Labour's static society

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New Labour came into power with a host of promises they were going to fulfil. We have seen them fail in many specific areas; health, industry, education, and so on. But one of the overriding ambitions of New Labour was to increase social mobility. Here, they have failed spectacularly.

New labour pledged to break down the age-old barriers within our education system and labour markets, meaning that that anybody could achieve anything they set their mind to in Britain. But through all the spin and policy mismanagement, that final goal seems to have been forgotten, and we are now in worse situation than in 1997.

Jeff Randall has written a damning critique of New Labour's social mobility schemes here. The evidence is clear: social mobility has declined in the last decade. This is in conjunction with a deepening ‘poverty trap’, creating a cycle where families and communities are continually punished by government meddling in the labour market and the welfare state.

By interfering with education, creating low-income quotas for universities, abolishing grammar schools, and ‘dumbing-down’ public exams, the government has only managed to punish high achievers and create false success and disincentives to work for others. This cannot continue. What incentives do students have to study and improve themselves if they know they can pass exams with a minimal score? Such dumbing-down of education soon leads to a dumbing-down of society.

This is an example of what happens to society at large, and to the average family, when governments focus on image, perception and spin, rather than reality.

All is politics, all is politics

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Johann Hari seems to have got a tad confused really:

Far from being some dreamy call to kumbaya, collective political action is the single biggest reason your life is incalculably better than that of your great-grandparents.

Hmm, I don't know about yours but my great grandparents were, well, among them at least, an Irish publican, a Norfolk vicar and a newspaper printer in Leeds. Their lives were, by current standards, harsh, even though they were none of them at the bottom of the economic pyramid. Real incomes per capita have grown, at constant prices, by about three times since 1900. As they started out, in the 1880s, transport was still a horse, a bicycle or a train, no one at all had flown in a heavier than air craft (although grandfather, it has to be said, went on to crash such no less than 8 times): antibiotics of any sort, let alone penicillin, were still decades away. The germ theory of disease was really only just getting going and an infected blister would kill the son of a US President in 1924.

Telephones, radio, the gramophone, each had either only just been invented or were still over the horizon: entertainment was live either at the theatre or (eek!) around the piano in the front parlour. Food was grossly expensive as a portion of income, deficiency diseases were rife. Dentistry had advanced little beyond the barber surgeon and in fact, for most diseases, treatment other than bed rest was non-existent.

Umm, you know what? No, I don't think collective political action is what has made my life so different from that of my great grandparents. I think I'll stick with the more reasonable explanation, that these longer, better fed, more mobile and more healthy lives have been brought to us by that strange mixture of capitalism and free markets that drives so much of the world.

For I can see many parts of the world that have had lots of collective political action and many of them seem to be still lacking food, medical care and all sorts of modern technologies: while I cannot see anywhere at all that has been capitalist and free market for the past century that lacks them.

And as for kumbaya: words fail me as they so obviously did the lyricist.

The FTSE-100 – Contrary Behaviour?

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Given the precarious state of the UK economy, it was curious that the FTSE-100 recently registered increases over 11 successive days of trading: this run ended last Tuesday.

Since the founding of the FTSE-100 in 1984, this was the only the third time that there has been such a sustained upward performance.

To be sure, trading volumes were low. And, in market jargon, this rise may well have been a case of a ‘dead cat bounce’, a trend that is typical after prolonged losses.

Prospects for the real economy remain grim as recession digs in. Whilst there is some evidence that the worst is past, many market watchers argue that this recession – caused essentially by the heavy over-valuation of financial and housing assets which gave rise to the credit crisis – is different.

Moreover, the UK’s public finances are in a dreadful state: this year, no less than £220 billion of gilts are due to be issued to fund the massive public debt.

At the corporate level, though, there are some grounds for optimism. Recent results and trading statements, with a few exceptions, have been reassuring.

And even the massive slump in profits for both BP and Shell were readily absorbed by the market which recognized that plunging oil prices were bound to cut their returns.

One persistent theme has been the pension deficit issue, which continues to do dreadful damage to the share price ratings of British Telecom and British Airways amongst others.

Where will the FTSE-100 go from here? Inevitably, opinions vary.

Many experienced market professionals remain pessimistic, given the shocking state of the public finances and the expectation of higher interest rates. 

A serious failure with a forthcoming gilt auction would also alarm the market. Furthermore, irrespective of the outcome of the next General Election, substantial public expenditure cuts look inevitable.

Worrying times.

Walking with dignity towards the light

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On Thursday, Debbie Purdy was told by the Law Lords that the Director of Public Prosecutions must inform her partner whether he would face prosecution if he travelled with her to an assisted-suicide clinic in Switzerland. Mrs Purdy suffers from Multiple Sclerosis and has been seeking clarification on the law surrouding assisted suicide, due to it still being an offence under UK law to assist someone in ending their life.

The Director of Public Prosecutions will now have to shed light on their decision-making processes. From that, they will develop a policy document to broaden the available information to those who are seeking recourse to assisted suicide.

Rational, fully developed humans understand the concept of compassion. It is something we exhibit towards each other, and also to animals, all the time. We recognize suffering and when we see it we wish for it to end. We hope for ourselves to be treated in the same way. Yet when we can’t observe another’s misery or have knowledge about when it has been ended, why do some believe that they themselves have been wronged? What value did that other ‘non-existent’ persons life hold to them? Why did they want their suffering to continue, despite not even knowing that person? As previously stated in an earlier blog, the law of the land is there to protect us, and those vulnerable few who may suffer at the evil hands of some fellow human.

The group Right to Life are continually arguing that they represent the whole of the disabled community. In reality they are cowering behind them, demeaning them via the notion that one disabled person is the same as the next and that they are in permanent need of shepherding. They are not. And they should be free as the next person is in making a decision over the lives. Which is why the Law Lords decision is a welcome one.

And now the Swedes get all Austrian on us

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Johan Norberg and Johnny Munkhammar get all economically Austrian on us, that is. In trying to dig us out from the dotcom crash everyone lowered interest rates which then inflated the asset price bubble in housing. Sure, that this coincided with invention in securitisation didn't help, but that's the basic reading. Plus, of course, a small seed of doubt about homeopathic economics, that troubles from an overdose of cheap debt are best dealt with by more cheap debt.

A recession is a time when we should sort out bad investments and transfer capital and labour from failed sectors into more competitive industries.

I'm not sure about that "we" there: agreed that the misallocation of resources needs to be sorted out but "we" implies an agency which isn't really there. They, everyone else, by interacting in markets, need to change that misallocation.

It's also not necessary to agree with their thoughts on the causes to see that their solution has merit. However it happened, we had a huge over-allocation of resources to construction and finance (as well, possibly, as to industries like cars). We need some method of moving that over-allocation to, well, that's the bit we're not quite sure of. To somewhere, to sectors that will produce more value, any value even, it's just that we don't really know what those are. The only real method we have of finding out is to allow those resources to go fallow, to become unused, and then watch and see what entrepreneurs find to do with them that does indeed create value that people are willing to pay for.

And that's one of the major problems with shoring up the current industrial and productive structure by various stimulus measures: if the resources don't become unused, then we'll never find out their best alternative uses and thus never make the necessary adjustments in the structure of the economy.

Which, while it is possibly depressing, is all very Austrian. Recessions are what happen while we figure out what we did wrong and try to work out how to do better.

Flat tax would be fairer

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Readers may already have seen coverage of The Effects of Taxes and Benefits on Household Income 2007/8, which was published by the Office of National Statistics earlier this week. Allister Heath wrote about it in City AM here, and Charlie Elphicke has done a briefing on it for the CPS here. The headline-making findings are that the poorest quintile of households pay a greater percentage of their gross income in tax than the richest (38.7% compared with 34.9%), and that their share of the total tax take has risen from 6.8% in 1996/7 to 7% in 2007/8 – despite an allegedly redistributive government being in power during that period. This is mostly down to rising indirect and stealth taxes, which tend to hit the poorest hardest. See the chart below for details:

Direct taxes Indirect taxes Total taxes Poorest 10.8% 27.9% 38.7% 2nd 14.1% 18.6% 32.7% 3rd 18.6% 15.9% 34.6% 4th 21.8% 13.7% 35.4% Richest 24.9% 10% 34.9%

No doubt these figures will lead some to conclude that the tax system needs to be made more progressive, and that the rich need to be stung with punitive higher-rate taxes to make the tax system 'fairer'. However, this would be completely the wrong approach. We already have a 'progressive' tax system, and yet it appears to achieve the opposite of what is intended. By contrast, replacing our current income tax, employees' national insurance contributions and council tax with a flat tax and a high personal allowance would make things much fairer. The figures below assume a tax-free personal allowance of £12,000, with all income above that taxed at 30%:

Direct taxes Indirect taxes Total taxes Poorest 0% 27.9% 27.9% 2nd 0.01% 18.6% 18.6% 3rd 15% 15.9% 30.9% 4th 20.7% 13.7% 34.4% Richest 25% 10% 35%

Now, I'm not saying that this is the ideal allowance/tax rate – I'm using simply using £12,000 and 30% to illustrate that a flat tax could leave the richest quintile paying the same percentage of their total income in tax, while greatly reducing the burden on lower-earners. Plainly, the UK's indirect tax burden would still leave the poorest quintile paying more tax than they should, but this would largely be addressed by existing cash benefits.  As it happens, the ONS statistics say some interesting things about benefits too, but that's a story for another day. You can download the complete set of ONS figures and tables here.

And now for something completely different

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The Austrians saw it coming

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In Thursday's Telegraph, Edmund Conway has a bash at the economics profession: "everyone is suffering" from the recession, he says, but "no one really foresaw precisely how this crisis would pan out."

The international financial system is a complicated beast, with countless actors, complex causal relationships, and multiple external influences and so, as he himself recognises, to make exact predictions would be "akin to providing an accurate weather forecast for every week of the following year." Nevertheless, despite his claims, there were those who did a pretty good job.

Peter Schiff, for example, not only predicted the housing crash in 2006:

Today's home prices are completely unsustainable… What's going to happen in 2007 is that… these sky-high real estate prices are going to come crashing back to earth.

But also the knock-on effects for the financial sector in 2007:

It's not just sub-prime… This is going to be an enormous credit crunch… The fundamentals are not sound… The worst is yet to come. Stay away from the financials – they're toxic.

And for the wider economy in 2008:

By November it'll be obvious that we're in a pretty big recession… it's not going to be months, it's going to be years.

Although in the minority, he was not alone. Economists across the world voiced similar concerns, but were ignored until too late. Almost all of them had one thing in common: they were followers of the Austrian Tradition, and inheritors of the ideas of F. A. Hayek.

Conway's criticisms don't properly apply to the profession as a whole, but rather to the prevailing economic orthodoxy, made up of those in comfy government posts and university seats, who happily sat back believing that there would be "no return to boom and bust" as the government blew up the housing bubble with easy credit.

Still, there's a really interesting point here: the crisis has damaged the reputation of economics, but at the same time thrown it open to new ideas and the return of old ones. Ideas that lie on the periphery of the discipline can now move to the troubled centre. We can, in Conway's words, "exhume once-sacrilegious figures such as John Maynard Keynes or Friedrich Hayek." Given the Austrian School's performance in predicting the current crisis, may I suggest we choose the latter?

What has become of the country of free Englishmen?

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Coming from a country haunted for decades by its totalitarian past, and being born at dawn on May 1st 1945, only a few hours after Hitler killed himself with a shot in his mouth, I have always had qualms with people telling me that Britain has become a police state. Even more so because I was so grateful for the sacrifice the British people made for my freedom, and because I eventually emigrated to this country. However, having experienced what happens if you cut yourself off from the number one state propaganda outlet, you get the impression those people are right. I dared to cancel my TV Licence in March this year because I was so bored, and because I get all I want from the internet anyway. Since then I keep getting scary letters from the TV Licensing Enforcement Division. Each of these letters assumes that I keep watching TV – they just don’t get it that there are people out there who think the value for money offered by the license fee is poor. Importantly, the letter indicates that equipment liable to pay the licence fee includes computers and mobile phones. Under the headline “Official Warning", suggestive of state action, the letter I received today went on: Our Enforcement Officers have now been authorized to visit your address in Gloucester Place. This is because we have no record of a TV Licence at Your address and you haven’t responded to previous letters. Indeed, I took the liberty not to bother with their previous letters and threw them away. The question emerges here: Does the state monopoly of the BBC really encompass all digital information gadgets such as mobile phones, blackberries and laptops? Thinking it through, surely that would mean they would be entitled to collect the licence fee worldwide from anyone who watches BBC broadcasts anywhere?

Towards legalisation?

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A report launched on Thursday by the UK Drug Policy Commission urges drug enforcement agencies to target the most harmful dealers, areas and activities, rather than simply aiming to reduce total supply.

The report must be praised for recognising the central flaw in the current drugs strategy – that “more enforcement generally does not lead to less availability because established drug markets are too resilient and adaptable." As long as demand exists, suppliers will find a way to get drugs to customers.

Crucially, the report also recognises that much of the harm associated with drugs is caused by the activities of suppliers – gang warfare, sexual exploitation, targeting of children, and dangerously impure drugs. Quite obviously, it is only because of the illegality of drugs that their supply is characterised by such criminal behaviour.

These insights are useful, but the report’s recommendations do not go far enough. Targeting the most harmful activities of drug criminals may alleviate the damage, but it will not solve the problem. Only by recognising that this is a war we cannot win, and by removing the drugs trade from the hands of gangsters can we really make a difference. Regulated legalisation is the best solution.

And as Tom pointed out in his post of yesterday, legalisation would also save a lot of money. Even allowing for the societal cost of heroin and crack use (potentially) doubling, the total saving would be at least £5bn.