More economic illiteracy

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In yet another startlingly display of the government’s economic illiteracy, Yvette Cooper has announced plans to dish out £1bn to 'create' jobs for 47,000 unemployed.

She would do well to ask herself one simple question: 'where will the money come from?' Of course, the answer is the taxpayer, either now or in years to come. The billion pounds that Cooper gives away will be taken from the pocket of the consumer and the tills of business. Consumers will spend less, and businesses will take on less staff – creating jobs in the public sector will inevitably destroy jobs in the private sector.

In reality, Cooper must have asked herself this question, and she (or at least her advisers) must know full well that there can be no sustained gain in employment from this scheme. Rather, they have their eyes on a political prize. The fabricated jobs are concentrated and obvious: photos of the newly-employed will find their way into government press releases and election manifestos, while the invisible losers, as many and as serious, will be left ignored.

Then there are the jobs themselves. These are positions that were deemed unnecessary even in the most prosperous (and profligate) years of the last decade, and yet it is now, when the country faces the greatest fiscal crisis of a generation, that the government decides that our money is well spent on dance assistants and tourism ambassadors. In the private sector, workers generate wealth, or they lose their job: in the public sector, there is no such discipline.

Having seen the government splash out more than a trillion pounds of our money to save the bankers, and collectively bearing a public debt of more than two trillion, it is all too easy to dismiss a billion as irrelevant. But we shouldn't - it's enough to pay MPs' expenses for a decade, exempt Dorset from income tax, or send a cheque for forty quid to every household in Britain.  This money should be given back to private individuals and private firms, who alone have the potential to bring about the economic growth that will get us out of this recession, and bring the unemployed back to work.

The cost-effectiveness of prohibition

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Back in April, the Transform Drug Policy Foundation published a paper comparing the cost effectiveness of the prohibition and the regulated legalization of drugs. I've only just got around to reading it, but I can confirm that it is an excellent piece of work.

The report finds that the total cost of prohibition of heroin and cocaine (the calculations focus solely on these two 'hard' drugs, since this is where the most extensive data is available) is £16.8bn per annum.

The benefits of prohibition depend on the extent to which prohibition decreases heroin and cocaine use – something for which there are no authoritative figures – and therefore reduces its health, social and economic costs. Depending on your assumptions here (the paper details four different scenarios), the estimated 'benefits' of prohibition range from £618m to –£309m.

This means that the total net cost of prohibition is somewhere between £16.2bn and £17.1bn.

The authors go on to compare this with a regulated legalization model under which heroin and cocaine would be freely available to buy from licensed pharmacies, with 10 percent of users (those with the most serious addiction problems) receiving diamorphine and cocaine by medical prescription. Depending on whether you assume that opiate and crack cocaine use would (a) go down by 50 percent, (b) stay the same, (c) go up by 50 percent, or (d) go up by 100 percent, the net cost of legalized heroin and cocaine under this model would be £3.2bn, £6bn, £8.8bn, or £11.6bn.

To put it another way, if opiate and crack use fell by 50 percent, we would save £14bn. If it didn't change, we would save £11bn. If it rose by 50 percent, we would save £8bn. And even if opiate and crack use doubled, we would still save £5bn, according to the authors' calculations. It is worth noting that this does not include any potential tax revenue that would be generated by drug legalization – something the authors believe would be small anyway, since drugs would be so much cheaper if the 'illegality premium' were removed.

This research deserves to be taken seriously. It's high time we had a mature and rational debate about drug legalization in the UK.

For more on the problems with prohition, I'd highly recommend the IEA's Prohibitions, edited by John Meadowcroft. The picture above is from the NORML Foundation.

Directionless banking policy

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"Pathetic." "Ridiculous." "Stage-managed." Utterly fake." "Desperate." "Absurd." "Utterly inconsistent." "Hypocrisy." "Disgraceful muddle."

Those are a few of the phrases Alistair Heath used to describe the government's banking policy in an excellent City AM editorial yesterday. He's right not to pull any punches: the Chancellor's demand that the major UK banks increase their lending really doesn't make a lot of sense, other than as a media stunt.

As Heath says, do we really want the banks to lend at the same levels they did in 2006-7, at the height of what is now recognised as a completely unsustainable boom? Surely it's a good thing that banks like Northern Rock are "no longer growing at a crazy rate by imprudently borrowing on the money markets"? 

Moreover, it's not just that the supply of credit has fallen, in part because "many foreign banks (such as the Icelandic lenders) have quit Britain". Demand has fallen too – a point made in our recent book, The Recession. As Heath points out, there's still plenty of mortgage credit available, it's just that people have finally developed more realistic attitudes towards investing in property (i.e. prices don't just go up). And that's a good thing.

The trouble is, ultimately, that the government doesn't know what it is doing. They can't decide whether stabilizing the banks is the priority, or whether more debt is needed to 'stimulate' the economy. So they attempt to require the banks both to sort out their balance sheets and hold more capital, and try to get them to lend more at the same time. In their desperation to paint the Tories as a "do nothing party", the government is running around doing anything and everything it can think of, without a rational set of guiding principles.

This kind of incoherent policymaking is not just ineffective, but actually damaging. Businesses and consumers don't know what to expect next, and economic activity slows as a result. What markets need desperately if they are to recover is stability. Sadly, this government seems singularly incapable of providing it.

Subsidizing housing

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Property developers will be pleased by Housing Minister John Healey’s announcement that 270 developments have been shortlisted for government assistance totalling £925m. £419m of this takes the form of five-year loans (presumably at lower rates than offered by the commercial banks), while £339m will go towards affordable housing, and £166m be given as direct grants to developers.

Healey’s declared aim is to “help build the homes the country needs." One would think that a shortage of homes would sort itself out – that demand would push up prices, and developers would be able to make a profit on constructing new homes. On these 270 projects at least, that doesn’t seem to be true: since the housing slump, the projects need government help to make them viable. At more than £40,000 per home (22,400 are to be constructed), the scheme is an expensive way of building homes that cost more to build than people want to pay for them.

Perhaps the logic is that we need to provide more affordable housing (although only a third of the proposed homes fall into this category). But if that really is the idea, then surely the best way is not to subsidise loss-making developments, but to give grants to consumers who could not otherwise afford homes. Rather than a Soviet-style central government department determining where and how homes should be built, it should be left to the decisions of consumers and developers operating in a free marketplace – it is they who know best.

Healey boasts that the scheme will “create 20,000 jobs on housebuilding sites", ignoring the fact that government funding for these jobs must found from somewhere. It is perhaps the only merit of the plan that it is to be funded from cuts elsewhere, but nevertheless the money given to house-builders must eventually come from the taxpayer, either now or in the future. The scheme will not create jobs – it will take wealth from the productive areas of the economy, to subsidise the unproductive activities of private builders.

Now, it is true that in the long term we face a shortage in housing supply – the rate of building new homes just isn’t keeping up with the demand generated by a growing population and dividing households. But government handouts (and generous loans) are resolutely not the answer. Rather, if government is serious about tackling the housing shortage, it must address the heart of the problem: the stifling and illogical planning laws and politicisation of the planning process that hold back developers from pursuing really beneficial projects.

A safe pair of hands?

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News that Sir Win Bischoff, formerly chairman of Citigroup, is taking over as chairman of Lloyds Banking Group does not exactly inspire confidence. After all, Citigroup needed a massive bailout from the US government in November 2008, receiving $45bn under the TARP scheme and receiving government guarantees on another $306bn of assets. Those figures exceed even those of AIG – the posterboy for mismanagement and incompetence on Wall Street. So clearly Sir Win is just the man to run Britain's biggest and (arguably) most troubled bank...

I'd prefer we adopted the approach advocated by Tim Ambler and Keith Boyfield in our recent publication, Regulatory Myopia: "If any financial company is rescued by the government, the directors should be treated as for bankruptcy: i.e. they should be disqualified with pro rata loss of bonuses and pension rights". The City's current failure-free merry-go-round just gives capitalism a bad name.

Sowing the seeds of the next recession

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sowing-the-seeds-of-the-next-recession

Gordon Brown promised to put an end to boom and bust. Having put an end to the boom, he now has a novel wheeze to put an end to the bust. Unfortunately, that wheeze is likely to put us right back where we started.

The Guardian reports that the Government is considering providing state insurance (initially outright but later by underwriting private insurance, which amounts to the same thing) to all mortgages secured with a deposit of less than 20 per cent.
 
According to this month’s banking white paper, “Some countries have adopted alternative models for mortgage insurance... Some UK stakeholders have proposed that the government considers the benefits of international models". For stakeholders, read bankers and insurance brokers.

As the paper freely admits, “"this model helps [sic.] by encouraging risk sharing between insurers and lenders, and helping ensure that lenders do not take excessive risks when the economy is growing and do not withdraw from higher LTV lending during periods of economic disruption." But when the insurers are themselves underwritten by government, what this effectively means is that risk is not shared but transferred completely to taxpayers. Banks would therefore have even less reason to take care when and to whom they lend.

The problem is not merely one of risk, however. Government caused the previous housing boom by massively expanding the money supply, which inevitably found its way into asset prices. While it was inevitable that (artificially) increasing the supply of mortgages would lead to more risky lending – banks are bound to lend to the best customers first, and only lend to less good customers if the resources are available – this was only part of the story. In the US banks were cajoled into lending to individuals from low-income groups in the name of “fairness", loans which were inevitably “sub-prime".

Government policies that encourage further risky lending on the back of even looser monetary policy than that of the last decade risk repeating the errors of the past. Rather than lifting us out of recession, they will create a new housing bubble and more systemic risk in the economy. The next recession starts here.

Privatizing primary care

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privatizing-primary-care

ConservativeHome's Tim Montgomerie reports:

I've now been told by an impeccable Tory source that co-payments have been ruled out for the NHS and that it will remain free at the point of use.

I'm not surprised and, indeed, have heard the same absolute commitment myself. One of David Cameron's earliest acts as leader was to rule out ever moving in the direction of an insurance-based system, and shadow health secretary Andrew Lansley has been going out of his way not to "frighten the horses" ever since.

This is understandable. Despite its failings, the British public remains bizarrely attached to the idea of a nationalized health service, so it would take a brave politician to break with orthodoxy. At the same time, the Conservatives are promising a fully-fledged internal market in the NHS, which is at least a step in the right direction.

However, I don’t believe that a universal, taxpayer-funded, free-at-the-point of use health service is sustainable – especially not in the context of a fiscal crisis. Given that healthcare accounts for about 17 percent of total public spending, no government that is serious about balancing the books can afford to 'ring-fence' it, as the Tories currently propose.

My money-saving suggestion would be a radical one: the complete privatization of NHS primary care (GP surgeries, clinics, dentists, etc), on which the government spent £18.6bn in 2007/8. Clinicians would offer their services in a free, competitive free market. Patients would be free to shop around and would then pay directly for any services. Of course, an NHS entitlement could still be available for those unable to pay their own way.

Britain's high street opticians – Specsavers, Vision Express and the like – provide a good example of how this could work in practice. They also indicate the way in which private ownership and competition could make a dramatic difference to standards, as well as working to keep down prices.
 
This would certainly be a controversial policy at first. But just as no-one would today advocate returning opticians to government control, privatized primary care would soon be accepted as a completely normal state of affairs. And given that the vast majority of patient interactions with the health service occur at the primary care level, the impact of this would be enormous.

For whom the road tolls

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According to Monday's Telegraph, David Cameron is considering plans to introduce road tolls after the next election. This is in essence a good idea: as Adam Smith identified in 1776, tolls, if properly implemented, have three great benefits.

A toll road "defrays its own expense" – it pays for itself. Any policy that moves the burden of expenditure from taxpayer to user should be applauded, but Cameron's tolls will only do so if balanced by cuts in general taxation, road tax and fuel duty. Motorists already pay more than 5 times the cost of maintaining the roads , and road tolls on top of this would be rightly seen as nothing more than a revenue-generating exercise.

Toll roads "pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them." Pricing the roads, like any other scarce commodity, encourages their efficient use: drivers have a reason to economize. When tolls are set intelligently, costing more in periods of congestion or in polluted areas, drivers pay not only for the maintenance of the roads but for the costs that driving imposes on others. This can only work, however, if the toll system is a comprehensive one; otherwise drivers simply avoid the expensive roads, and move the maintenance, congestion and pollution elsewhere.

Toll roads "can be made only where commerce requires them." Like in any market, those roads that are profitable would survive, and roads that cost more to maintain than they generate in wealth would be abandoned. Faced with abandoning a road, the government is more likely to bail it out, or put up toll prices. Only a road system owned by private enterprise can sustain the competition necessary to keep down prices and jettison loss-making roads.

Unfortunately, it looks unlikely that the Tories will introduce a system of road tolls that seizes these potential benefits. Rather, Cameron emphasizes that he can't "promise tax reductions", advocates "separate road tolls" rather than a comprehensive scheme, and has made no reference to privatization. It seems driving will remain dirty, crowded and expensive for a while to come.

David Rawcliffe joins the ASI

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I’m studying Philosophy, Politics, and Economics, at Exeter College, Oxford, where I spend a lot of my time arguing, with anyone who will listen, for the free-market policies Britain needs. Thinking that my tutors and fellow students had probably heard enough, I applied for a summer placement at the ASI, who have offered me a chance to work for them over the next two months.

This is a brilliant time to be working at the ASI. The economic crisis - and the rocketing government spending, surging market intervention, and collapsing trust in capitalism that have followed - has made it more important than ever to argue for limited government, and limited spending; to point out to both policy makers and the public how government interference in the market led us to where we are; and to explain why the government can provide no easy route out. I’m really looking forward to playing a part in that.

As part of my degree I’m taking papers in British and American Politics, Political Theory, Money & Banking and Public Economics, which I hope will all prove helpful here. In time away from work, I‘m generally to be found flying aircraft, sitting in a pub, or playing golf badly.

How governments run things

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how-governments-run-things

Yes, we know the argument, if only those wise people who had learned how to steal the most votes were put in charge of running everything then we'd all be gambolling in flowered meadows and life for all would be immeasurably better. This argument works right up until we look at what actually happens when the politicians manage to run something. Like, say, the monopoly off track bookie in New York State.

OTB is operating with a negative cash flow of $600,000 to $800,000 a month on a betting handle of $900 million a year, largely because of a revenue-sharing formula dictated by Albany that forces it to pay out more than it takes in after operating expenses...

Yes, the wise and omniscient beings face incentives, just like everyone else, and as everyone likes something for nothing they've set up a bookies so that it must (note, MUST) pay out more than it gets in plus the costs of doing so.

Of course, a bookies isn't that much of a problem but what happens when similar pressures are brought to bear on a more important segment of the economy?

What great advice!  Make more loans, but make better loans.  What a great banker he would make!  I mean, the guy is just amazing, he knows everything about everything.  I’m sure all the bankers in the room slapped their heads in a collective I-coulda-had-a-V8 moment and said as one: “Why  didn’t I think of that!?!"  And of course Putin knows just what the interest rate should be.  14 percent is Just Right.  Pretty amazing to watch a bald guy do a Goldilocks impersonation.

It's not going to work out well, is it?

Aren't you glad that there is at least a modicum of sense in our own government regarding the banks? They're desperate to sell them off, get them out of governmental ownership, before the sillier parts of the Labour Party have a chance to offer such sterling advice.

Thank goodness.