The big shrink

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Credibly or not, the UK’s three main political parties are committed to cutting government spending over the life of the next parliament. The Conservatives go a bit further by promising to reduce the role of the state in general while Labour and the Liberal Democrats only want to regroup before resuming the government’s dominant role.

In the midst of the election campaign, there’s very little detail as to what spending will actually be cut, beyond some big-picture accounting sleights-of-hand. For the fact is, no one in the UK’s governing establishment - the politicians, the bureaucrats, the quangos, the chattering classes – has any experience with actually cutting spending. It just hasn’t happened for decades.

A fascinating article in a recent The Wall Street Journal recounts the travails of Colorado Springs to reduce spending by 10% in order to eliminate a $28 million budget deficit. A third of street lights have been turned off, taxi drivers have been recruited as a second set of eyes for the police, volunteers are emptying garbage cans in city parks and so on.

Some measures are working, some are not, many may not be applicable to the UK. What’s instructive, though, is how the social and political background for Colorado Springs permits such creative experimentation. America has a long tradition of devolved powers that positively encourages states and municipalities to experiment. A very close correlation between taxation and services heightens citizens’ awareness and engagement.

By contrast, the UK is strait-jacketed by ever greater top-down management, starting with the European Union, through Westminster and out to unelected quangos. Margaret Thatcher emasculated local councils while Labour now mandates uniform delivery of all manner of services. There is now no greater crime in the eyes of the ruling elite than the consequences of the dreaded “post-code lottery”.

Outside the cabinet and Whitehall, initiative and creativity are simply not welcome. Local councils and regional bodies have long lost the necessary managerial talent to encourage and foster new ideas. The real risk from the next government will be micro-management of spending cuts as a natural sequence to micro-managing spending increases and probably with the same unfortunate results.

For the Tories, this well-rooted bias towards centralisation is a double challenge. If they win the election with a working majority, not only will they be battling vested interests seeking to preserve their privileges, but they’ll be up against a culture that long ago abdicated local initiative to those who know better in Westminster.

Transfer mispricing

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In a report for Jersey Finance, ASI Fellow Richard Teather challenges two reports by Christian Aid. These have formed the basis for wild claims of the effects of transfer mispricing that have permeated into the media. It may not have escaped you attention that the figure of 1000 children dying every day has been bandied about, as though it were an established fact.

Transfer mispricing is when related firms agree to overprice imports or underprice imports, in order to declare less profit and so pay less tax. Christian Aid’s statistics for the first report drew on the anecdotal evidence of a book entitled Capitalism’s Achilles Heel, which estimates that 7% of trade volumes is elicit capital movement, this 'fact' was based solely upon interviews. The second report is exposed to show that, even based on the reports dubious figures, transfer mispricing impacts markedly less on the tax take of poorer countries than claimed in either report.

More importantly, the faulty methodology of the reports is pronounced. Goods are considered to be either underpriced or overpriced, just for being less or more expensive than that of the mean. Considering that bicycles and Ferraris are judged to be in the same category when working this out, the accuracy of the results is highly contentious. There are also blatant data errors, that are acknowledged by the authors, but left in to work out that 1000 per day figure. For example, a phantom 7,000,005 shearing machines were sold by Turkey to EU in 2007. The result accounts for a great deal of supposed transfer mispricing.

All this means that Christian Aid’s claim that 1000 children per day dies of transfer mispricing can be reduced to 25. The report goes on to point out the fact that poor countries opening up their economies, FDI and the resultant trade saves thousands of children every day.

There is one thing that the report does not touch upon that I could add. Even if the governments in developing countries were to get all this extra tax revenue, I can see no evidence to believe that many of them would be spending it on saving the lives of children. Better to leaving the money in the private sector and push for further deregulation of what are still protectionist economies.

And now it's the World Bank on financial transactions taxes

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As I noted last week the European Union has concluded that the Robin Hood Tax would be illegal. This week it's the World Bank: they don't say it would be illegal, no, just that it wouldn't work very well and therefore shouldn't be done.

We will argue that attempts to raise a significant percentage of GDP in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. Although the side-effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the crisis.

Ah, not raise much money and not stop the behaviour which led to the current problems. Hmm, that's not really a ringing endorsement.

For example, all that "speculative" trading on foreign exchange that we don't want so much of:

Close analysis of the minute-by-minute microstructure of the foreign exchange market reveals that most foreign exchange transactions (spot and forward) have nothing to do with speculation, but are instead undertaken to hedge risk and ensure liquidity.6 (The same would be true of interest rate swaps.)

Ah, there isn't any. On CDOs that spread the risk around, that left the "toxic waste" in their trail:

Interestingly, the failures in this structured finance market have little to do with frequent trading, or with complex sequences of transactions such as would be discouraged by a transactions tax.

The Robin Hood Tax would have no effect here whatsoever then.

Nor was there ever much revenue potential in these securities.

And wouldn't raise much money either.

Certainly not a panacea, and more likely a damp squib in terms both of revenue and efficiency gains (and perhaps more likely to result in efficiency losses), financial transactions taxes could be a threat to fiscal stability if overoptimistically seized upon as a reason for abolishing more reliable revenue sources.

In fact, the Robin Hood Tax would leave us with little tax money and worse off than we are now.

So, not just illegal but a bad idea as well. So perhaps everyone would like to concentrate their efforts on doing something useful instead? Something that might actually advance human civilisation like, perhaps, creating the both affordable and really good pork pie? Something both value enhancing and actually achievable?

Presidential politics: the horse that’s bolted

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British politics has become presidential. Thursday’s leaders debate just underlined that. The problem, of course, is that we don’t have a constitution that can contain presidential power. In fact, we have one that takes presidential power and, provided the ruling party’s majority is large enough, turns it into an elected dictatorship. Put simply, our legislature no longer holds the executive to account in any meaningful way. Party whips enforce discipline, and anyone who wants to climb the greasy poll knows they have to toe the party line – if they don’t they’ll lose out on the luxuries that come with being a minister.

There are plenty of proposals to strengthen parliamentary democracy – beefing up select committees, for example – but while most of the usual suggestions would be an improvement on the status quo, I’m not sure they’d make all that much difference in the long run. Might it be time to admit that the horse has bolted, that Britain now has a presidential system, and that in the era of 24hr news media we’re not going to be able to row back from it? There is also some truth in the maxim that people get the politics they deserve. Has the British electorate become irredeemably attached to personality politics? Maybe so.

The question then becomes how to adapt our constitutional arrangements to deal with presidential politics. Sometimes I think the most sensible thing would be to separate the executive from the legislature, directly elect prime ministers, and ban members of the government from sitting in parliament. Apart from restoring the independence of parliament (which was always intended to stand up to the executive, not be its lackey), this could help improve the calibre of government ministers (they couldn’t exactly get worse, could they?). It would also mean letting the PM advise the Monarch on whether to grant the royal assent to legislation, creating an effective veto power.

Would a separation of powers do a better job of protecting liberty than our current arrangements? That’s the standard by which all constitutional amendments should be judged, in my opinion, and honestly, I’m not sure what the answer is in this case. But it’s an interesting thought for a Sunday morning.

Educational reform

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“The solution to some of the gravest problems we face as a society lies on reforming the way we educate our children”, wrote Alan Greenspan in his 2006 memoirs. For a change, I wholeheartedly agree with the man. Educational reform in the UK, along with restoring fiscal credibility, is of preeminent importance to the cause of securing long-term growth prospects for the UK.

As we slowly climb out of recession (although apparently at a faster rate than the rest of the EU), standards of education and widespread availability of high quality schools, colleges and universities will form a key part in creating what needs to be an increasingly flexible labour market.

The current centralised state sector, supposed to guarantee the availability of quality schools across the country, has produced some of the highest inequalities of educational opportunities in the developed world. A recent OECD report, ‘Economic Policy Reforms: Going for Growth’, states that educational achievement in science, mathematics and reading is extremely uneven. The standard deviation of student performance, a measure of how far individual cases deviate from the average attainment, is higher in the UK than both the OECD and EU-wide averages.

The current state system is becoming increasingly clunky, bureaucratic and cumbersome, an abject failure for thousands of youths across the country leaving high school with nothing to show for it. The talent and experience of teachers is systematically precluded by top-down proclamations of what counts as learning. The best teachers I had at school where those who ignored OFSTED’s view of ‘quality teaching’ in favour of a more flexible and spontaneous approach, responsive to the classes needs. The in-classroom know-how developed by teachers must be unleashed. Competition is key to ironing out the regional differences in educational standards.

I’ll reserve my judgement as to which party can best deliver such reform, bearing in mind the likely resistance to be faced from teaching unions, but it must be a top priority for whoever takes power. Educational standards are a key input in determining economic productivity, labour flexibility, innovation, growth, crime rates and many other indicators of a countries’ progress; little else is of comparable importance.

On corporate capture

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The problem, as we all know, with having a network of subsidies for this and that is that said network gets captured by those receiving the subsidies. Even if, as is possible at least in theory, the subsidy is a good idea (for some public good for example) in practice the entire structure veers off into an orgy of rent seeking and producer troughing to the expense of all the rest of us.

As an example, consider US subsidies to cotton farmers. It's possible, in theory, that the US really should have domestic production of cotton. Just think what would happen if there were not the ability to produce t-shirts from All American sources! However, these subsidies obviously impact upon cotton farmers in other parts of the world and Brazil, for one, has taken the US to the WTO court over the impact of such sibsidies on Brazilian cotton farmers. And won the case.

So what would a rational policy be at this point? You or I would say that, well, yes, we the US signed up to the WTO and agreed to be bound by the rules so, yes, we'll stop the subsidies then. This shows how little you or I know about politics. The actual solution is subtly different:

What could be more outrageous than the hefty subsidies the U.S. government lavishes on rich American cotton farmers? How about the hefty subsidies the U.S. government is about to start lavishing on rich Brazilian cotton farmers?

That's how you do politics. If subsidising only US cotton farmers is illegal why not subsidise Brazilian cotton farmers with money from US taxpayers?

It's very difficult indeed to reach any conclusion other than that politics simply isn't a good way of dealing with the real world.

Dull, limp, lifeless*

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First up, if I hadn’t been reviewing the debate on CNBC, there is no way I would have sat through last night’s debate. Political commentators are spinning it as a victory for democracy, and a lot of people seem enthusiastic about it, but to me, it was just three men standing on a stage pontificating and rolling out their favourite soundbites. A real debate would have drawn the party leaders on their plans for Britain, and subjected them to cross-examination and scrutiny – we would have switched off our TVs knowing a lot more about what electing each of them would mean. The ITV debate, by contrast, was nothing more than an exercise in presentation skills.

So how did the candidates fare? Well, Nick Clegg was judged the winner by the commentariat, and opinion polls back them up. I don’t disagree – his anti-politics, ‘let’s-be honest here’ shtick worked well – but Clegg still left me cold. For Clegg is not what he claims – a new kind of politician – but rather just a fresher face in a different tie. And despite his party’s liberal heritage, Clegg is every bit as statist as his opponents. His policy platform is grounded not in principle, but in crude, bash-the bankers, soak-the-rich populism.

What of Brown? It wasn’t a disaster, certainly, but I can’t imagine he won over any swing voters. He only really had two lines of attack, which quickly wore thin. First was his ‘I agree with Nick’ stuff, trying to co-opt Lib Dem support on almost everything. Trouble was, Nick didn’t agree with him and told the audience as much – ‘there’s nothing to agree with’. More annoyingly, Brown just wouldn’t shut up about the £6bn the Tories were going to ‘take out of the economy’. Cutting this 1% of public spending (little more than a rounding error, in fiscal terms) is apparently enough to trigger a double-dip recession, cost thousands of jobs, and decimate public services. Right…

What Brown is seemingly incapable of understanding is that cutting public spending is not ‘taking money out of the economy’: it is leaving money in the private sector where it belongs. The British state, which now accounts for half our GDP, isn’t stimulating anything; it’s just a parasite sucking the life out of productive enterprise. Government does many things it shouldn’t do at all, and the rest it does wastefully and bureaucratically. It desperately needs to be cut down to size, and fast.

So is Cameron the man to do it? His performance was smooth and polished, and he said some nice things that few could disapprove of. But for all his Obama-lite, ‘hopey-changey’ rhetoric, there wasn’t much passion or urgency on display, and few signs of ideological conviction. But then maybe those aren’t things that win elections these days: perhaps it really is all about seeming a lovely fellow and not frightening any horses.

But if that is the case then these debates are emphatically not victory for democracy. In fact, they are little more than a perpetuation of the staggeringly shallow status quo.

* Unlike Cheryl Cole's hair extensions.