So Gordon Brown was right then, Britain should not have joined the euro

That Gordon Brown was in fact right about something is a bit of a shock but he was indeed correct that Britain should not have joined the euro. One of his points being that the housing finance system was too different.

In an optimal currency are the different components will react to interest rate changes the same way. But if we've got largely variable rate mortgages and other places have largely fixed rate then they won't react in the same manner. A change in rates will affect, for us, all paying a mortgage, for others only those considering new ones. Our reaction will thus be of greater amplitude.

Some new research on this more generally:

Business-cycle synchronisation is a key criterion for optimum currency areas. The standard argument is that membership in a common currency area becomes costly for any country whose national cycle diverges significantly from the common cycle.

We find that for most EMU member countries there is a tight correlation between the national cycle and the common cycle. At first sight it thus appears that, with the exception of Greece (and possibly Portugal), the standard optimum currency area criterion is fulfilled. But our key argument is that it is not sufficient to look at correlation patterns. Countries that share the same business cycle might nevertheless experience quite different cyclical positions, and thus require a different monetary policy stance if the amplitude of the cycle is very different. We indeed find large systematic differences in the amplitude of national cycles and the degree to which the national cycle reacts to the common one, with many countries registering a ‘beta’ that is significantly different from one.

The practical conclusion for the Eurozone is that the main problem for the ECB might not be a de-synchronisation of cycles, for example between the core and the periphery. Instead, a more relevant problem in practice might be that individual countries have cycles that are tightly correlated, but of very different amplitudes, thus requiring at times a different monetary policy stance at the peak than at the trough. The more general conclusion is that a high degree of correlation is not a sufficient optimum currency area criterion. Having a beta that is close to one is equally important.

As it turns out, nor should anyone else have joined the euro either.

But why wait until the EU is being beastly Prime Minister?

Theresa May has told us all that if the Europeans are beastly to us over the Brexit negotiations then she'll show 'em. It will be more than just wind signifying nothing too, she'll create a lot tax and low regulation Britain just to show those continentals:

In comments that were hailed by Eurosceptics, the Prime Minister told EU leaders that any attempt to “punish” Britain would be “an act of calamitous self-harm for the countries of Europe” that her Government will not accept.

She said she would rather do “no deal” than one which is a “bad deal for Britain” and said that any attempt by the EU to harm the UK would force her to change the country’s “economic model” by lowering tax and cutting regulation to compete with Brussels.

The question that pops into mind here is, well, why do we need to wait for Brussels to be beastly? 

Of course, around here, we generally support a lot tax and low regulation model anyway. But the PM is stating there that such  a model would be good for the UK. For it would allow us to compete with Johnny Foreigner - presumably making us richer as we did so. And given that that is the case, both from her logic and also from the basic fundamentals of the subject, why are we waiting upon J. Foreigner? 

Why don't we just get on with having a low tax and low regulation economy and country? That is what Brexit gives us the freedom to do after all....

Bit of a blow to The Spirit Level idea, isn't it?

In The Spirit Level, by Wilkinson and Pickett, we are told that inequality is the source of most social ills. So much so that a more unequal society raises murder rates, makes even the rich die younger and ....well, you get the picture.

This is shown by lots of comparisons a cross countries, more equal places have better results by certain measures, more unequal worse and so on. It is, of course, a great big steaming pile of foetid dingoes' kidneys, as Chris Snowdon has memorably proven. But now comes another little blow to the thesis.

Japan is one of those places which they claim is more equal. So much so that quite a number of their projections  are anchored by the Japanese result. At which point:

Their plight is a rarely seen consequence of Japan’s struggle to steer its economy out of the doldrums after more than two decades of stagnation and deflation. Four years after Shinzo Abe became prime minister for a second time, campaigners say the rise in poverty is evidence that his grand plan for growth – known as Abenomics – has failed to deliver for many families.

Japan now has some of the worst wealth inequality and highest rates of child poverty in the developed world, according to a Unicef report released in April that ranked Japan 34th out of 41 industrialised countries.

Japan isn't all that equal and therefore their assignment to the more equal class must be called into question.

Or, of course, perhaps it has only just become more unequal - in which case they must all be dying younger, there are more murders and so on because inequality is the cause of these things, no?

In the absence of the evidence that those social indicators are going the wrong way we'd be back where Mr. Snowdon says we are, wouldn't we - foetid dingoes' kidneys? 

Bleedin' Germans, coming over 'ere and nickin' our markets

A nice outburst of xenophobia here, apparently Deutsche Bourse is going to nick some markets from the City:

Deutsche Börse’s €25 billion merger with the London Stock Exchange will trigger a huge grab of business by Frankfurt from the City, a study claims.

Research, which was commissioned by the German exchange, says that the merger will give Deutsche Börse the opportunity to relocate billions of pounds of derivatives trading from the UK to Germany.

The findings raise fresh questions about whether the deal, which will have to be signed off by the Bank of England, is in the City’s best interests.

So, how is this to be done? It is, after all, customers who decide where they are going to trade:

“Deutsche Börse has a good chance of winning significant long-term market share in the areas of interest rate and currency trading and relocating trading from London to Frankfurt if the market participants in London are given unrestricted access to superior trading platforms in Frankfurt,” Dirk Schiereck, chairman of corporate finance at Technische Universität Darmstadt, wrote in the report.

"Hmm, if we could just get this straight professor. You're saying that a producer who offers consumers a superior product might gain market share? Are you absolutely sure about this very strange idea?"

At which point shouldn't we put that xenophobia back in its box where it belongs?

Yes, remarkably, these people are being paid by you

A standard analysis of the effects of the European Union would include the fact that it subsidises the production of certain agricultural goods. This is what led to those wine lakes and butter mountains of yore. Set the price well above the market price and watch as producers flood the continent with product that no one wishes to eat.

One such product is sugar. The EU price is well above the world price and has been for yonks. This keeps the sugar beet barons in business and leads to, as always with a price above the market clearing one, excessive production. Fortunately, this is about to change. We consumers will be less ripped off to favour some few thousand landowners, how excellent, eh?

Except there are those who think this is not a good idea: 

British efforts to tackle obesity could be rendered futile by a European Union deal that threatens to flood the market with cheap sugar, experts have warned.

Campaigners fear the reform, described as a “threat to public health”, will allow companies to laugh off Government measures such as the Soft Drinks Levy, aimed at forcing a reduction in sugar content.

Beginning in 2018, the levy promises to tax companies which make and sell sugary drinks almost £1.5 billion over the first three years.

The high mandated prices are accompanied by quotas, so that entire countries do not in fact disappear under the overproduction of sugar. Those quotas are to go, as are the guaranteed prices.

And here's the lovely thing. The people telling us that we should continue to be ripped off in favour of those few thousand land owners are in fact paid by us. The claim being that they are experts looking out for our interests. It being somewhat difficult to see that they are really.

That Carthaginian solution is looking better all the time, isn't it?

A coherent economic policy is a useful thing Mr. Corbyn

We thus suggest you take the time to acquire one:

A Labour government will take failing care homes into public ownership to protect social care provision, Jeremy Corbyn is to promise.

The Labour leader will warn the social care system is at "serious risk of breakdown" unless the Government invests more money.

OK, maybe there is a problem here and maybe there isn't. And we don't think that nationalisation is a good solution either. But leave that aside. Let's at least try to insist upon coherence here, shall we?

 In a speech to the Fabian Society new year conference, he will say rising costs and falling fee payments from councils had seen 380 care home businesses declared insolvent since 2010.
...
"So a Labour government would give social care the funding it needs and give a firm commitment to take failed private care homes into public ownership to maintain social care protection.

That coherence being what's missing here. The initial insistence is that the government isn't spending enough on care homes. The solution is thus that the government will take them over and become entirely responsible for them? That's going to help, is it?

And we can meet this coming the other way too. If funding levels are raised then the care homes won't go bust and thus need not be nationalised. Even, if government doesn't have to buy the homes (and they would, you cannot nationalise without compensation) then there would be more in the budget to pay for funding, wouldn't there? 

Yes, we realise that we and Jeremy are most unlikely ever to get on and all that but our wish for the new year really is that people start proposing actually coherent public policy, not just sound bites to please the crowd.

Adopting the economics of fascism isn't quite how we'd see off the extreme right to be honest

But that is how Colin Hines sees it in his latest tome, Progressive Protectionism. Of course, this subject has been discussed before, around about the time he announced that he was going to be writing the book. That passage of the years in the work hasn't improved the idea it has to be said.

As proof we've Richard Murphy insisting that the ideas have merit. As every compass has its butt end so do we have an infallible test of a bad economic idea:

The essence of Colin’s argument is that global capitalism is not working. And, given that Colin is a long time environmentalist (having been around that scene since it near enough began), what we should do to replace it is build strong local economies. This is not only green, but he also argues it is the way to tackle many other issues. Capital controls, for example, would let us more effectively tackle tax abuse and so build a more equal and just society. They would also end a focus on speculation that is creating massively harmful inequality in our country, and others. Controls on trade would, Colin argues, support local economies and jobs and massively reduce the enormous carbon cost of much of world trade.

This free market globalisation has just produced the largest fall in absolute poverty in the history of our species. Sounds like a pretty good result from a socio-political system to us. But that's not how Hines sees it:

Under these circumstances, beggar-your-neighbour globalisation gives way to the potentially more cooperative, better-your–neighbour Progressive Protectionism.

The book does not advocate a return to the oxymoronic protectionism of the 30s, where the goal was often for each protected industry or country to increase its economic strength by limiting imports and then hoping to compete and export globally at the expense of others. Unsurprisingly the more countries did this, the less trade there was between them.

Progressive Protectionism aims at reducing permanently the amount of international trade in goods, money and services and to enable nation states to decide the level of migration that their citizen’s desire.

What is being suggested is a move toward autarky as Enver Hoxa enacted, as Ne Win did, as Mussolini, Franco, as North Korea does, as the BNP when still extant claimed should be done.

Do note that we are not suggesting that Mr. Hines is actually a fascist. We are just noting that he's recommending economic policies adopted by those who were.

At which point enough with the insults. His recommendations are idiot stupidity which will make us all poorer. Larding them with the word progressive isn't going to be enough to get them down society's gullet.

Kids are different; it's time we accepted that

Roger Scruton recently argued for the reintroduction of selective schools - working from the premise that ‘knowledge benefits the child, but not as much as the clever child benefits knowledge’. He thus argues it is in the government’s interest (indeed in all our interests) to reintroduce selective schools—in the end, the whole of society benefits when the brightest individuals are educated to a higher level. 

Different sorts of education are needed for different people. The state’s role should be to promote society’s interest in general, not specifically reduce educational ‘gaps’. Those with other abilities would benefit from technical schools—like the “realschule” which arguably underlie much of Germany’s continuing success in manufacturing—schools of equal importance, but with different goals. We should not succumb to the notion that equality between individuals means identical skills. This may have brought about a dumbing down of our education system.

Scruton’s argument is very persuasive. Every child should have the right to be educated, so the state has a ‘duty’ to provide each child with an education. The state should not discriminate in the irrelevant areas, i.e. wealth and social status. But there should be discrimination in the relevant areas – i.e. academic ability. Assessment at any age is essentially arbitrary, but evidence suggests that ability is very stable through the lifespan from age 11. 

However, Scruton’s argument is short on empirical evidence.

Critics such as Chris Cook suggest such selection would be a ‘radical departure from educational orthodoxy’. Cook shows that in Kent and Medway, where there is extensive selective schooling, kids from poorer backgrounds do worse than in the rest of the UK. But this is confounded by the possibility that many families who would be in that position may leave for comprehensives elsewhere.

And US evidence suggests that universal ability testing actually helps find bright kids from less privileged backgrounds. Harris Westminster Sixth form may be a good English example. According to James Handscombe, its principal, 33% of its pupils are from deprived backgrounds (compared to national average of 29% and typical selective schools average of 10%).

Furthermore, this narrow focus on academic results is exactly what is wrong with the current system. These results are only relevant for some: the difference between a C and a D is largely irrelevant when it comes to university or careers requiring academic ability. We need more relevant measures. Many children find academic tracks stifling, boring and irrelevant—surely we should help them develop skills more relevant to their interests and desired careers. It is simply not the case that any individual is capable of following any career path.

A significant proportion of young people are now coming out of university with expensive degrees which are not preparing them for the world. Indeed there is a lot of evidence that apprenticeships have probed more valuable to both their prospects and self-esteem. According to the Office for National Statistics, more than a quarter of graduates in 2013 were paid less than the £11.10 an hour average for those on work-based training schemes.

More recently, the Sutton Trust found that people who had completed level five apprenticeships (equivalent to a foundation degree) were expected to earn £52,000 more over their lifetimes than graduates from non-elite universities. And with the average debt for university leavers now at £44,000, apprentices may find themselves better off in the long run. 

Challenging orthodoxy has been how we’ve made progress in every field. Where would science be today if Galileo had not challenged the Church’s monopoly on truth and power or if Darwin had not challenged special creation. Such challenge is the very essence of progress. There is always room for doubt and that, in and of itself, gives us the freedom to challenge orthodox views.

Some people are getting very angry about the Coca Cola Christmas truck

And we must be careful of these people when they are angry of course:

Coca-Cola’s "Happy Holidays" truck tour should be banned next Christmas because it promotes unhealthy living to children, a group of 108 health experts have said.

Over Christmas the lorry visited various locations in Britain offering free cans of fizzy drink, which contain nearly four teaspoons of sugar.

But Robin Ireland, director of food charity Food Active, said Coca-Cola was trying to "hijack Christmas" and bring the gift of bad teeth and obesity to children.

The current, at least public, advice of the killjoys is that fizzy drinks should be a rare treat for children. You know, like Christmas? So we rather think that associating the two would meet their objectives.

But the real complaint becomes apparent in the letter in the BMJ:

This Christmas the truck visited five locations in north west England in the first week of December: two in Greater Manchester plus Lancaster, Liverpool, and St Helens. The major local newspapers such as the Liverpool Echo and the Manchester Evening News provided substantial coverage over several days, including where to see the truck, live blogs, and reproducing images of the bright red truck with lights twinkling. They faithfully reported that you could have your photo taken with the vehicle while being given free product (including a 150 ml can of standard Coca-Cola containing 15.9 g of sugar—nearly four teaspoons).

With figures showing that 33.8% of 10 to 11 year olds in the north west are overweight or obese and that 33.4% of 5 years olds have tooth decay,11 many public health departments have used their ever-squeezed budgets to launch campaigns about sugary drinks to try to help their communities reduce their consumption. So Coca-Cola’s campaign was scarcely welcomed by local directors of public health, medical professionals, educationalists, or indeed members of the public. Food Active, a healthy weight campaign based in north west England, organised a letter of concern stating “We can celebrate without allowing Coca-Cola to highjack Christmas by bringing false gifts of bad teeth.”12 The 108 signatories included five public health directors and the current and past presidents of the Faculty of Public Health.

But neither the letter nor the accompanying press release received any coverage in either Liverpool or Manchester. As we wrote in follow-up letters to the Liverpool Echo and the Manchester Evening News that also went unpublished, it is of huge concern that no alternative views were provided in the face of a concerted commercial marketing campaign by Coca-Cola.

Because the local papers didn't publish our letter therefore the Coca Cola truck must be banned.

Is it any wonder that the phrases health fascists, health-nazis, have been coined?

Why we oppose taxing capital

Last week, I set out the ASI's position on tax policy in 2017. In making the case for scrapping all taxes on capital, I mentioned that existing tax rates and reasonable interest rates imply massive taxes on future consumption.

"Taxes on interest income, capital gains, inheritance and corporate profits all effectively tax future consumption higher than current consumption, incentivising short-termism. And this future consumption tax goes up every year you forgo instant gratification. A few months back, I did the maths. Assuming a 5% interest rate and the European Commission’s estimate for the Marginal Effective Tax Rate on capital (47%), you’re effectively paying 97% extra in tax for waiting 30 years and a whopping 147% if you leave it another 10 years."

I think it's worth expanding on this point, but the mechanism isn't exactly clear. Why does a 47% tax on capital imply a 147% tax rate 40 years down the line? It's worth going back to basics.

People prefer to have things now rather than later. Market interest rates reveal how strong that preference is. If the market rate of interest is 5% (high for today but not by historical standards) then it means £100 of consumption today is worth £162.29 of consumption in ten years time.

Should I spend now or save for tomorrow? Capital taxes distort that choice. Let's pretend we have a flat 20% income tax with no deductions or exemptions. If you get paid £125, you'll pay £25 in tax and then you can choose to save or spend the rest of the money. If you saved £50 and the market interest rate was 5% you would end up with £81.44. But you'd have to pay 20% of your interest income each year in tax. Leaving you with £74.01.

It's the equivalent of the interest rate falling from 5% to 4%. That might not make much of a difference over 10 years. That's just £7.43 extra in tax, effectively a 10% additional tax on consumption. Not huge, not small either, but not huge.

However, as Einstein probably never actually said "compound interest is the most powerful force in the world". The difference between a bank account paying out 4% and one paying 5% becomes much larger over 30 years (4% = £162.17, 5% = £216). That's a difference of £53.93, or to put it more generally you'd be almost a 1/3 richer with an account paying 5%. To put it another way, a flat income tax of 20% implies an extra 33% tax on consumption in 30 years time. The longer you wait to bigger the extra tax you must pay is.

But we don't have a flat tax of 20%. We have an income tax with a top rate of 45%, a corporation tax of 20%, capital gains tax of 20% (not to mention inheritance tax). We also have some tax exempt savings vehicles like ISAs but they have a maximum limit so those most able to increase savings are still taxed.

To figure out how high the extra taxes on future consumption are we need to know the marginal effective tax rate (METR) on capital. Unfortunately that's rather tricky to work out. The best estimate I could find is from 2000 and by the European Commission, they reckon the UK's METR is 47%. Things have changed since then - income tax and capital gains tax is higher, while corporation tax has fallen, so buyer beware. But, an METR of 47% means a consumption tax of 97% in 30 years time. And if you waited another 10 years that tax would rise to 147% (even Jeremy Corbyn's bonkers maximum salary cap only implies a 100% rate).

Tax rates of 97% and above are absurd. Yet, rates like these are the status quo for those who defer gratification and make productive investments. This isn't just bad for those rich enough to max out their ISA limit, it's bad for ordinary workers as their wages stagnate due to chronic under-investment.

The tax code should be neutral between the frugal and the spendthrift. In 2017 we'll be pushing for tax reforms that fix this imbalance.