Fiscal alcoholism

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fiscal-alcoholism

Thanks to our Senior Fellow Tim Ambler for introducing me to a new phrase: fiscal alcoholism. It was coined by György Kopits, a member of the Hungarian National Bank's monetary council, in the Wall Street Journal recently. The phrase neatly sums up the illness in Hungary's public accounts – and in the spending habits of many other countries around the world. They know that they should be giving up their reckless spending and borrowing. But they like the high it gives them. And they reckon that one little bit more spending or borrowing can't do them much harm, can it...?

This is why we get booms and busts. When things are not going well, governments reduce interest rates, or print more money, or embark on any number of 'stimulation' packages. The immediate effects seem nice: business flourishes, investment increases, and unemployment falls. People take out loans to buy bigger houses, and new factories, and everything booms. But it is a boom built on sand: it was the cheap credit that created it, not some revolution in productivity and efficiency, or an influx of new customers. Bigger and bigger doses of the credit drug are needed to keep the high going. Eventually, it falters and the result is an awful hangover.

So I think fiscal alcoholism is a good way of describing this phenomenon. Unfortunately the G20 meetings simply provide an opportunity for all the fiscal alcoholics to get together and buy each other more drinks. It's a shame we don't have regular fiscal AA meetings where they all come and fess up: 'My name is Gordon Brown and I'm a fiscal acoholic...'

Or perhaps we should go further and take a leaf out of the Political Correctness manual. Round up the financial responsibility deniers and cart them off to jail. Then at least, with three-quarters of the world's politicians in jug, the other quarter could get on with balancing the books.

Dr Butler's book The Rotten State of Britain is now in paperback.

Beer and the nanny state

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From pariahs to saints in a matter of months. The Brew Dog company were excoriated in the media and political circles for creating a porter that had an alcoholic content of 18%. The beer, Tokyo (Tokio in the US) is a beer that, "was all about the craft, the challenge and pushing the boundaries of beer and the perception of beer in Britain." It certainly pushed boundaries. So far, that the Portman Group and the Scottish executive want to ban its sale. Illustrating the point that when it comes to beer in this country the press and the politicians know nothing.

In response to the brouha regarding this strong porter they have developed a new ale: The Nanny State. It comes in at a whopping 1.1% and is technically not a beer and will not have any duty levied on it. As they say, they are awaiting the heartfelt praise that this beer deserves from those so outraged by the first. It is possible that because they are behaving as the state requires, they will slip under the radar.

While there may be a minority of teenagers and those in their twenties who are drinking beyond their own personal limits as they grow up they will learn to deal with drinking. There's no need to punish us all by lumping us together in the same hostelry. In the meantime this beer is awaiting it's much deserved fulsome praise...

The car scrappage scheme

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In case you hadn't heard by now, car scrappage is the new path to economic nirvana. You take a perfectly serviceable old car and junk it. You then take a portion of the earth's valuable resources and turn them into a new car to replace the old one you just junked. Add a dash of government spin and you have a process that is somehow presented as both economically sensible and environmentally friendly to boot, even although it is clearly neither.

– John Steepek, 'The car scrappage scheme will cost us all in the long run' MoneyWeek

In the Realtime Worlds

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in-the-realtime-worlds

The Herald Scotland reports that several successful Scottish computer game companies are thinking of moving to Ireland, tempted by the available tax breaks. This includes the maker of the much anticipated online role-playing game All Point Bulletin by Realtime Worlds.

As the Herald reports:

Colin Macdonald, studio manager of Realtime Worlds, the Dundee venture which employs 300 people and which has created globally renowned games such as Lemmings and Grand Theft Auto, said that the Irish overtures were enticing. “If the package on offer in Ireland was attractive we’d have to give it serious consideration," he said. “Dundee is a great place to be based, one of the main hubs for computer games in Britain, but at the end of the day we’ve got to look after our bottom line."

It will be interesting to see if these companies take up the offer from Ireland. The UK has proved a successful site for the game industry, but it remains to be seen for how long this will the case.

Could Labour split?

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The results of Germany's elections are not just interesting because they produced a centre-right majority and saw the tax-cutting FDP increase their share of the vote. They are also worth noting for the fact that, even following an economic crisis for which 'capitalism' has taken much of the blame, the main party of the left, the SDP, had its worst election since World War II.

Obviously, the reasons for this could well be particular to Germany, and have no wider relevance. The fact that the SDP have for the past four years been in an uncomfortable coalition with the centre-right CDU certainly makes one wary of generalising.

But there may be implications for the UK in Germany's election, even if they should be taken with a pinch of salt. One is in the way Germany's political left has fractured, with the Greens and the socialist Left Party getting 11 and 12 percent of the vote respectively, compared with the SDP's 23 percent. Could the same thing happen in Britain?

Perhaps not while our first-past-the-post voting system endures. But there could still be a damaging split on the horizon for the UK's Labour Party. As William Rees-Mogg wrote in the Mail yesterday, many Blairites already feel closer to the Social Democrat wing of the Lib Dems than to their party leadership. If Labour reacts to electoral defeat by swinging back to the left – as seems likely given the financial and constitutional power of the unions – it is not inconceivable that they would jump ship.

For what it's worth, I think the German results also indicate how different British party politics would be if we had proportional representation. It's unlikely that Labour or the Lib Dems would survive such a change in their current forms. We would probably end up with the Conservatives and UKIP to the right, a (very) small liberal party in the centre, and a new 'Social Democrat Party' and a hard-line Old Labour–Green alliance on the left.

P.S. I'm not advocating proportional representation. I'm just suggesting one of the ways it would change things.

Car scrappage scheme extended

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The government funded car replacement scheme in the UK has now been extended. The program is one of many that have been instituted throughout many countries to help stimulate the auto industry. But are the programs actually worth the money? To help with this question let’s examine the U.S. model since the program did spur large amounts of auto sales and since the program has ended we can look at some solid numbers.

Using average numbers from America - given that an average “clunker” or older car is getting 15 mpg and travels an average of around 12,000 miles per year it would use about 800 gallons of fuel. If the owner of the car took advantage of the government program and traded in for a vehicle that got 25 mpg they would use 480 gallons of fuel less each year. That adds up to a large amount of savings for the consumer so far, and that’s where the politicians would want the analysis to stop.

As reported by the New York Times nearly 700,000 vehicles were traded in during the program which means the total fuel consumption in the United States would be reduced by nearly a quarter of a million gallons which equals out to a little less than 11.5 million barrels (there are 19.5 gallons to a barrel). The problems start to become apparent in these numbers, the U.S. uses 20 million barrels of fuel everyday so the actual savings in fuel are just over a half a day’s worth. Although that isn’t that impressive, it’s still something. However, the real predicament is in how much that fuel is worth compared to the amount of money spent to save it. If there was 11.5 million barrels of oil saved, as of 11/09/09, it would be worth just over 816 million dollars, but the government spent 2.87 billion dollars to save that money. That means that for every dollar saved in the “cash for clunkers” program the government spent around $3.50 which is far from impressive.

Yes there may have been jobs saved, and increases in demand, but I am more than confident in saying that any short term benefits will soon be eclipsed by inflation and even worse by massive decreases in demand over the long run.

Sexism has nothing to do with it

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According to the Financial Times, Jack Straw, the UK's justice secretary, believes that "the media and political firestorm engulfing Baroness Scotland is motivated by sexism". Let's review the circumstances of the case:

• Baroness Scotland, now attorney general, was the Home Office minister responsible for amending Section 8 of the Asylum and Immigration Act 1996, which meant that businesses and individuals that employed illegal immigrants would face harsher penalties.
• It turns out that that Baroness Scotland has, in fact, been employing an illegal immigrant herself.
• She claims that she saw documents which led her to believe the employee was entitled to work in the UK, but is apparently unaware that the law requires employers to have checked and copied the documents in question – otherwise they have no defence.
• The employee in question, Tongan Loloahi Tapui, tells the Mail on Sunday that Baroness Scotland made no enquiries as to whether she was eligible to work in the UK, and that she "didn't have any of the 6 documents that entitled her to work in Britain". If true, this would mean that Baroness Scotland had not only failed to comply with a law that she herself had introduced, but that she had also lied to the UK Border Agency to cover it up.

On that basis, I'd say it is: (a) clear why people are calling for Baroness Scotland's resignation; (b) clear that sexism has nothing whatsoever to do with it; and (c) clear that Jack Straw's assertion to the contrary is pretty pathetic.

Of course, the Asylum and Immigration Act is bad, onerous, illiberal law. This case is a perfect illustration of that fact. But when a government minister is caught breaking a law that they were themselves responsible for introducing, then surely they must resign. There is nothing more to it than that.

A Liberal Party

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Liberty does not consist in making others do what you think right. The difference between a free Government and a Government which is not free is principally this – that a Government which is not free interferes with everything it can, and a free Government interferes with nothing except what it must. A despotic Government tries to make everybody do what it wishes, a Liberal Government tries, so far as the safety of society will permit, to allow everybody to do what he wishes. It has been the function of the Liberal Party consistently to maintain the doctrine of individual liberty. It is because they have done so that England is the country where people can do more what they please than in any country in the world.

– Sir William Harcourt, 1873.

Yes, let’s tax home ownership

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Last week we featured a number of blogs discussing why Vince Cable's property tax would be a bad idea (see here and here). Today we release a think piece entitled Yes, let’s tax home ownership, written by ASI Fellow Richard Teather. In it he defends the principle of a home ownership tax, but only if the money raised is used to reduce income tax. The question posed is: Can anyone come up with a strong argument against a homeowner tax that doesn’t apply equally to existing parts of our tax system?

It was all those greedy bankers, wasn't it?

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It's the cry of the day: the financial system was brought to its knees by the greed of he bankers! This leads to the simple thought that if we stop the bankers from being able to be greedy then we'll have solved the problem.

The problem with this simple thought is, well, apart from the fact that it is simple minded, is that there appears to be no empirical evidence whatsoever that it is in fact true. Jeffrey Friedman pointed this out last week. Given that Richard Fulds of Lehman lost a billion dollars (yes, $1,000,000,000) when the firm went belly up it's difficult to accuse him of risking the shareholders' gelt for his own gain by knowingly taking excessive risk. In fact, the research shows that those banks where the senior executives held more stock did worse than those where they held less.

Further, about those toxic assets: the banks were holding the higher rated (and thus less profitable) AAA tranches rather than the AA ones. They were deliberately, at least as far as they understood matters, eschewing both risk and potential profit.

These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.

If that is true (and no one has as yet offered any proof that it isn't: nothing beyond the "well, everyone knows, don't they?" level at least) then the concentration upon bankers' pay and bonuses is simply Naomi Klein's "Shock Doctrine" as it usually works rather than as she described it. A crisis is when those who would extend State power extend it: when the politicians gather more power to themselves rather than dispersing it to you and I in the markets.

But much more importantly, if that is true then changing the mode of bankers' remuneration will not reduce the risk of it all happening again for it was not the cause this time around. That's much more dangerous than any shortfall at a Chelsea Bentley dealership: the thought that by misidentifying the causes of the problem we assuage populist anger than actually solving the problem itself.

Perhaps instead of the bankers' pay it was indeed cock-eyed regulation? Shouldn't it be more important to fix that, perhaps the real cause of the problem, than please the baying mob?