The cost of the benefit cap



The BBC has an article today that shows the harm that the benefit cap would do to an average family on benefits. The graph, above, summarizes their income and expenditures.

It's distressing enough that Ray, the father of the family, can say "The market for my skills dried up 10 years ago - there's a total lack of work in my area of expertise [educational software writing]". In that ten years, has he tried doing something else? He also says, "I see eight people here having to choose between eating or heating." Grim stuff, but is this true?

£82.40 a week is no small sum, but look closely at what those expenditures include: Sky TV, 24 cans of lager, 200 cigarettes and a large pouch of tobacco. Frankly, I find it unbelievable that a family of eight could spend £240 a week on groceries without being able to cut down, but let's leave food expenditures aside, along with the nebulous categories like "entertainment" and "shows". Here are the weekly costs of just this family's luxuries:

Sky TV - £15

24 cans of lager - £20

200 cigarettes - £70

Large pouch of tobacco - £12

Total - £117

If they're choosing between "eating or heating" without thinking about cutting the above expenses, well, OK. Some people have unusual priorities, and good luck to them. I'm in favour of as many people as possible who want to smoke doing so, if only to annoy the health fascists at ASH and the BMA. But that's not something taxpayers should be paying for.

Join the Next Generation

In Facebook's drive to annoy its users to the point of madness, our The Next Generation (TNG) group for under-30s (this is quite a strict rule, I'm afraid) has been archived so it's no longer useful. Our Next Generation events are hugely popular monthly events for under-30s with a short speech by a person of interest and an informal reception afterwards. If you'd like to subscribe to our Next Generation emails and come along to future TNG events, please enter your email address in this form.

You should also like us on Facebook — much as we'd love to leave Facebook behind, it has its uses.

Our next TNG is being held on Tuesday 7th Feb with Nick Pickles, Director of Big Brother Watch. Details here.

What is private equity for?

Following his landslide win in the Florida primary election last night, it now seems certain that Mitt Romney will be the Republican party's presidential nominee. Romney will be the first presidential candidate to have spent most of his career in the financial sector, specifically private equity, a sector many view with suspicion and fear. Romney's opponents have made much of the fact that he succeeded at his job by "firing people". Although I'm not much of a Romney fan, this is a slur caused mainly by the confusion surrounding private equity.

Writing in the National Review, Reihan Salam has a great piece on what private equity is and why firms like Romney's Bain Capital are so important to modern economies:

Successful firms such as Apple change the larger competitive landscape by threatening the very survival of competitors. Chad Syverson, an economist at the University of Chicago’s Booth School of Business, found that what separates top firms from bottom firms is, typically, a large difference in productivity, with the top ones producing almost twice as much with the same measured input. This creates an almost irresistible temptation for investors. If Firm X, languishing at the 10th percentile in terms of productivity, could somehow be overhauled to match the productivity levels achieved by Firm A, at the 90th percentile, the potential for profit would be huge. Note, however, that halving “measured input” in order to double productivity will often mean shedding the weakest performers and giving those who remain the tools they need to do their jobs better and faster. Private equity does exactly this.

What Mitt Romney discovered was that American corporations sometimes had to be dragged, wailing and whining, into a state of efficiency. As a management consultant at Bain & Company, Romney had studied successful firms and then told other firms how to replicate their strategies. But those firms had come of age in the fat years of American corporate dominance, when many believed that the Japanese could do little more than manufacture cheap toys and textiles, and many were reluctant to accept his newfangled advice. . . .

The typical pattern, at Bain and at other private-equity firms like it, was to buy a company by spending some portion of their capital (augmented by debt — usually somewhere between 60 to 90 percent of the total purchase price). They would then offer supercharged incentives for top managers, both among the investment professionals at the private-equity firm itself and at the firms they acquired. CEOs of newly acquired firms would be enticed with stock options and performance incentives. When the system worked, as it often did, CEOs started making sums that were unheard of in the 1960s.

We can trace the enormous increase in compensation among top earners to this embrace of performance-based compensation among the CEOs of privately held firms. This relation between huge paydays and the work of private equity is one of many reasons the field is so controversial. Equally controversial is the use of debt. Having bought a company with borrowed money, private-equity firms had to extract the mortgage payments, as it were, out of the company’s cash flow. This was a new expense for management, and it was also a source of discipline: If you couldn’t make the payments, you’d kiss your performance incentives goodbye, and you might even end up going bust. But loading up a company with debt could also hasten its demise, especially if management failed to cut costs.

When people like Ed Miliband talk about "predator capitalism" and "asset strippers", this is usually the sort of thing they have in mind. And, in Ed's case at least, they're usually utterly, desperately uninformed about what they're talking about. Private equity is, essentially, management outsourcing. Anybody who understands how markets work will realize that a successful streamlining of a company saves it from eventual extinction. Bringing in new ideas and new structures to a company is often rough on the workers, but in the long run it's what preserves the jobs they have. As Salam says: 

Private-equity firms have taken the process of turning around failing businesses and made it into an industrial process. The hostile reaction to this industrialization of corporate cost-cutting evokes the revolt of the Luddites, the 19th-century textile artisans who sabotaged the mechanical looms that threatened their familiar way of life. These artisans had no objection to buying and selling textiles — that was how they made their living. Rather, they objected to the scale of the new factories, their speed, and the rate at which they were displacing skilled workers. The balance of power had shifted from a few skilled artisans to the owners of capital and the managers of the new factories, who could now draw upon a much larger labor pool. Management is no longer the work of artisans. Just as the young consultants at Bain & Company hoped, it has evolved into a rigorous, unsentimental, data-driven enterprise dominated by sophisticated investment professionals.

The only downside? The more sophisticated an industrial process becomes, the more opaque it is to outsiders; the more opaque something that might threaten your job is, the louder the cries that "something must be done".


Fiscal and economic stability in the eurozone

Every day the news is filled with increasingly depressing news about the economy. The recent Autumn Statement (29 November 2011) to the House of Commons by UK Chancellor of the Exchequer, George Osborne, confirmed that the cause of a potential “double dip” recession in the British economy lay largely at the doors of the European Union and, in particular, the eurozone. It is easy to understand why some commentators feel that perhaps the European single currency is in its death-throes, and that the European Union itself needs major structural revisions. But for the sake of perspective it is important to remember the underlying rationale behind the “European project” which remains as relevant today as it did in the 1950s.

The origins of the EU lie with the formation of the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), which were formed in 1958 by Belgium, France, West Germany, Italy, Luxembourg and the Netherlands. The primary rationale at the time was to find a way to put behind the enmity that had led to two World Wars being fought primarily on European soil during the twentieth century. It was believed that when nations trade freely with one another they are less likely to engage in hostilities (in addition to the potential economic benefits as outlined in Ricardo’s Principle of Comparative Advantage). Seen from this perspective the EU has been something of a success, with Europe being a peaceful region and one that is likely to continue as such for the foreseeable future.

However, since the start of the financial crisis in 2007, and the consequent recession of 2008–2009, both banks and governments have found themselves under increasing financial pressures. In particular, while governments were happy to borrow increasing amounts during the “years of plenty” before the financial crisis, the lack of more recent economic growth has seen fiscal deficits grow in some countries to unsustainable levels. This was especially the case with Eire, which required an EU-IMF bailout in 2010 to assist both the government and Irish banks. The imposition of austerity measures since then appears to have been relatively successful, although the government may yet require further funding from the European Financial Stability Facility (EFSF).

While the fiscal problems in Eire were dealt with relatively quickly and decisively, this has not been the case with the EU more recently. It is increasingly clear that the continued failure to tackle fiscal uncertainty in the eurozone has the potential to generate a recession far worse than that of the “Great Depression” of the inter-war years of the 20th century. The prolonged and monotonous euro-crisis debate among Europe’s capstone political, financial and economic leaders has so far produced very little decisive action, largely as a result of competing, entrenched national interests. The outcome has been a series of too-little, too-late agreements on stimulus packages in some countries and austerity measures in others. Decisions that have actually been made by eurozone leaders have fallen short of inspiring the confidence necessary to prevent financial collapse. The more fiscally-troubled nations, such as Portugal, Ireland, Italy, Greece and Spain (PIGS or PIIGS), have experienced severe economic and financial problems, leading to outbreaks of unrest and sometimes violence on the streets. The potential social and political consequences of fiscal retrenchment by government in the PIIGS is more stark than in the wealthier nations of the eurozone. The contrast between national and broader EU/eurozone interests has brought clearly into focus the question: is there a solution that European leaders might make to offset the possibility of widespread sovereign and commercial default?

Despite some attempts to introduce emergency stimulus packages in wealthier eurozone countries and austerity measures in countries with increasingly untenable sovereign debt problems, the financial damage has become deep-seated. Because banks in the EU have bought much of the debt of the PIIGS governments, many major banks have found their balance sheets further stretched (beyond that induced by the financial crisis), with the fear of possible insolvency if the sovereign debt issue is not rapidly resolved. Despite the presence of record levels of expansionary monetary policy (or “quantitative easing” as it has become known) in many countries, the further fear of contagion has led to the European economy stalling. There is every likelihood of a “double dip” recession in the EU as the government budgets of usually stable states such as Germany, France and the Netherlands become too limited that they are unable to deliver any large amounts of funds to “failed nations” without incurring dangerous levels of debt themselves. The IMF has been encouraged to take all necessary steps to ensure that the eurozone does not fall to a point where there is no hope of salvation. In some quarters it has been suggested that the assistance of China should be sought, although even China has experienced a reduced level of economic growth recently. UK Chancellor, George Osborne, has urged that the eurozone seriously considers a “culling” of certain nations from the eurozone, with a return to their previous national currencies as a first step towards rebuilding their economies, and repaying their debt with a currency which might help promote favourable exports and slow but independent growth. However, any secession of countries from the eurozone is likely to be regarded negatively, both for the eurozone per se and for those countries unable to meet the conditions necessary to remain within.

Interest rates on government and corporate bonds have risen recently within the eurozone, partly as a result of bond market forces but also as the result of  downgrades by the ratings agencies. Naturally, there is a limit to the levels of financial stress that countries can incur while maintain conditions necessary to remain in the EU. However, the alternative would bring into question the entire existence of the “European project”, potentially leading to the destruction of the EU as a major economic entity, something unthinkable given its origins.

We believe that there are benchmark decisions that can be made to prevent the further systemic meltdown of the eurozone. The following are feasible actions that might be considered for the eurozone to rise out of the abyss of uncertainty and avoid an inevitable doomsday ending:

Borrowing: Macroeconomic theory suggests that government borrowing to fund initiatives (“priming the pump”) that can lead to economic growth is one possible solution to a recession. The economy is given a kick-start which improves business confidence so that the private sector’s expectations are revived, fuelling further economic growth. However, the current recession is no ordinary recession. However, many governments are already borrowed to the point where their creditworthiness becomes questionable. The recent (23 November) failure of the German government to sell all of its offered bonds (“bunds”) and the concomitant rise in yields is an indicator of the market’s sense of German government creditworthiness. This should come as no surprise. The original thinking behind government borrowing as a counter-recessionary element (Keynes 1936), also talks of governments running repaying debt and running budget surpluses during the years of economic growth. However, it has long been clear that many politicians have abused this technique in an attempt curry favour with their voters, by generating above-trend levels of growth. However, while borrowing during the “good years” has been occurring since the 1960s, the long run of growth during the 1990s has led to excessive, unsustainable levels of debt, particularly in the more peripheral countries of the EU. One of the conditions behind this was the eurozone itself: instead of accepting the reality of the situation and allowing default, other eurozone members decided that the solution to this is further debt in the form of “bail-out packages”.

A properly functioning single currency: The EU failed to develop a meaningfully functioning system for seventeen nations to share a single currency. Pioneered by Robert Mundell, the conditions for a single currency (or “optimal currency area”, OCA) have been well defined for long enough to be part-and-parcel of every textbook in International Finance. The four most commonly-cited criteria include:

  1. Labour mobility across the region.
  2. Capital mobility and price and wage flexibility across the region.
  3. A risk-sharing mechanism, such as an automatic fiscal transfer mechanism to transfer funds to areas adversely affected by 1 and 2. Usually this takes the form of taxation redistribution.
  4. Participant countries have similar business cycles.

Despite their trading connections, it was always going to be difficult for different European economies, with diverse backgrounds (historical, political, social, fiscal) to ensure the long-run success of a single currency arrangement. This was particularly the case when most of the conditions for an OCA were not in place. One innate problem was that before the euro was established, countries considered “risky” had to pay more (in the form of higher interest) to attract skeptical investors. With the implementation of the euro, a common consensus grew up to the effect that the eurozone countries would “stick together” to ensure that the debt is repaid. Risky countries (such as the PIIGS) came to be considered safer, and were consequently able to borrow a lot more, even though the actual risk was virtually unchanged. Now that the possibility of default is apparent, with very high levels of debt it has become a very real burden for the other, less risky nations to help out, and some degree of animosity has replaced togetherness.

The cultural mindset: By looking superficially into the notion that debt-ridden Italy could be considered a “spendthrift playboy”, in Spain the throwaway phrase “less-is-more” is often factored in when companies slash their employent levels, and the reaction of many Greek people reacting to the possibility of necessary austerity measures has been “it’s the government’s fault and everyone is still enjoying their wine and weather”, it is clear that the cultural mindset in these countries forms an element of the problem. With Greece, there is a clear sense that a large section of the Greek population would like to have their cake and eat it too. That is to say, the other EU members must use a portion of their tax revenues to attempt to bail out the Greek government. In order to get the Greek economy back onto the path of sustainable growth, they also place conditionality conditions, regarded as austerity measures which diminish the Greek ability to live a lifestyle that they can no longer afford. The November 5th-11th issue of The Economist pointed out in an article that “the polls show that 60% (of Greek citizens) are against the rigorous terms of the bailout, but 70% want to stay in the euro”. Coupled with Papandreou’s talent for infuriating President Sarkozy, Chancellor Merkel and even his own partners by calling for a referendum on the euro crisis, makes tensions among the Eurozone members even greater. This contrasts with the Irish, who demonstrated initially against the austerity measures, but rapidly became persuaded that such measures were indeed necessary for the long-term future of the Irish economy.

It is clear that stabilising the PIIGS is key to restoring confidence and hence stability to the eurozone. What is required swiftly is a detailed assessment of whether or not it would be beneficial to allow them to default, implement non-negotiable austerity measures combined with structural reforms, implement further bailout packages (with the use of a combination of funds from Eurozone members and foreign assistance), or to decide in eliminating some or all PIIGS from the eurozone, on the grounds that they might be better able to grow without the euro.

To conclude, it is clear that certain decisions need to be made by the member-leaders of the Eurozone and this paper consequently suggests the following:

• Countries such as Greece, Portugal, Spain and Ireland need to come to terms with the possibility of default. They must quickly analyse predict the consequences of two key scenarios: what would happen in the event of a default, and evaluate if they would be better or worse remaining within the eurozone or attempting to solve their problems by regaining their monetary sovereignty with a return to their national currency.  Putting aside the costs of a currency change, it is likely that this latter path would lead to increasingly worse debt ratings and a depreciation of the national currency. Unless there were growth in the trading partners’ economies it is hard to see any economic benefits from such a choice.

• Structural reform should be given a higher priority than tax increases and spending cuts. With Greece, a judicious budget devised by the region’s top economic advisors and finance ministers, might be able to put what little government capital that the Greeks possess to good use. Meanwhile, the private sector of Greece could begin to aim for growth without having to pay increasing amounts of taxes. Corporate tax could be made low enough to attract foreign and local entrepreneurs to start new businesses within Greece, and make the climate more favourable for investors who might wish to purchase government and corporate bonds.

• There should be more greater and clearer scrutiny of the conditions for monetary union among eurozone leaders. The sovereign debt crisis is a clear example that in troubled times the single currency can become a problem rather then the cause for good for which it was designed. Certain countries must therefore contemplate whether a temporary or permanent return to their currency before the monetary union is a good option towards the path to stability. Equally, the EU needs to consider fully implementing the conditions for OCA to improve the euro in the future. This should include further political integration of the eurozone states, with a fully democratic and accountable European parliament, closer to the model established in the USA. For wealthy European countries such as the UK, whose currencies are very widely traded, with fully functioning futures and options currency markets, the necessity of joining the eurozone is less clear.

• Lastly, in working together to solve the recent series of unfortunate events, the eurozone members need to put their differences aside and focus their mindset on stability. This requires a change from narrower national interests towards a stronger focus on European interests. It is a given that countries such as Germany, France and the Netherlands are a lot more affluent than the PIIGS, and that must be used as a non-biased benefit for the greater good of the union. German taxpayers should not bicker about their money being “wasted” on failed governments, but rather as a pursuit for safeguarding the economic climate of the entire region. Conditionality should ensure that moral hazard does not become a longer-run issue. Likewise, the PIIGS should not view the aid and measures given as a loss of sovereignty but more so an opportunity to repay, reform and repair their economy in an orderly, humble and productive manner as part of a much larger club.


Ivan K. Cohen, Ph.D. Associate Professor in Finance and Economics, Richmond University, The American International University in London.

Bryan McIntosh, Ph.D. Associate Professor of International Business, Richmond University, The American International University in London.

Marc-Anthony Richardson, Richmond University, The American International University in London.


Anonymous BBC Correspondent (23 June 2011), “EU leaders pledge to do what is needed to help Greece”, BBC, Retrieved 24 October 2011.

Forelle, C., Gauthier-Villars, D & Walker, M. (3 Nov 2011), “Europe Gives Greece an Ultimatum”, Wall Street Journal.

Keynes, J M (1936), The General Theory of Employment, Interest and Money,  London: Macmillan.

Manolopoulos, J (2011), Greece’s ‘Odious’ Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community, London: Anthem Press.

Lynn, M (2010), Bust: Greece, the Euro and the Sovereign Debt Crisis, New Jersey: Wiley.

Mundell, R. A (1961), “A Theory of Optimum Currency Areas”, American Economic Review 51 (4): 657–665

Nicolas, M. and Firzli, J. “Greece and the Roots of the EU Debt Crisis”, The Vienna Review, March 2010

Roubini, Nouriel (28 June 2010). “Greece’s best option is an orderly default”, Financial Times, Retrieved 24 October 2011.

Spiegel Staff (20 June 2011), “Time for Plan B: How the Euro Became Europe’s Greatest Threat”. Der Spiegel.

Story, L; Thomas, L & Schwartz, N D (14 February 2010), “Wall St. Helped to Mask Debt Fueling Europe’s Crisis”, New York Times, Retrieved 19 October 2011.

Gay marriage is a libertarian issue

Over at the Telegraph, the ASI's JP Floru has an excellent article in defence of gay marriage. He makes the point that what we think of as the "tradition of marriage" — the state- and church-endorsed institution that is currently reserved for heterosexual relationships — is in fact a relatively new phenomenon rooted in modern codifications of common law practices. Per Hayek, this creation of state-created legislation instead of case-based, court-created law has had desultory effects in all sorts of spheres of life, by replacing the bottom-up with the top-down. JP argues:

Before the first ever Marriage Act (1753) established common procedures to enter into a legal marriage, there was a wide range of ceremonies and customs by which people thought of themselves as being married...

With the Marriage Act 1753 state and church came together to decide what was marriage, and what wasn’t. From then on, a mere agreement would never be sufficient anymore to give all the legal consequences of a marriage as defined by statute. The heavy hand of government closed the door to the endless variety of unions which existed before, to be recognised as a valid marriage.

Read the whole thing.

You don't have to believe that same-sex marriages existed in pre-modern times (though some academics do) to see their emergence now as a part of a healthy institution of marriage; what is necessary is for people to have the freedom to adapt. JP's point about the patchwork quilt of practices that existed before marriage's codification is important — once the state gets involved with the messiness of life, it tends to impose its own kind of order on things without much care for why things were messy in the first place. Fundamentally, JP says the state should get out of marriage (as it should get out of every other aspect of our private lives). But, failing that, there is an overwhelming case for it to extend marriage rights to same-sex couples to allow them to live their lives with dignity and the same privileges that heterosexual married couples currently enjoy.

Some libertarians argue that this is the wrong position to take: they say that arguing for same-sex marriage within state boundaries amounts to "extending state privilege" and is not a form of justice. JP is not writing for this narrow group, so he doesn't discuss this, but I think he would agree with Steve Horwitz, who compares the injustice of many US states' current marriage laws to the injustice of a social security system that withheld benefits from black people. It is in the interests of liberty for the state to be as indiscriminate as possible even where it is acting unjustly; so, for instance, while a state social security system may be an unjust infringement upon our liberty, one that excluded black people would be even worse.

It's great to see articles like JP's in media outlets like the Telegraph. I have a feeling that the fight will be won in the next few years, despite resistance from some sections. After that, the next push has to be for true freedom for everybody: for the state to get out of marriage altogether.


The perfectly ordinary case of Ryan Lavery

In Northern Ireland, there is a man named Ryan Lavery, who used to live next to the Ballykinler military installation in County Down. Lavery, whose solicitor describes him as a "trainspotter, an anorak, a nerd with no friends" and who would, if "put beside an airport... take pictures of planes," used to be in the habit of taking photographs of cars entering and leaving the nearby base from his home. From time to time, he would write down a list of registration numbers of cars he observed in this way, and it is on account of this unusual hobby that, last Friday, Mr Lavery found himself standing before a Northern Irish magistrate, deprived -- at least for the moment -- of his liberty.

Information on his case is scant, and media coverage light. What I have been able to glean from open-source media reports is that Mr. Lavery is accused "of collecting information likely to be useful to a person committing or preparing an act of terrorism," namely the photographs, and of "having a document likely to be of use to terrorists", i.e., the list of registration numbers. While my familiarity with the Lavery case goes no further than that which has been reported by the media, I am going to venture a guess that he has been charged under the Terrorism Act 2000, s. 58 - which proscribes "possessing or making a record of information of a kind likely to be useful to a person committing or preparing an act of terrorism, or possessing a document or record containing information of that kind." While it is a defence to this charge for the accused to demonstrate that he had a reasonable excuse for making the images and possessing the list of registration numbers, whether Mr. Lavery's brand of budget, home-bound trainspotting will hold water with a judge is another question entirely. If it does not, the allegedly friendless Mr Lavery has a potentially very serious problem on his hands: the maximum penalty for contravening s. 58 is ten years imprisonment.

It would, of course, be wildly inappropriate to speculate as to Lavery's guilt or innocence at such an early stage, and from such a great distance, physical and factual, as I do from my perch in London. Yes, taking photographs of car number plates is something that someone with sinister intentions might do, but it is no more unusual than trainspotting or planespotting (though as far as hobbies go, I can think of better ones). However, given the legislation currently on the books, we should not find the fact of his arrest unusual in the least.

Even before the September 2001 attacks against the United States, terrorism has presented a vexing problem for liberal democracies: on the one hand, while Western democracies exist largely free of separatist or revolutionary civil conflicts (changing governments through a polling booth is much more straightforward, and allows the majority of the population to do their bit and get home in time for TV Burp or Dancing on Ice), those who really wish to engage in political violence have historically not had a great deal of trouble doing so: wrote Paul Wilkinson in 2000, "The intrinsic freedoms of the democratic society make the tasks of terrorist propaganda, recruitment, organisation and the mounting of operations, a relatively easy matter. There is ease of movement in and out of the country... Rights of free speech and a free media can be used as shields for terrorist defamation of democratic leaders and institutions and terrorist incitement to violence." Of course, when our governments address the threat and are "provoked into introducing emergency powers... (they confront) the paradox of suspending democracy in order to defend it." Unquestionably, Britain was so provoked (in 2005), and liberal democracy was suspended in due course.

Using the excuse that terrorism poses a greater existential threat to the state than other forms of extreme violence (e.g. GBH, youth rioting, or non-political murder), the government enacted legislation to curtail and restrain terrorist activity, all of which is drafted very broadly when viewed through the lens of traditional criminal law. Writing in 2008, Sally Ramage points out that this approach is deliberate: the point of such legislation is to "allow the state to intervene at earlier stages of a criminal enterprise", and, according to Clive Walker, serve as a "platform for investigative police powers where there must be some margin of error." As a result, the British people have been made to endure sweeping new powers of arrest and detention, the criminalisation of many forms of free speech (see the ongoing debate over s. 1(3), and ss. 1-3 generally, of the Terrorism Act 2006), and the banning of information which might be of use to terrorists -- even if it isn't going to be used by terrorists. All of this has created a "climate of panic" where anything that has even the remotest connection to terrorism, whether it be a young girl's poetry, an opera, or a PhD thesis is treated as suspect by the nation's police forces, a broad range of culturally acceptable or benign expression is suppressed through fear of judicial sanction, and "prosecutorial discretion" is more determinative than the express intention of Parliament in deciding what is legal and what is not.*

Practically, this means police arrest far more citizens on suspicion of terrorism than are actually charged with any crime,** and we must keep in mind that this is the climate in which Ryan Lavery has been arrested. For that reason alone, his is a case worth following.

If the charges stick and there is in fact some sinister ulterior motive to Lavery's actions, then the local constabulary deserves a pat on the back and congratulations on a job well done. If, however, it becomes clear that there is nothing to this story and the charges are dropped -- which is my hunch, as I suspect the Co Down constabulary would have been rather more vocal with the press over the weekend if they had uncovered anything resembling a serious plot -- then the state, through the application of a widely criticised and overly broad act of Parliament, will have instantaneously blown apart the very private life of an eccentric, but nonetheless quiet, lonely, and reclusive man in front of the entire world. I can think of nothing more terrifying.

*Writing in 2007, Clive Walker pointed out that, "at the moment, too much depends on prosecutorial discretion as to who is treated as friend or foe. Plots against the Libyan regime of Ghaddafi were possibly encouraged years ago, but now there is rapprochement. Conversely, plots against Syria are openly tolerated." Expressing hopes for the violent overthrow of an Arab government is virtually certain to fall within the meaning of "encouraging terrorism" under s. 1(3) of the Terrorism Act 2006. Yet, while the Ghaddafi regime was still the competent legal authority running Libya, where were the arrests of supportive Tweeters, bloggers and journalists? A law which cannot be consistently applied without utterly crushing freedom of speech is not one which should be in force to begin with.

** ibid. at 331, referencing Hansard, HC Vol. 431, Col. 1621w (March 7, 2005) (Hazel Blears).


How charities and religion (should) solve the problem of social spending

At the beginning of January, the UK’s Charities Aid Foundation published a report on the World Giving Index. The ASI already covered this topic and the emphasis was how this index can recognize between-country differences in their respective levels of social capital. 

One would expect that the outcome would see countries with strong egalitarian welfare states topping the list, as they have a much better sense of social capital developed than the 'ruthless' USA, where self-interest and greed allegedly drive the incentives of individuals.

Well, surprisingly (or not surprisingly at all), the US tops the list, followed by other Anglo-Saxon countries. As well as Ireland and the Netherlands, the USA, Australia, New Zealand, the UK, and Canada make up the top 7 in the list. And even though countries like Denmark (17), Sweden (40), Norway (32) or Germany (26) are ranked high enough, countries like France (80), Spain (83), Italy (104), Portugal (127) or Greece (151) apparently don't have any sense of social capital at all.

How does one explain these obvious differences between the Anglo-Saxon countries and the welfare state continental European countries? One paper provides a particularly interesting insight. A paper by Scheve and Stasavage (2006) uses religiosity to explain the difference in social welfare spending and redistribution between countries. Using a cross-country analysis they conclude that countries with higher levels of religiosity have lower levels of state welfare spending. They use this conclusion to explain the differences in between-country levels of redistribution.

As they show in Figure 1. (pg 259 of the paper) European welfare states (such as Sweden, Denmark, France, Germany, Norway etc.) experience traditionally high levels of social spending (measured as a % of GDP) while simultaneously religious beliefs (measured by the importance of God in a person’s life) are not very high (averaging between 4 and 5 on a 1 to 10 scale). On the other hand, countries in which religious beliefs play an important role (between 7,5 and 8,5 on the same scale) in an individual’s everyday life (such as the US, Ireland, Canada, Portugal) the level of spending tends to be much lower, 5 to 10 percent on average, thus strengthening their initial hypothesis. Therefore religion could act as a substitute for an inadequate level of state funded social insurance. 

But why are then churches and charities so much more involved in countries with lower levels of welfare spending? Does the importance of God influence people to be more cooperative and thus engage in charitable activities? Or is religious awareness, as in the case of the UK, irrelevant to the fact that people are more charitable?

Consider the implication of inter-church competition to explain the reasons behind why churches in some countries offer more services to replace government welfare programs. One should look at the difference between countries with one dominant religion and one dominant church and those with many churches (with same or different religious beliefs) and observe that in countries with multiple churches there exists a certain level of competition between them. In these cases offering services such as child day care may be a way to attract more people to their church. Observing this the government has less incentive to invest into the provision of these services.

There may exist a reverse causality in this case – it’s not due to the fact that the government decided to lower social spending that the churches have increased the level of services they offer, but quite the opposite – it is due to the competition between churches to lure more and more people in that signals to the government to lower their social spending levels. Charitable donations can be tracked in the same direction; due to the fact that more people tend to privately solve the coordination problem in the demand for social insurance, there is less need for the state to step in and provide it.

If this is indeed true, it should act as a signal to countries such as the UK or Ireland to lower their welfare spending, since private incentives and charitable organizations are likely to take over from the government and provide services such as child day care, private schools, hospital care, retirement homes, homeless shelters, soup kitchens etc. The Salvation Army does just that, as do many other UK organizations. Perhaps it isn't quite sure how much the private sector can 'offload' the government in its welfare spending, but it should be given a chance to do so, particularly in the Anglo-Saxon countries where social capital is undoubtedly very high.

Who wants to be a businessperson?

Who in their right mind would want to be a businessperson these days? It’s always been tough creating and growing a business - failure is more common than success but the potential for reward and the thrill of the chase still appeal to the energetic, the imaginative and the diligent.

These days, though, the historically successful “western” liberal business model is under attack from the bottom and the top. From below on the home front, frustrated socialists have variously re-branded themselves, most recently with appeals to corporate social responsibility (CSR) as part of a broader “fairness” agenda. From above on the foreign front, failed communist and other statist societies are now re-born as champions of state capitalism, merging the twin evils of big money and big government. It’s a brave soul who’s willing to take on both forces.

Here in the UK, liberal capitalism is most under threat from the CSR crowd. Our Deputy Prime Minister pines for a cuddly “John Lewis economy”. Perfectly legally tax avoidance is fast becoming a crime. Profits are inherently bad, especially if they increase. A business is “good” only if it does things other than deliver a product that people want.

Before CSR types get too carried away, they should consider the most successful yet least CSR company of this new millennium – Apple. It just reported quarterly profits of $13 billion, more than double a year ago for a profit margin of 44.7%. It’s sitting on a cash hoard of $100 billion, it makes nothing at home but assembles everything in China from components made in other emerging markets. It’s CEO Tom Cook will get total compensation of $378 million for 2011, including nearly $1 million in cash and the rest in shares (whose dividends will attract a lower tax rate).

This emphatically non-CSR profile is the result of one simple focus for Apple – delivering exciting new products, quickly and cheaply, to as many customers as possible. Apple’s employees are happy, its suppliers are happy and its customers are happy. I’ll have more of these non-CSR apples in my basket, please.

A growing long-term threat to entrepreneurial business, though, looms from surging state capitalism in the emerging markets, most notably China and Russia. The Jan. 21-27 edition of The Economist featured one of its always informative surveys on “The Rise Of State Capitalism” and is well worth checking out.

These enterprises are becoming bigger and more dominant. For example, four of the world’s top 10 publicly-listed companies by revenue are now state-controlled. State enterprises represent some 65% of global energy companies, 55% of utilities and 35% of both telecoms and financial services. The sovereign wealth fund of China is worth nearly $1.2 trillion while the UAE’s is approaching $1 trillion. As The Economist put it, “across much of the world the state is trumping the market and autocracy is triumphing over democracy…The invisible hand of the market is giving way to the visible, and often authoritarian, hand of state capitalism.”

To some market sceptics, this is a welcome development in the naïve belief that state capitalism can be more CSR. State capitalism, though, usually has a broader agenda than customer satisfaction and can be very hard to tame. National anti-trust laws are meaningless, WTO sanctions are ponderous to implement and competitive threats are simply crushed by the state’s iron fist.

So pity the poor business folk who just want to make a lot money selling customers things they want. There’s a lot of people out there intent on making them do otherwise.


Arnold Kling's right: Just as Keynes pointed out

Arnold Kling over at Econlib has been saying for years that there's more (or less if you prefer) to current economic woes than just a shortage of aggregate demand. We're going through a period of quite rapid economic change (the internet is only part of it, the container ship and thus globalisation is perhaps more important) and this leads to restructuring. And restructuring simply takes time as we all scratch our heads and try to work out what to build as our new model to replace the old.

But the PSST story is focused on why we do not observe (b). The answer is that it takes time for entrepreneurs to figure out that there is a need for more health insurance claims processors, for the mortgage underwriters to seek and obtain retraining, etc.

The more change we've got the more pondering we've got to do and thus the longer the restructuring takes. Thus, quite weirdly, the better the future is going to be as a result of all the new wondrous things we can do the worse the present is as we ponder how to do what we can now do.

But here's Keynes writing in 1930:

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down --at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.
I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase of technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improvement in the standard of life has been a little too quick;

Now whether you think this is that Arnold is right because Keynes said it or that Keynes is right for a change because Arnold confirms it is up to you. But it is very much the same story, isn't it? Rapid change will, almost absurdly, lead to economic hard times as we consider how to best make use of these new possibilities.

And yes, I am certain that this is at least a partial explanation of what is going on at present. The policy takeaway from this being that simple stimulus, spending just to get us back to where we were, just won't work. For that entrenches the old way of doing things when the task is to devise the new ways that the new situation allows.