The vision thing

This week’s obsession of our chattering classes has been an alleged failure of Prime Minister David Cameron’s government to implement a coherent strategy for an apparently flagging agenda. Clearly, bringing the nation’s appalling financial condition under some semblance of control is now so yesterday. Never mind that it was always going to be a long slog and that the journey has only just begun.

The latest bout of whingeing was mostly triggered by the March budget statement with its “unfair” tax cuts, VAT on Cornish pasties, the so-called granny tax and trimmed charity tax credits. The Vision Thing critics say these clearly show up Mr Cameron and his Chancellor George Osborne as out-of-touch posh boys, lacking any ideas on how to take things forward.

What they really show, though, is how special interests have riddled the UK’s tax code with improvised explosive devices that detonate at the merest hint of tampering. From opera buffs to fast-food munchers, we’re all special interests now.

You’d think Mr Cameron’s previous incarnation as a public relations executive would have packaged those measures as a logical progression in dealing with the one issue that will make or break his government into the next election. For the fact is that the UK’s financial condition is the top priority – government overspending is simply unsustainable – and Mr Cameron has restated that view in response to the criticisms.

We at the ASI have been clear that the best way forward is to enhance the UK’s growth potential through various liberal policies of low taxes, more competition, less regulation and the like. Now those exploding measures in the budget are an opportunity to re-invigorate the mission to repair the government’s finances by presenting them as the start of a wider tax reform that does away with breaks for special interests in exchange for steady reductions in overall VAT and income tax rates.

It’s a good simple message and not hard to explain. 

3,051 words

Lost in the noise of Wednesday’s news that the UK has slipped into a double-dip recession was the report Tuesday on the government’s financial performance for its fiscal year ending March 31. A picture is said to be worth a thousand words so here’s 3,000 words of pictures and 51 of comment.

Cumulative public sector net borrowing

As a percentage of GDP, the UK government’s net borrowing comes to 8.3%, about the same as Spain’s 8.5%.

Net debt as a percentage of GDP excluding financial interventions

As a percentage of GDP, the UK government’s public sector net debt come to 66%, up from 60.5% a year ago and about the same as Spain’s.

UK Central Government current expenditure

Spending cuts? What spending cuts?

Kevin and Detlev explain it all

If you want to understand why we're back in recession, these two videos are a good place to start.

Here's Kevin Dowd on The Decapitalization of the West:

And here's Detlev Schlichter on Paper Money Collapse:

The return of the recession

So it’s official: Britain has double-dipped. Is anyone really surprised?

Of course, today’s number are relatively insignificant in statistical terms, and there is every chance that the Office of National Statistics will revise them a few months down the line. So we shouldn’t put too much faith in the details of today’s announcement or try to draw lessons that aren’t there to be drawn.

But it has been obvious right from the start that this was not your average, run-of-the-mill, cyclical downturn. The financial crisis and the recession that followed it was and is the result of severe, deep-seated structural problems in Western economies. And Britain has bigger structural problems than most.

Put simply, we are addicted to debt and constant monetary expansion. This has eroded our capital base and undermined our productive capacity, and has skewed the economy disastrously towards those sectors that thrive on credit and easy money: namely housing, finance, and big government. The boom years inflated huge bubbles in these sectors; the bust years have revealed how much of that growth was unsustainable, or even illusory.  

The situation we are in now can be summarized as follows. The economy remains heavily distorted: the prices of houses and financial assets are artificially inflated by government policy; banks which would have failed in the market have been kept on life support; gigantic, hugely inefficient public sectors are being sustained by money-printing and growth-sapping taxation. The savings needed to support investment aren’t there, and we’re weighed down with one of the highest levels of public-private debt in the industrialized world.

The astonishing thing is that every single one of those distortions is consciously, willfully being pursued by the government as a matter of policy. Quite frankly, it is surprising we aren’t doing worse than we are.

Not that there is all that much governments can do to create growth in situations like this. Yes, tax cuts and deregulation would give the private sector a sorely needed boost. And yes, reforming / privatizing / abolishing the public sector (as appropriate) would do wonders for Britain’s productivity. But what really matters is what governments don’t do. They have to allow the mistakes of the boom years to be unwound. They have to let markets adjust. They have to let new patterns of sustainable specialization and trade develop spontaneously, without bureaucratic interference.

That is a process – and it takes time. But unless we go through it, we won’t be returning to robust, real growth any time soon. The road we are on leads to a zombie economy. It’s time we took a different one.

Isn't it great that Apple makes everything in China?

Via The Guardian I find a paper doing the usual bleating about how it's simply just terrible that Apple works the way it does, gets all that grubby manufacturing work done in China. True, this paper is a little more sophisticated than the usual we're all exploiting the Chinee stuff. But then again they do use "Foucaldian" and not as a term of derision so they're not that good.

However, in there I found one quite remarkable set of numbers. So I shall remark.

In 2002 the average Chinese manufacturing wage was US$ 0.72 an hour.

In 2008 the average Chinese manufacturing wage was US$ 1.57 an hour

There are other interesting numbers in there, like the Chinese manufacturing labour force peaked in 2005 and had declined fully 10 million people by 2008 (that's a larger percentage cull than we've ever had in such a short time period, yes, including Maggie).

But isn't that simply wonderful? Over 100 million people have doubled their real incomes, doubled their lifestyle, in only 7 years? Isn't this, as the good little liberals that we are, what we're all striving for? That the poor become rich?

And it is all happening simply because of trade, simply because we, the rich of the world, are buying things made by poor people in poor countries.

Howzabout that for a bit of voluntary cooperation, a bit of spontaneous order then?

And can anyone think of any government, bureaucratic or State planned action that has managed this feat, of doubling the real incomes of 100 million people in so short a time? Maybe this global neoliberal stuff really works then? As, you know, we've been saying for decades?

A free market solution to pollution

The chart above shows the number of deaths per watt of energy produced by various different energy sources. (Data from the World Health Organization, image from Seth Godin, original graphic here.) Coal is by far the worst offender, causing 161 deaths per terawatt hour (TWh). Nuclear power is remarkably safe by comparison, with just 0.04 deaths per TWh. Shale gas also does well compared to coal and oil, with 4 deaths per TWh.

Clearly, there are significant, unfactored external costs to the use of fuels like coal and oil compared to fuels like nuclear power. This does not mean that coal and oil should be banned, though many environmentalists would like it, because they both produce significant real benefits as well – cheap energy is one of the cornerstones of modern civilization. The optimal outcome is not a total ban or a total free-for-all. As with motoring, where some deaths are an inevitable outcome of socially beneficial activity, the optimal number of deaths is greater than zero.

This is a classic case of conflicting property rights: what we need is a situation that can balance the property rights of polluters with those people whose air is being polluted against.

The standard pseudo-market solution is to assign an arbitrary value to each life and tax polluters by a fraction of that, to “price in the cost to society”. But this is a poor approach, because the cost is borne by the individuals who get sick and die — not by society in general or the government, which gets the money.

A free market solution to pollution would, through courts or voluntary agreement, force polluters to compensate the people they pollute against. If the property rights of the polluted-against were upheld, this would lead to a situation where both parties would agree a pollution premium: a middle-point where the polluter is compensating local people enough to continue polluting.

This would have the happy outcome of incentivizing polluters to move away from urban areas. It might also incentivize people who care less about their lungs, like smokers, to move to areas of higher pollution. The big obstacle to this is that the technology for measuring air quality is quite primitive, and probably wouldn’t allow us to find this balance. But this isn’t as significant a problem as it seems: the very fact of these property rights being upheld (even crudely) would incentivise innovation in demarcating property rights, and so on.

Best of all, it would rebalance the relative price of dangerous fuels, like coal, against safer fuels, like shale gas and nuclear power. Currently, nuclear power isn’t really viable as a free market fuel source – it requires massive government subsidies for the initial investment. With a "free market environmentalist" mechanism that puts respect for property rights at its core, this could change — relative to coal and oil, nuclear may become quite competitive. Shale gas, cheap and relatively clean, would probably become even more invested-in than it is now. And the real costs of pollution would be mitigated to an acceptable level. There's no need for complex regulation and arbitrary "social" taxation. For an energy industry that bears the costs of its pollution, all we need to do is recognise property rights.

LearnLiberty's great work

LearnLiberty's videos are getting better and better. Along with Madsen's excellent Economics is Fun series, they provide neat, entertaining, informative and, best of all, short takes on controversial economic and philosophical issues. 

The video above is a superb example: visually interesting as well as educational. I can only hope that videos like these make it beyond libertarian circles to real wavers, because they're such quality that they deserve a wide audience. No doubt they can help to change some minds, too. 

The glory of cooperative economics

This is just glorious from Red Ken:

Livingstone is confident he can offer cheaper energy to Londoners by exploiting a Transport for London contract which allows it to buy energy at "half the price" of a domestic consumer.

"So we will be just buying more energy and then selling it on at a much cheaper rate than the energy companies do it," he said.

He insisted there was no restriction in the contract over how much the energy companies could sell to the transport body, which falls under the Greater London Authority and is the city's biggest purchaser of energy.

"TfL has got a contract to purchase this energy at half the price a domestic consumer does," he said.

Isn't it wonderful how people who have never run a business seem to think that running a business comes with no costs? Leave aside the details of the specific contracts, whether the energy companies would complain or not. Here's what's going to happen then.

The electricity will arrive at a substation somewhere on the Tube network. Ken's new cooperative now has to get it from there, back onto the distribution system of the grid (for which yes, you do have to pay access fees). They've got to market this new system to electricity consumers (coming soon, Ken's 'leccie chuggers outside every Tube Station, why not?), check that they've got the money to pay for it, monitor how much of it they use and then collect the money from them for having done so. Then chase the bad debts.

Presumably there will have to be in there some people to make sure that they're, minute by minute, buying enough wholesale power to supply their retail customers as well.

Oh, and they're going to do all of this with civil servants and bureaucrats and do it cheaper than all the other companies already in the market. Yes Siree Bob.

You see, here's the thing. All those other companies are already buying electricity at wholesale prices then paying the costs of delivering it and getting paid for it retail. That's what they do, that's the business model. And Ken's lot, with no experience, no capital, are going to do it better and cheaper than the participants in an already cut throat marketplace?

No, of course they're not and not even Ken believes they will. This is just a rabbit pulled out of a hat a couple of weeks before an election by the likely to lose candidate.

At least I hope it is: God Forbid that Ken himself actually believes any of this rot.

What are we to do with our ignorant governors?

We face something of a dilemma here. For it's certainly true that we need government but it's also true that we need those doing the governing to understand the governing they're doing. And we have evidence that those we have at present do not.

This week ministers from across Europe are meeting to tackle a threat to our shared prosperity: the crashing price of carbon. The EU has the world's largest international emissions trading scheme (ETS). The amount of carbon that companies can emit is capped, and each firm has its own allocation of carbon permits, which they trade freely. Ultimately, cutting carbon can yield financial rewards.

But the price of carbon has plummeted. In 2006 a tonne would fetch around £28. Now – thanks to the downturn, and a glut of permits – it's barely £6. That's bad for the environment: when it's cheap to pump out carbon there's less incentive for firms to go green. But it's also bad for the economy, because it makes Europe less attractive to low-carbon investment.

This is entirely, gargantually, completely, the wrong way around.

Now let's not start with whether climate change is happening or whether we ought to do anything about it. Assume both for the moment. The EU has plumped for cap and trade as the solution: leave aside whether this is better than a carbon tax for the moment (it isn't but leave that aside).

Concentrate instead purely on the role of the price of the permit in a cap and trade system.

A high permit price is a bad thing, a low permit price is a good thing. Because the permit price is not the thing that is limiting emissions: we're already limiting emissions by the cap we have put in place. The permit price is instead the information of how expensive it is to limit those emissions. A high permit price tells us that it's very expensive to limit them, that we've got to give up much more of our wealth in order to save Gaia. A low price tells us that it's actually easier than we thought to lower emissions, that we've got to expend less geld in order to stop the oceans boiling.

So, what do our two rulers do when presented with the evidence that dealing with climate change might be cheaper than we thought? Insist that it must be made more expensive, that if it isn't painful it isn't working.

Err, no lads, sorry, you need to go back to the Janet and John book on cap and trade systems. Let Spot the Dog explain to you that low prices are good. And it'll have to be J&J for obviously Ladybird is too advanced for you.

ISOS 2012

Next Wednesday (25th April) the ASI will be holding its next Independent Seminar for the Open Society (ISOS) in Westminster. The one-day conference is aimed at sixth-form students and undergraduates with an interest in politics and economics. Named for philosopher Karl Popper’s book ‘The Open Society and its Enemies’, ISOS explores the principles and practicalities of an open, free and tolerant society.

Political views are formed from an early age and it’s a sad fact that far too few people come across free market and classical liberal ideas during their formative years. However we at the ASI are pretty confident that classical liberal ideas are very appealing to young people because they emphasise individualism, peace and mutually beneficial exchange. ISOS is just part of our work to inspire young people with the ideas of liberty and free markets.

On Wednesday we will have Dr Tim Evans talking on the morality of markets and Dr Madsen Pirie giving a short talk, based on his ‘Economics is fun’ videos, on economics for real people. Chris Snowdon, author of our cigarette plain packaging report, will be lecturing on prohibition and its discontents and Tony Gilland will be talking on the right to be offensive. The day will finish with a debate between Jamie Whyte and Nic Marks on whether it is the role of government to make people happy.

There are still some places available for sixth formers and undergraduates so please email isos@old.adamsmith.org if you would like to attend. Full details on the conference are here: http://www.old.adamsmith.org/events

For those of you who don’t fall into that bracket, but are interested to find out more about our work with young people or interested to support our student work, do feel free to email us!