I vote for a tea party

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A few of pieces of US polling data caught my eye over the weekend. The first is that a Fox News/Opinion Dynamics poll conducted last week has found that 46 percent of Americans do not think that President Obama will be re-elected in 2012. This comes on top of the news that Obama has lower approval ratings than any previous president at this stage in their presidency, according to a survey by Gallup. The other intriguing poll result comes from a survey by Rasmussen Reports, in which 36 percent of people said they would vote Democrat, 23 percent ‘Tea Party’, and 18 percent Republican.

The really interesting thing there, of course, is that there is no political party called the ‘Tea Party’ – rather, the ‘tea parties’ are a series of anti-big government grassroots organizations that have sprung up all over the US in the wake of the Wall Street and Motor City bailouts, President Obama’s stimulus package, and the Federal government’s attempted healthcare reforms. While their policy objectives are, unsurprisingly, not clearly defined or codified, the tea party movement is very clearly a manifestation of what Grover Norquist calls the ‘Leave Us Alone Coalition’ – people of various political backgrounds who want lower taxes, limited and fiscally responsible government, and less state intervention in their lives.

As I’ve said before, this is precisely the ground that the Republicans should be re-colonizing after the disgraceful profligacy and statism of the Bush years. If they were to manage it successfully, I’ve no doubt they could win back Congress in next year’s mid-terms, and then be in a position to curb Obama’s excesses. To put it simply, the future of the ‘Grand Old Party’ lies in rediscovering common ground with libertarians, and developing a coherent, small government message. But will they realize that in time?

An education revolution

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According to the Guardian, interest in the Conservative Party’s education reforms has been growing. Hundreds are ready, willing and able to overhaul the quality of education in this country.

Parents, teachers, charities and companies have been in contact with the New Schools Network to register their interest and find out more about how to set up schools if the Conservative Party comes to power. It appears there will be no shortage in demand for Gove’s radical policy. So far Ed Balls’ responses to Gove’s position have been unconvincing and uninspiring – defending the dreadful status quo.

The words of Lesley Surman, of the BBG Parents' Alliance, reflect where the drive for improving standards of education will come from: "We are uncompromising on the level of ambition for all of our children, for our school and for our community." The BBG Parents' Alliance is in process of searching for partners to set up their new school.

Provided reform is swift and uncompromising command and control public services will have been dealt a terrific blow from education reform. If done properly, this supply-side reforms can undercut the current vested interests controlling the natural market in individual and familial expectations. Given the widespread monotonous failure of state education, the disillusioned but talented pool of young teachers and the bored, uninspired, untapped, wasting potential of majority of children – this education revolution could not come a moment too soon. For the children of this country, the election could not come early enough.

Now what about the NHS Mr Lansley?

Circular financing

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Other countries – such as the United States - have also used QE, but not to the same extent as Britain. Since March, the UK has almost tripled the size of its "monetary base". We've then used more than 99pc of that freshly-minted money to buy our own sovereign debt so Mr Brown and his ilk can keep spending, in a last-ditch attempt to prevail at the polls. As a result, the UK is now being kept afloat by a bizarre, Zimbabwe-style form of circular financing that will ultimately explode in our faces.

Liam Halligan, 'Labour's dishonesty is leading us down the road to sovereign default' Telegraph.co.uk

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?