On the culture that is France

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There really does seem to be something to this "cultures have a culture" idea you know. That France is different from England, Germany from Italy, for reasons far more deep rooted than simply language or style of governance. Take Sarkozy's latest bright idea:

Google’s plans to provide digital versions of classic books over the internet have run into trouble in France after President Sarkozy vowed to spend hundreds of millions of euros to see off what he regards as a threat to the country’s cultural heritage.

Mr Sarkozy has signalled that he will earmark a substantial portion of a new state investment fund to try to head off Google’s drive to digitise French-language and European books and art.

“We are not going to be stripped of our heritage for the benefit of a big company, no matter how friendly, big or American it is," Mr Sarkozy said.

“We are not going to be deprived of what generations and generations have produced in the French language just because we weren’t capable of funding our own digitisation project."

There are several different mistakes wrapped up in that. That someone is willing to find the digitisation project does not mean that France or the French are deprived of their heritage: it means that they get it cheaper than if they did it themselves. That France (or at least, a Frenchman) is up in arms at the thought of Americans having anything to do with French culture is also behaviour quite usual. And there's also this quite cute insistence, quite contrary to any measure of human experience, that government will handle either a technical, cultural or computer project better than a private sector firm.

But rather than explain why this is so clearly wrong, I'd prefer to point out what this tells us positive about the world we live in.

This sort of knee jerk defence of home production, small scale rather than large business and a resolutely national approach to the origins of items to be consumed by the populace: well, it explains the European Union's attitudes towards trade and agricultural production very well, doesn't it? And with the same effect that this digitisation project will have on the French taxpayer of course: we pay vastly more for everything than we would if we simply bought the best in the world without regard to such petty nationalisms.

European money-go-round

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For now the British taxpayers have paid to the EU more than GBP 74 billion (EUR 80 billion) over what they have received.

Since 1976 the biggest net contributor to EU budget was Germany having paid to the EU budget over what it received GBP 229 billion (EUR 254 billion). The biggest net recipient was Spain having received from the EU budget GBP 81 billion (EUR 90 billion).

In 2008 the biggest net contributors to the EU budget were the taxpayers of Netherlands contributing GBP 312 (EUR 347) per head over what they received. The biggest net recipients were the taxpayers of Greece receiving GBP 479 (EUR 532) per capita over what they paid.

These sad numbers can be found at www.money-go-round.eu a web site monitoring the volume of taxpayers’ money redistributed through the European Union’s budget.

The EU finance is full of bureaucratic waste, EU’s false self promotion, corruption and economic inefficiency. Furthermore, the EU was spending our money not only on regional and agriculture subsidies around the European continent but it also sponsored the Palestinian Authority or a campaign favouring the Lisbon Treaty before the second Irish referendum.

I used to believe that the system of the EU finance (national contributions and EU subsidies) can be abolished, that the EU could be transformed into a free trade area. Now I believe that the EU cannot be transformed. After the Lisbon Treaty came into force I believe that the only reasonable thing the advocates of freedom can do is advocating complete withdrawal from the EU and joining EFTA.

Petr Mach is economist and founder of the Free Citizens‘ Party in the Czech Republic

A phony struggle against the shadow economy

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In 2000 the OECD made a list of Tax Havens, trying to shame them to comply with international jurisdictions. One of the main arguments of campaigning against tax havens was/ is that it is a part of the fight against the shadow economy. However as Daniel Mitchell explains in this video, the data used to calculate the possible revenues retainable from tax havens is at best: faulty. Further what should be noticed is that most, if not almost all, tax avoidance takes place inside the economy itself, making the campaign against tax havens even more dubious.

Considering the constructive effects of tax havens contribution in the global system of tax competition and vital investment capital for entrepreneurs, the OECD campaign is mistaken. See this video of Richard Teather speaking about tax competition.

Luckily there are no countries left on the OECD list of tax havens, whether this is due to countries complying with the international rules or the OECD realizing their mistake. I think it is of special interest that the two most important tax havens on earth have not yet appeared on the list. As far as I know neither the UK nor the US have changed their legislation concerning international investments. It should of course be for the UK and US governments to decide what domestic legislation they want, and in addition they should stay out of other government’s domestic legislations.

Are bankers worth their wages?

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It's a commonplace of current discourse that bankers of course don't deserve the vast wages that they get. Half the world seems to think that you could put one of the few numerates the State school system produces into an office in London and everything would be just the same. Thus these million pounds salaries and bonuses are not a reflection of some rare skill set. They're just greed....although quite how that works I'm not sure. I regard myself as at least as greedy as the next economics graduate but no one's ever offered me a million a year so there must be something more than merely the desire for huge wedges of wonga going on here.

Which perhaps there is: if we thought that wages might be a function of the possession of a rare skill set then we could go looking for evidence. Do people, in an environment where we can disaggregate causes and effects, with an additional extra skill get more money? It would appear that they do: 

The study of sports is beginning to tell us more and more about the operation of labour markets and incentives. This column looks at football to verify that wages reflect marginal productivity. It shows that two-footedness – the rare ability to use both feet to pass, tackle, and shoot – commands a large wage premium.

There are a lot of similarities between the market for footballers and that for bankers. Both are international markets, the players in them highly mobile. Both are "tournament" markets, in which many try to get in but it's the few winners at the very top who get disproportionate rewards. It's even true that a banker doesn't actually need to be all that good by any absolute standard, just like a footballer. They just have to be better than those around them.

And if we find that in the market for footballers extra skill leads to extra pay, might we not, at least as our starting assumption, work on the thought that extra pay might reflect extra skill in the market for bankers?

In response to a reader's question...

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“Please clarify this for me – wouldn't £150bn of cuts be a terribly bad thing for the economy at this point in the recovery?"

No, it wouldn't be a bad thing for the economy, at this point or any other. All the advocates of government fiscal stimulus conveniently ignore one thing: that the government can't spend a single penny without first taking it out of the private sector economy. It actually doesn't make any difference whether they do it by taxes or borrowing – they are taking capital which would otherwise have been used by individuals and businesses. Once you accept this, it all comes down to the argument that government will put that money to better use than the private sector during a recession – a point of view that strikes me as being on very shaky ground.

I guess the Keynesians would say that if you leave money in the private sector during a recession, people will just cut back on consumption and use the proceeds to pay off debts and build up savings, and that this will lead to a deflationary spiral. But in reality this kind of behaviour is precisely what the British economy needs. At its root, this was a crisis founded on too much borrowing and spending, and not nearly enough saving (these things were to a great extent the result of overly loose monetary policy, which pushed interest rates below their 'natural' level).

Ultimately, this is the whole point of recessions – while unpleasant, they are actually a necessary, remedial phase of the economic cycle, where bad investments are liquidated, debts are paid off, relative prices adjust, savings ratios recover and the economy, which was distorted by the boom, rebalances. All that deficit financed 'stimulus' achieves is to prevent these things from happening, entrenching economic distortions, creating new ones, and storing up more trouble for further down the line.

This article on the Mises Institute website tells an interesting story. When faced with a depression in 1920, President Harding did precisely what Keynesians say would lead to disaster: he cut spending almost in half, cuts taxes, and paid off a third of government debt. Meanwhile, the Federal Reserve took a hands-off approach. By August 1921, the economy was recovering.

Compare that with the Great Depression of the 1930s, when Presidents Hoover and Roosevelt intervened left, right and centre, with wage and price controls and gigantic public works programmes. In September 1931 unemployment rate was 17.4 per cent and the Dow Jones industrial Average was 140. By January 1938, unemployment was still at 17.4 per cent, and the Dow had dropped to 121.

It really makes you wonder why laissez-faire ended up with a bad reputation, while Keynesianism became the new orthodoxy, doesn’t it?

How to cut spending by £118bn, overnight

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Politicians find it difficult to cut public spending. Even Margaret Thatcher, who was accused of making savage cuts, didn’t manage it, with spending growing by 1.2 percent a year in real terms from 1980 to 1990. And yet Britain today desperately needs spending cuts. The deficit this year is forecast to be £178bn and – even making some heroic growth assumptions – will not be much below £100bn in 2013. This deficit, which the OECD puts at 14 percent of GDP, is not just the result of the financial crisis and the recession. Indeed, the structural deficit is 10.4 percent of GDP, which is to say we’d still be massively overspending even if the economy were performing well.

The trouble is that ‘efficiency savings’, every chancellor’s favourite ‘get out of jail free card’ just won’t cut it this time. Even if the government could deliver substantial efficiency savings (and history, not to mention public choice theory, suggests that this is unlikely), they still wouldn’t be big enough to do much about the deficit. So instead of looking at the public sector as it is today, and trying to work out how money could be saved, the next government ought to take a different approach. They should start by making a list of the things that government should be doing, and then simply abolish everything else.

Let’s say that they decided to keep pensions and welfare as they are – that would cost £225bn a year. And let’s say they do the same for healthcare, which is set to cost £120bn. They could provide a £4700 school voucher for every child in primary and secondary education for £60bn a year. Maintaining spending on transport and key infrastructure at current levels would cost £30bn a year, while government’s core functions (foreign policy, defence, law and order) would cost £80bn. That comes to a total of £515bn. Throw in £43bn in debt interest payments, and it comes to £558bn – £118bn less than the projected 2009/10 total. Do we really need government to do anything else? After all, it’s not as though I’m outlining a minimal state here.

Of course, that £558bn would still leave a deficit, with 2010/11 tax receipts only forecast to be £528bn. But there are plenty of other things you could do. The regulated legalization of drugs would save a further £10bn a year, while cancelling foreign aid would save another £10bn. And that’s just for starters – reforming pensions and benefits could save many billions more.

The NHS – Regulating the accounts

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Clearly, the next Government must address the issue of NHS expenditure – £102 billion has been allocated to the NHS in England for 2010 - and the priority is to maximize returns from such a vast annual outlay. With a work-force in excess of 1 million, it is simply not credible to argue that there is minimal scope for savings. But, assuming – in line with the opinion polls - that Andrew Lansley becomes the next Secretary of State for Health, how should he proceed?

Whilst clinical matters will obviously be handled by doctors and nurses, financial issues should be the priority for Lansley, especially as UK public finances are so dire. In particular, he needs to set common – and unambiguous - accounting criteria for each hospital. By doing so - and by using Monitor as the Financial Regulator - it will become abundantly clear where the most serious inefficiencies lie. Of course, in some cases, there will be valid reasons for above average expenditure. But there is clear evidence that some Foundation Hospitals – certainly not all – have outperformed those lacking this status.

Furthermore, the separation of accounts will enable particular activities within hospitals to become progressively more subject to competition. Within that grouping are both imaging and pathology, both of which have historically been under-funded. Whilst undoubted progress has been made in reducing the imaging backlog, there is a strong case for establishing a genuine competitive market in imaging - with the latest expensive radiography equipment being funded by the private sector on the basis of projected long-term revenues. Investment in pathology is also desperately inadequate. Similar efforts should be made to set up a competitive – and modernized - pathology market.

In time, a few key players should emerge, who hopefully would establish the UK’s leading role in these fields.

These proposals may sound radical – but are they?

Preventing extremism

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A leaked email to The Times suggests that police in the West Midlands have been contacting community groups encouraging them to be on the lookout for radical islamification in children from the age of 4. They are under the belief that a child may give away such indoctrination by drawing a photo of bombs or decreeing that ‘all Christians are bad’.

As the unit acknowledges it is unlikely to yield any real results, so all it does is perpetuate a society focused on surveillance and distrust. Also, one would assume that educated and compassionate humans such as nursery teachers would use their initiative and monitor and report any child’s behavior they found unsettling without prompting from the police. Police initiatives undermine individual responsibility and encourage citizens to act in a certain way ‘because the police said so’ and not because of any individual moral judgment.

The surveillance of young children for ‘abnormal’ behaviors ties in with criticism of the government’s ‘Prevent’ programme, which uses £140m to tackle extremism in the UK. The initiative has been accused of gathering data on Muslim households, stigmatizing communities & encouraging neighbors to spy on one another. Culture Secretary John Denham has recently pledged to make the project more transparent and to deal with complaints from Muslim communities that such a scheme is imposed upon them, instead of working with them.

Acknowledging shortcomings in attempts to stem extremist ideologies is a positive thing. Communities feel distrusted and treated as a threat from such schemes; as such they are given more incentive to alienate themselves from British culture. Similarly, knowing that government-directed projects are focusing in on your religious beliefs and everyday lives is likely to lead to resentment and backlash.

The best way to tackle any form of extremism is to step back from media frenzy and show the benefits that a genuinely tolerant, multicultural society that invites both diversity and debate can bring.

Why Cameron is a conservative, liberal and socialist

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Which ideology does the leader of the Conservative Party subscribe to? I would argue none and all. Depending on the issue Cameron is a conservative, liberal or socialist.

Under Cameron the Conservative Party has of course continued to take a conservative line on welfare, the family and various social and civil liberty issues. They are warm to the policies coming out of the Centre for Social Justice. Through the ‘One Nation’ and 'progressive conservative' nonsense, his support for the NHS and his adherence to 'sharing the proceeds of growth' there can be few who doubt his socialistic tendencies. Yet he is also mildly liberal – by this I of course refer to classical liberalism* – on a number of issues, most notably in his faith for institutions outside of the state, contained in the original idea of the 'post-bureaucratic state'. Although yet to form into any solid policies, this offers the prospect of some liberal policies breaking through.

Cameron of course is what success looks like in modern politics. The public voted for Tony Blair, so they will vote for Cameron. It is possible that a new brand of conservative Conservatives, such as the remarkable Dan Hannan, could stem the tide; or even better, the Orange bookers could eject the socialists from the Liberal Democrats – who could go on to found the Sandal Party – rekindling the flames of liberalism. In the battle of ideas all things are possible – until then, we need to convince a pragmatist to be a little more liberal and a lot less socialitic.

* This true meaning of liberalism is perhaps dead in the water. Hayek was using the term in his time to define his intellectual position, but as his fame and opinions preceded him, it was rather easy for him to retain that affectation. If a mere mortal such as myself claims to be a liberal, most people would take me to hold the diametric opposite views to ones I actually hold. Nevertheless, corrupted as it is, there seems little point having two words for socialism, so the definition of liberalism might be a battle worth fighting.

Public sector profligacy

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If the finance director of any private company issued a set of half-year figures like Alastair Darling’s pre-budget report, angry shareholders would be calling special general meetings to have the entire board sacked.

Since 1997 the government has spent, and borrowed, wildly. Its debts are about as large as they were after Waterloo and the Second World War. At least then we could see where the money went – saving ourselves and Europe from tyranny and fascism. Today we have no victories to show for it. All that it has bought us is bloated government and a collection of decrepit banks. Yet the borrowing continues to rise – by an amount equal to £3,000 for every man, woman and child in the UK this year, and about the same the next.

If that were a company, it would not be just the board getting fired. There would be massive cost-cutting all round. Over the last five years, public spending has grown nearly 7% a year. The Centre for Economic and Business Research figure that if our debt is ever to stop growing, we have to shrink that spending by at least 1% a year. With inflation at 2%, that means real cuts of at least 3%.

Of course, politicians hate cuts, particularly before an election. But private companies have to take a hit when times are bad. They already have. Ask all those people who are out of work – which I reckon could peak at 3.8 million – and the millions more who have had to take real pay cuts. The CBI says that half the UK’s companies plan to freeze pay this year. Two-thirds of them have already imposed recruitment freezes.

Yet the finance director of UK plc, in worse debt than any private company and any comparable country, is not proposing cuts or freezes at all. Indeed, he aims to pay his workers another 1% this year! If their productivity had grown by a quarter in the last decade, as private-sector productivity did, that might seem sensible. But in fact, public-sector productivity declined 3.4% in the same period.

Would you invest in a company like that? Many foreign investors are having doubts too, and three rating agencies are hinting that UK plc is a bad risk. Of course they know that there is an election coming up. The first budget after that will be crucial. But really, we should be taking action now. We do not need to lose front line services. But we need to cut back office costs, and reduce those gold-plated public-sector pensions, and bloated staff numbers and pay. The public are ready for it. After all, they have been tightening their own belts for a while. Is it not about time, for once, that our government sector did the same?

Dr Eamonn Butler is Director of the Adam Smith Institute and author of The Rotten State of Britain.