The economy is still bubbling along

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The London stock market has been soaring. Another sign that the recession is over, business is thriving, and investors are piling back in? Or evidence of a bubble?

The Bank of England has pumped £175 billion of new cash into the UK economy through 'quantitative easing'. Basically, it's been buying government securities hand over fist. So government IOUs look a lot healthier than they should be – given the profligacy of the public finances. Investors have had to look for other assets – like shares.

Go back to your Milton Friedman and you'll understand that the world is full of different sorts of 'assets', from government stock to shares, to houses, to machinery, to bank accounts, to cash. A monetary expansion, he thought, does not occur all at once all over the economy, but spreads from one lot to another. That is exactly what is happening here. New money is being pumped in to the financial markets, so financial asset prices are rising. House prices are also starting to rise, as investors seek something better than a bank account paying less than 1%. And the money will have to spread down through other assets too before it has much of an impact on the real economy. So the stockmarket is booming, while shops and factories are still closing down and laying off workers.

All this new cash must, of course, eventually have a reviving effect on the real economy. But now put your Friedman aside and read F A Hayek. The problem with new cash rippling through an economy is that price rises ripple through too. Prices rise, then fall, in one sector after another. So people invest, first here, then there, on the prospect of high returns, only for their hopes to be shattered by the ensuing fall. So real resources are wasted on investments that don't ultimately work. That is the real human cost of inept, boom and bust monetary policies. Policies of the sort that Gordon Brown told us he'd saved us from.

Property taxes

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As Tom commented here yesterday, ahead of his party conference speech, Vince Cable announced that the Lib Dems' plans for a 0.5% annual levy on homes worth more than £1m.

No-one explains why this is such a terrible idea as well as the Lib Dems themselves, who have long campaigned against a Council Tax based on property values. As their own website convincingly argues:

The tax "is based on value of your home and takes no account of a person's income and their ability to pay," whereas “fair taxation is based on ability to pay or income."

The argument applies just as well here. A levy on expensive homes would not target those most able to pay. It would target those who happen to live in London and the South East. It would target those who get caught up in property booms, and feel no positive effect from a rise in the nominal value of their house. It would target those who have previously worked hard and prefer to stay in their lifelong homes after they retire. It would target those who choose to live in larger houses with an extended family. And inevitably, it would force some of these people out of their homes.

More generally, the question we should ask is this: should home-owners, who have paid taxes on their income throughout their lives, and who will pay tax on their estate when they die, be made to pay a yearly sum to remain in their own homes? The Lib Dems' website is right: of course they shouldn't.

What's more, according to the Lib Dems, the tax "is costly to collect and administer."

In order for the tax to be levied, homes must be regularly and accurately valued, a laborious and expensive process. Valuations would have to be made for many homes that would not even reach the threshold, and could at best be an informed guess of what a home would really fetch on the market. Protestations and appeals over valuations would no doubt be commonplace. The Lib Dems are quite right: property taxes are deeply unfair and extremely costly. They would do well to listen to themselves, and drop the idea.

The Brixton pound

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Last week, Brixton realised its own ‘alternative’ currency: The Brixton pound. Decorated with local celebrities such as Eddy Grant, David Bowie & The Clash (I notice that John Major has been excluded), I’m sure this will get Notaphilists salivating and provide locals with a few days of amusement. The B£ has come about through Lambeth Council’s support of the Transition Town Network, a decidedly bourgeois organisation aiming to help communities “respond to the challenges, and opportunities, of Peak Oil and Climate Change". How a local currency is supposed to help fight the environmentalists’ crusade against global warming is not entirely obvious, especially when it seems that the currency itself is unlikely to take off.

Money, in its most basic sense, is something that is accepted as payment for goods and services, as those on either side of the transaction believe it to be a legitimate store of value. The problem with the B£ is that many of the people most vital to Brixton’s economy and distinct culture deem the currency almost worthless. While the money is supposed to encourage a feeling of civic pride and unity, the Caribbean shopkeepers and stall-holders view it with suspicion and contempt, believing it to be a pet project of the middle classes that will saddle them with counterfeit, valueless notes which they cannot bank or pay their staff with. Whether this is the case or not, the reluctance of the heart of Brixton to support the B£ makes it unlikely that its velocity will be particularly high. A movement of cultural and economic solidarity has to be made from the grassroots in order for it to be successful, not imposed by a project manager who has returned fresh from Sweden with a degree in climate change adaptation.

The concept of the B£ is also based on suspiciously protectionist principles. Branded as money that ‘sticks to Brixton’, it aims to keep money within the community, giving a boost to local businesses. Were it to be successful on any great scale, it is likely that the surrounding neighbourhoods such as Camberwell and Peckham would receive a fall in business. Consumers may feel morally compelled to ‘Buy Brixton’, which would lower their economic choices, and could result in them paying higher prices for goods than they otherwise would have done. It is also ironic that such a multicultural community with access to goods from across the globe is being discouraged from shopping outside their immediate area. The trade and immigration which has given Brixton its unique identity would not be possible without the movement of goods and people across the world, whereas the B£ stands for a form of localism that attempts to confine the spread of economic activity.

ASI at the Labour Party Conference

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Next week the ASI will be hosting a fringe event at the Labour Party Conference on the title: “Is the cure worse than the disease? The unintended consequences of regulation." Speakers include John Fingleton (Office of Fair Trading), David Smith (The Sunday Times) and Stephen Sklaroff (Finance & Leasing Association). If you would like to find out more, click here. If you are not going to be in Brighton we are also holding an event on the same subject in Manchester with Mark Hoban MP (Shadow Financial Secretary), John Fingleton (Office of Fair Trading), Paul Mason (BBC Newsnight Economics Editor) and Stephen Sklaroff, (Finance & Leasing Association). Click here to gind out more about this one.

An information revolution

With plans from the Conservative Party to increase the amount of government information the public can access, Anton Howes considers the value of these moves for political reform.

In hankering for wide and sweeping reforms of our public services, the smaller steps that can be taken towards meaningful change are often overlooked, dismissed as vote-catching fads or shunted off to the sidelines. A particular proposal taking form from the utterances of David Cameron’s Shadow Cabinet is one such specimen, and in forgetting about it, we risk jeopardising any further significant attempts at bringing greater choice and public decision-making into our public services.

In June, Cameron spoke of using information to enhance accountability, proposing that every item of government spending over £25,000 be published online, in full and for all to see. Although the reason for setting such a high figure seems odd and arbitrary, the potential for such a move is monumental. Far from simply encouraging and utilising “an army of armchair auditors” to hold government waste at bay, the information available could be used to agitate widespread public and political backing for very specific reductions in government expenditure. The largely ignorant outrage over increases or cuts in expenditure for specific departments by commentators outside government would be almost immediately replaced by calculated, precise and unequivocal suggestions from countless sources.

However, there is another aspect to reforming government transparency: as well as making spending restraint easier, there is the potential to transform the way public services are run. Governments are currently able to manipulate the choices of the public on a vast scale, often with unpredictable consequences: school league tables and hospital rankings can be manipulated to suit the political pressures of the day simply by including a new criteria, or restricting another.

The release of all government-collected data other than that pertinent to privacy or defence would do away with a system so open to abuse, as well as making it easier for the public to make fully informed choices about the services that they want. Cameron has so far cited a few possible examples, such as local crime maps emerging from the full release of crime data, allowing communities to hold the police and local council to account – to see whether politicians have really fulfilled a promise to cut crime, or where they would like to see more done.

In some ways, the prospects for accountability and the functioning of democracy are also revolutionary. Voters would be able to see exactly how much a particular administration has done for them, and hold politicians to account not only for their individual expenditure decisions in central and local government, but for changes in countless variables in their local area. Voters would be able to make more informed choices, seeing through the obfuscations and misrepresentations.

If Cameron’s vision of a “Post-Bureaucratic State” is to be fully appreciated, the potential of this reform should be looked at in far more detail – other than headline a Conservative party commitment to the NHS, the same speech in late August proposed the far more significant proposal to allow patients to control personal budgets and see their full “health records online in the same way they would their bank accounts”, allowing them to make decisions about the GP they want or the hospital they would like to use.

Some of the Shadow Cabinet have started to have ideas of what they may have the chance to do in this context: Michael Gove announced in August that a Conservative government would establish a free online library of past exam papers to allow parents to track possible grade inflation. Nevertheless, Gove simultaneously fails to appreciate the larger possibilities of transparency: just a few weeks later, he proposed a reform of school league tables, arguing for a change in the way certain subjects are weighted – such a proposal is really no better than Ed Balls’ “school report cards” in that it is yet another adjustment at the edges.

In the touted dream of a “post-bureaucratic state”, all data on schools would be freely available, and independent rankings would be able to emerge in the same way as a car price comparison website, or in the way universities are already compared by various newspapers. The public would then be able to choose from those lists based on the criteria they use and on their own individual merits, free from the chance that governments may use data to skew choices or steer us towards what they think is “best for us”.

Rather than simply creating choice, transparency in government data allows existing choices to be informed, increasing the quality of public choice. It paves the way for further choice creation, for example breaking up the postcode lotteries associated with schools and hospitals, part of which could be remedied by current Sweden-inspired reforms. But these Scandinavian or other imported reforms can only be effective if the choices between schools and hospitals are properly informed.

A recent Google-sponsored competition on the “Young Rewired State” in late August explored the possibilities of websites based on government information, that don’t, but probably should exist. Among them was a web-based tool to show the safest school routes based on crime statistics; a phone application to show when public transport will arrive, based not on timetables but on live data London buses already send back to their controllers; or even something as mundane as collating council tax bands for every single postcode in the country, or finding your nearest NHS dentist.

If there is anything to be positively excited about from a potential Conservative government, it is this move towards transparency. Cameron has already shown a willingness to display information instantly online in the form of MPs’ expenses, but if and when they do gain control of Whitehall, it is crucial that everything is done to make them see these commitments through.

Lib Dems want to soak the rich

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Vince Cable, the Liberal Democrat Treasury spokesman, has unveiled plans to introduce a new 0.5% levy on the value of properties over a £1m threshold. That means that someone owning a house worth £1.5m would pay 0.5% of £500,000 – £2,500 – to the Treasury each year. Cable says the new tax would raise £1bn, helping to fund Lib Dem plans to raise the personal allowance to £10,000 and take four million people out of the income tax net.

The populist appeal of this measure is obvious. And indeed, I support the Lib Dems pledge to raise the personal allowance. I can even see an argument for some long-term rebalancing of the tax system towards property taxes and away from taxes on income and production. But we really need to look at the Lib Dems' property tax idea in the context of the tax increases on the wealthy that are already planned:

  • Income tax: From April 2010, people earning between £100,000 and £150,000 will see their personal allowance phased out, effectively creating two narrow income bands (£100,000–106,475 and £140,000–146,475) where tax is levied at 60%. Also from April 2010, a new 50% tax rate will be charged on incomes over £150,000.
  • Pensions: In April 2011, the higher rate (40%) tax relief on pension contributions will be abolished. Higher rate taxpayers will only be able to claim tax relief on their pension contributions at the basic rate, 20%.
  • National Insurance: Employee and employer National Insurance Contributions will both rise by 0.5% from April 2011. There is no practical difference between this and higher income tax.
  • Tax on non-domiciled residents: In the past, non-domiciled residents have only had to pay tax on UK income/capital gains, and on overseas income/capital gains which are remitted to the UK. However, they now have to either pay UK tax on all overseas income/gains or pay an annual £30,000 levy.

One of the results of this is that the City of London would, from 2011, be the most highly taxed financial centre in the world. As Alex Masterly of Financial Crimes puts it:

[With] the new 50% rate of income tax and taking into account social security payments, a banker earning £250,000 in the City of London will keep only half of their gross income. This is a lot lower than other European centres such as Paris (58%), Frankfurt (60%) and Zurich (68%) and far less than Dubai (95%).

Once you throw in the Lib Dems' new property tax, and their plans to tax capital gains as income – which would mean capital gains tax for higher rate taxpayers going up from 18% to 40% or 50% – you can almost hear the pips squeaking. Eventually, people will start to wonder why they even bother.

Leaving aside any economic concerns, my real worry is what this says about British society. It suggests that we still haven't consigned our envy-ridden class-consciousness to the past, and that we are still as ready as ever to denigrate and resent success, rather than celebrating it. In the long run, it is that mentality – and not merely its political manifestations – that will do this country the greatest disservice.

101 Great Philosophers

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I have a new book out which is something of a departure from the field of public policy. Published by Continuum it is "101 Great Philosophers," my own selection of the great thinkers who between them set the Western intellectual tradition. Before the Adam Smith Institute I was a philosophy professor in the US, so I am revisiting familiar territory.

The remarkable feature of the book is that I allocate only 400 words to each of them! This is not any kind of "bluff your way" book. On the contrary, I try to bring out what they said, what was innovative and important about it, and to capture a small flavour of their lives. The result is a book you could read in an evening, gaining admittance thereby to some of the intellectual heritage of our civilization.

Why, though? It is because I think philosophy is important, and that some of our leaders might not make the mistakes they do, were they more versed in what philosophers have said. Philosophy is under-taught and under-studied, which is a pity because it does develop and expand the thinking processes. In an age awash with information, my supposition is that some people will want and value a highly condensed analysis of the contribution of the great thinkers. My hope, too, is that after reading my account, readers will be tempted to explore more of their works.

It is a personal selection, but a fair one, in that it probably overlaps by 80 percent with the names almost anyone might choose. The great minds who have blighted human happiness are in there alongside those who have blessed it. There is more information about it here.

Taking localism seriously

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One of the annoyances of my privileged position as someone watching the political and economic world go by (and yes, it is indeed a privilege to be able to combine work and interest so) is that almost no one on the political side of that divide is ever willing to actually take their own ideas seriously.

For example, localism is something that everyone at least pays lip service to (we here take it very seriously of course) whether it be under that rubric or "more power to the community". But as this letter to The Times makes clear, everybody then acts as if local power wielded locally by locals is the very last thing that any system should allow to happen. As the famed boat, Raedwald, pointed out about the Magistrates Courts:

Many of the arguments against the old systems are around objections to (hateful term) a 'postcode lottery'. Well, those 'postcode lotteries' often reflected very accurately the values and relativities of local communities; the Welsh benches from 'dry' shires that savagely disposed of alcohol-related offences, and the harsh penalties for thieves imposed by benches in the northern Mill Towns. When I was a lad the bench covering the seaside retirement towns of Frinton and Clacton had the reputation of jailing speeding youngsters - and the message was understood; don't race in Frinton.

That's exactly what localism means: that locals get to run their locality as they wish. We should also not forget that while the authority was indeed handed down from the centre to those JPs the methods of deployment of that authority were not. Hand the power back and let people get on with it.

We should also note that Magistrates are unpaid volunteers (as the letter notes) and are very much part of Burke's "little platoons". That voluntary collectivism which has so enriched our society over the centuries and which the current state of politics seems so insistent on trying to snuff out.