The economic facts

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Anyone who thought Gordon was the last person in Britain to recognise the desperate need for cuts should pick up a copy of Wednesday’s Guardian. Yes, there is someone left behind, someone even more deaf to the truth, someone even more pig-headedly allied to their big-state creed, someone even more hopelessly set against the surge of public opinion, and, yes, it’s Polly Toynbee.

Her latest column “Spend now, pay later" (sadly not a DFS advert) tells us that:

1. “There is no urgent rush to pay down a deficit."
2. “There is no danger of not sustaining our triple A-rated debt."
3. “Low inflation makes [the debt] relatively cheap to run."
4. “Rapid cuts are not necessary, while there are tax rises that would be less painful."

Let’s look at the facts:

1. The National Debt currently stands at £800bn, that’s £32,000 for every family in Britain. It stands to increase to £1,400bn by 2014. We’ve also got £1,120bn of pension promises to pay, and £1,500bn of liabilities through the nationalized banks.

2. Britain’s AAA rating was only saved by Conservative promises to cut spending, and would be in jeopardy if cuts were abandoned.

3. Even at historically low rates, government debt will cost more to service than we spend on education. Given the inflationary time-bomb set by printing £175bn to fund spending, holding interest rates at record lows, and forcing banks to extend credit, this is only going to increase.

4. The average tax burden is already 37% of income. The state spends 44% of GDP and directly employs one in four of the British workforce. Firms and individuals are already fleeing high-taxes to more competitive nations abroad.

The British state is a clumsy giant, suffocating the private sector under enormous taxation and regulation. It feeds its enormous gut by borrowing on our behalf, building up debt for our children and grandchildren, and spewing money aimlessly and unproductively across the economy. It has never been so urgent to cut spending, to let the private sector prosper, to pay off this enormous debt, and to allow the growth that will bring better times.

You can’t borrow your way out of a recession, and you can’t tax your way to growth. The only cure to our economic woes is a drastic reduction in the size of the public sector. Adam Smith knew this, Cameron has caught on earlier this year, and even Brown’s starting to get it. When will Tonybee realise she’s wrong?

UEFA 1 EPL 0

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The English Premier League have shot themselves in the foot using a pistol proffered to them by Michelle Platini. They have agreed to the implementation of a quota system on the number of "home grown" players that a club must have in their squad. Players must have had to be registered for at least three seasons between the ages of 16-21 at an English or Welsh Club to qualify as home grown. That, though, isn't the damaging part. The fact that there must be 8 of these players in a squad of 25 is the significant hindrance.

Football is a competitive sport: there has to be an open market on who you employ, how much you pay and a respect of success. Whining about a lack of young English footballers in the Premier League makes a mockery of the sport. A fair analysis of the standards of many of the players under 21 marks them down as being substandard in quality to those from outside the UK. (A fact backed up by the number of home nation players plying their trade in the lower half of the Premier League and the lower divisions who used to be on the top clubs' books). This isn't a failure of the Premier League and teams should not be punished for this. This is a failure of the FA, for a lack of support of grassroots football, and the government's for their over-involvement in education these past 30 years.

The Premier League has been running since 1992, similarly the Champions League, (the renamed European Cup) both offer adequate incentive to any youngster who wanted to play football professionally. And it has. There are now many who are 'coming through the ranks' at clubs. Most though don't make the grade when compared to others around the world of a similar age (they also tend to be on the expensive side when compared to cheaper talent from abroad). Imposing archaic and illiberal restrictions on the make-up of squads won't solve this problem, it will merely weaken all premiership teams.

RIOTT

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The Randomised Injecting Opioid Treatment Trial (RIOTT) programme has just released its findings of a 4-year scheme in which heroin addicts were given free access to drugs in supervised, clinical conditions. Unsurprisingly, the scheme led to significant reductions in the crimes committed and street drugs taken by addicts, particularly when it was heroin, not methadone, given to them.

127 heroin users for whom conventional treatment had failed took part in the scheme, and the results clearly show that prohibiting an action is not the best method to make it go away. At the start of the trial addicts reported carrying out 1731 offences a month, but after six months this had fallen by 2/3 to 547. While participants spent on average £300 a week on street drugs at the start of the trial, by the end this had decreased to about £50. With pilot schemes taking place in London, Brighton and Darlington, the independent National Treatment Agency for Substance Misuse concluded that the successes of the trial warranted the creation of further pilots.

Nearly two thirds of crime is drug-related, and the legalisation of heroin and other drugs will eradicate entire black markets and cause levels of petty crime to plummet. By legalising narcotics, the cost to society that their abuse causes is reduced. Transform Drug Policy’s latest report shows that if heroin was regulated the cost to society could drop by nearly 14bn due to a fall in the costs of crime, health and social care.

Heroin users are addicts that deserve treatment, just in the same way that alcoholics and those with mental health issues are given help and respect. When hooked on an illegal substance addicts are driven underground as they are treated as criminals, not patients. All evidence suggests that the UK should follow Portugal’s example by decriminalizing narcotics and bring addicts within the law to be treated as human beings, not scum on the bottom of our shoes that we wish wasn’t there.

Public sector pain

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The government should lop 5% off every budget and every public salary for a year, no exceptions and no argument. It would be crude but fair, the price paid by a public sector that has done well over the past decade at the expense of the productive sector of the national economy. It is an expense that the nation cannot at present sustain.

– Simon Jenkins, 'Crude, but fair. The public sector must take the pain', The Guardian.

Great?

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Archbishop of Canterbury’s views on the City capitalism veer close to populist sloganeering

Dr Madsen Pirie, in reply to the Archbishop of Canterbury, sets out that Capitalism has lifted more people from poverty and hunger than any other force in history, including religion.

I respectfully disagree with Dr Rowan Williams, the Archbishop of Canterbury, over his views on the City and its finance industry. He regrets there has been “no repentance for the excesses which led to the economic collapse,” and describes a feeling of “diffused resentment” that bankers have failed to accept their responsibility for the crisis.

While the archbishop is entitled to express his views, I am sure he will not mind me pointing out that these are somewhat uninformed views. He admits to not being an economist, saying the crisis has taught us that “economics is too important to be left to the economists.” I am sure he will not mind me pointing out, either, that financial services are not founded on greed. For the most part they represent honest trading by well-intentioned people whose skill lies in the efficient allocation of resources. This skill, internationally, has lifted more people from the blight of poverty and hunger than any other force in history, including religion.

Few economists think that the crisis was caused by greedy bankers. In increasing numbers they are coming to the view that recklessly loose credit created by politicians and central bankers sent false signals to the financial industry, causing them to act inappropriately and take on undue risks. Dr Williams describes a sense of “muted anger” at the bonus culture, pointing to a gap between what people are paid, and the worth of what they do. He might just as well criticise the huge rewards gained by footballers and pop stars, but the fact is that their pay reflects what people are prepared to pay for their services. The “bonus culture” is no different; it reflects the economic worth of people whose financial skills can add value to transactions.

Of course we can learn something from the crisis. Perhaps that banks should be encouraged to align bonuses with long-term returns rather than with short-term turnover. We can also learn that when governments try to “smooth” downturns for political advantage, it simply stokes up future calamity.

Everyone admits that there have been bad eggs in the City, as there have been in the Church, and perhaps in every walk of life. That is why we need institutions and practices to restrain them, and to improve these when they fall short. But to taint the financial industry with “idolatry” is to veer dangerously close to populist sloganeering.

Published on Telegraph.co.uk here.

Sound money

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Rather a shock admission from ex-Chancellor Lord (Nigel) Lawson at the Legatum Institute/AEI London Forum yesterday. I asked him to confess that his flooding the world markets with cheap money after the 1987 stockmarket crash got central banks hooked on the drug of cheap money – an addiction that grew and grew, until it inevitably ended in the cold-turkey episode we're just going through.

No, he said: China's hugely expanding population of savers meant that rates were naturally low. But, he said, he did think that mistakes were made during the 'Big Bang' deregulation of London's financial markets in the 1980s. Of course, the Big Bang had to happen. I remember the City of London still being in the quill-pen era, while technology and communications allowed its business to fly to other centres across the world. But when retail banks, stockbrokers, commercial banks and all the rest started to merge, the old relationships and restraints broke down. US banks came to London, relieved to be able to grow, free of Glass-Steagall and other onerous regulation. The Bank of England wanted the UK banks to be in the same league, and encouraged the mergers of retail and investment functions.

That active encouragement, Lawson suggested (if I understood him correctly), was a mistake. He would like to separate investment and 'utility' banking, so that customers know where they are. If we bail out anyone in a crisis, it should be the small retail customers of conservative banks who have come a cropper for some reason, with the Bank of England as lender of last resort (a role it seems to have messed up a year ago). But taxpayers shouldn't bail out the professionals in the world investment markets, who know the risks they are taking.

Amen to that: but I'd like to add the sine qua non of sound money into that particular policy mix.

Good-for-nothing government?

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I was interested – but not at all surprised – to read in The Times last week that cycle lanes actually make cyclists less safe. According to a study by the universities of Leeds and Bolton, cars drive far closer to cyclists where there are cycle lanes, putting them at a much greater risk of being hit. It's a classic example of the law of unintended consequences at work: when motorists sense that cyclists have their own designated lane, they don't go to such trouble to give them space.

This is just the latest indication that government-inspired "road clutter" designed to make us safer on the roads often ends up having the opposite effect. The Dutch are probably the pioneers of this: the town of Drachten famously removed all traffic signals, and found that traffic flowed more smoothly and that accidents were reduced, not least at Laveiplein, a 22,000-vehicle-per-day junction next to a bus terminal.

But the technique has also been applied in London. As the Telegraph reported back in 2006: "Kensington High Street has been decluttered by removing barriers and simplifying road markings. Pedestrian accidents in the affected area have been reduced by more than 40 per cent." More recently, Ealing has followed suit, announcing that traffic lights would be removed from up to seven junctions leaving drivers to fend for themselves.

What this illustrates, ultimately, is the way in which spontaneous orders based on voluntary co-operation tend to be more efficient and effective than coercive ones based on government planning. Or to put it another way – letting people take responsibility for themselves usually works out better than having government take responsibility for them.

It also suggests that even in policy areas that seem so naturally the preserve of government planners, like traffic management, approaches based on individual freedom are well worth considering.

Nudge off

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"Persuading Us to be Good" is a new programme on BBC Radio 4 broadcast last night and previewed here. The question the article opens with is, "Are you a good citizen?" If you are bad, and you aren't recycling your grandmother in the name of Gaia, then how does the government get you to act? They may ultimately be investigating the use of advice from behavioural economists who have developed the idea of influencing human behaviour via gentle prodding and goading.

"Let us do your thinking for you. We know you are busy and don't have time to find out about the issues that matter to us. We know that you hold completely different, yet, irrelevant issues, dear to yourself which we will gloss over. We will provide you with all the government sourced information you require for us to make a decision for you. But just so that we can alleviate the guilt of telling you what we want you to do, we're going to let you do a little for us via us moralising at you." That's pretty much what paternalism is. How do you get large swathes of the informed populace to take up crass public policy initiatives that have little or no benefit to the broader scheme of things? Especially when there is zero incentive to the persons undertaking the sacrifice. (The warm fuzzy feeling that the bureaucrats feel inside does not count as an incentive).

The question should not be whether politicians can shape our behaviour but can information put forward by either side of an argument persuade us. Imagine if there was no imposed cost upon our liberty with regard to our paying of taxation. What would the outcome be if we were allowed to offer up our own sums of what we thought fair. It would not be what the government thought fair. It would not be what the moral minority thought it should be either. There is little difference between nudging someone or standing over them with a gun. Both impose upon liberty and both subjugate the individual to a will that is not their own.

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.