Unfare Competition

It’s not really a huge surprise that Brussels, the home of EU bureaucracy, has recently banned ‘cab app’ service Uber from the city. The Brussels court unashamedly declared the company “unfair market competition” to the town’s two (yes, two...) taxi companies, and drivers face a €100,000 fine if they use the app to pick up customers. This isn’t a one-off, either; Uber’s had a bumpy ride from the start. Across the USA and Canada they’ve endured cease-and-desist letters, impounded cars, sting operations and suspended trading. Taxi drivers in Chicago are suing the city itself over them,  Berlin’s slapped on an injunction, and in France enraged taxi drivers are getting physical.

Uber hit London in Summer 2012. Given the range of ventures on the scene- Black cabs, mini cabs and fleets of Addison Lee, as well as apps like Kabee and Hailo – Uber’s operation should be uncontroversial. Not so. Instead, the Licensed Private Hire Car Association (LPCHA) has called upon TfL to ban cab app services for failing to conform to relevant legislation, citing , uninventively, public safety concerns.

Reading all of this Uber come across as renegade cowboys, tearing through cities kidnapping passengers. Reality is far more boring.

Uber’s critics deem them an unlicensed taxi company (or as per the Chicago lawsuit, an ‘unlawful transportation provider’), who blatantly violate regulations. In actual fact, Uber are a new kind of entity: an app-based, ‘logistical’ intermediary. They use GPS to connect passengers with self-employed (and in the UK, licensed) drivers, and handle payment through a registered card. Their trick is that in only ‘matching up’ independent drivers with riders, they don’t count as a taxi operator.

Additionally, in the UK private hire vehicles can’t ply for trade like registered taxis and must be booked in advance. It seems that a rider requesting a pickup through Uber counts as a booking, allowing a nearby driver to accept a request and be there in minutes. In these ways it does seem that Uber and other like it have thrown away the rulebook, but only because they’ve been ingenious enough to innovate around it. Uber’s model also brings other innovations too, such as price discrimination through ‘surge’ pricing, truly flexible work for drivers, and a highly responsive rating system of both drivers and passengers.

There’s no wonder that incumbent players are worried. But it’s sad, if not surprising, that anti-Uber sentiment comes not from governments angry at rulebreaking but businesses threatened by fresh thinking.

State intervention imposes huge costs and barriers to entry on the taxi industry (think of London cabbie’s ‘The Knowledge’, fixed taxi fares, and America, where taxi medallions have sold for over $1m) - scuppering competition and innovation. Reform of the industry with its often cozy cartels is long overdue.

Companies like Uber show other firms how they can improve their game. In fairness there is an argument for ‘leveling the playing field’; it’s not one actors want to use. When Uber works around (or even flouts) a jurisdiction’s regulation, other players can use Uber’s success as evidence that restrictions are superfluous to providing a good service, and therefore unfair on them.

Instead of demanding more relaxed regulation, however, incumbent actors have decided which side their bread is buttered, and would rather keep the status quo than improve their service. Instead of competing, they cling to the regulatory chains binding them and wail for others to be shackled by them too. They might cry the cry of public safety, but it’s the safety of their market share which they’re really concerned about.

Sadly, vested interests have had far too much success in this area. Where Uber hasn’t been banned completely, lawmakers have often caved in and introduced new restrictions. Frequently, this doesn’t stop protestors. And it isn’t just Uber who has such woes. Companies with similarly innovative models such as AirBnb and Aereo have also faced an uphill struggle of acceptance.

TfL should disregard LPCHA’s demands. It certainly isn’t up to the government to protect old industries and vested interests, but sadly so many other cities clamping down on Uber adds false weight to their claims. It’s beyond obvious that consumers, not regulators, and certainly not business rivals should be the judge of an effective (and safe) service. That said, the fact that cab app services are making so many competitors uncomfortable is a pretty good indicator that they’re doing something right.

We've said this before and no doubt we'll have to say it again

In the short term, if you want to alleviate hunger then the obvious thing to do is give the starving food to eat. If you want to stop people getting wet then give them that kagoule we've just mugged off the trainspotter at the end of the platform. And if people are poor, poverty being not having money, given them some money.

This is, obviously, not the long term solution to any of these problems: that good ol' mixture of capitalism and free markets is what has alleviated our own poverty, is what is alleviating it for billions more currently and will, estimated by the end of this century, abolish absolute poverty once and for all for our species. But as we know, the long and the short term are rather different: telling people to farm better does work but doesn't alleviate the immediate suffering of famine.

All of which leads to this interesting paper at Vox. Making a poiint that we've made here a number of times: whatever it is that you're trying to do do please make sure that you're doing it efficiently. That is, achieve your goal at the least possible cost. They're rather more worried about inequality than we are (we reserving our ammo for dealing with what we see as the real problem, absolute poverty, the solution to which see above) but they're making absolutely the same point about efficiency:

Other countries also have similar programmes that are sold as pro-equality but are inefficient or even harmful for that goal (IMF 2014a). In developing countries, measures that tax, subsidise, or price-regulate food and energy tend to be highly inefficient tools for improving the income distribution, and frequently even have the opposite effect. A disproportionately small share of social spending goes to the poorest 40% of the population (IMF 2014b). Of the $400-plus billion that countries spend on fossil fuel subsidies each year, far less than 20% of the benefits go to the poorest 20% of the population (International Energy Agency 2011). Conditional Cash Transfers, on the other hand, have proven highly effective – they reach the poor and promote education and health.

Don't try to rig markets, don't try to freeze or subsidise prices. If you want the poor to be able to consume more just give them money so that they can buy more.

This has domestic lessons for us in the UK as well. The much talked about idea of "predistribution" is exactly this. Attempting to cock up markets so as to gain a more pleasing distribution of consumption. It won't work for it's, by definition, cocking up markets. Redistribution is a more efficient method of achieving that consumption levelling goal. And if the nation has run out of appetite for more redistribution then, well, that's just tough, isn't it? As it does appear to have done...

Subsidy is not the way to export success

UK Chancellor of the Exchequer, George Osborne, says he wants to see more 'Made in Britain' stickers appearing around the world. So would I. But we have to create the right conditions for that to happen.

We certainly don't want 'Made in Britain' stickers to appear round the world only because we are subsidising our production. We tried that in the 1970s with shipbuilding, steelmaking and volume car manufacturing. It just loaded cost on taxpayers and created vast monopolies that grew inefficient because they faced no effective competition. But in fact, other emerging economies such as Korea could do all these things better and cheaper than we did.

Adam Smith pointed out 250 years ago that by means of glasshouses and hotbeds you can grow good grapes in Scotland, and make wine out of them – but at around 30 times what it costs to make wine in France. So we should stick with what we are better at than others – design, fashion, finance, tourism, education and luxury goods such as Scotch Whisky.

What we certainly should not be doing is subsidising industries such as renewable energy. If these are potentially money-making industries for the future (as the government say, to justify the subsidies), then private investors would be well ahead of any government investment bureaucracy, that is for sure.

Perhaps Mr Osborne is riled by the fact that Germany, even though its economy is flatlining, has expanded its exports to China, while the UK, even with its devalued pound, hasn't. But the solution to that is a proper growth agenda. Roll back the acres of regulation on employment and manufacturing, making it easier for people to hire workers and less risky to invest. Then stand back and watch the 'Made in Britain' stickers streaming out.

Once more we find Adam Smith was right

This should come as no surprise to us all for, as we all know, almost all of economics is either footnotes to Adam Smith or wrong. But we've nice evidence that once again he was right. That evidence comes from a study of entrepreneurs and what is necessary to allow, possibly encourage, them to succeed:

Indeed, entrepreneurialism is strongest in countries that share the English common law tradition – five times higher than those with a French legal origin. There is also a strong correlation between high rates of entrepreneurship in a country and low taxes. Equally, a low regulatory burden correlates strongly with high rates of entrepreneurship. On the other hand, those government and supranational programmes that politicians love to announce to encourage entrepreneurship – such as the EU’s Lisbon Strategy – tend to fail. The lesson is clear: to encourage innovation and entrepreneurialism, governments should do as little as possible, beyond cutting taxes and regulations.

It's always interesting to see people pointing to the Common Law as we're quite certain that it's one of the major beneficial attributes of our society. But leaving that aside this is remarkably similar to Smith's comment:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

One other point that the study makes: there's a very large difference between self-employment and entrepreneurialism. I, for example, when writing am self-employed but I am not an entprepreneur. When I am fossicking around for scandium I am both and when I find a nice large pile of it I will be employed by a company but still be an entrepreneur. and as the study notes the rates of the two things can often move in opposite directions. The rate of self-employment in Silicon Valley, the most entrepreneurial spot on hte planet, is actually half the self-employment rate for California as a whole.

Is Keynesianism finally dead?

Jamie Parker explains why Keynesianism has lost in the UK, and where macroeconomic policy may go from now. Little over a year ago now, and after yet another quarter of GDP flat-lining, the Coalition’s mandate for fiscal austerity looked increasingly fraught. As George Osborne sat in Whitehall reflecting on 2012, there was little to console him from the gloom and despair. In April, his ‘Pasty Tax’ Budget had been awash with disastrous U-turns and was overshadowed by a downgrading of Britain’s AAA rating. Not even the country’s gold medal haul in the Olympic Games could create the ‘feel good’ needed to dispel the dark clouds hanging over Britain.

When the Chancellor actually went on to blame the poor weather for dismal growth figures, one could not help but feel the argument for spending cuts was becoming a rather desperate one. For the duration of this period, at least, it seemed that the combined forces of economic stagnation and a public wary of further cuts had handed the initiative to Keynesian expansionists on the Labour front benches. Indeed, Ed Balls’ warnings against cutting “too fast and too far” and kicking the economy while it was flat on its back seemed to be gaining currency.

The picture we are presented with today is, for ministers in the Treasury anyway, undoubtedly a rosier one. And it is amazing just how quickly the initiative can change hands. For now it would appear, it is for those on the political left, the advocates of ‘Plan B’, to explain why, in spite of their predictions, the government is running down the deficit and at the same time the economy is achieving growth figures of 2.7%. Of course this is made little easier given how the alternative is playing out across the Channel. Hollande’s crippling ‘Robin Hood’ tax policy and fiscal expansionism, far from promoting growth and prosperity, has sent unemployment soaring and the country’s finest talent packing for London. The mantra of ‘tax and spend’ appears as unattractive an alternative as ever. Indeed, everywhere it is the advocates of fiscal expansion who are in retreat and ministers in the Treasury muttering ‘I told you so’.

For them, the events of the past 12 months have played out as well as they could have hoped. Recent data suggests that all sectors of the economy have been expanding rapidly and the Confederation of Business and Industry argue that growth has become “entrenched” here in Britain. This is supported by news that record numbers of people are in work, of which full time work is showing the greatest increases. Such overwhelmingly positive data, quick in succession, gives reason for optimism and is likely to put a smile back onto the Chancellor’s face. I suppose then the question going forward now is whether austerity has won out, is this recovery balanced and sustainable as the treasury would claim? And, what’s more, can we believe Ed Balls when he argues that the “three wasted years” of ‘damaging flat-lining’ were, as he would claim, suffered needlessly?

I think the first thing to concede, before supporters of the government get too excited, is that the economy is far from fixed. Of course, there are now clearly ‘green shoots’. The labour market, which has remained fairly robust throughout, seems to be showing signs of further strength – any week now the unemployment rate is likely to fall below that elusive 7% target the Bank of England is so interested in. This is supported by strong, slightly above trend growth figures, stable inflation and increased consumer confidence. However, it is also worth pausing and considering the risks that still threaten a sustainable recovery – I share Vince Cable’s “cautious optimism” about what we are seeing happening in the economy at the moment. There are the devil’s advocates who, rightly or wrongly, remain unsettled by the kind of recovery the country is experiencing.

The first concern relates to the notion of a ‘balanced’ recovery, something which arouses particular attention from economists. A return to growth in the long-neglected manufacturing sector is of course a welcome diversification away from the country’s decades-long reliance on financial services. However, the strong performance we are seeing in these industries is coming from a very low base and exports are still far from sufficient to eradicate, lesser still exceed, the nation’s hunger for imported goods. What this seems to suggest then, is that Britain’s economic success continues to rest precariously on an uneasy compromise between consumer spending, cheap credit and the City of London. These are, of course, vital elements of the economy. It is important that they continue to flourish. However, it is important mistakes of the past are not repeated. It would be wrong and foolish to lay all eggs in one basket only to see them all then break if something goes horribly wrong again, as it did in 2008. The easy solution now would be to let financial services and credit cards do all the hard work, and not accept that sustainable, long-term growth lies in business investment, productivity gains and competitiveness in our exporting industries.

Now that the demand-side of the economy is recovering, it is important to remain focused on the more intractable weaknesses in Britain’s ‘supply-side’. Successive governments have cowered from making firm commitments to invest in long-term capital spending projects. These are needed if the UK is serious about modernising and revitalising its infrastructure. If London is to remain a destination for business and investment, aviation capacity must be able to meet demand from China and the Middle East. If the North East and the Midlands are to share in the country’s wider prosperity, then they must be well-connected and receive investment to grow. Furthermore, schools and colleges must provide young people adequately with the skills and competencies they require to succeed in competitive, globalised labour markets. This may require a more rigorous reassessment of the subjects students take – orientating back towards more traditional disciplines, such as maths and science. With a competitive tax regime, a pool of skilled labour and modern infrastructure, Britain will be far better placed to address the gap in productivity which has emerged with her European competitors.

What’s more, these issues have become compounded within a wider criticism of the government over the ‘cost of living’, which is Labour’s new strapline now that the economy has returned to growth. Putting aside political point-scoring, hard-working people have been squeezed by rising utility bills, rail fares and commodity price fluctuations. All this in the context of stagnant, or even declining, real wages. The 2008 recession did enormous damage to the country. It would of course be wrong not to expect a pinch in the pocket as a result. However, what people seem to be asking, six years on, and at a time of public pay freezes and stagnating living standards, is why is it that bankers in Canary Wharf continue to enjoy such generous bonus packages while we, the innocent victims, pay the price? Prolific amongst alienated, working people is a sense that the taxpayer is carrying the burden of risk and private enterprises are enjoying the profit. The government may well stress the need for London to remain ‘competitive’ and ‘open to business.’  However, defending the questionable practices of the City is becoming more and more difficult. To many, we should be concerned more with issues of fairness and morality than merely with profit and greed.

This is not helped of course by alarmist fears that there is an asset bubble being reflated in the housing market. According to some commentators, the market is being fuelled artificially by the government’s ‘Help to buy’ scheme, accelerating foreign demand and severe supply constraints. While I think there is reason to be wary of the fragile nature of this recovery as it takes hold, media headlines warning of “double digit” rises in house prices do not tell the whole story. House prices have started to rise again, as we would expect. Indeed, in some places they have done so quite spectacularly. However, giving the impression of an ‘asset bubble’ or a ‘crisis of liquidity’ is unhelpful when we are talking about a phenomenon almost entirely exclusive to London. Furthermore, the construction sector has remained in the doll-drums for six years now. As private building firms return to more normal, pre-recession levels of investment, the supply of new housing will restore equilibrium in the market. It is comforting as well to see is that it is the Bank of England that is overseeing the ‘Help to buy’ scheme and not a defunct regulatory authority like the FSA. Perhaps, then, we are starting to learn some lessons from the past.

So how would the alternative to fiscal tightening have fared?

Counterfactuals are always dangerous because circumstances change and of course that impacts the decisions that would have been made anyway. That said, Ed Balls has admitted that a Labour government would have had to have made cuts. I suspect as well we would have seen more interventionist initiatives, such as jobs programmes, aimed particularly at young people. Taxation would likely have been more progressive – both on income and also possibly in the form of an inheritance or a banker’s tax. What’s more, the public applause for Ed Miliband’s Conference pledge to freeze energy prices tells a story. Laissez faire policies, which allow unregulated markets to do as they please, generate a climate of discontent. Energy prices have been steadily increasing for years now. In the meantime the ‘Big Four’, mostly foreign owned, energy companies have been making record year-on-year profits. The public want a fair solution and the Labour Party have offered one.

This is not necessarily to say that what they have suggesting is right, or indeed, feasible. From the opposition benches it is easy to criticise and offer hypotheticals. In reality, breaking up the energy market would be hard. The high fixed and sunk costs of production and distribution necessitate large scale operations. Moreover, freezing prices for a year may provide respite for squeezed households in the short term. However, if investment seizes up, what are the medium and long-term prospects for our, and future generations?

The core issue here is that the energy industry has become cartelised, with a few large firms able to maintain profit margins by exploiting their share of the market. The solution must address the cause, that there is a private monopoly in operation, and not the symptom, which is that prices are rising. Opening up the energy market to greater accountability and transparency would help to ensure that prices fairly reflect wholesale costs. It would also offer a more sustainable solution than a price freeze. As too would exploring and investing in alternative sources of energy. It is important that the government follow up on the findings recently published in the Wood Report, which lay out the prospects for North Sea Oil. They must also remain negotiable to the potential nuclear power and renewables offer. The energy problem faced by the UK is intractable, and ultimately requires a more considered, long-term solution than that which regulation can provide. This is not merely a case of fat cat directors at EDF and British Gas exploiting helpless consumers.

In reality, these concerns run deep into the ideological differences which separate the two major political parties. The Labour Party argues the need for greater government intervention to address structural weaknesses in the economy, such as youth unemployment. Of course, no-body wants to see large numbers of young people without the fulfilment and prospects work can provide them with. However, subsidising labour markets, when the national debt stands at 86% of GDP and is set to grow further still, is difficult to reconcile. Last month, a Shadow Treasury Minister conceded that Labour’s Job scheme could only be supported for one year after a student leaves school or college. In reality then, the only way to sustainably improve work prospects for young people is to channel resources into education and training. Forcing firms to take on school-leavers, who lack sometimes even the most basic skills and competencies, passes the buck unfairly from government to business. This will have either the effect of eroding competitiveness in the UK or will simply drive employers away to Europe and America.

Again, the causes and not the symptoms must be addressed.

The causes of youth unemployment lie in the inadequacy of the education system to provide young people with relevant and useful skills. This is what creates occupational immobility and bottlenecks in the labour market. Given that the government spends roughly £4000 per year per pupil in England, there is something inherently concerning in the fact that some young people are leaving secondary school still unable to read and write. That is a damning indictment, not of businesses and labour markets, but of schooling here in the UK.

The public’s enthusiasm for government intervention is quite often matched by an enthusiasm for redistributive taxes, particularly targeted at wealthy bankers and property-owners. Nick Clegg’s proposed Mansion Tax on millionaires carries a strong political message. Indeed, it ties in well with the party’s more organic vision - for a society built on the foundations of equality and fairness. However, taxes such as these must be considered within a wider perspective.  As I said before, one need only look at what is happening in France to realise the impact ‘Robin Hood’ scare taxes are likely to have on national wealth. What, on the surface appears to be a well-intentioned levy on the assets of the very rich may, by the law of unintended consequences, adversely affect the interests of the nation as a whole. Driving away wealth and talent to safe havens overseas is no way to encourage investment, employment and opportunities at home. Last year, Senior Liberal Democrat officials conceded that the party’s tax proposal would derive ‘in the grand scheme of things…relatively little revenue.’ Creating a political culture which is opposed to wealth creation and ambition is damaging for all. The key is to strike the balance between doing what is right, out of principle, and doing what is needed in practice, to make British people better off and more prosperous.

In many ways, presenting a false dichotomy between fiscal expansion and ‘austerity’ is unhelpful. An eclectic approach is needed here. On the one hand, this means rolling back the frontiers of the state where it has become bloated and bureaucratic. On the other, it means recognising that government has an immense capacity to restore the economy to more normal levels of output and demand.

More of Surrey is now under golf courses – about 2.65% – than has houses on it

We all know what's wrong with the British planning system: the British planning system. It won't allow anyone to build housing where people actually want to live and insists that housing can only be paced where no one does wish to be or, alternatively, in the middle of flood plains where they'll get swept away every few years. And this is why, as the man says, more of Surrey is under golf courses than is used for housing:

Cheshire lays into "supporters of urban containment policies who argue that Britain is a small island that we are in danger of concreting over", claiming it is a myth because green belts cover one and a half times as much land as all of England's towns and cities put together. "Moreover, there is little or no public access to green belt land except where there are viable rights of way," Cheshire says. "Green belts are a handsome subsidy to "horseyculture" and golf. Since our planning system prevents housing competing, land for golf courses stays very cheap. More of Surrey is now under golf courses – about 2.65% – than has houses on it."

He calculates that there is enough green belt land within Greater London – 32,500 hectares – to build 1.6m houses at average densities. "The only value of green belts is for those who own houses within them," Cheshire argues. "What green belts really seem to be is a very British form of discriminatory zoning, keeping the urban unwashed out of the home counties – and, of course, helping to turn houses into investment assets instead of places to live."

The answer is, of course, to blow up that planning system. We might, for example, simply say that all golf courses in Surrey now have planning permission for housing on them: that would mean doubling or more the land available for housing without losing even the slightest iota of farmland or wilderness. But a better idea would be to adopt our long written plan here at the ASI, Land Economy. In essence, simply state that low density housing may be plonked where people wish to live.

We're never, ever, going to solve the "housing crisis" without reforming the very thing that causes it, the planning system.

What really gripes my goat in the discussion of profits

Deborah Orr discusses why the breat cancer treatment she had was just fine but why a more expensive one that might save the lives of other women wouldn't be. And while my description of her argument might sound cruel and her argument itself might sound cruel she is in fact correct. Resources are limited and a cost benefit analysis has to be applied as to where and upon what they should be expended. However, there's one little point she makes that really gripes my goat:

But Roche seems pretty good at recouping them. It made a profit of 11.4bn Swiss francs (£7.7bn) last year. As its chairman, Franz B Humer, said in his 2013 letter to shareholders: "In a challenging, increasingly cost-sensitive environment, our focus on targeted medicines and diagnostic tests has allowed us to expand our strong market position and to significantly improve net income. In light of our strong performance, the board of directors is proposing – for the 27th consecutive year – an increase in dividend." It's worth bearing in mind, reading this, that a 2012 report called The Research and Development Cost of a New Medicine reckoned that, on average, only about 10% of the overall cost of developing a new drug is taken up by research and development. Much more is spent on attracting and servicing investors. Quite a bit is spent on PR.

It's that "attracting and servicing investors" part that so annoys. For this is exactly the same cost benefit analysis leading to the efficient deployment of resources that Ms. Orr is so praising. Hoffman La Roche employs some 80,000 people around the world and  has, if I've read their accounts correctly, some 40 billion Swiss francs in capital to back up their work. And we do need some system to try and decide how much of the accumulated wealth of the species is tied up in trying to create cancer drugs to save the lives of Ms. Orr and other unfortunates who lose that crap shoot with their health.

Please note that while we do have a mixed capitalist/market based system doing that allocation for us here the problem doesn't go away if we try to move to some other system. Perhaps worker based socialism where that 40 billion has to come from the pockets of the workers who work in the company, perhaps some planned system whereby taxes are raised to provide that capital. But however it's done we still need the cost benefit analysis to tell us that we're allocating that capital optimally. And we still need to pay the price too: by devoting 40 billion to the treatment of breast cancer we're not allowing it to be used to create vaccines, or for people to consume now, or on beer, or space rockets.

In fact, simply and purely the fact that capital is scarce means that we both have to calculate how best to use it and also pay the price for with holding it from other uses, whether we have a capitalist/free market economy or not.

Against the hypothecation of taxes

One of the sillier ideas floating around out there at present is that there should be a new hypothecated tax to pay for the NHS. The reason that this is a silly idea is that there's simply no connection whatsoever between what you can tax out of a particular activity and what we wish to spend upon some other particular activity. That is, hypothecation is itself a bad idea. Here's one demand for an NHS tax:

But a credible idea for preserving Labour's most enduring achievement in government is desperately needed. An earmarked health tax may be one whose time has come, and perhaps a model for financing other strained public services and modifying voters' resistance to taxation. Gordon Brown introduced a 1% national insurance health surcharge in his 2002 budget. The trickier question is how far the idea can be extended. Should all health spending come from specific revenue sources – the total proceeds of NI, say, or a general sales tax? Should something similar be done for education? Should older people's care bills be financed from an enhanced inheritance tax? Should corporation tax go to in-work benefits – which, in effect, subsidise inadequate wages?

Leave aside here that line about modifying voters' resistance to taxation. Concentrate just on this one point: that how we raise taxation, from what, is an entirely different question from how we wish to spend the money raised.

For example, we could posit a cigarette tax to cover the costs to the NHS and social security systems of smoking. Indeed people do. That smokers actually save the NHS and social security system money by dying earlier would mean that the correct tax would be a subsidy in this case. But leave that aside: we'll tax cigarettes their direct costs to the NHS and ignore the indirect savings. This would lead to a tax much lower than the one currently levied.

So, why do we tax fags so highly? Because demand for them is inelastic. We can load 200%, 300% taxes on smokers and people will still line up to buy the coffin nails. So, therefore, we tax cigarettes highly. And the same is true of booze, petrol and a host of other things. We tax them highly simply because we can. There are also any number of things that have very low elasticity of demand with respect to price and thus those things must be taxed lightly if we are to avoid too many distortions.

So what we can tax and how we can tax it depends on attributes of the thing that is being taxed.

Over on the spending side there is absolutely no connection whatsoever between what we can raise by taxing one specific thing according to its attributes and how much we want to spend on whatever other activity we're undertaking. What we can efficiently squeeze out of smokers has no connection whatsoever to the costsof the NHS, or the education system, nor even what we might want to spend on smoking cessation programs. For example, if the smoking rate either rises or falls, does this have any influence at all on how much we might want to spend on childhood vaccination?

No, it does not, there is no connection at all between these things, between how much we can raise from one specific tax and how much we want to spend on one particular activity. Therefore we shouldn't link one specific tax with one specific area of spending: that is, hypothecation is a bad idea.

Which leaves us back with Colbert's point. The art of taxation is to have the maximum plucking of the goose with the minimum hissing. The same statement as we should tax things with highly inelastic demand and not things with elastic such.

Another reason we really do want a carbon tax now

Have a look at this nonsense that is going on over Drax at the moment:

Drax is to legally challenge the Government's decision to exclude the power plant operator's plans to convert a coal-fired unit into one burning biomass from its latest round of funding. The decision to challenge the Government could set a precedent for other generators and overshadowed the approval of several new renewable energy projects on Wednesday. Drax had expected to receive the subsidy after the project to convert Unit 3 at its Drax station in North Yorkshire was shortlisted in December under the Government's new contracts-for-difference (CFD) scheme. However, the Government said on Wednesday that the scheme does not meet all its criteria for the enhanced CFD mechanism and urged Drax to continue with the project under the existing direct subsidy, sending shares in the company tumbling 11.7pc to 667p at midday.

The first point we should make is that it's actually fairly stupid to try to ship wood pellets 3,000 miles in order to avoid the burning of coal. There are reports out there insisting that this will lead to an increase in emissions, not a reduction. But leave that aside for a moment.

Assuming that we do sign on to the idea that climate change is a problem, one we need to do something about, it is exactly this sort of bureaucratic jockeying which makes the case for the carbon tax. Who is getting, or not getting, saubsidies, contracts for difference and all the rest is being determined by who is in favour politically. Whcih isn't what we want at all: we want simple and sustained economic pressure on people to reduce emissions. Which is exactly what a carbon tax does. It might put Drax out of business. It might encourage a move to biomass, or to continued coal burning with more efficient methods. But it becomes purely an efficiency argument as to which happens rather than a political one driven by whatever it is that is between Ed Davey's ears.

And what's actually worse is that we do now have a carbon tax. It's disguised as a minimum price for a carbon emissions permit but it has much the same effect as a carbon tax. Meaning that all of this bureaucratic nonsense has already been superceeded. Either burning coal at Drax, including that minimum price for a permit, makes sense or it doesn't: therefore it will happen or not.

All of which is intensely irritating of course. We now actually have that correct (if rather Heath Robinson) system to reduce emissions. Yet the politicians are still playing games as if they don't realise that they've already solved the problem.

How do we solve unemployment?

It appears that the correct method to reduce unemployment is to reduce unemployment benefits, increase in work benefits, abolish the minimum wage and insist that those unemployed take a job, any job, at any price.

After all, that's what Germany has done and the German unemployment rate fell dramatically as a result of doing just that. Scott Sumner has the detail:

So what's the real explanation for the German success? That's pretty obvious; the Hartz reforms of 2003 sharply reduced the incentive to not work, and sharply increased the incentive to take low wage jobs. As a result, today Germany has lots of very low wage jobs of the type that would be illegal in France or California. ....So the one major success story among developed countries has achieved its success by doing essentially the exact opposite of what progressives want. Germany has no minimum wage, reduced its incentives to live off welfare, and has a level of wage inequality that is increasing even faster than in the US. It's no wonder that progressives prefer to focus on things like "vocational training programs," which were just as common during the 30-year period of steadily rising German unemployment.

That's a fairly forthright explanation of what has been going on. And the real annoyance of that Progressive stand (what we over here might call Guardianista), that we must raise the wages of the lowly paid, not reduce them, that no one should be forced to work to gain benefits, is that you can derive the Hartz reforms from the work of Richard Layard. Indeed, even the timid attempts we do have to get people to work, any job at all at any price, even if the pay must be topped up with benefits, can be derived from Layard's work. For what he's actually saying is that long term unemployment puts people on the scrap heap. Thus there have to be sticks and carrots to drag them, screaming wildly if need be, back into the labour force.

Sumner is depressed at the way that the American left insists on counterproductive policies on unemployment. And we are here about the British left. If the market for low skill labour isn't clearing then that must mean that the price of low skilled labour is too high for the market to clear. If you're really worried about getting people into jobs you've therefore got to accept that wages will fall. If you then want to top them up with in work benefits then that's intellectually at least, just fine. But wibbling on about how the minimum wage must rise because inequality is just condemning ever more people to lives wasted on the dole.