Nazis v the Bank of England

BBC News reported today that newly de-classified files from 1945 reveal that MI5 concluded that a Nazi counterfeit currency programme which increased the amount of British Pound notes in circulation by 10% during World War II had achieved the Nazi’s goal of “destroying confidence abroad in Bank of England notes”. 
By contrast, during the 3.5 years since September 2008, the Bank of England has increased the amount of British Pound notes in circulation by 28% and increased the total UK money supply by a factor of 3.34 times!  Has this also had the effect of “destroying confidence abroad in Bank of England notes”?  Well, the fact that the British Pound has lost almost 60% of its value relative to the price of gold since September 2008 might be a clue.

Beware workfare

Workfare — the policy of tying benefits to work programmes — has come under scrutiny this week as an unpaid position at Tesco was advertised in a workfare programme. The position was originally advertised as being permanent (which Tesco says was a human error), causing some to accuse Tesco of using "slave labour". Of course, this is silly hyperbole — real slaves didn't have a choice. But even so, I'm deeply sceptical about the concept of workfare. It strikes me as a tenth-best approach to welfare reform, and may even be worse than the status quo.

Government interventions in the market should aim to distort things as little as possible. Government is short-sighted, bad at handling information, and subject to incentives that rarely line up with those of the public at large. And workfare has the potential to be massively distortional. By requiring government officials to decide which jobs are worthwhile and which aren't, workfare acts as a form of central planning of the labour market.

It's extremely unlikely that governments know better than individuals what is best for those individuals. Yet workfare assumes exactly that. Assuming that people on benefits are too stupid to make decisions for themselves is a Victorian-style paternalism that also underlies the health fascism of minimum alcohol pricing and plain cigarette packaging laws.

The mistake behind workfare is to assume that everybody who is unemployed is idle. Yes, some are. But many are either looking for work, or reskilling to work in jobs that require new skills.

An example might be of a computer programmer who is an expert in the Java programming language. Suppose some new advancement means that her Java skills are no longer in demand on the market. A good path for her might be to teach herself a new language, to build on her existing skills and eventually find a new, skilled job. This would be vastly better for her and the rest of us than if she ended up working an unskilled job flipping burgers at McDonald's. But it is very possible that workfare would do the latter, failing to distinguish between our actively unemployed programmer, and the idle unemployed people it is aimed at.

Some of workfare's supporters point to provisions it makes for retraining, but this is naive and simplistic. Retraining is basically a form of individual entrepreneurship — trying to anticipate unfulfilled demand in the labour market and meet it with new services. It is a highly individualistic activity that is difficult to categorize and is contingent on each person's interests, skills and experience. The government can't direct it with any hope of success; when it tries to it will inevitably get things wrong. The overall effects may be that workfare pushes potentially skilled workers into unskilled jobs, and mangles the market signals that the unemployed would otherwise be responding to.

There's something deeply unpleasant about the government-corporate relationship that workfare is based on. Firms have to be approved by the government to qualify for the scheme, and as usual it's large, established businesses that can navigate (and maybe manipulate) the state's rules most effectively. Workfare isn't slavery, but I'm not happy with a system that predominantly supplies privileged businesses with artificially cheap labour, paid for by the state.

The empirical evidence isn't encouraging either. A 2008 report by the Department for Work and Pensions found that "there is little evidence that workfare increases the likelihood of finding work" (h/t Daniel Sage). Workfare's supporters point to Wisconsin's "Wisconsin Works" programme, which did reduce long-term unemployment when it was introduced in the 1990s. But, in the first big recession since its introduction, Wisconsin's unemployment rate has been roughly in line with the national average, and is unremarkable when compared with similar US states:

But there is a problem with long-term unemployment in Britain and, even if workfare won't help, the status quo isn't much better. No wonder unemployment is so bad — minimum wage laws effectively ban unskilled (read: low paid) jobs. That means that people cannot get on-the-job training and skills unless they take unpaid internships or work experience. The bizarre result of the minimum wage is that Tesco can hire people for £6.08 an hour, or £0.00 an hour, but nothing in between. Combined with the fact that working means you have to forgo benefits that may be worth more than your wage, it's hard to think of policies that could make long-term unemployment more attractive.

There is a solution that could appeal to a broad base of people and fix most of the broken incentives that unemployed people face:

1) Abolish the National Minimum Wage so that unskilled jobs can be created. This will allow more "first foot on the ladder" jobs to be created and give unskilled people a way out of unemployment.

2) Replace benefits with a tapering income subsidy, similar to the government's Universal Credit, which would supplement the incomes of people on low wages. This should be generous, to persuade some supporters of the minimum wage (who, wrongly, think that it creates some kind of minimum living standard for people) to accept abolition of the minimum wage.

3) Reduce the income subsidy over time — say, a year — so that the initial safety net provides security to people who have been recently made unemployed but does not allow for long-term dependency on welfare. 

Workfare is a misguided, statist attempt to fix a problem made by government. By adding even more planning and state control to people's lives, it will end up causing more problems than it solves. Unemployment can be addressed, but only by removing government barriers to work, not by adding on more layers of state involvement in people's lives.

The triumph of global capitalism

When she was young, Maria Vargas moved from the countryside in northern Brazil to Sacadura Cabral, a poor suburb (favela) of São Paolo. (Melo, 2002) She worked as a maid and in the textiles industry, but was injured and had to provide for herself and her seven children – one of whom died as a four-year-old – by sewing after the death of her husband.  Maria is only one of the many faces of poverty.But poverty is decreasing and the world is gradually becoming a better place to live in: health is improving, school enrolment is increasing and democracy is on the rise. Many people seem to be unaware of this fact. An important reason for the progress that is taking place is the fact that during the last decades of the 20th century, there was a movement towards liberalisation and globalisation almost everywhere.

A freer world economy

World trade has become considerably freer over time – the median global tariff rate has decreased from 26 percent to 9 percent since 1980. (Gwartney & Lawson, 2009) Today, 80 percent of developing countries’ exports to industrialized countries do not face any tariffs, up from 54 percent in 1998. (UN, 2010, p. 68) Government intervention in agriculture has become less pervasive. An obvious case is China, where agricultural output has increased considerably since liberalization. In other developing countries, the government has historically maintained a monopoly on the purchasing of agricultural produce or regulated food prices, typically as a way of supporting politically powerful urban residents at the expense of farmers. But around 1990, many countries implemented wide-ranging market reforms and abolished the monopolies. (Giuliano & Scalise, 2009, Swinnen et al., 2010) Government intervention in agriculture has declined also in rich countries and subsidies have become lower as a share of farmers’ income, but much remains to be done. (Primdahl & Swaffield, 2010, p. 162, The Economist, 2010)

Macroeconomic policy has improved significantly over the last few decades. Since 1980, the median inflation rate has fallen from 14 to 4 percent. Destructive manipulation of exchange rates of any significant degree is only taking place in three countries today, compared to 50 countries in 1980. During the same period, the number of countries with a top marginal income tax rate exceeding 50 percent shrank from 62 to 9. (Gwartney & Lawson, 2009) Direct government intervention has also decreased, as well as bureaucracy and red tape. The World Bank has documented 1,835 privatizations between 2000 and 2008 at a total value of $453 billion. (World Bank, 2010d) It has become easier to run a business in 153 countries over the last five years. The situation has worsened in only 20 countries. For example, three out of four countries have implemented reforms to make in easier to start a business and six out of ten countries have made it less troublesome to trade across borders. (World Bank, 2010c)

All the indicators of a well-functioning market economy mentioned above can be summarized by an index referred to as economic freedom. A network of think-tanks puts a number on economic freedom in the countries of the world each year. As figure 1 indicates, average economic freedom has increased by one and a half points on a scale of ten since 1980. 87 percent of world population reside in countries that have increased their economic freedom since they were first included in the index.

Figure 1. Population-weighted economic freedom in the world on a scale of ten. Source: Author’s calculations based on Gwartney & Lawson (2009)

Economic theory tells us that more economic freedom should result in faster economic development. Free trade allows countries to specialize in activities that they are good, low taxes give people an incentive to work and invest and private firms with profit motive have greater incentive to rationalize production than state-owned enterprises. This intuition is confirmed by the empirical evidence in figure 2, where GDP per capita in the countries of the world is plotted against economic freedom. Almost half of the variation in income is explained by economic freedom and the relationship is statistically significant. The experiences of similar countries that tried different economic systems – such as North Korea/South Korea, Dominican Republic/Cuba and Finland/Estonia – also imply that economic freedom fosters growth. (Paldam & Gundlach, 2008)

Figure 2. Association between economic freedom and income across countries. Source: Gwartney et al. (2010), Maddison (2010)

However, figure 2 does not prove the existence of a causal relationship between economic freedom and economic growth. In order to show such causality, more advanced statistical methods need to be utilized, also making use of the available historical data on economic freedom. An entire academic literature does exactly this, and the picture that emerges is clear: economic freedom is good for growth. It does not seem likely that there is reverse causality – growth causing higher economic freedom – as the increase in economic freedom precedes the increase in growth. (Berggren, 2003, Doucouliagos & Ulubasoglu, 2006, Justesen, 2008)

Rising incomes – and the poor benefit the most

Figure 3. World GDP per capita with a prognosis. Source: Maddison (2010), IMF (2011)

Figure 3 indicates that the increase in economic freedom has had an impact on growth of world GDP. Growth has been particularly strong since the turn of the millennium. The only decade that compares to the 00s – including the financial crisis – is the 60s post-war boom. But during that period growth was strong mostly because rich countries became richer and diverged from many poor countries. This time it is the poor countries that are growing the most. Asia and Africa grew faster in the 2000s than in the 1960s. For Europe and the Americas, the reverse is the case.

But the conventional way to compute world GDP growth may not give a fair picture of economic development for most people in the world as the rich countries dominate when average growth is calculated. (Collier, 2007) If the populations of the countries are used as weights rather than GDP, a different picture of average GDP growth emerges. Annual growth remained within the band 2.4–3 percent during every decade of the second half of the 20th century. During the 00s, growth was 4.3 percent. Never before have so many people experienced as fast economic development as during the first decade of the 21st century. (Author’s calculations based on Maddison, 2010)

This development has consequences for world income inequality. There are many different ways of calculating inequality, but a majority of the studies in this area conclude that the world Gini coefficient – the most common measure of inequality – fell during the 1990s and probably also during the 1980s. Within-country inequality has risen while between-country inequality has declined. And since the big inequalities in the world are between rich and poor countries, total inequality has decreased. (Anand & Segal, 2008)

Economic growth is by far the best way to fight poverty. The countries with the highest income growth are also the countries were the incomes of the poor grow the most. (Dollar & Kraay, 2002, Adams, 2004) Strong growth over the last three decades has lifted almost a billion people out of extreme poverty – when consumption falls short of a dollar per day, inflation adjusted. As a share of world population that represents a decline from 42 to 21 percent between 1981 and 2005. The World Bank predicts that poverty will continue to fall to 11 percent in 2020.

But even this might be understating the fall in poverty rates. Two economists in the United States claim that the household surveys used by the World Bank to estimate poverty are biased as the increase of consumption in the surveys is lower than the income increase implied by the national accounts. The reason could be that rich people are less able to recall everything they have consumed. The economists therefore estimate that poverty has declined by almost two thirds since 1981, rather than halved as the World Bank data suggests. (Pinkovskiy & Sala-i-Martin, 2009)

Figure 4. World extreme poverty and hunger. Sources: Chen & Ravallion (2010), World Bank (2010b), FAO (2010b)

Higher incomes allow people to purchase more and better food. Daily calorie intake rose from 2,200 per person in the 1960s to 2,800 in 2007. People consume 37 percent more fruit and 56 percent more vegetables today compared to twenty years ago. Protein intake has also increased – by ten grams per person and day since the 1980s. Contributing to this is the fact that meat consumption rose by a third and fish consumption by a fourth during the same period. (According to production statistics from FAO, 2010a) The share of people who get so few calories that they are classified as undernourished has halved since the 1970s, but undernourishment has not fallen by very much over the last two decades and increased temporarily in 2009 (see figure 4). Still, the undernourishment among children fell from 31 percent to 26 percent in developing countries between 1990 and 2008. (UN, 2010) Improved nutrition is an important explanation of the Flynn effect – the substantial increase of average IQ test scores over time. (Boix & Stokes, 2003)

Democracy is on the rise

Economic growth has positive effect also in the political arena; there is a clear association between economic development and democracy. Dictatorships are more likely to democratize the richer they are and democracies are less likely to collapse the richer they are.  There is an exception, however: if national income increases due to oil, the country becomes less democratic on average, not more. The oil curse, as this phenomenon is called, is probably caused by the concentration of power generated by oil money, giving politicians the opportunity to buy political support. (Ross, 2001, Asleksen, 2010)

Researchers have noted that countries that are richer than a certain level of income are almost guaranteed to be democracies. (Gilley, 2008) A look at the list of the countries with a GDP per capita exceeding 15,000 dollars confirms this. Of the 56 countries on this list, 45 are democracies. (IMF, 2011) Ten of the eleven nondemocracies are oil exporters. The only country that is neither a democracy nor an oil exporter is Singapore. An important test of this theory takes place in the late 2010s when China is likely to surpass 15,000 dollars.

Figure 5. Share of world population in democracies, nondemocracies and countries without data. Source: Author’s calculations based on CIDCM (2008)

Bearing in mind that the world has become considerably richer, it is not surprising that democracy is reaching an increasing number of countries. Figure 5 shows that a wave of democratization started in the 1980s.

More than half of world population now live in democracies. Some of the countries that were part of this wave of democratization are listed in table 1.

Table 1. Some of the countries that democratized over the last 30 years. Source: CIDCM (2008) and others

The human rights situation is also improving. During 2010, 23 countries carried out executions; during the 1990s, more than 30 countries performed executions each year. (Amnesty, 2011) The latest country to abolish capital punishment is Gabon. At the same time, the rights of sexual minorities are progressing. Since 2009, same-sex marriage has been introduced in Sweden, Iowa, Vermont, New Hampshire, Portugal, Iceland, Argentina and New York.

The rise in the number of democracies is a good thing in itself, but it can also have positive effects in other areas. It is now generally accepted that two democracies have never waged war against one another in world history. The possible exceptions to this empirical rule are marginal cases where it is disputed whether the countries involved were democracies or whether the conflict was in fact a war. (Russett, 1993, Ray, 1998, Wayman, 2002) Democratic regimes do not murder their own people, either. (Rummel, 2009) The reasons for the democratic peace may be that those in power are kept responsible by the public for costly wars, that governments who respect the rights of their own citizens also respect the rights of foreigners or that democracies perceive other democracies to be legitimate. (Doyle, 2005)

The progress of democracy is in all likelihood an important explanation of the declining frequency of war. Between 2002 and 2007, annual battle deaths are estimated to have been three per million people. That is a fall by 95 percent compared to the Cold War average. According to Harvard psychologist Steven Pinker, this is a part of a trend of declining violence that stretches over long time periods. (Pinker, 2007)

Figure 6. World battle deaths (conservative estimate). Source: HSRP (2010)

Better health for women, children and everybody else

The situation of women has improved dramatically over the last few decades. The proportion of women that marry before the age of 18 has decreased in most countries, as has the share that is forced to go through genital mutilation. Women’s own acceptance of men’s violence against their wives is also on the decline. (Unicef, 2011) In addition, women’s work outside the home is increasing. (UN, 2010, p. 22) The number of births attended by skilled personnel is rising and maternal mortality has decreased by over a third since 1990. The trend is similar for child mortality: since 1970, it has halved in Africa, declined by two thirds in India and by five sixths in China. Globally, child mortality has fallen by 57 percent.

Figure 7. World life expectancy. Source: World Bank (2011)

Life expectancy continues to increase – it is now 69 years. Life expectancy reaches record-high levels every year even in sub-Saharan Africa; it has increased by three years since 1990, despite the devastating impact of the aids epidemic on some countries. Most improvement has taken place in Asia, however: Indonesia has raised its life expectancy from 41 years to 71 years since 1960 and Vietnam has enjoyed an increase from 57 years to 75 years since 1980. (World Bank, 2011)

Increased chances of survival enable people to have fewer children, as parents face less uncertainty about whether their descendants will survive to adulthood and care for them during old age. Except for sub-Saharan Africa and a few other countries, the normal number of children is now one, two or three. The falling number of children causes world population growth, expressed in percent, to continue to fall – a trend that started in the 1960s. The UN predicts world population to increase at a decreasing rate during the 21st century, stabilizing around ten billion towards the end of the century. This is bad news for those of us who like people. However, it is good news for children that grow up in small families were parents can invest more in each child. (UN, 2011)

An important explanation of declining child mortality is progress in the struggle against malaria, a disease that mostly affects children in Africa. The proportion of African households who own an insecticide-treated bednet is estimated to have increased from 3 percent to 42 percent over ten years. During the same period, malaria deaths declined by a fifth. (WHO, 2010, p. 20 and 61) There is also progress in the fight against aids. The number of new infections is on decline since the mid-1990s and deaths peaked in 2006. (UN, 2010, p. 40)

The world is also becoming a safer place. During the years 2000–2010, there were 17 documented fatalities per million people per year in disasters such as droughts, epidemics, floods and earthquakes. That is less than any decade in the 20th century, despite the 2004 Indian Ocean tsunami and the 2010 Haiti earthquake. The death rate was 305 per million during the first half of the 20th century and 38 per million during the second half. (CRED, 2011)

Education, education, education

World literacy has been increasing for a long time (see figure 8). And the positive trend will continue: more than nine out of ten children attend elementary school in almost every part of the world. The only exception is sub-Saharan Africa, where 76 percent of children go to school. This is still an increase from 58 percent in 1999. Participation in tertiary education has increased by 50 percent over the same period. (World Bank, 2011) Children in developing countries are now educated for 10.4 years on average (up from 9.1 years in 1999) and children in developed countries are educated for 15.8 years (up from 15.2 in 1999). (World Bank, 2010a) Parallel to increasing school enrolment, child labour is declining. It is believed to have halved during the second half of the 20th century. The trend continues into the 2000s: the share of 5–14-year-olds who work fell from 16 percent in 2000 to 13 percent in 2008. (Basu, 1999, p. 1087, ILO, 2010, p. 8)

Figure 8. World literacy. Source: Unesco (2008)

The growth of cities is contributing to social progress. There are fewer malnourished children in cities than in rural areas in every region. The proportion of children not attending school is twice as high on the countryside as in urban areas. Male-female disparity in school enrolment is also lower in cities. (UN, 2010, p. 14) For these reasons, it is a fact to be welcomed that the share of world population who live in cities has climbed from a third in the 1960s to about half today. It is especially hopeful to note that African urbanization is progressing at high pace. (World Bank, 2011) In addition, fewer city dwellers reside in slum areas. A third of urban population in developing countries is classified as slum dwellers, down from 46 percent twenty years ago. (UN (2010), p. 64. A small part of the decrease is due to a change of definition.)

Urbanization is contributing to improved access to water. The proportion of people with access to safe water has increased from 77 percent to 87 percent since 1990. Two thirds of the increase consisted of expanding coverage of running water, while the remaining third consisted of protected wells and other improved water sources. A little more than half of world population now have running water in the home. During the same period, the share with access to improved sanitation facilities that prevent human contact with human excreta increased from 52 percent to 61 percent. (World Bank, 2011, WHO, 2006)

80 percent have a TV

The proportion of people with access to electricity in their homes has risen from 49 percent to 79 percent since 1970. (IEA, 2002, IEA, 2010) Four out of five households own a television, an increase from three out of four in 2003. There are 76 mobile subscriptions per 100 people. That is twice the number of five years ago. Three out of ten people are internet users – also twice the number of five years ago. People in developing countries already make up the majority of internet users and those regions are where most future growth will take place. (ITU, 2011a) Progress is helped by privatizations and increased competition. 126 countries have privatized their national telephone companies. The share of countries with a competitive market for information and communication services has increased from a third to two thirds over ten years. (ITU, 2011b)

A rising number of people have access to an automobile, expanding opportunities to recreation and commuting. There were 8 cars per 100 people in 1990. By 2005, the number had increased to 10. It is estimated that there will be 14 cars per 100 people in 2020. (Chamon et al., 2008) This trend will of course have an impact on the environment in general and on global warming in particular, but it should be noted that the concentration of carbon dioxide in the atmosphere increased from 300 ppm to 370 ppm during the 20th century. At the same time, the average temperature of Earth increased by 0.6 degrees and sea level rose by 20 centimetres. But the world became a better place from practically all points of view during this period. If fossil fuels had not been used, progress would probably not have been as fast. The costs of global warming must therefore be weighed against the cost of emission abatement, and simply pointing to environmental factors is not a legitimate argument against the thesis that the state of the world is improving dramatically over time.

Some environmental indicators deteriorate in a country’s initial industrialization phase but subsequently improve as the country becomes richer. During the last few years, methane and sulphur dioxide emissions, as well as per capita carbon dioxide and nitrogen oxides emissions, have declined in rich countries. It should therefore be expected that the environment of today’s poor countries will improve as incomes grow and people raise their valuation of the environment.

Some aspects of the environment are already improving on a global level, for example air quality. The concentration of particles in urban air fell by 42 percent between 1990 and 2008. Africa saw the largest decline. (World Bank, 2011) The concentration of CFC-11 – a Freon that contributes to ozone depletion – in the atmosphere peaked in 1994 and has decreased by seven percent since then. (WRI, 2007)

The meta-good news

Another positive trend is that more and more people seem to be aware of the fact that the state of the world is improving. The interest for global development issues has increased and most people appear to realize that economic growth and a market economy is the only way to achieve sustainable development. It was shown in an experiment that individuals who live in globalized countries or are in contact with foreigners cared more about people in other countries when asked about how a pool of resources should be distributed. Perhaps this is an explanation of the fact that the volume of non-governmental aid from the OECD to developing countries more than doubled between 2002 and 2009. (Buchan et al., 2009, OECD, 2011)

Migration is rising, especially with developed countries as the destination. This might be a result of more liberal policies – immigration to the United States has increased considerably since the 1965 immigration reform. Emigration often yields significant incomes when guest workers abroad remit money to family members back home. In 2009, migrant workers across the world sent home more than 400 billion dollars to their families. As a share of world GDP, this is twice the levels of the 1980s and 90s. (IOM, 2010)

In all likelihood, people’s standard of living will continue to improve. Life expectancy is believed to increase by three years between now and 2020. Extreme poverty is estimated to decline by six percentage points over the same period. This is possible because of continued economic growth. China, India, Indonesia, Vietnam, Ethiopia and Tanzania are among the countries expected to growth the most – all by more than five percent annually. (Inflation-adjusted GDP per capita growth according to IMF, 2011)

Maria Vargas has experienced most of the improvements of the last few decades. Brazil’s favelas now have running water and electricity and almost everyone has a television. All of Maria’s sons attend school and aim to proceed to university. They work when they do not study and have each bought a car. And in contrast to Maria, her children have grown up in a democracy. Maria’s life story is in many ways typical – she is one of billions of parents who know that their children will live a better life than they did.

This article was originally published as “Globaliseringens triumf” in Cooper, Eva (ed.), Globaliseringens triumf? (Stockholm: Timbro)


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Wayman, Frank W. (2002), ”Incidence of militarized disputes between liberal states, 1816–1992”, paper presented at the annual meeting of the International Studies Studies Association, New Orleans, 23–27 March

WHO (2006), Meeting the MDG drinking water and sanitation target: the urban and rural challenge of the decade (Geneva: WHO/Unicef) <>

WHO (2010), World Malaria Report 2010 (Geneva: WHO Press) <>

WRI (2007), “EarthTrends: Environmental Information” <>

The fallacy of Project Merlin

Project Merlin – the idea that the UK Treasury can centrally plan the amount of credit needed in the real economy – was a predestined failure.

Recent data released by the Bank of England was disappointing for the UK SMEs. The lending target fell short by £1bn, even though total lending did rise to overshoot its target by £25bn. The banks claim they did their job as required, while accusing the sluggish economic recovery and poor demand for credit from small businesses as the reason behind lower SME loans. On the other hand, SMEs blame high credit costs and unfavourable loan terms, calling for more competition between the banks to offer better products and lending models.

The reaction from both sides, the banks and the businesses, was as expected, proving once again the short-sightedness of politicians. Banks don’t want to loan to risky borrowers fearing new potential losses they are unwilling to accept. Businesses realize this and want more competition as the only possible way to lower the costs of credit.

However, with ideas such as credit targets the government is doing the opposite – it is undermining any possibility for more competition. When you set an artificial target applying to only the 5 largest banks, those banks will strive to meet the targets by increasing their dominance and taking a larger share of the market than usual. The result is that 5 biggest banks accounted for 90% of all SME lending last year. 

The end result of the target was political pressure on banks to increase lending, no matter how and to whom, meaning that the banks channelled funds not guided by commercial incentives or market signals, but by the bulk of funds needed to be deployed to satisfy the central authority. This resulted in a huge misappropriation of resources where money, instead of flowing to projects where it might generate new value and growth for the economy, is artificially drawn to various projects simply to fulfil the given target.

Besides, how is the government supposed to determine the threshold of credit big enough to start up the recovery? Even if such a threshold existed, a target to reach it means the government can only influence the supply of credit, not its demand, which is what the results have showed. In addition, having credit targets, whether achieved through bank lending or by the Treasury itself (via credit easing) the ultimate effect will be dependency on government transfers and credit flowing only to politically selected companies, instead of those who could actually use the funds to create value.

Targeting a mandatory level of spending, savings or credit always reminds me of the misguided EU policy on mandatory expenditures on R&D in the IT industry to 3% of the GDP for every EU member (this was a goal of the 2000 Lisbon Treaty for 2010). Not surprisingly many of the countries fell short of the 3% target, and have tried to artificially move closer to it, by dumping huge amounts of money into R&D only to satisfy the target. Needless to say this yielded poor results and almost no substantial technological innovation or progress (these results were evident before the crisis even started). R&D is proven to have positive effects on technological advancement and economic growth, but when it’s promoted by subsidies and investment interventions, the market gets distorted by receiving wrong signals of what is a good investment and what innovation is most likely to deliver growth.

One can go a step further and compare this sort of reasoning to the Soviet Union planned targets for its heavy industry. Both are based on the same principal; that politicians and bureaucrats believe they are better qualified than individual businesses to make decisions on how much money should be invested in a particular industry. Just as the Soviet Union and the EU planning failed to create a competitive and a dynamic economy, so has the Merlin Project in the UK. And this wasn’t a policy enforced by the EU – it was a product of domestic thinking.

You don’t solve a problem in the economy by pumping taxpayers’ money into banks, technology or manufacturing, you do it by enabling a fair and competitive environment where successful firms triumph, while unsuccessful and those unable to adapt are forced to closed down. There is nothing more fair than the system of meritocracy. In a market economy it is a travesty to have private sector decisions and strategies be guided by politics.

Thankfully, Merlin won’t be repeated this year, but Mr Osborne is instead negotiating a new £20bn loan guarantee scheme with the banks in order to support his credit easing policy. What he doesn’t realize is that although this may provide a temporary short-term relief, it will have deeper consequences by creating dependency of the businesses on government transfers. In addition, it is very difficult to make a temporary policy work effectively, particularly when future expectations may undermine its temporary desired effects. The problem is always what happens when the government ceases its lending scheme.

A decrease of regulatory constraints and taxes will level the playing field for all businesses, making sure that competition gives rise to successful and adaptable companies. A much better way than a stimulus in any form of ‘easing’, is to lower costs for the SMEs.

Finally, can someone tell me what type of economic policy requires huge spending and stimuli from the government to the real economy in times of crisis? Is it called austerity? 


The Armchair Economist on why more sex is safer sex

Steven Landsburg, better known as the Armchair Economist, is one of the closest things the economics world has to a rock star. His book was one of the first of the series of pop economics books like Freakonomics - and one of the best at that.

I'm delighted to say that he'll be speaking at the Adam Smith Institute next Monday, on his new book "More Sex is Safer Sex and Other Surprises From Economics". You can see the event details here — it's free and open to everyone, so do come along if you can. Please RSVP so we know you're coming, and let your friends know — they'll never forgive you if you don't!


Whatever happened to deregulation?

Older readers will recall two major initiatives for less regulation and deregulation.  In 2007 the EU created an “Action programme” to reduce the administrative burden of regulations by 25%.  In the event, they claimed to have reduced the €126bn p.a. by 31%.  Unfortunately they did not take into account the new regulations since 2006 and furthermore the 31%, even if correct, was not passed along to EU businesses.  UK businesses have certainly not seen any benefit from this EU Action programme.

The UK Regulatory Policy Committee (RPC), together with their opposite numbers in the Netherlands, Sweden and Germany, published a report in November 2011 welcoming the progress so far but noted that the EU Action programme was due to finish in 2012 and there were no signs of any follow up, or indeed any, action.

In the UK, the RPC reviewed the Impact Assessments (IAs) of 278 new regulations (no slowing down there) in the first half of 2011 and found that IAs were improving in quality in the sense that the 40% of  IAs “not fit for purpose” previously was down to 31%.  All that shows, of course, is that Whitehall is getting less bad at justifying new regulations.  The RPC has no power to slow regulation down, still less to reduce regulation.  All they can do is to criticise the process.

In previous publications, colleagues and I have shown that the responsibility lies with Parliament.  MPs have the power to block regulation and to deregulate.  They just do not use it.  They have been, in short, asleep at the wheel. The Commons European Scrutiny Committee in particular is tremendously busy shuffling EU paper but do nothing to ensure that new EU regulation is worthwhile.  Their latest annual report, published in January, pointed to four EU policy matters that they recommended for Parliamentary debate: Trans-European Networks: integrated EU infrastructures,  Safety of offshore oil and gas activities, Financial services: credit rating agencies and Economic governance.  All topics worthy of wider discussion, no doubt, but nothing the Commission would need to worry about.

The bottom line is that the Coalition has lost the regulatory fox.  The most extraordinary aspect of all this is that the Government has run short of new primary legislation to run through Parliament and MPs are complaining that they have little to do.  The NHS and welfare payments are attracting great attention, notably in the Lords, but there is not much happening in the Commons.

Maybe this would be a good opportunity to challenge new EU and UK regulations and to simplify the existing mountain of impediments to doing business.  If we are to get out of our economic difficulties, business, and especially small and medium enterprises need their help.

Can the GOP defend capitalism?

Of America’s two political parties, Republicans are viewed as the better friend of the market-place.  But these capitalist credentials have taken a beaten in the race to choose a candidate to challenge the Democrats for the White House.  Two recent events on the campaign trail epitomise GOP troubles.

The first sign of danger came in January when former Massachusetts governor Mitt Romney’s business career came under scrutiny, with former Speaker of the House Newt Gingrich (and Texas governor Rick Perry) calling into question Romney’s tenure at Bain Capital, a private equity and venture capital firm — which Perry characterised as ‘vulture capitalism’.  An independent Gingrich Super PAC exacerbated the issue with an incendiary video from which even the candidate distanced himself.

Facing outrage from the business community, Gingrich soon abandoned this avenue of attack to focus on Romney’s personal tax records in a South Carolina exchange.  A few days later in Tampa, Florida, Romney complicated matters with a populist appeal against Gingrich’s own zero capital gains tax policy, quipping that ‘under that plan, I’d have paid no taxes in the last two years.’

Romney mounted a belated counter-offensive in a CNBC interview with Lawrence Kudlow, but his on-the-stump sop on taxes deserves reproof:  For whereas the supply-demand, profit-loss principles of capitalism are easy to grasp, the obfuscation that underpins disingenuous ‘the rich should pay their fair share’ class warfare arguments need vigorous refutation.

Double taxation lies at the heart of the subterfuge, when a capital gains tax (15% maximum) is heaped upon wage incomes that already have been taxed (35% maximum) — an ant-grasshopper taxation policy where capital investors pay while capital consumers play.

Michael Tanner, a senior fellow at the Cato Institute, deconstructs President Obama’s so-called ‘Buffet rule’ (a 30% minimum tax on high earners):

Buffett makes most of his money from investment income (capital gains and interest), and he pays a capital-gains tax rate on that money. [...] However, the president’s narrative ignores the fact that Buffett’s income had already been taxed at the corporate level.  When the effect of both taxes is combined, the real effective tax rate is closer to 45 percent.  That is quite a high rate on an inherently risky activity — investing — that our tax code should encourage.

Dan Mitchell, another Cato senior fellow, further unravels the capital gains tax canard with an explanatory video and chart.

Romney committed a second own goal during a February interview on CNN, saying ‘I’m not concerned about the very poor; we have a safety net there.  If it needs repair, I’ll fix it’.  Again, Gingrich took the putative front runner to task, arguing that ‘I think what he said and the underlying part of that is very revealing.  I think we want to replace the safety net with a trampoline.  We want to have policies ... to help the poor become middle class, to help people get out of poverty.’

It was Texas Rep. Ron Paul, libertarian extraordinaire but long-shot nominee, who came to Romney’s defence in both instances.  With respect to Bain Capital, Paul said of Romney’s Republican critics:  ‘I think they’re wrong.  I think they’re totally misunderstanding the way the market works.  They are either just demagoguing or they don’t have the vaguest idea how the market works.’

And in relation to the poor, Paul defended Romney, saying that he didn’t believe that the governor was unconcerned about the poor, but that ‘I think the problem is he’s a victim of his own economic theories, rather than him being cold and heartless.’

What is shocking about these misguided economic smears is how the supposed defenders of free markets shape their vision according to the language of ‘social democracy’.  As Friedrich Hayek opined in The Intellectuals and Socialism, ‘That a particular measure tends to bring about greater equality has come to be regarded as so strong a recommendation that little else will be considered.’

But for Republicans, the issue is even more invidious, for in trying to counter the Democrats’ strongest electoral message — ‘social justice’ — they have ceded the field of first principles to their opponents:  ‘Since on each particular issue it is this one aspect on which those who guide opinion have a definite conviction, equality has determined social change even more strongly than its advocates intended,’ wrote Hayek. 

The overall picture is ominous: in most parts of the Western world even the most determined opponents of socialism derive from socialist sources their knowledge on most subjects on which they have no first-hand information.  With many of the more general preconceptions of socialist thought, the connection of their more practical proposals is by no means at once obvious; in consequence, many men who believe themselves to be determined opponents of that system of thought become in face effective spreaders of its ideas.

With the GOP’s championship of capitalist tenets not above reproach and with Democrats preparing to run on a platform of redistributionist measures, wealth creators are put on notice.

Though the true path to eradicating poverty lies in innovation, entrepreneurship, and capital accumulation, rich and poor alike will be sacrificed in the 2012 race for the White House to easy rhetorical platitudes and political opportunism.  Between the safety net or the trampoline, will voters be given a real choice?

What turns doctors into tyrants?

The British Medical Association has called for the government to ban all smoking in cars. This follows a similar call from the Royal College of Physicians a few years ago.

The British medical lobby has had an epiphany. Why should they have to worry about adapting to the shifting nature of Britain’s healthcare needs – which reeks of the unwelcome prospect of change – when they can instead simply demand that the government outlaw things that are making us ill?

Allowing people the freedom to do harmful things, and thus to contribute to ‘preventable death’ statistics, is anathema. I mean, if the entire nation were the prisoners of good doctors we would all live much longer.
That very phrase, ‘preventable death’, is symbolic of the problem. It reeks of a ‘something must be done!’ attitude towards people’s lifestyle choices that indicates a widespread disregard on the part of the medical authorities and much of the commentariat for the capacity of ordinary people to make their own decisions.

Of course, nobody will own up to this sort of old-fashioned, paternalist elitism. After all, progressives are meant to respect the working man and woman. Looking down on the ‘great unwashed’ and making moralistic judgements about them is what Tories are meant to do.

So instead, other reasons are found. Sometimes they are small and particular – for example, the car smoking ban is supposed to be about protecting children, even though advocates want to apply it to single drivers as well – and all this on the basis of an almost certainly apocryphal ’26 times the death’ statistic.

More often the reasons are big and sweeping, and none comes bigger than ‘cost to the NHS’. It’s pretty perverse: on the one hand, we insist that our social conscience will not permit anybody, for any reason, to fall beyond the safety net of the state; while on the other we try to claw back as much money as we can by stripping them of freedoms which may weigh heavily on our social treasury.

I’ve written at length about how a certain species of leftist will turn a safety net into a straightjacket and use the NHS as a highly effective basis for authoritarian government. Yet this is really just the logical outworking of the fact that the freedom-minded have almost totally lost the cultural battle about whether or not adult citizens of a country should be respected as such.

That’s the real battle. Important as the individual policy struggles for liberty are, they’ll continue to resemble endless rematches of Canute vs. the Tide unless public perceptions on personal liberty can be fundamentally shifted. Otherwise, each and every state-cutting measure will come with a ‘preventable death’ toll, and progressives will continue to paint liberty as murder-by-omission.


Snippets from a wacky world

“A spokesman for the Federation of Small Businesses, while hopeful that credit easing would cut the cost of lending, said that peer-to-peer forms of lending – where individuals lend directly to businesses – needed to be explored.” What’s to explore? Put a sign up in your shop window saying “Loan wanted – please form orderly queue.”

“The Institute for Fiscal Studies, the ultimate arbiter of what is and what isn't doable in the budget….”  Well, that’s settled then. Close down the OBR and retrain every economist in the land for a new trade.

“The Lords had opposed the so-called "spare bedroom" tax a fortnight ago, and on Tuesday reasserted that view by saying housing benefit cuts of £14 a week should not be imposed on claimants in under-occupied homes if they are unemployed, carers, foster carers, disabled or war widows.”  Former Canadian Prime Minister Trudeau once famously said “There’s no place for the state in the bedrooms of the nation.” Our ruling elite clearly disagrees. Prepare for midnight knocks on the door from the bedroom police.

“So why are Gove and his friends so keen on (for-profit schools)? Dogma is part of it. But privatisation has created interests which have driven policy in the teeth of the evidence for years.”  Unlike the teachers’ unions for the past several decades.

Economics is Fun, Part 7: Middlemen

Madsen's talking middlemen today — those wicked people who buy things for one price and then sell it to someone else for a higher price. But, it turns out, this is actually quite a useful function, both for the seller and the buyer. I remember back in school being taught about how middlemen were exploiting the poor, and if you didn't buy things directly from the seller you were exploiting them too. Even back then it didn't sound right, and I wish I'd had a video like this to explain why.

There are thirteen more videos to come in this series, and the whole lot can be viewed as they're posted in this playlist we've made. You can also subscribe to the Adam Smith Institute's Youtube account here to get notifications about this and other ASI videos as we post them.