Democracy must restrain the mob against the minority
More e-petitions will get written responses form the government, the Commons leader Andrew Lansley has announced. Any petition signed by more than 10,000 people, he says, will have a government response published alongside it. Well fine, for all the difference that is going to make.
There are three dozen petitions around that would qualify for such an official response, ranging from the culling of birds of prey to granting a pardon for Enigma codebreaker Alan Turing. But there are also a few joke ones, or perhaps barbed ones, like the petition calling for Mrs Thatcher's state funeral (when it happens) to be privatized. Very droll. But is it the sort of thing that parliamentarians should be racking its brains to respond to?
Petitions, like referendums, are a tricky constitutional issue. Yes, we want the public to be expressing their views strongly, and as Daniel Hannan and Douglas Carswell say in their excellent book The Plan and other articles on opening up our system of government, it is right that Parliament should debate things that the public feel are important, rather than just things that the party leaderships think important. It makes our MPs recognise, once again, who they work for – not who doles them out ministerial jobs. So yes, peitions getting lots of signatures deserve some response and those with overwhelming support should be debated.
But we should not conclude from this that we should be governed by petitions. Nor even referendums.
Our representative system is a system of balances, albeit a rather creaky one. That is why we have two chambers of Parliament – so no dominant majority in the House of Commons can get its way. Not all the time, at least. As James Buchanan and Gordon Tullock showed in The Calculus of Consent, to impose your will on the public, all you need to do is to win 51% of the votes in 51% of the constituencies. So that's about a quarter of the population. Actually it is less, because only about half the population will probably vote anyway. So if there is just one chamber of Parliament, it is possible for quite small majorities to dominate the agenda. That is why we have such absurdly high tax on businesses and on people who earn a lot by creating jobs and prosperity. There are simply fewer of them than the majority, who enjoy the benefits of the taxation. Splitting the power with a second chamber, and indeed the Supreme Court, reduces that risk of the minority being exploited by the majority. Well, it reduces it a bit.
As Buchanan and Tullock suggested, and as I recounted in my recent book Public Choice – A Primer, we need strong constitutional arrangements to prevent this kind of exploitation. The US constitution managed to contain it for quite a time, but now it is hardly up to the job. As government has grown, the benefits of controlling the government – the amount you can loot from exploiting the minority – has grown too. So controlling governments has become big business. Ask any lobbyist. We need, in fact, surprisingly strong constitutional arrangements if we are to prevent the tyranny of the majority.
Am I in favour of democracy? Of course I am, but like the market economy, democracy only works if it is constrained by a set of rules. You need a fire basket to contain the fire. Without the rules of honesty, contract and private property, the market will soon descent into crony capitalism, with governments dishing out favours to their friends. Without constitutional rules to prevent minorities being exploited by majorities, democracy will turn into mere majoritarian populism, or into rotating elected dictatorships. Some people say this has already happened.
The results are in: Spending cuts, not tax hikes, are the road to recovery
Vuk Vukovic draws on new academic research to argue that the historical evidence around recessions is clear: cutting government spending, not Keynesian stimulus, is the way to create a recovery.
A new research paper by Alesina, Favero and Giavazzi focuses on measuring the output effect of fiscal consolidations. The idea is that fiscal consolidations tend to have much more favourable effects on the economy if they are done via spending cuts alone, not via increased taxation (see the graph below), which is actually what austerity is supposed to be.
Here's the abstract:
"This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.” (Alesina, Favero, Giavazzi (2012) "The output effect of fiscal consolidations" Figure 3, pg. 40.)
Miles Saltiel
Miles Saltiel is the CEO of the Fourth Phoenix Company which provides policy, research and associated services to banks, industry and others. His recent publications include Seeing the wood for the trees, which evaluated the Forestry Commission’s place in modern Britain; The revenue and growth effects of Britain’s high taxes, (with Peter Young), which presented cross-country and cross-period analyses of tax reform; Bank regulation: can we trust the Vickers report? (with Tim Ambler), which analysed the report of the Independent Banking Commission and made counter-proposals; On borrowed time, which argued for the reform of “age-related” expenditures to relieve otherwise insupportable fiscal pressure; and No reason to flinch, which argued against insulating the NHS from reform by comparing it to equivalent regimes internationally.
Miles read PPE at Oxford and wrote his MA dissertation on Japanese business and government at Sussex. In 1979, he joined GEC-Marconi, working in corporate finance and recoveries, to become no. 2 in Marconi Projects. In 1986 he went into investment banking, joining the WestLB Group in 1996 as Head of Equity Research, Emerging Markets. In 1998, he assumed responsibility for London-based Tech Research, and in 2000 was voted one of the UK’s top 50 in the New Economy, in 2002 becoming the senior tech banker at the WestLB group.
No, Brendan Barber, the economy is not a sporting event
TUC leader Brendan Barber has jumped on the back of Olympic glory to make a strange analogy about the Games and how we should run the economy. He criticises the notion that private is better than public spending and that the market will deliver better than government by pointing at the success of the publicly funded and organised Olympic and Paralympic games, just ahead of the TUC’s annual Congress.
Of course, the function of the Olympic Games was to provide entertainment. Some may argue that it will boost tourism and (temporary) employment but, essentially, it is a sporting event. If we were to run the country like the Olympics, we would produce a society in which wage values would be polarised between very high achievers (the Usain Bolts and Jessica Ennises) and the very low earners (the many, many amateur athletes that do not manage to make it to the Olympics). This is precisely the wage differentiation that the TUC campaign against.
Barber ridicules the fact that government claim they "can’t pick winners" when helping companies adding, ‘Tell that to Bradley [Wiggins], Jessica [Ennis] and Mo [Farah], all supported by targeted funding.’ What he is missing in this comparison is the essential difference between athletes and companies, which is one of function. An athlete can certainly be targeted by funding, as they have only one function, easily and objectively measured. For example, the target of funding for a 100 metre runner would be whoever can run 100 metres in the fastest time, while the target of funding for a high jumper would be whoever can jump the highest and so on. Simple.
When governments target spending towards companies however, they are essentially saying: the products and services this company provides are what people will want and all alternative products and services are inferior. By ‘picking winners’, companies compete for government investment as opposed to consumer spending. The great thing about letting the markets decide is that it is, in a sense, democratic; it lets people vote with their money, creating a fluid and representative selection of what the entirety of society actually want and allowing those areas to develop and become more accessible.
Barber goes on: ‘Markets always trump planning, they say. Well look at the Olympic Park, the result of years of careful planning and public investment.’ He says look at the Olympic Park, well I say look at Concorde, British Leyland, the Millennium Dome, the Channel Tunnel, and so on. All government investments that overshot costs and timescales and were grossly inefficient. The taxpayer underwrites the risk of government investment and it is they that have to foot the bill when things go wrong.
Economic activity and investment in certain industries in London and the surrounding areas have been boosted (at least temporarily) by the Games, but to the detriment of those living everywhere else whose income was diverted through taxation to fund it. This may be regarded as an acceptable loss by many because of the entertainment value provided, but is it right that even those who have no interest in the events should be made to pay? Central planning means that your income is diverted towards things that may not be in your best interest and often in a way that is too inefficient to justify the collective good rationale.
Finally: ‘Private is always better than public, they argue. Not true, as we saw all too clearly when it came to Olympic security.’ G4S remember was the choice of government with the backing of the public purse; it should have been up to them as investors to ensure that the security company was up to the task, something a well run private organisation would have been sure to do. Even if we disregard this fact, the Olympic games took place over a matter of weeks, while the market has been in existence for thousands of years.
Markets learn and adapt to needs and preferences, removing underperforming businesses and rewarding those that provide the desired service at the cheapest cost (unless of course there is government interference). Unlike the targets of government spending, companies within a free market system that do not provide the products and services desired of it better than their competitors can are allowed to fail, while better and more efficient ones take the lead. Competition induces progress, forced monopoly results in stagnation.
Perhaps Brendan Barber realises the fallacies of the arguments he is making, but think they can win him favour simply by allying him to the ‘Olympic spirit’, implicitly setting his opponents against it. However, the economy is not a sporting event, it cannot be run like the Olympic Games and nor should it.
Helping entrepreneurs to help us
On Tuesday, while Vince Cable was advocating government direction of the economy, I was speaking at a Royal Society for the Arts workshop devoted to young entrepreneurs. The RSA published poll figures showing that large numbers of young people aspire to run their own businesses. This is in line with our own findings, first with a poll of the Millennial Generation, and more recently with a poll about the nanny state. In both we found that nearly half of young persons would like to run their own business at some stage.
I pointed to three obstacles. First there are planning laws that act against building up a business from domestic premises. Then there are the regulations and liabilities imposed on employment, including PAYE, NIC, maternity leave, sick pay, holiday pay, protection of employment, and so on. Added to these are the regulations on health and safety and the paperwork that has to be filed. Thirdly, I pointed to taxes on business which are high enough to act as a disincentive, given the risks involved.
I suggested that each could be redressed. A five year 'holiday' could exempt start-ups from the regulations which otherwise apply to business premises. And if all employees of small firms could be treated as self-employed, most of the employment regulations would not apply, nor would the obligation to fill in the paperwork pertaining to them.
Finally I suggested a version of the German law that allows people to earn up to 400 euros a month from part time jobs without being taxed on it. People are allowed to take on more than one such job, provided they are with different employers. In Germany these laws halved youth unemployment and created 500,000 new such jobs in their first year.
My contention is that these would clear space into which young entrepreneurs could move in large numbers, creating between them the growth agenda that has to accompany fiscal responsibility, and would do it far more effectively than the many-times-discredited approach of Vince Cable.
The results are in: Spending cuts, not tax hikes, are the road to recovery
Here's the abstract:
"This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.” (Alesina, Favero, Giavazzi (2012) "The output effect of fiscal consolidations" Figure 3, pg. 40.)
Tax-based (RED) and Expenditure-based (BLUE) adjustment
The figure shows the results they got when comparing tax-based and expenditure-based fiscal consolidations, using a sample of 17 OECD economies, over 25 years (1980-2005). It is clear that for every country in the sample, tax increases resulted in a negative or stagnant output, whereas expenditure cuts resulted in an increase of output two years after the adjustment.
They have also found (not shown in the graphs) that business confidence picks up immediately after the expenditure-based adjustments, unlike consumer confidence for which it takes longer to recover. Finally, the most important finding, in my opinion, is that the "heterogeneity in the effects of the two types of fiscal adjustments is mainly due to the response of private investment, rather than that to consumption growth". This means that private investments tend to drive recoveries, not consumption as the Keynesians would claim.
The findings of the paper are important in trying to explain the process of "right" or "wrong" fiscal adjustments. Using an increased taxation burden combined with spending cuts is a wrong approach since it depresses the economy temporarily (loss of public sector jobs leads to a loss of consumption before these people are reemployed), but fails to offer incentives for it to grow. All the laid off public sector workers that are supposed to find jobs in the private sector are unable to do so since the private sector isn't hiring due to the many existing constraints it is facing.
Unemployment starts to go up, supported by an increasing number of graduating youths for whom finding a job is now even more difficult, making the situation look bad for the politicians in power. This means that the politicians, still under pressure to close the budget deficit, now need to cease spending cuts and stop firing more civil servants and bureaucrats, since they don't want to make the unemployment picture even worse than it already is. So the government then relaxes the spending cuts and public sector reforms and focuses mostly on increasing taxes to close the budget deficit. The government starts running out of options, as further spending cuts become politically unfavourable while increased taxation is needed to continue closing the budget deficit.
Are public investments the key to recovery?
This got me thinking further on one of the most popular policies aimed at kick-starting a recovery, one that is especially being advocated in the UK - infrastructure spending. The idea is as follows: the government is suppose to kick-start growth via infrastructure spending by two ways; (1) directly creating jobs, and (2) cutting costs to businesses through improved infrastructure.
The first idea implies that hiring more workers in construction, who will use their new wages to increase spending, will ultimately boost consumption (the classical demand-side story, followed by a Keynesian government spending multiplier). However, if the idea is to hire more workers to start a demand-side increase in consumption, why not have the government hire 100,000 workers (or more), give them all a job to dig holes around the country, and then fill them up? That's a perfectly meaningless job, but as long as the workers get paid, they will begin the cycle of recovery, right? Wrong! Modern consumption theory teaches us that expectations of temporary income aren't the same as expectations of permanent income.
If people anticipate a rise in income, tax rebates or any other form of stimuli (this is true for companies as well, not just consumers) to be temporary, they will save this money instead of spend or invest it. But when they anticipate a permanent rise in income (like getting a new or better paid job) they are much more likely to spend or invest now as they anticipate a certain future stream of income.
The second way is having the newly build infrastructure lower the costs of businesses and help them grow. But how long does it take to build major infrastructure projects like motorways or railways? A long time! Much longer than the average bankruptcy rate for businesses in the UK. And much longer than the current recovery is going to last (hopefully). Full benefits won't be visible in another 10 years, during which time the very same businesses advocating the project will be using old roads and old railways.
This isn't to say that infrastructure projects aren't important - they are, for long term growth almost definitely, but they cannot be the priority in starting up a recovery. One can argue that major infrastructure projects and things like the New Deal made a big difference during the Great Depression, but the world is much different today than it was 80 years ago. For starters back then information was being distributed either through the radio or word of mouth. In that case the people hearing that the government is ready to do something to help them out was enough to get confidence going. Their knowledge of possible negative effects on public finances was very limited. In the modern age of vast informational availability this is certainly not the case anymore. Particularly among investors, but that's another story.
To start up a recovery, the priority should be on supply-side reforms aimed primarily at resolving labour market inefficiencies and at reducing the regulatory and taxation burden on businesses. These will decrease costs much faster and much more efficient than any new road or rail-link, no matter how good or fast they could be.
We don't need an industrial policy
Britain's business secretary Vince Cable wants an industrial policy. He is wrong.
Core to his proposals are a new state-sponsored business bank. "There are areas where the banking sector just isn't working for large chunks of the economy," he says. "Small business lending has actually contracted." So he wants a new bank, with as much money behind it as he can squeeze out of a hard-pressed Chancellor, George Osborne, to step into the breach.
We don't need a new government bank. Governments are not good at running banks, or any other industries, for that matter. And the government is already the controlling shareholder in many of Britain's banks. And they are not doing their job, one might surmise that it is up to the shareholders to change their policy, rather than run off and build a competitor.
But in fact the banks are behaving perfectly rationally given the circumstances they are in. They got burned in 2007/08 because they had lent too much to too many people who, when the boom came to and end, discovered they were well overstretched and couldn't meet their repayments. Regulators in Basel had told them that government bonds were good security that they should invest in, but it turned out that governments are even more broke than householders. So now – once bitten, twice shy – banks are being far more canny about how much they lend, and to whom. And indeed Vince Cable and his colleagues have been telling them to stock up on their reserves, which leaves them less money to lend out even if they wanted to.
Businesses and householders got a fright too. So they have been paying off their debts and trying to have some money under the mattress just in case another financial crisis hits them for six. In other words, the banks can't and don't want to lend so much, and businesses don't want to borrow as much. But Mr Cable sees only those small businesses who want to borrow but can't get a loan from the bank. He forgets that small businesses are in general very risky businesses, and that he has already told the banks to be more wary.
So when Mr Cable's new government bank opens its windows, who is it going to lend to? Small businesses? That would be a risky thing to do with taxpayers' money. Particular future-focused industries? Governments have never proved very good at 'picking winners'. Good ideas generally get the support of investors, if people really believe that they will make money in the future. Is the government, politicians and civil servants, better at predicting what industries and what companies will succeed better than professional investors who make such decisions every hour of the day? You would have to be nuts to think that.
But no, we are told that the bank will target lending to carmakers, aerospace, life sciences, construction, energy, higher education and creative industries. The winners, it seems are already picked. And taxpayers will pick up the cost of the government's choices, just as they always have. We would have a more thriving industrial sector if Mr Cable took his own advice: "Most sectors of the economy function perfectly well on their own. They want lower taxes and for the government to get out of the way." Quite. Low taxes, less regulation, fewer confusing, short-term, counterproductive but headline-grabbing initiatives like a state investment ba nk. As Allister Heath put it in City AM today, "There is only one industrial policy worth pursuing: making the UK a better place to conduct business, regardless of sector." Mr Cable should be creating that open competition policy, not a new bank.
Predistribution is an old trick for an old dog
Ed Miliband’s new big idea is that wealth redistribution takes place too late. One has to be poor first to get government hand-outs of richer people’s taxes. How much better it would if no one was poor and then redistribution, and all the bureaucracy that goes with it, could be consigned to history. We would all rejoice if benefits could be cut without further impoverishing the poor. He uses Sweden as an example of a predistributive country.
As Neil O’Brien points out in his excellent article in Saturday’s Telegraph, Britain does have one of the highest levels of income inequality, seventh out of 34 OECD countries and that surely fuels the widespread discontent. Note the booing of George Osborne at the Olympics.
Unfortunately, Sweden is not a good example of a ‘predistributive’ country. Income tax only looks low because national (social) insurance is four times as high as the UK’s. The Nordic countries public expenditure is far higher, maybe 50% higher, than the UK’s share of GDP. They have grown accustomed to being high tax/high public spending economies. In other words, the hand-outs are given in different ways.
Two factors contribute to the inequality in the UK: housing costs and unemployment. They compound each other because housing costs are highest where there is most employment. Governments have tried to move employment to where it has most needed but moving the BBC to Salford and civil servants to Newcastle is not the answer. The employers most easily moved from the south east contribute nothing to the economy and it would be better to employ fewer civil servants than rehouse them elsewhere.
Inequalities will be reduced when, and only when, employees create more wealth than they earn. Sweden and Denmark, for example, achieve high personal incomes due to free markets and relative economic strength. Any government that tries to micro-manage its economy achieves precisely the opposite, especially if it tries to raise incomes when there is no productivity to pay for it. Older readers will recall the futility of government attempts, in the late 1960s, to direct prices and incomes. At the same time, the trades unions were doing their best to destroy such industry as we had.
Today we have Ed Miliband demanding higher personal incomes unsupported by national wealth creation and trades unions backing that up with calls for strike action. Welcome back, Old Labour.
Make room for a bottom-up Olympic legacy
Interesting proposal from a group called British Future, saying that we should build on the Olympic feelgood factor, and widen the Olympic legacy by having more minority/disabled sport on TV, a single national school sports day, and suchlike.
Hmmm. I would be perfectly content to see the nation taking to sport, cycling to work, insisting that their kids walk to school and run round at the weekend rather than slouch on the couch. But these proposals all sound a bit – well, statist. I would really prefer not to live in a country where some minister could tell schools what day to arrange their sports day on, or could bully broadcasters into carrying programmes (however worthy) that they believed their viewers and listeners were not really interested in.
Better, surely, to have diversity among schools, who might want to do all sorts of different sports activity in their own way and at their own time, in ways that some central ministry could never imagine in a decade. Better too to have diversity of broadcasting, rather than the close central regulation we have at the moment which allows broadcasting 'watchdogs' – that is, a state-appointed quango – to dictate what they should carry. Better, indeed, that broadcasters should owe their living to carrying what their public actually wanted, rather than what ministers want for them (or what they say they want to surveys – who is going to answer 'no' to the question 'should sporting minorities be better represented on TV?'.
The remarkable thing about the Queen's Diamond Jubilee is how little it was organised from the centre. There were more than 2,000 street parties, all of them organised by local people in response to the desires of local people to have them and to help with them. You would think the nation would be street-partied out after the Royal Wedding not so long ago, but no, they came onto the streets with bunting and deck chairs and had a good time. It didn't take any ministers or officials or think-tanks or pressure groups to dictate how we were going to get into the mood, we just did it.
Nor did it cost anything. Actually, for the £9.5billion that the Olympics cost, you could keep the Royal Family up and running for 294 years. And I think that in the last year or two, they have been responsible for at least as many Union Jacks on the streets as the Olympics.
I often figure that interest groups come up with good ideas that we all agree should be done, but somewhere along the way a price tag appears. Sure, we want to capitalise on the Olympic legacy, but maybe not at the expense of higher taxes to fund more central programmes. And worse, it gives the nannies an opportunity to come out and dictate how we should live our lives.
An Olympic legacy will amount to nothing if we try to manage it from the centre through state initiatives. it has to come from the hearts, minds and enthusiasm of local people. We need to set them free, though. When parents refuse to help out with school sports because they face the indignity of criminal record checks, when you want to hire a school gym or a village hall for some sport event and get hit with a demand for risk-assessments and a whopping insurance bill, you can hardly expect people to promote sport at the local level. Get out of our hair, and the legacy will create itself.
Back to the stone age at the Trades Union Congress
It's like that moment when the clocks go back, and suddenly the evenings are dark. After a glorious summer of sports and jubilees, suddenly the annual Trades Union Congress meeting is upon us and gloom spreads around.
Austerity isn't working seems to be the slogan this year. Apparently we need more government spending to boost the economy by hiring a lot more public-sector workers and raising their pay. They will then go out and build things, supply essential services, encourage business by buying stuff, and help the government by paying more taxes.
Sounds a bit like inviting in a burglar in the hope that he might spend some of the swag in your shop. Unfortunately, the money to hire more public-sector workers, and to pay them better, has to come from somewhere. The government could borrow the money, but its problem is that it is already borrowing far too much. There comes a time when your creditors reckon you are so deep in debt that you will never be able to repay everyone, so they had better stop lending to you and indeed start getting their cash back. Then you are sunk, of course, like Greece, having to offer 20%+ in the hope that a few reckless or over-optimistic folk might be daft enough to keep propping you up with loans.
So yet more borrowing does not seem a particularly safe source of money to boost public-sector employment and wages. Nor is inflation. We have had too much of that too. A rising cost of living means that people's savings and pensions do not buy as much. And rising prices also confuse businesspeople about what is actually profitable: they cannot see the 'signal' of where the real demand is from the 'noise' of prices rising all around. That gave us the financial crisis: when everything seems to be booming, people make some pretty crass bets.
Or the government could raise the money for public-sector expansion from higher taxes. Don't get me started. A sure-fire way to kill off hard work and enterprise is to slap a high tax on it. We tried that in the 1970s and we got the brain drain. Not many of us who drained out actually came back.
But why should we boost public-sector employment and wages anyway? The fact is that productivity in the public sector is dire. It has flatlined at a time when, for decades now, it has soared in the private sector. Shouldn't we be putting our money into things that are highly productive, rather than things that are not?
And it is fine to talk about downtrodden cleaners and nurses on low pay, but the fact is that the average public employee is, for a similar job, better paid, has a much better pension, takes more days off, and has better fringe-benefits and holiday entitlements, than the average private-sector worker. Private-sector workers have also been more likely to have lost their jobs over the last five years, or to have had to take cuts in hours. So why should a private-sector cleaner be expected pay higher taxes to boost the wages of public-sector cleaners?
Austerity isn't working? What austerity? Government spending is pretty well what it was five years ago in real terms. The government is reducing its borrowing a bit – that is, it is not over-spending, beyond its means, quite as much as it did before. But it is still borrowing £2.50 on every £10 it spends, and still adding to a national debt that is already at record levels.
Adam Smith once wrote that what is right for a family cannot be wrong for a great nation. One reason the economy is sluggish is that businesses and families are actually trying to cut their debt. Once bitten, twice shy. So people aren't spending as much. When people become more comfortable with the level of their household debts, they they will start spending again and growth will resume. It's just a phase we have to go through, like the hangover after a bender, before we can recover. A hair of the dog is no solution, it provides only a temporary relief but actually adds to the problem and makes recovery even harder and longer.