Parsing that Compass report

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Compass had a report out last week which you can read here. All the usual arguments we've come to expect: don't cut "public services" and do ramp up taxation upon the rich and everything will be just hunky dory. However, as usual again, the arguments don't in fact stack up: and no, this is nothing to do with whether what they desire to do is a good or a bad idea (that I think it a bad one is not relevant here). It's simply and purely that they're arguing two entirely contradictory things in the same paper.

Their argument against cuts is that it's cheaper to have someone being employed by the Government than it is to have them on benefits. No, don't even worry about their arithmetic here, just take that point as it is. So if we cut "public services" by firing half a million bureaucrats that means that we'll make the public finances worse, not better. Implicit in this argument of course is that everyone so fired will go on benefits. That not one single one of those currently employed by the State will be able to get a job outside the molly coddling of the public sector.

No, don't even worry about what this says of their views on the competence of those currently in public employment (that they are, quite literally, unemployable elsewhere). Let us move on to their second argument, about raising taxes on the top 10%, the top decile, of households.

These tax rises are really very impressive indeed: marginal tax rates would move to 75% and in small bands to possibly over 100%. Average tax rates (the percentage of total income paid in taxes) would rise by 60% or so from 34% to 55%. We would expect some sort of change in behaviour from such tax rises but as Chris Dillow points out, exactly what they will be is difficult to predict. Will people offer more market labour in order to maintain their post tax income? Or will they trade income for leisure in the face of the high marginal tax rates? Again, let us not be too empirical here (facts are such nasty things) and let us look just at the logic being used. After a lot of badgering, Richard Murphy (for yes, of course he is the author of this report) tells us what assumptions he has made about which effect will predominate.

For reasons we have given - and which I have explained here - we think there will be behavioural changes - which may result in more, not less effort

I think there may be a greater demand for work - for example from the second partner in a high earning household that will - in accordance with all observed social behaviour - including the wish to ‘keep up with the Jones’ or to simply pay the mortgage - which is widely ignored in the blackboard economics you favour developed, rather oddly, by economists who have never worked in a market in their lives

That pressure to earn more to cover fixed obligations will, I (we) think counterbalance any tendency to reduce work.

We'll even leave aside the well known point from "blackboard economics" that married womens' (this is of course what "second partner" means in general and in practice) decisions to enter the paid labour market are more sensitive to marginal tax rates than mens'....for of course, empiricism is so passe these days, is it not? Concentrate again just on the logic.

We must not cut spending because there are no jobs to go to, meaning that the public finances will be worse off. But we can raise taxes because any of those ladies who currently lunch can simply waltz into a job and the public finances will benefit.

I can see that you can believe either one of these but to assert both in the same paper is really rather Red Queen behaviour. So, this is Alice in Wonderland economics. Unless, of course, you really do want to assert that the current public sector workforce is unemployable except on the public shilling and yet that the wives of the upper middle classes are a labour resource of such value that all will get jobs at the drop of a Hermes scarf.

An assertion which I suppose you can indeed maintain if you were some extreme form of Social Darwinist but it's a very odd argument indeed coming from an organisation like Compass...even if not all that odd from Richard Murphy.

Generations of benefits

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In the Centre for Market and Public Organisation's Research in Public Policy Winter 2009 edition there is an article concerning research that was conducted which examined the link between fathers and sons and worklessness. Lindsey Macmillan analysed the rates from two data sets, one from 1958 and the other from 1970 (the former being the National Child Development Study and the latter was the British Cohort Study) and found the probability of a son being out of work for a year or more between leaving full time education and the age of 30.

For the first data set the probability of the son being unemployed for a year or more was 20% if their father had been out of work during the latter part of their sons childhood years. For the second set the rate increased to 25%. The results compare to a probability of only 14% for sons whose father was in work for the duration of their childhood. This increase could be used as an indicator as to who may need the most assistance in the future. Ms Macmillan also looked at data from the recession of the 1980s, and hard hit industries and found that unless the period of joblessness was long then the effect on the child was lessened.

The conclusion is that there is a 'correlation between workless experiences between fathers and sons in the UK.' How then do policy makers break this bond? Perhaps one way would be to make benefits generational within a family: if your parents were in receipt of benefits then you can't claim, you must work and you must purchase employment insurance while also paying back your parents debt via national insurance. Or benefits could actually be made to last only for a limited period. Our current system of benefits does little more than addict people to the political teat which of course is what politicians want: a supplicant mass that votes solely based on who awards them the most benefits. This bond is one that needs to be broken.

Thanksgiving

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As an American, I was obliged to celebrate one of our most time-honored holidays, Thanksgiving. As part of the tradition, many families across America take time before Thanksgiving dinner to express what they are thankful for in their lives. In the spirit of Thanksgiving I would like to talk a bit about a couple of the things I am thankful for.

As an American, I am thankful for the Constitution and the Bill of Rights. In today’s world it is easy for government to enter into a slippery slope were rights can be reasoned away. This has never been more apparent than in Britain where we see government stepping into homes and telling more than adequate parents how to raise their children. Invasion of privacy is now perceived as something only criminals should fear, and anyone speaking out against big government is branded as ‘ignorant’ or ‘obtuse’. While things are far from perfect in America, it is comforting to know there is a document that draws a line somewhere; that we at least have a platform to stand on when arguing for personal liberties.

I am also thankful to be living in a socially and economically free country. While we still live in a free Britain, there are many politicians with good intentions that would seek to take that away. Limiting individual and business income with massively high marginal tax rates is what many government leaders believe to be the moral thing to do. Government intervention in the economy has cost thousands of individuals their jobs, and yet they still preach that the solution to the problem is more intrusive action. We are losing the ability to be economically independent of government.

In reality, there is a lot to be thankful for even if you sincerely believe that government is slowly changing that fact. But while we still have a chance we need to stop this wave of government expansion. It is imperative that we stop the massive amounts of public spending and curb the intrusion of government into our personal lives. We need to make the world a place where future generations will still have freedom to be thankful for.

Ketchup, glorious ketchup...

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Everything you ever wanted to know about ketchup.

The Copenhagen Summit – Kyoto Re-visited?

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Energy experts are focusing on next month’s climate change summit in Copenhagen. Given the complexity of the issue - notwithstanding the need to guard national interests - a far-reaching deal emulating that at Kyoto is an unlikely outcome. Much attention will surround the stances adopted by the US and Chinese Governments, which between them account for 40% of global greenhouse gases.

In the case of the US, any agreement to bring about major emission reductions would need Senate approval. The Chinese situation is also fraught with difficulty given that its economic growth rate remains robust. Whilst emission reduction figures will be widely debated, the issue of new nuclear-build cannot be ignored. As a general environmental principle, more nuclear investment will reduce the need for renewable generation capacity, whose development in most countries remains very challenging.

However, recent events have seriously dented the prospects for new nuclear-build projects, including the current weakness of world gas prices, and especially those in the US. The recession was a key factor in bringing down oil prices but, more recently, the deferred linkage between oil and gas prices has frayed: new gas recovery systems from shale sands in the US are partly responsible. In the nuclear sector itself, there has been a raft of bad news, including cost and time overruns along with technical concerns about the new designs.

Hence, if new nuclear-build fails to take off, there will be increased demand either on the renewables sector if the case for large emission reductions prevails or on gas-fired generation if security of supply becomes paramount.

In view of all the uncertainty on general economic issues, on new nuclear-build and on the future of gas supplies and prices, will Copenhagen deliver anything more than solemn and binding undertakings?

Free markets, perfect competition and monopolies

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Simon Jenkins writing in Guardian yesterday, makes a claim that “Nobody but a fool believes that a free market in anything, left to its own devices, will tend to perfect competition. Economic history attests that it tends to monopoly." Scratch the surface and this argument adds up to very little and as a consequence, so does his demand that politicians need to regulate the banks better.

Mr Jenkins makes two crucial errors. The first is obviously his conflation of free markets with perfect competition. All markets are human and are by that attribute imperfect; this does not mean we need politicians and regulators to step in, history attests that they make matters worse. We could do with better education so that people can make better decisions more of the time, but seeing that the state has a near monopoly on teaching we can't expect that any time soon.

The second error Mr Jenkins makes is his statement that free markets tend to monopolies. This is wrong. Regulated and politicized markets tend to monopolies, while free markets tend towards competition, perhaps not perfect competition, but competition nonetheless. With regards to the specific case of banking that Mr Jenkins tries to tackle in his article, though not a monopoly, it is regulated to such a ludicrous extent that the barriers to entry are too high for newcomers to enter the market.

In general Mr Jenkins takes an illogical approach to the issue of government and regulation. If he is writing about small businesses he wants less regulation, if it's big businesses he wants more. However, he fails to acknowledge that the reason many businesses are so big is down to the regulation itself.

Hobart lunch at IEA

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I was privileged to attend what I'm told might be the last ever Hobart Lunch at the Institute of Economic Affairs (IEA). These monthly munch-ins have been going on regularly for decades, attracting a mix of academics, politicians, students and policy thinkers. Indeed, my first introduction to the free-market policy world was attending one as a student, and sitting cheek by jowl with some of the leading liberal ideas people of the day. Derek Scott, former economic adviser to Tony Blair, gave some remarks about the financial crisis and what to do about it. Sound money, of course, a less politicised civil service and a public expenditure bill heading more to 35% of GDP than its present 45% or more featured among his answers. The last word went to Esca Hayek, who congratulated the outgoing director, John Blundell on his long stewardship of the IEA in a way that her father-in-law, the great Nobel economist FA Hayek (who played a key role in its founding), would have heartily approved.

Alien environmentalists

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And now even the aliens are not happy with the way we treat the environment.

Free-market fundamentalism

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Ben Chu is not alone. His conclusion that ‘free-market fundamentalism’ is to blame for the financial crisis is still sadly reflected in much of the media and public at large. Yet a glance at the arguments made in his article published in The Independent reveals an antipathy for government, not the free market.

So what are the traits of this ‘free-market fundamentalism’ that Mr Chu is condemning? Despite using the term, he is certainly not upset about anything ‘free’. He is annoyed that the UK government has been captured by baking lobbyists, that they and the Bank of England lent vast sums to these banks, and that despite this, banks are still in much the same state as they were last year. The real recipient of Mr Chu’s ire should be this corporatism and poor inefficient government, not free banking. A free market in banking has not been practiced in the UK (Scotland) since 1845, and even then arguably.

Although clearly used as a pejorative by Mr Chu and others, the fundamentalists – if by fundamentalism one means a strict adherence to principles – would agree with Mr Chu’s concerns, if not his solutions. Following the financial crisis, the ideas of the Austrian school have rightly undergone something of a renaissance across the globe. In the US, the work coming out of the Mises Institute, Peter Schiff of Euro Pacific Capital and Republican Congressman Ron Paul have redefined the terms of the debate. In the UK, the recently formed Cobden Centre has the potential to do the same over here.

The zombie that actually needs putting out of its misery is the model upon which we have built and allowed our economy to bubble and burst. Although the jewel in the crown, of the overturning fiat money, is unlikely to take place any time soon, the ideas may well set the groundwork for radical reform once the next financial crisis hits.

George Miller-Kurakin

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As reported in yesterday’s Independent the Adam Smith Institute recently lost a great friend and a heroic fighter for freedom. George Miller-Kurakin was an anti-communist activist who during the 1980s was not only a close associate of the ASI but in orchestrating a wide range of direct actions behind the Iron curtain he inspired a generation of young freedom fighters during what turned out to be the latter decade of the cold war.

A larger than life character with a great sense of humour, George was thoughtful, generous and staunch. Strategic, visionary and an outstanding executioner of field-craft and tactics he always believed that Communism would eventually collapse under the weight of its own manifest contradictions. How right he was. Rest in peace.