The blunder that is France's Tobin Tax

I'm in City AM this morning writing about the new French Tobin Tax, something we're particularly interested in here at the ASI:

WHEN Napoleon Bonaparte’s regime executed an aristocrat on trumped-up charges of treason, stirring up bloody memories of the Revolution, his chief of police is said to have remarked that it was “worse than a crime; it was a blunder”.

The same could be said of this week’s introduction of a Tobin Tax in France. The measure imposes a 0.2 per cent tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading.

This is a form of the EU-wide Tobin Tax on all securities exchanges proposed by Nicholas Sarkozy last year. Though less disastrous than that would have been, the unintended consequences of this tax may leave President Francois Hollande wishing he had let these proposals die along with the Sarkozy government.

Read the whole thing.

The time bomb keeps ticking

Last Saturday’s Wall Street Journal (US edition) carried an essay by David Wessel, author of the forthcoming book, “Red Ink: Inside the High-Stakes Politics of the Federal Budget”. It provides an excellent breakdown of the budget crisis looming over the US federal government.

Perhaps the most striking fact contained in the essay is that 63 percent of the US federal budget is on auto-pilot: “Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds.” In technical jargon, this is non-discretionary spending – unless Congress actively stops it, such spending continues every year without the need for any further authorization. Throw in an ageing population and inexorably rising healthcare costs, and it becomes clear that such spending is only heading in one direction – skywards.

What is most worrying is that the US federal government currently only funds 66 percent of its spending through taxes. For the rest, it has to borrow. And while that may be bearable in the short-term, as nervous investors around the world pile into US Treasuries and push bond yields to record lows, it spells big trouble in the medium- to long-term. Every cent the government borrows now means more debt interest payments – and even more non-discretionary spending – in the future.

For an idea of just how bad it could get, take a look at this 2010 working paper from the Bank of International Settlements (BIS). Its projections indicate that without a policy shift, US public debt would rise to more than 400 percent of GDP by 2040. That would translate into annual debt interest payments equaling 23 percent of GDP – well in excess of total federal tax revenues, which have averaged a little over 18 percent of GDP since the Second World War. Such a scenario is plainly impossible: the US would be forced to default on its obligations long before things reached that point.

The policy implication here is straightforward enough: non-discretionary spending programs like Social Security, Medicare and Medicaid need urgent, drastic reform to put them on a more sustainable footing. The problem is politics: neither party is really serious about dealing with this fiscal time-bomb. Politicians’ electorally-driven time horizons are just too short to permit the sort of significant, structural changes that are required.  Perhaps a rise Treasury yields will force the issue. Maybe another showdown over the debt ceiling will do the trick. But I won’t be holding my breath. As Detlev Schlichter puts it, when it comes to debt, governments around the world are determined to “extend and pretend”.  Sadly, it is only a matter of time before reality catches up with them.

Tom Clougherty is managing editor at Reason Foundation, a libertarian think tank with offices in Los Angeles and Washington, DC. This article was originally published at reason.org.

New at AdamSmith.org: 'We built it together, Mr President, through the division of labour.’

Is Barack Obama right that entrepreneurs 'didn't build it' when they look at their own achievements? No, says Stephen MacLean - he should re-read his Adam Smith.

Friday the thirteenth wasn’t kind to Barack Obama.  In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world:  ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.

Obama privileges ‘corporate’ co-operation at the expense of individual achievement.  It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing.  No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’

Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy.  By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’  Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Commonwealth’ (which occasions opprobrium from contemporary libertarians).  Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected.

Read this article.

'We built it together, Mr President, through the division of labour.'

Friday the thirteenth wasn’t kind to Barack Obama.  In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world:  ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.

Obama privileges ‘corporate’ co-operation at the expense of individual achievement.  It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing.  No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’

Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy.  By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’  Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Commonwealth’ (which occasions opprobrium from contemporary libertarians).  Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected:

The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society (Ibid.).

Until singled out by Smith, the unheralded champion of the poor was the division of labour.  ‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour (I.i.1).’  We cannot ourselves fashion all the necessities which life requires (though Smith would prefer the term ‘wants’), but instead produce goods and services for which we excel and exchange them with others who have exploited their own particular aptitudes.  ‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy (IV.ii.11),’ noted Smith.

What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.  If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage (IV.ii.12).

By disparaging ‘outsourcing’ in favour of ‘insourcing’, President Obama is obviously not an apt student of the Kirkcaldy professor.Goods are not brought forward on the market because of altruistic motivations — nor by State diktat — but rather because the self-interest of one leads to well-being for another.  ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,’ Smith wrote.  ‘We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (I.ii.2).’

In addition, it is the surplus product from the division of labour which serves to propel production models forward, in financing labour-saving devices or investing in innovative methods that may revolutionise current production or lead to the development of entirely new products:  ‘It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people (I.i.10).’

Burdensome taxes which exceed those necessary for Smith’s ‘certain publick works and institutions’ reduce this surplus, and redirect it to schemes for redistribution and social justice.  ‘The stateman, who should attempt to direct private people in what manner they ought to employ their capitals,’ Smith warned, ‘would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever (IV.ii.10)’.

Moreover, this meddling from on high defeats the purpose of helping those who are low, for surplus is the answer for alleviating poverty, for which, writes Eamonn Butler, ‘Smith asserts is an essential condition for economic progress’:

The creation of surpluses makes exchange and specialisation possible.  This specialisation helps build even greater surpluses, which in turn can be reinvested in new, dedicated, labour-saving equipment.  It is a virtuous circle.  Thanks to this growth of capital, prosperity becomes an expanding pie:  one person (or one nation) does not have to become poorer in order for another to become richer.  On the contrary, as wealth expands, the whole nation becomes richer [see II.3-4].

When abused on behalf of the clientele of the Welfare State, however, this circle becomes vicious.  ‘Such people, as they themselves produce nothing, are all maintained by the produce of other men’s labour,’ Smith observed.

Those unproductive hands, who should be maintained by a part only of the spare revenue of the people, may consume so great a share of their whole revenue, and thereby oblige so great a number to encroach upon their capitals, upon the funds destined for the maintenance of productive labour, that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment (II.iii.30).

Having blundered on the big questions, it’s no wonder that Obama caricatured Republican policies based on free-market principles as merely ‘They’ve got the tax cuts for the high end, and they’ve got rollback regulation.’

Writing against the mercantilists and cronyism of his time, Smith argued that government’s principal function was to establish a system of necessary laws and to allow the marketplace free reign.  ‘All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord,’ he advised.  ‘Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men (IV.ix.51).’

Smith would hardly be surprised that politicians continue to distort economic policy for partisan gain; ‘They are themselves always, and without any exception, the greatest spendthrifts in the society (II.iii.36).’  President Obama’s policy of high taxation on the real job creators, to fund his spurious job creator — the State — is a well-worn political trick.  Fortunately, defenders of liberty have as a foil their well-thumbed copies of The Wealth of Nations.

Summary

You didn't build it? What would Adam Smith say, asks Stephen MacLean.

One hundred years of Milton Friedman

As former Federal Reserve Chairman Alan Greenspan put it: "There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people."

He was talking about Milton Friedman, Nobel-winning economist, libertarian policy advocate, great communicator and author of the Free to Choose book and TV series – born on this day, exactly a century ago, to Hungarian Jewish immigrant parents in Brooklyn, New York.

And Greenspan was right. For most of Friedman's professional career, from the 1930s to the 1980s, the world was dominated by government planning, economic management and control. But at last a new approach came to dominate – Friedman's approach of free markets, open trade, personal liberty and capitalism. And these things are now part of the everyday life of billions of the world's citizens.

When the Berlin Wall fell, tiny Estonia took Friedman's ideas wholesale – and reversed 1,000% inflation, a 30% drop in the economy and 35% unemployment as a result, becoming the 'Baltic Tiger'. Its young prime minister, Mart Laar, explained that Free to Choose was about the only Western economics book he could get his hands on in the Soviet times, and he did not have, as the West had, hordes of mainstream economists around to gainsay it.

After Mao's death, China opened up to Friedman's economic thinking too. The reformist Deng Xiaoping invited him to lecture there on the use of market mechanisms. Today, China's adoption of market principles is improving the lives of hundreds of millions of its citizens. India too, after decades of socialist failure, liberalised its economy in 1991, ending price controls, cutting taxes, scrapping regulations and abolishing public monopolies. Again, hundreds of millions there now enjoy rising literacy, life expectancy, and economic prospects. The people of India and China may not realize it, commented Nobel economist Gary Becker, but “the person they are most indebted to for the improvement of their situation is Milton Friedman.”

In South America too, Friedman's influence can be seen in Chile. Though he was no supporter of the dictator Augusto Pinochet, young economists who had learned under him at the University of Chicago came to dominate Chile's economic policy during those years. They cut import tariffs, replaced the ailing state pension system with one based on personal accounts, privatized farms, stabilized the currency and liberalised the financial sector. Chile became Latin America's most successful, open and competitive economy.

Ever the optimist, Friedman was confident that his ideas would, in the end, win – as they did. But for decades he was in a very small minority. From the New Deal, through the Keynesian intervention, exchange controls, nationalization and planning of the postwar years, most Western economists and politicians simply assumed that government economic management was both essential and inevitable. Meanwhile, the Soviet Union dominated Eastern Europe and exported international socialism to Asia, Africa and Latin America. It often seemed hopeless to resist. But Friedman relished the argument, winning over even his sternest opponents with his cheerful, commonsense, optimistic approach. A naturally brilliant teacher and communicator, he spoke to the wider public in his popular books, magazine columns and interviews, and of course through his hugely influential Free to Choose TV series.

Friedman addressed all the great public issues of the day – the importance of sound money, the damage done by trade barriers, the baleful effect of regulation, the folly of wage and price controls, the need for competition in the provision of education, the benefits of flat taxes, the poverty of state pension systems, the advantages of a negative income tax, and how the greatest harm done by drugs is the result of their being illegal.

He became, in fact, the world's leading exponent of personal and economic freedom – ideas that were once scorned and dismissed, but which now shape the lives of billions. Milton Friedman was the economist who changed everything.

Eamonn Butler is author of Milton Friedman: A Concise Guide.

I, Smartphone

Behold the Dartford Olympics

Hopefully, David Cameron’s summer vacation takes him over the Dartford Crossing over the Thames River downstream from London. With luck, the toll queue on the Queen Elizabeth II Bridge will let the Prime Minister take in the stunning views in all directions - the panorama will instil more pride in the nation and inspiration for new policies than the opening ceremony of the Olympic Games.

That ceremony might have encouraged Mr Cameron to return us to a rural idyll that never was, to imprison all wealth-generating industrialists, to beatify the NHS as the country’s official religion and to ban all culture except pop. The Dartford Crossing, though, is the real-world antidote to that view of Britain and suggests some good ideas to restore the economic growth needed to pay for the flights of fancy on show at the Olympic Stadium.

Start with the sheer volume of traffic that is utterly breath-taking – thousands upon thousands of cars, vans and trucks streaming across in both directions heading to all points of the compass. Mr Cameron should take pride in the fact that the majority of the world’s major carmakers – Ford, General Motors, Toyota, Honda, Nissan, BMW, Tata - continue to  make their cars in this land and that those cars are good enough to export anywhere. And he should be proud that so many of the lorries are registered in lands as far away as Turkey, hauling goods to and from every nook and cranny of the nation.

However, Mr Cameron should also recognize that Britain’s roads are far more critical to the economy’s health than any prestige rail projects like the high speed link from London to Birmingham and Manchester. A crowded Britain will live or die by an efficient road network where the vast majority of economic traffic isn’t between the centres of big cities. Road infrastructure offers many opportunities for creative thinking - privatisation of major trunk routes, tolls and road pricing where the money stays within the industry for consistent upkeep, modernisation, expansion and even dismantling as required by a dynamically changing economy. Handle this right and little taxpayer funding will be required.

Mr Cameron should also recognize that Britain’s historic economic success is so clearly underscored by those foreign-registered lorries – foreign trade. At every summit, at every meeting with every foreign dignitary, at every trade show on every continent, Mr Cameron must shout out the virtues of trade, starting with the EU’s own reluctance to implement the directive on free trade in services. Conveniently, such evangelism doesn’t need any additional taxpayer funding.

Just upstream from the Dartford Crossing is the sprawling Littlebrook Power Station and another testament to Britain’s strengths and weaknesses. The nation has a proud history of energy innovation and development with its skills in the field exported around the world. Littlebrook is oil-fired, though, and incessant dithering about long-term energy supply is bordering on the criminal. So let’s cut through the crap and dash for gas to exploit the nation’s skills, significantly reduce if not eliminate carbon emissions and secure energy supplies for the foreseeable future. It’s another opportunity to enhance growth prospects without hitting up taxpayers.

Downstream from the Dartford Crossing is the Thames Estuary, the proposed dream site of a new futuristic airport for London and there’s no escaping the need for more airport capacity in the southeast if Britain has any intention of sustaining economic growth in the decades ahead. An airport in the Estuary would be a huge challenge but Britain’s engineering industry is second to none in the world. The country’s problem isn’t building things – it’s being unable to decide to build anything. So, Mr Cameron, push the button for this airport if you want a real legacy, especially if you can finally get Whitehall to negotiate proper public-private financing initiatives.

Let’s hope the Olympics opening ceremony was the last hurrah of New Labour’s delusions and that Mr Cameron can recognise it as such. For a sense of the real world, he should spend £1.50 for the adrenalin rush of the Dartford Crossing.

What is it with these people and trade?

So some swarthy foreigner sidles up to you and offers a deal on something you desire. A very good deal, real cheap. Clearly the correct response is to take the deal: you're getting what you want cheaper than you can elsewhere and are thus being made richer. If this swarth foreigner was an agent of the Sultan of Constantinople and was being subsidised by hte Sultan in order to create work for his subjects to do: the answer is still the same. Take the deal for it is a deal. Your own resources have been increased and you are richer.

Your delight at being offered such an opportunity would be even greater if it was being offered on something that you just must have. Imagine, for example, that the oceans would boil and Flipper be left floundering on a desolate shore if you did not immediately install solar PV in order to generate the electricity you need (need note) to be able to watch a Simon Cowell program for the opportunity to sneer. One would, and one would expect our politicians to agree, take such an offer in an instant and be very happy with it. So what's happening here?

Solarworld AG (SWV), Germany’s biggest solar-panel maker, led a group of manufacturers asking the European Commission to investigate whether Chinese competitors dumped their products on the region’s market.

The so-called EU ProSun group filed the anti-dumping complaint in Brussels after a similar request in the U.S. resulted in duties on solar imports from China. The group has 25 members including companies from Italy and Spain, and Germany’s Sovello GmbH, EU ProSun President Milan Nitzschke said today.

“A majority of the European solar industry backs the complaint,” Nitzschke said by e-mail. “Chinese companies are offering their products below manufacturing costs despite their own massive losses.”

Strangely, I was in the Solarworld offices a few weeks back but I didn't need to be in order to work out what is happening here.

As Adam Smith pointed out the purpose of all production is consumption. We the consumers desire cheaper solar panels and if we're to get them by bankrupting Solarworld and sucking subsidies out of the Chinese taxpayer then that's all well and good. We're better off and the Chinese government is foolish for gouging its own citizens to make us so.

What is going on here is that trade policy is being made to suit the interests of the producers, not the consumers: and that ain't the point of it at all. The correct response to this "suit" is to reject it with the words "Tough luck Sonny". The aim and point of trade policy is to improve the life of the consumer, yea even if that means accepting foreign subsidies.

That it won't work out this way we also know but then that's what's so wrong with the trade policy we have. In fact, that's what's so wrong with any trade policy other than unilateral free trade: we're trying to make life better for you and me and all who want to buy things, not the producers of anything at all.

The glory of this mechanisation thing

One of the things that people often miss (or at the very least, underappreciate) is how the mechanisation of daily tasks in the past century has made us both hugely richer and also increased our leisure time. Further, it's less the mechanisation of industrial tasks that has done so: the mechanisation of the household has probably had more to do with it than anything else. In one of the few things that he's observably got right even Ha Joon Chang has cottoned on to this. That possibly the greatest labour saving device, the greatest contribution to female emancipation, has been the domestic washing machine.

Now, the thing is that these machines do depend upon the basic infrastructure of our society. Electricity, piped water and so on. They're also, while incredibly cheap for the time they free up, expensive for people in the poorer parts of the world. Which is where this little invention comes in:

"The GiraDora is a blue bucket that conceals a spinning mechanism that washes clothes and then partially dries them. It’s operated by a foot pedal, while the user sits on the lid to stabilize the rapidly churning contents. Sitting alleviates lower-back pain associated with hand-washing clothes, and frees up the washer to pursue other tasks. It’s portable, so it can be placed nearby a water source, or even inside on a rainy day."

The freeing of the distaff side from the monotony of hand washing clothes is quite possibly an even greater contribution to human utility than the concurrent freeing of men from those boring and repetitive tasks in a pin factory. Mechanisation of such routine tasks leads to the ability to do something more interesting and more remunerative with ones' time.

New at AdamSmith.org: These Olympic Games are nothing to be proud of

The London 2012 Olympic Games have been a triumph of wastefulness, nannying government, corporatism, deceit and incompetence. Our writer Lawsmith asks, how could our political class have gotten it so wrong?

The first and only time I've met Boris Johnson was when we were on our bicycles at the traffic light at the bottom of King William Street in the City. I stammered: "Uh, good morning, Mr. Mayor." Play it cool. After a brief (and awkward) exchange, he pushed off, away from my sight and into eternity.

Months later, as the tangible effects of the Olympic Movement's month-long occupation of central London started to make themselves felt, my thoughts once again turned to my cycling buddy. After reminding yourself for a moment that Boris once gave some constructive criticism to the city of Portsmouth by saying it was "too full of drugs, obesity, underachievement and Labour MPs," and that barely two months ago he referred to the BBC – which, like that brainchild of the Blairite Labour Party, the 2012 Olympics, is state-run – as “corporatist, defeatist, anti-business, Europhile and… overwhelmingly biased to the Left”, I take the view that BoJo -- currently the Games' biggest cheerleader -- would be doing one thing, and one thing only if he were in opposition (if he were so inclined).

He would tear the government, the media, and anyone even remotely associated with bringing the Olympics here to shreds.

In his absence, others have tried. Most have failed to make a dent. Dominic Lawson, writing for the Independent, fired the opening salvo of reason against Olympics fever last month — writing a fairly broad-brush piece which covered most of the general criticisms of this circus (cost, inconvenience, armed police), he scored his best points at the ‘leftist’ BBC's expense: "[news coverage of the Games] really does make one feel as if this is North Korea,” he wrote, “rather than a country supposedly characterised by individualism and nonconformity."

Read this article.