conscience.

Inflation and quantative easing

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Does the Bank of England's new policy of quantitative easing – printing money, as you or I might call it – threaten us with future inflation, or is it a vital tool to dig us out of deflation? We have debates about it at the Adam Smith Institute, and I even have debates with myself.

This week's inflation figures have done nothing to quell the debate. Though falling house prices and interest rates mean that the Retail Price Index is zero, prices are still not exactly falling. And on the government's preferred Consumer Price Index, prices are still way above the Bank of England's target, at 3.2%. So the Bank is printing money at exactly the same time as the Governor is being forced to write to Gordon Brown to explain why prices are rising so fast.

Of course, the point is that there is a lag between monetary policy and its effects. It can be months, even years. So if you expect prices to fall in the future – as the Bank does – you need to take action now. Hence quantitative easing.

But: will prices fall? And if so, how much? Sure, there are a lot of cash-strapped businesses out there, slashing their prices in order to keep afloat. But many prices seem quite resistant to falling. Food is expensive, which is why supermarkets are some of the only companies making any money. Oil seems to be bottoming out at around $40 a barrel. A 28% drop in the value of the pound in the last 18 months has made imported goods much more expensive. And interest rates can't drop much more.

Money is a sledgehammer, far too massive to be used for fine-tuning. It should grow at a smooth, fixed rate. But the money supply has fallen dramatically over the last year, so arguably, it must be rebuilt. The lag is the snag. If prices are indeed stickier than the Bank thinks, then today's quantitative easing may simply force them up again. If confidence and the economy recovers faster than it expects, it could end up inflating into a recovery and setting off another inflationary boom.

Even if the Bank is right, will it be able to detect the recovery early enough to take its foot off the accelerator. And would it want to? Politicians and central bankers rather like booms. That's why we are in this mess.

Eamonn Butler's new book The Rotten State of Britain is out this month. Hear him talk about quantitative easing on the BBC's World at One here.

A short history of the social rights myth

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Jack Straw, the UK’s Justice Minister, has proposed to introduce a new British Bill of Rights, which would establish ‘rights’ to education, housing, healthcare, and so on. Click here to see our latest think piece by Rachel Patterson, in which she examines the evolution of the ‘social rights’ myth, and concludes that while we do have rights to life, liberty, and property, the provision of public goods is simply a matter for the government of the day.

The income tax mess

COMBINED INCOME TAX AND NATIONAL INSURANCE RATES 2008-12

2008/9

£ 0 – 4,525	0%
£ 4,525 – 6,035	11%
£ 6,035 – 40,040	31%
£ 40,040 – 40,835	21%
£ 40,835 +	41%

2009/10

£ 0 – 4,940	0%
£ 4,940 – 6,475	11%
£ 6,475 – 43,875	31 %
£ 43,875 +	41 %

2010/11

£ 0 – 4,940	0%
£ 4,940 – 6,475	11%
£ 6,475 – 43,875	31%
£ 43,875 – 100,000	41%
£ 100,000 – 106,475	61%
£ 106,475 – 140,000	41%
£ 140,000 – 146,475	61%
£ 146,475 +	41%

2011/12

£ 0 – 6,535	0%
£ 6,535 – 43,875	31.5%
£ 43,875 – 100,000	41.5%
£ 100,000 – 106,535	61.5%
£ 106,535 – 140,000	41.5%
£ 140,000 – 146,535	61.5%
£ 146,535 – 150,000	41.5%
£ 150,000 +	46.5%

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In the aftermath of last autumn's pre-budget report, most coverage focused on the temporary reduction in VAT from 17.5 percent to 15 percent and the alarming rate of growth in government borrowing, budget deficits, and national debt. More recently, there has been much talk about the proposed introduction of a new 45p tax rate on incomes over £150,000. It is due to be introduced in 2011, and the Tories say they won't stop it.

What people have generally missed, however, is the complete mess that Alistair Darling proposes to make of the income tax system from 2010 onwards, when people who earn over £100,000 will have their personal allowances phased out. The impact of this bizarrely complicated measure is to create two narrow income bands where the effective income tax rate is 60 percent. If you click 'read more' you will see a series of tables showing the combined income tax and national insurance (which is also set to rise in 2011) rates for the next four financial years – just see if they make any sense to you!

Even if an incoming Tory government did not prevent the introduction of a 45p income tax rate – and I think they should, given the stupidity of increasing the tax on wealth creators when we're trying to encourage economic recovery – I hope they would at least reconsider the government's complicated and irrational plans on the personal allowance. If taxes can't be cut, then they should at least be made simple and transparent. Honest, open government demands it.

Obama the Swede

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At a time when President Obama resorts to populist rants against CEOs, dipping his toe in the dangerous waters of class envy, the formidable Charles Murray demonstrates what the janitor and CEO should expect from Obama’s emulation of Old Europe. In a brilliant lecture delivered at the American Enterprise Institute annual dinner, Murray shows that Barak Obama is the model Swede - expanding the role of the state at the cost of individual responsibility, family and private enterprise.

Murray carefully examines the sources of human happiness as developed in the Federalist by the American Founders. He identifies American exceptionalism with the lack of class envy and freedom of one's own destiny. He believes not in comprehensive equality, but for happiness “in the sense of lasting and justified satisfaction".

His thesis maintains that although Europe offered a respectable and viable alternative to the United States, its model is now doomed - but surprisingly not primarily for economic reasons. Rather, Murray is concerned that the culture of the welfare state is draining “too much of the life from life", thus depriving the individual of a source of deep satisfaction which rests on self-determination and managing ones own life. Murray detects four crucial institutions that qualify as sources of deep human satisfaction: family, community, vocation, and faith.

Seen in this light, the goal of social policy should be to ensure that those institutions are robust and vital. The European model doesn’t do that. It enfeebles every single one of them. The problem is this: "Every time the government takes some of the trouble out of performing the functions of family, community, vocation, and faith, it also strips those institutions of some of their vitality – it drains some of the life from them." Importantly, this applies as much to the lives of janitors as it does to the lives of CEO’s.