Don't panic

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So it’s a hung parliament. That isn’t ideal: Britain could do with a strong government with a clear mandate to sort out the fiscal mess that Gordon Brown has landed us in. But it need not be the chaotic disaster that some pundits were predicting in the run up to the election.

I think by far the most likely outcome at this stage is a minority Tory administration. After Nick Clegg’s remarks a few moments ago, it is clearly David Cameron’s ball to run with, so here’s what he could do:

First, come to some accommodation with the Ulster Unionists. This should be relatively straightforward.

Second, get on the phone to SNP leader Alex Salmond. Offer fiscal autonomy for Holyrood and a referendum on Scottish independence in return for his support. He would be a fool not to leap at the offer.

Third, since that still wouldn’t give the Tories control of the Commons, try to co-opt the Lib Dems. There’s no need for a coalition – all the Conservatives really need is Lib Dem backing for their budget. Letting Nick Clegg have his ‘Council for Financial Stability’ is an obvious olive branch.

Fourth, focus on what can be done without the need for primary legislation. In reality this is a lot: a public sector efficiency drive, a bonfire of regulations, and even the Tories’ school reforms can be accomplished via secondary legislation and administrative orders.

Fifth, get ready for another election within a year. Come up with a clear platform that (a) people actually understand, and (b) answers the question ‘what will a Conservative government do for me?’

The fact that the Tories only got 36.1 percent of the vote, despite facing a tired government, a discredited, disliked prime minister, and should make them ask some serious questions about their campaign. Thatcher got 43.9 percent in ’79, 42.4 percent in ’83, and 42.4 percent in ’97. John Major got 41.9 percent in ’92. Whatever the spin coming out of CCHQ, last night was not a victory for Project Cameron.

Treasury forecasts: the tendencies and consequences of Inaccuracy

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In a briefing paper released today, I examine the tendencies and accuracy of treasury forecasts for GDP growth contained in the spring budget. My sample contains three different types of forecast: Type I are forecasts for the same year as the budget, Type II are forecasts for the next year and Type III are forecasts for the year after next. All are made simultaneously in each spring budget. Using some basic statistical and probabilistic analysis, I reach three key conclusions based on my sample of thirty forecasts:

  • There is a low correlation between forecast and outturn for Type II and III forecasts.
  • All three types of forecasts are less likely to be accurate when economic growth is changing faster in either a positive or negative direction.
  • There is strong evidence of a bias towards overestimation in each type of forecast

Statistical analysis can sometimes be quite dry, so I think it is important to spell out the significance of the findings. First, and most obviously, it seems we should place little trust in the predictive power of the Type II and III forecasts given their low correlation with outturns. Second, and perhaps more significantly, the combination of a forecasting process that does very badly at foreseeing higher growth in either a positive or negative direction, and the finding of strong evidence for a bias towards overestimation, means that treasury fiscal projections for future spending and borrowing plans (both elastic to changes in growth) can be highly inaccurate and unrealistically optimistic.

For example, in 2007 the treasury was predicting 2009 growth at positive 2.5%. In fact, the economy shrank by 5% in 2009. The projections for the national debt and deficit, which are given as a percentage of GDP, were accordingly way off the mark. This seriously undermines any attempt at fiscal discipline.

I argue that to counteract the effect of such inaccurate projections, government should use very pessimistic assumptions about future growth when projecting debt and borrowing. Currently, the treasury seems to place quite a lot of confidence in its forecasts, adjusting the figure down by just a quarter per cent when it plans future borrowing. The data suggests that this figure should be far larger. I don’t go as far as to suggest an actual figure: perhaps that is for a different paper.

TNG with James Delingpole

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The Spectator and Telegraph columnist James Delingpole gave a solid defence of classical liberalism at the ASI's The Next Generation event on Tuesday 4th May. He explained why it was so difficult to be a classical liberal - its firm roots in empiricism and the realities of human nature do not often arouse great enthusiasm. Its policies and positions must constantly be explained and justified, relying on the audience's commitment to reason and logic. A big ask.

To be on the left on the other hand is simple. Not only have they won the culture wars as Gramsci had hoped and advocated, but to take on an air of moral superiority is both thoughtless and effortless - it is the easiest thing in the world to be committed to reducing global warming, poverty and inequality. Actually acting on those commitments is something entirely different, and could be done to the detriment of all in a spurt of destructive moralising zeal.

Despite the numerous advantages of the left, classical liberalism is fundamentally 'sound' due to its basis in reality rather than wishful thinking. It will prevail so long as we keep on justifying our positions sensibly and with the use of reason. Delingpole's speech ended in a call to arms - it was for us to continue a fight with the odds stacked against us - whilst being a classical liberal may be difficult, we gain all the more from the tools of empiricism and realism at our disposal. In short: classical liberals are always right, and should remember it.

Join The Next Generation here

Real reform

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Real reform starts when government money stops.

Valdis Dombrovskis, Prime Minister of Latvia at Munich Economic summit, 30 April 2010

[Note: Latvia has abolished 30 percent of public sector jobs, and the wages of government employees who remain has been cut by 28 percent. A government deficit of 20 percent of GDP has been transformed into a surplus of 8 percent in just 2 years. Budget flights to Riga start at £14.99].

A Pyrrhic victory?

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The key General Election question is whether the Conservative Party can secure an overall majority – or does it have to form either a minority or coalition government. If the Conservative Party did secure a narrow overall majority, there would be considerable relief at Conservative Central Office: such an outcome seemed unlikely shortly after the first TV debate when Nick Clegg joined the electoral party to make it a three horse race. But a narrow overall majority brings its own risks. After all, the financial markets, possibly through a falling £ sterling, would demand strong action to tackle the £163 billion public sector net borrowing deficit.

Inevitably, this means deep – and very divisive – public expenditure cuts. The current turmoil in Athens bodes ill for those who believe that large public expenditure cuts can be readily implemented. A very small overall majority would probably compel the Conservative Party to call a further General Election, well before its five years of government were out. The nearest precedent is 1974, when two General Elections were held. In the February poll, the Labour Party won four more seats than the Conservative Party. In October, Labour sought a renewed mandate and secured a tiny overall majority of three, which lasted – with backing from the Liberal Party - until 1979.

If he did win a very small overall majority, David Cameron would hope to hold out for some years. Fighting a second General Election, on the back of savage public expenditure cuts, is hardly likely to attract votes. Moreover, despite its desperate financial state, the Labour Party will presumably have a younger - and more voter-friendly - leader. The Liberal Democrats, too, would hope to build on their recent momentum to remain genuine third party contenders.

If the Conservatives do squeak home with a wafer-thin overall majority, would it be a pyrrhic victory?

That £6bn: A lesson in economics

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“David wants to take six billion out of the economy when it is most at risk” said Gordon Brown, more times than I care to remember in each of the television debates. This statement hints at an economic misunderstanding that is almost as old as the subject itself, and is worryingly ubiquitous in the post-crisis discourse.

The fallacy was first laid out and refuted by Frederic Bastiat in 1850 in the form of the ‘broken window fallacy’. Bastiat’s example goes as follows: while at a first glance it may seem that the breaking of a bakery’s window in town somewhere creates employment for the glazier and must therefore be a good thing for the town, this doesn’t take into account the “unseen” consequences of the act. The baker has to pay the glazier; while the glazier benefits from this, it means that the baker is not able to buy that new suit he really wanted. So, stay with me on this, if the window had never been broken, the baker would have a new suit and the tailor would have been paid for the suit – the wants of two people have been fulfilled. But with the window broken, the only person who benefits is the glazier.

Now, this is not a mere argument against vandalism, but a profound allegory at the heart of which is a truth that is missed by many commentators and economists.

So, what of the six billion? Lets go with Brown for now on the point that this money is ‘stimulus money’, which is a dubious assumption given that much of it is probably waste. This money, like the money used to pay the glazier, has to come from somewhere, the government has to raise it via taxation or bond issuing. When the government ‘puts money into the economy’ it is really just moving it from one area (the pocket of individuals or the portfolio of the bond investors) to another*. The money has to be removed from the economy before it can be ‘put back in’.

The argument, made by economist and ex-MPC member David Blanchflower, that ‘this was a public-sector sustained recovery’, just doesn’t make much sense, especially as a justification for keeping an extra six billion in the economy. The public sector gets its money from the private sector, so the money is in reality just being retargeted by the government into whatever the £6bn is being spent on.

Brown is right to say that he is keeping the money in the economy, but wrong to assert that cutting this money would be taking it out of the economy. In fact, it would be giving the money back to the economy, but in a different place (hopefully the pockets of taxpayers). If this all sounds a bit confusing, I would recommend Henry Hazlitt’s Economics in One Lesson, a short, easy book expounding the ideas of Bastiat and available free to read online.

*That is assuming that it isn’t just printing all the money, which introduces the idea of inflation and a whole different can of worms.

Snouts in the trough

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The eighteenth century Scottish judge Alexander Fraser Tytler, said “A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public Treasury”. In other words, democracy evolves into kleptocracy.

If Tytler were alive today, surely he would have added that the rot begins with a state education system and a national syllabus which themselves eulogise the State. What else can cause highly intelligent and educated people to plead for funding of their personal interests, even as Rome is burning?

Thus can eminent scientists seek more taxpayer funding for science, while sportsmen write in the Telegraph that, “A party that prioritises sport might get my vote”. More generally those making good livings from “the arts” (actors, musicians, and so on) seem to bleat almost perpetually in the broadsheet newspapers.

Did all these worthies not learn that science and inventions, sport, and “high-brow” entertainment were thriving features of the UK throughout the 19th century (and earlier), when state funding wasn’t on anybody’s agenda. Indeed, government involvement would have been pooh-poohed on the basis that not only would it come with strings attached; it would also become contaminated. Indeed this has happened in spades to science and statistics in the last 75 years.

The end of democracy is nigh, unless it is severely constrained via a constitution which puts most current government functions firmly off limits. Fat chance.

Terry Arthur is a keen sportsman and played rugby for England in 1966.

The governmental cost of doing nothing

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Every new regulation should be justified by an accompanying Impact Assessment (IA). Sometimes, to keep themselves busy, Whitehall departments issue IAs even when there is no new regulation to justify. All these people have to find something to do. A recent example is “Crowded Places”.

No one would argue that terrorism has increased the risk for crowded places. The Home Office published an IA for a regulation to address the issue on 11th March. These were the four options they considered:

  1. “Do nothing – allow owners and operators of crowded places to continue as before, and accept the risk.”
  2. Home Office to publish two guidance documents: good practice for local partners on how best to protect crowded places; and suitable protective security measures for new and retro-fit developments outside the planning framework.
  3. Home Office to publish two guidance documents as above plus one from the Department for Communities and Local Government aimed at planners.
  4. “Legislate, enforcing suitable security measures for the highest risk buildings.” Quite how  legislation could achieve this is not explained.
    An IA is supposed to compare the costs and benefits of all options but this one did not. The Home Office went straight for option 1, “Do nothing”, which begs the question of why we needed the IA in the first place. Options 2, 3 and 4 were not considered, still less quantified.

Readers thus far might assume that doing nothing costs nothing, or nothing extra. This underestimates the creativity of the Home Office. The IA does not have precise estimates but apparently doing nothing will have transitional and annual implementation costs of “££10s of millions” and “££100s of thousands” respectively. And there will not be any benefits.

It is unkind to suggest the Home Office “is not fit for purpose”: it doesn’t seem to have a purpose which it could fit.

Tim Ambler is a Fellow of the ASI and Honorary Senior Research Fellow of the London Business School.

This blog is part of the ongoing series: Daft regulation of the month. The first port of call for any government that is really committed to cutting useless red tape. Click here to find out more.