Old ways

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old-ways

I’m currently reading a biography of Gladstone, the 19th Century Liberal prime minister, by Philip Magnus. It was first published in 1954 and is currently out of print. Nevertheless, it’s a fascinating read, and is fairly easy to pick up second hand on the internet.

One tidbit I picked up on this morning is that when Gladstone was Chancellor of the Exchequer, it was the practice to make every tax contained in the budget the subject of a separate bill in Parliament, to be debated and voted on by both houses, rather than just approved in one go by the ruling party.

Such a system certainly has advantages: it would ensure a far greater degree of budget scrutiny, and would also place a roadblock in the way of unpopular tax rises. Forcing MPs to vote on each particular tax would also make it very clear to their constituents where they stood on fiscal issues, and increase accountability.

So perhaps it would be a good idea to return to such a system. On the other hand, I can easily imagine some downsides: such a budgetary process would probably be seized upon by special interest groups, who would distort it to their own ends. Political horse-trading and pork-barrel politics might increase as government whips struggled to secure support for individual measures, and principled reform of the tax system might be made that much harder.

What do readers think? Are the old ways the best?

P.S. A few pages on, and I discover that it was actually Gladstone who introduced the consolidated finance bill, in order to get the repeal of the paper duty through the Lords in 1861... 

In place of a thousand words

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This graph says a lot about Gordon Brown's management of the economy. Starting in 2000 (the last time we had a budget surplus) and continuing to the present financial year, it shows public sector net debt (purple), public spending (red), tax revenues (bliue), and the deficit (green) as percentages of GDP. The two big shifts were (1) after Labour's second election victory in 2001, when spending started to outstrip tax revenues and the budget deficit hovered around 4 percent, and (2) when the financial crisis struck and the country moved towards recession, with falling tax revenues, rising spending, and a ballooning deficit. One interesting thing to note is that tax revenues have remained fairly constant as a percentage of GDP, averaging just under 36 percent over the last decade, within a range of 34-37 percent. It seems to follow that - even assuming government continues to do the things it currently does - it ought not to spend more than 36 percent of GDP. That's still too high for my tastes, but from where we're starting it would be a sensible target for an incoming government to aim for.

#KerryOut

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Far be it for Junksmith to intrude into party politics, but I derive some wry pleasure from the #KerryOut campaign. Labour's 'Twitter Tsar' Kerry McCarthy (MP for Bristol East) has made enemies of a good portion of the blogosphere for various reasons, including making defamatory online remarks about Tory Bear (Harry Cole) and Iain Dale, and then blocking their replies.

Kerry (as she is now universally known among the blogerati, was completely undistinguished as an MP, following the whip on every occasion. Ironically, her only taste of fame – her fatuous 'Twitter Tsar' appointment – could well be her undoing. Iain Dale has put her top of his list of 'Labour MPs I'd like to see kicked out of Parliament', and Tory Bear and others are sinking the snowboots in too.

As a result of the #KerryOut campaign, which Kerry has brought on herself, the Tory candidate for Bristol East, Adeela Shafi, has raised over £1,600 in donations in just a few days. I am sure her £2,000 target will be exceeded soon. It should all remind politicians – particularly pompous politicians who proclaim that they know how to handle the new media – that the blogosphere is not to be messed with.

Why are crime statistics down?

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If you look at the latest crime statistics you are probably in for a surprise. Recorded crimes fell 5% to 4.7 million in 2009. Here are the latest stats for the UK:

• Violence against the person down 6%
• with injury down 7%
• Domestic burglary up 1%
• Offences against vehicles down 10%
• Theft from the person down 12%
• Criminal damage down 10%
• Robbery down 5%
• Drugs offences up 6%

Given the financial crash and concomitant job losses, unemployment is at new heights. So shouldn't crime be going up? Haven’t we always been told that unemployment, poverty, etc. is the driving force behind crime? Well, the latest facts from both sides of the Atlantic don't support this thesis and may never have, according to Heather Mac Donald in the WSJ. As such, the theoretical link between jobless numbers and the number of crimes lays in tatters.

It has long been argued that thwarted expectations turn the disillusioned youth towards crime. From there emerged the logic that crime could best be fought by a higher income distribution. The logical consequence of this mindset is that the police can do nothing really to bring crime down. That’s why the police in Britain have been content to report that crime figures are “stable". Now the facts have taught politicians and the police a lesson.

Housing bubbles: yes, it's the planning system Dumpfkopf!

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Who am I to argue with a Nobel Laureate? Paul Krugman points out that the places with really terrible housing bubbles were those with more restrictive planning regulations. The less land available to build on (as opposed to looking at and going "Awe!") the worse the bubble was.

And as has been noted innumerable times, those places which had almost no such restrictions (although yes of course they require some form of planning permission) like Texas didn't have a housing bubble:

From January 2000 until they peaked in 2006 or 2007, the price of single-family homes rose 174% in Los Angeles, 181% in Miami, 135% in Las Vegas and 107% in 20 metropolitan areas tracked by the Standard & Poor's/Case-Shiller Home Price Indices. In the Dallas-Fort Worth market, by contrast, home prices rose less than 27% before peaking in June 2007.

Why?

Texas offers residential developers lots of wide-open spaces and imposes few restrictions on home building.

Right. Which means that if we want to avoid further housing bubbles in the UK then we rather need to do something about our own planning system. We need, in essence, to move to a more Texan system. Fortunately someone has already done the intellectual heavy lifting on how we might do this:

Land Economy proposes the most radical change in land use in decades, putting the case for redeveloping agricultural land into a combination of woodland, housing and infrastructure.

By converting just 3 percent of the farms in England and Wales over a ten year period, covering 90 percent of the land with trees and the other 10 percent with houses, we would create 950,000 new homes and almost 130,000 hectares of new woodland.

An excellent plan and I commend it to the House.

La tax Google

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France is considering a "Google tax" on internet search engines to raise money to plough back into creative industries weakened by the digital revolution. Fine: so we should put a tax on new creative industries to support old ones, is that what they are suggesting? At that rate they will be putting a tax on digital cameras to support the polaroid camera industry, a tax on polaroids to support the colour film industry, a tax on colour film to support the black and white film industry, and a tax on black and white film to support the print engravers.

Of course, the tax proposal is being justified on the ground that the internet has promoted piracy – illegal downloads of music tracks, for example. Then again, the music industry is working out its own clever strategies to deal with this new reality. And I haven't noticed an immediate drying up of creative music since the internet arrived, perhaps quite the opposite.

The French should go back to their Bastiat, who drafted a spoof petition from the candle makers, urging government to legislate that all windows should be shuttered to prevent the 'unfair competition' of the sun. Read it here, mes amis (English translation here).

Dr Pirie's philosophical observations on economics

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In case you misssed any, below are links to all Dr Pirie's Philosophical Observations on Economics that have been running on the blog since the start of this year:

1. There is no such 'thing' as value.
2. People seek to improve their lives.
3. Every economic activity uses energy and resources that might have sustained other economic activity.
4. Price is transient.
5. For every multiplier there is a de-multiplier.
6. Inflation is not a cost-push phenomenon.
7. There is no equilibrium position in economic activity.
8. Inflation and unemployment are not inversely related.
9. Economic statistics are a subset of history.
10. Most economic factors change when time is entered into them.

Salt grit

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The demand for road salt has reached such heights that there are now police cordons around the salt mine yards to control the endless stream of lorry traffic, not to mention the punch-ups. Contractors are desperate to get road salt, but in many cases it is a forlorn hope – not because the market has somehow failed, but because the government is trying to control it.

It is the same pattern we have seen before. Any sign of a problem, and Downing Street butts in and says that it is stepping in. Not that it is doing a very good job of it. In their buyers' market, besieged by lorries, the salt producers tell me that they would rather like the government to tell them exactly who they should and should not serve. (And local authorities, punch drunk from public criticism, would probably rather like Gordon Brown to tell them which streets and pavements to grit and which not to – a task that should keep him busy for a while.)

What people don't realise, though, is that the government has already decided the priority customers. And the priority customer is – you guessed it, the government. Rock salt suppliers tell me that right from the start of the cold spell, they have been telling private contractors that they can only supply government users, like local councils, health authorities, and the military. So contractors I know of have been reduced to buying food-grade salt in 25kg bags to spread in their contract areas.

Not only that, the local authorities have been instructed to spread what salt they have very thinly. So the gritters are out every day (for which, of course, the government is happy to take credit), even though they are not doing much good. Council officers tell me that what you need to do is to put down plenty at the outset to prevent roads icing up, then renew it as needed.

About the only people who are content are the drivers of the gritting lorries, some of whom, I'm told, are netting £1000 a week thanks to – you guessed – public sector wage contracts. When authorities decide to do preventative gritting at the end of the day, well, that is after their scheduled hours, so it is double time. Or when they go out early it is double time (and it stays double time for as long as they are out). Then Saturdays and Sundays are double time again.

It all seems like an extremely expensive way of the government getting what it wants. But as a way of keeping the country moving – I would take that with a pinch of salt.

See Dr Butler's new Alternative Manifesto here.

It's the answers that change

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There's an old joke about economics exams: over the years the questions are always the same, it's just the acceptable answers which change. Much more amusing than the joke though is the possibility that this might actually be true. That is, it's not just a comment upon what is the fashionably correct answer, it could be that the right answers really do change over time.

This is rather an addendum to Madsen's point that an economy never actually reaches equilibrium: I'd add to the issues he raises the point that technology is always developing. Thus any equilibira, even if they were ever reached, would be outdated as soon as they were by this new technology, new method of production, new change in the production mix and so on.

But what has this to do with the correct answers to questions economic changing? Let us take, just as an example, the New (or Neo-) Keynesian school of macroeconomics. This is a response to the New Classical school, itself a response to Keyesianism...and so forth back to the mists of time. The central point of the New K school is that of menu costs. The reason an economy once divergent from equilibrium doesn't immediately or quickly bounce back is because prices are sticky and thus government really should and really can do something about it all.

Now when the theory was first being pieced together in the 80s and early 90s sticky prices or menu costs looked like a reasonable assumption. However, we've seen much more recently that wages are a great deal less sticky downwards than had been assumed. And prices vastly less so:

It is time for everyone to realize that menu costs are a thing of the past. With current information technology, pricing is much more flexible than the production schedule (which gained tremendously in flexibility as well), and those New Keynesian models can safely be shelved now.

Which means that the New K explanations could have been true even if they are no longer so: and it's changes in technology which have made them wrong.

Now whether this applies to all macroeconomic theories is another thing: but I have a feeling that that is possible at least. For they're all trying to model past events and then using those models as predictions of the future. But if the underlying technology of the economy keeps changing, upsetting those modelled relationships, then we haven't really got a secure basis upon which to base our macroeconomics.

Not so much that the correct answers keep changing, but that by the time we've worked out what was correct for the past it is wrong for the present.

Turning health into a zero sum game

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Health is an area where the gains of one would not normally come at the detriment of others. If one person is cured, it does not usually involve another person becoming ill. As society becomes wealthier and better educated, most of its members ought to have access to better health and greater longevity, without impeding the ability of others to do likewise.

Alas, the NHS has changed that. Given its universal provision and its necessarily finite resources, decisions have to be made about which treatments and procedures can be afforded and which cannot. In a recent case a leukemia sufferer was denied access to a possibly life-prolonging drug because the NHS regarded the £30,000 a year cost as an ineffective use of resources, given likely clinical outcomes.

The point is that within a closed system of finite resources, each treatment has to be assessed to see if it is worth denying funding to other treatments in order to supply it. Television reporters interview someone demanding extraordinary (and very costly) treatments for their brain-damaged premature baby, without ever alluding to the brutal fact that others must die if it is to be kept alive. In the NHS people have to ask if that extended life is worth more than the ten kidney patients who might otherwise have been saved. They have to ask if a drug which might offer a few extra years to one patient is worth the suffering to dozens of elderly patients who will not receive their hip replacements if the money is spent elsewhere.

The NHS has turned health into a zero sum game, in which the survival of some takes place at the expense of the death or suffering of others. The QALY, or quality-adjusted life year, was devised to facilitate these complex, and some would say repugnant, calculations. Many people also blanch at the way the NHS can withdraw all treatment if people obtain privately the drugs the NHS has refused to allocate to them. Gods might behave like this, but men and women shouldn't.

There has to be a better way, and it might involve encouraging charities and communities to rally round people who lose out on NHS allocations, and raise extra funds to support them. That breaks out of the fixed pie of the zero sum game, and brings in additional resources instead of taking them at the expense of others.