Must be doing something right

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It does not look as though the truth is too popular amongst Guardian readers. Read 'Don't regulate banking – liberalise it' by Anthony Evans and decide for yourself.

One year after Lehman's collapse

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Is it true that in hindsight everything appears in 20/20 vision, or is the government so confident in its own conclusions that is refuses to take a better look? Marking now a year after the fall of Lehman Brothers, and the beginning of the current economic recession, it seems that all we hear from political leaders is that the entire economic recession was caused by too little oversight and regulation by government. But are governments trying so hard to be seen doing something about it that we are headed towards massive amounts of over-regulation, and perhaps planting the seeds for further economic crises?

Government intervention was in large scale the cause of the current economic crisis. In America, for example, the government organized programs aimed at what it called “fair housing" to give all Americans the chance to own a home regardless of past economic or credit status. Fannie Mae and Freddie Mac were essentially the long arm of the government to carry-out these programs and were given a direct line of credit into the US Treasury. The problem is that governments are not willing to leave anyone out, or have any losers, since their primary interest is in pleasing the masses and not turning a profit. The private sector may leave some people out, but it also doesn’t throw massive amounts of money to people that will never be able to repay either - that is unless the government throws equally large amounts of money at them first without expecting repayment. Governments simply do not internalize costs or risks, and government money carries those same tendencies with it. There was just too much of it floating around in investment firms pocketbooks.

Now governments all over the world are once again trying only to please the masses without internalizing any of the costs. They are cracking down on CEO pay and bonuses, limiting investments, and in some cases taking ownership stakes in high risk areas. The government just can’t keep its hand out of the market. The current conditions are due in large part to government covertly trying to buy the free market out, and now they are openly trying to suffocate the market which can only lead to similar or worse outcomes.

A creative department

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As an example of dodgy government statistics, the Taking Part Survey* by the Department for Culture, Media and Sport takes some beating. In an effort to prove their success at encouraging participation, they’ve come up with some gems of creative terminology:

• ‘Attending an art event’ stretches to seeing “street arts (art in everyday surroundings like parks, streets or shopping centres)".
•  'Visiting a historic site is as easy as going to “a city or town with historic character".
•  It counts as using a public library if one “used a computer outside the library to view the website".
• The most popular way for Britons to participate in an arts activity in 2007 was by “buying original/handmade crafts".
• The list of “active sports" includes snooker.

Shameless.

*Technical Note PSA21: Indicator 6", “annual data 2006/07", “Final assessment of progress on PSA3: complete estimates from year three, 2007/08." All published since May 2008.

How to save £50bn

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Readers may already have noticed an excellent new report – How to Save £50bn – which was jointly published by the Institute of Directors and the Taxpayers' Alliance last week. The logic behind its call for spending cuts is impeccable and, I would have thought, difficult for anyone to disagree with:

• The UK faces a massive fiscal crisis, with borrowing going through the roof.
• If the economy does not recover as well as the government forecasts, the deficit will be even worse than anticipated.
• Failure to bring borrowing under control could lead to the UK losing its AAA credit rating, which would have serious knock-on effects on Sterling and interest rates.
• Higher taxes could smother economic recovery, which would make reducing the deficit even more difficult.
• Public spending grew more quickly in the UK between 2000 and 2007 than in any other OECD country. That's why we have a structural deficit.
• We need both long-term reforms and short-term spending cuts to tackle the deficit.
• Governments can bring spending under control if they really commit to it: look at Canada in the 1990s.

The report then goes on to make 34 separate recommendations for reducing public spending, which would save just over £50bn in total. I've pasted a full summary of their proposals below (click here if you can't see it).

This IoD/TPA report is an important contribution to the debate on public spending, and one that I hope policymakers will take seriously. The ASI is working on a similar project at the moment, which focuses a bit more on capital expenditure. We are planning to publish it early next year.

ISOS - 15th October 2009

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On Thursday 15th October the ASI will be holding its next Independent Seminar for the Open Society; our one-day conference for sixth-form students with an interest in politics and economics. Named after Sir Karl Popper’s book The Open Society and Its Enemies, the conference is based upon the principles and consequences of an open and tolerant society.

ISOS always attracts prominent and distinguished names from all areas of politics, journalism and business; past speakers include the likes of Boris Johnson, Andrew Marr and Yasmin Alibhai-Brown. A key attraction of ISOS is the way in which students are able to get involved with the issues discussed. Following each 15-20 minute talk students are invited to question each speaker on their topic, and voice their own opinions and reactions. Talks promise to be on the cutting-edge politics and economics.

This October the speakers will be Brendan O’Neil, editor of Spiked Online and co-founder of the Manifesto Club, Conservative MP Sir Malcolm Rifkind, LibDem MP Lembit Opik and ASI President Dr Madsen Pirie. This October will also see the first ISOS debate (debators tba).

To apply for a place, please send an e-mail to isos@old.adamsmith.org. School group bookings are welcome. Places for students are limited to 200. A flyer for the event is available to download here.

The UK's credit rating

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The Prime Minister's solution is to keep spending willy-nilly and paint anyone who asks questions as immoral. Yet it is Brown that is immoral. Our so-called leader is at risk of wrecking the UK's credit rating – a cataclysmic outcome that would result in genuine austerity budgets and annual debt service costs approaching what we spend on the NHS.

– Liam Halligan, ' Daring Darling finally puts Brown in his place ' The Telegraph

Dinner with Portillo

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Back in July, I recorded an episode of Dinner with Portillo, in which I discussed devolution and Scottish independence with Rod Liddle (of The Times and The Spectator), Michael Fry (the Scottish historian and author), Henry McLeish (the former first minister of Scotland), Hardeep Singh Kohli (from The One Show), Vernon Bogdanor (the Oxford professor), Timothy Garton Ash (of The Guardian and Oxford University) and, of course, Michael Portillo (the former defence secretary). Just in case anybody wants to watch it, it's on BBC Four tonight at 10pm.

Taking welfare economics seriously

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Arthur Pigou was pretty much the founder of welfare economics and it is from him that we get the idea of Pigou taxation (you can see that the branding company had to work overtime there, can't you?). The essentials of which are that where there is an externality we should either tax or subsidise it. By definition, externalities are not things contained within market prices. Thus if there is a negative externality (that is, a cost which is carried by someone not included in the market price) then there will be too much of that activity. Many forms of pollution are examples here. We reduce the excess amount of pollution by taxing it and thus incorporating it into those market prices: we thus get the socially optimal amount of pollution.

What few seem to recognise is that we use the opposite argument all the time: why should the taxpayer pay for the education of children? Because there is an externality, a benefit this time, in being part of a literate and numerate society (it's the lack of that numeracy and literacy which is the usual complaint about governments and education, not the taxes). Thus the society as a whole subsidises said education. Basic scientific research, there are innumerable things whose subsidy is justified in the same terms (public goods for example). Positive externalities should be subsidised.

Which brings us to the concept of bequests: should they be taxed or should they be subsidised? Is there a positive externality there or a negative one? It's appallingly difficult to see that someone getting Uncle Stan's money is a negative externality but is there a positive one there? Yes, according to this new paper, there is.

Uncle Stan, as his motivation to make the bequest, has only that warm glow from knowing that his nephew will be provided for. What is external to his decision is the very warm glow indeed that his nephew gets from being provided for. Thus we have an externality: Stan's decision is motivated purely by his utility, while there is a large utility gain to others not contained in the motives that lead to his decision. And as we've already said, positive externalities should be subsidised, not taxed.

Thus the truth is that far from inheritance tax being raised, or even existing, there should be a subsidy to add to each and every inheritance received.

Zero Base Policy

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In our latest report Zero Base Policy, Dr Madsen Pirie argues that minor changes to existing policies is no longer an option, given Britain's dire economic and social fabric. Instead the need is for "zero base" policies to provide new and effective ways of achieving policy objectives.

Topping the agenda is economic change. Dr Pirie has set out measures to turn Britain from a high tax, high debt economy into one on the virtuous circle of low taxes and increasing growth and revenues. The Treasury's 'static' model of the economy needs to be rejected in favour of a 'dynamic' one, which factors in the growth impact of lower taxes.

As in previous reports we propose to lift the low paid out of income tax by raising its starting threshold to £12,000 p.a., corresponding to the minimum wage, or about half the average wage. This eliminates the need for vast welfare transfers to low earners by letting them instead keep what they earn. At the top end the ASI proposes to expand the tax base by successively raising the threshold for the 40% rate until no-one pays it. Local finance needs overhauling, replacing Council Tax by local sales taxes as in the USA, and setting business rates locally. Local budgets should require popular vote approval before coming into effect.

A one-year judicial commission should be set up to review civil liberties and make recommendations. Public body CCTV surveillance needs to be limited to police and security services, and for anti-terror powers must be restricted to cases of suspected terrorism. Also, government policy on drugs has proved a failure, and need a total rethink. Most narcotics should be made available at medical centres, and the production and sale of recreational drugs legalized under controlled conditions.

The biggest opportunity for reform is in education. Parents should of course be permitted to use their child's education allowance at any school which is non-selective and requires no additional top-up fees. Regulation can be addressed through the use of 'sunset' clauses under which regulations expire unless specifically renewed, and for regulation to be implemented by case law, with the findings of tribunals and juries filling in the details of broad statutes.

Zero Base Policy contains 33 radical objectives including the abolition of regional tiers of government and agencies, and the phasing out of most capital taxes.

Norman Borlaug has died

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On Saturday, Norman Borlaug died aged 95. The man who saved more lives than any other person who ever lived.

The green revolution that Mr Borlaug initiated irradiated the temperamental humanitarian "ship-to-mouth" sustenance for much of humanity. A consummate entrepreneur, his life is proof of the wondrous contribution one individual can have on the course of human history.

Beloved by many in the countries whose lives he saved, the Nobel Peace Prize winner lost favor among many in the West as politics trumped science and the environmental cause turned in on itself. It is beyond a travesty that so many environmentalists have retarded the progress that technology offers for feeding the world. Their lobbying of the Ford Foundation and World Bank to shun Mr Borlaug's work is a stain upon the environmentalist movement.

Mr Borlaug never gave in to their questionable priorities, and these and other institutions could learn a great deal from his courage and commitment to the evidence. In a rare reply to the armchair environmentalists who criticized his work, he retorted:

They've never experienced the physical sensation of hunger. If they lived just one month amid the misery of the developing world, as I have for 50 years, they'd be crying out for tractors and fertilizer and irrigation canals, and be outraged that fashionable elitists were trying to deny them these things.

Here’s a selection of obituaries to the great man:

The Times of India 'Norman Borlaug, India's 'annadaata', dies at 95'.

The Times 'Norman Borlaug, scientist who 'saved 245m lives', dies aged 95'.

The Telegraph:'Norman Borlaug'.