No free lunch for you Gordon!

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As the Pre Budget report approaches, Gordon must come to understand that “there ain't no such thing as a free lunch". Whatever the possible catering policy in Number 10 and the Palace of Westminster, the world of economics unfortunately does not quite work like that. This is an unfortunate common sense principle of economics: somebody always has to foot the bill.

Gordon wishes to draw an election battle line, arguing Labour is the party of growth, whilst others are anti growth. He makes occasional gestures to our debt crisis, but the strategy is primarily tax and spend focused rather than spending cut driven (to maintain consistency and his core vote).

His argument is that government must keep investing, so we can grow our way to prosperity. GDP= C(onsumption)+G(overnment spending)+I(nvestmnent)+X(net exports). Therefore, the logic is that if we increase G, we will increase GDP.

Unfortunately there is no such thing as a free lunch. Where does government get its money? You and I, the taxpayers must foot the bill. As we pay the bill, we have less money to spend on our own consumption and investment. This policy of stimulus is a road to hell.

Government is worse at spending money than its people are. For every government multiplier, there will be a negative multiplier of an equal or greater size, so the policy at best will not do very much, and at worst will have a negative effect on growth. Of course, people may not immediately spend all their money as the government might, but private saving, private investment, paying off debts, and fixing balance sheets are essential to restructuring and economic recovery.

Rather than maintain and expand government spending and uncompetitive taxes (to fund this spending), a policy of growth should slash taxes , cut expenditure, whilst understanding we are severely restricted by the debt straight jacket imposed on us by Gordon’s historic spending binge.

To make one exception to the rule: Gordon, Darling and the rest of the Labour apparatchiks, if you disband your government now I would gladly host a celebratory lunch, this one's on me.

First commercial spaceplane

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The private sector took another step towards space with Monday's unveiling of Burt Rutan's rocket-plane, SpaceShip Two. Rutan is the designer who won the Ansari X-Prize of $10m by sending a private plane twice into space within a fortnight. He has pioneered new technologies, including a fuselage made from composite materials, and featuring a novel re-entry technique in which the wings fold so the spacecraft 'feathers' like a shuttlecock. Rutan's vehicles have been adopted by Virgin Galactic to carry its fare-paying passengers on sub-orbital hops into space.

The ship carries two pilots and six passengers, and gives them the chance to see the earth from space, and to experience several minutes of weightlessness as they float around the cabin. It taps a potentially huge market for those prepared to pay for the once-in-a-lifetime experience. Space has until now been the prerogative of governments and their space agencies. Space Adventures broke that monopoly, much to NASA's original distress, by sending paying customers up to stay at the International Space Station as part of the Russian space programme. But only those prepared to spend $25-$30m had the opportunity. Soon it will be open to those who can afford $200,000 for a short flight, and as is the case with such things, the price will come down. Space is too big and too beautiful to be left to governments, so this has to be seen as a most welcome development.

O tempora, o mores

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It is a measure of how far we have come that few headlines have the capacity to shock. The news that Essex police have warned parents not to buy toy guns for their toddlers lest armed police mistake them for drug barons and shoot them dead raises only a flicker. But one story last week managed to raise both surprise and concern. It was the report that in Scotland one-fifth of all adults lacked basic literacy skills.

How sad that the land of Adam Smith, David Hume and the Scottish Enlightenment should have fallen so low. Scotland was always prized for the way its education system provided a ladder upward for the poor but talented. The "lad o' pairts" was a stock figure in the success story of Scotland and the Scots. Why is it now so far gone?

I really do not believe there are simple one-off answers like 'state education,' I rather think it might be a compound of several factors which took Scotland's eyes off the ball. One is the purpose of education. The aim of equipping children to have access to life's opportunities and to fulfill their potential became obscured by a desire to turn out right-thinking and socially aware future citizens. A second is the abysmal drop in the status of teachers. From respected pillars of the community they have been reduced to form fillers who meet the targets set by remote administrators. I really do not think the Gordon Brown mantra of "lack of resources" has played any part. Scottish education achieved wonders when it was chaotically under-resourced but featured motivated teachers and determined parents.

What can be done? One answer might be to give schools and teachers their independence. State funding can be routed via the parents and the choices they make, while independence for schools and teachers will result in striving for excellence once again. The sad part is that a generation of children perish in the breach until this is done, and a generation of lives miss out on the opportunities they could have known. Until then, alas poor Scotland…

Madsen Pirie's "101 Great Philosophers" makes an excellent Christmas present.

Slave nation

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Service Nation, the latest report from Demos, puts them firmly back in the big government box that they have been trying to crawl out of. Service Nation proposes ‘civic service’, which in case you are wondering ‘differs from volunteering, which is more commonly perceived as an add-on to citizenship: something that is morally desirable but not an integral or implied expectation in return for the benefits that citizenship confers.’ In other words, while volunteering is voluntary, 'civic service' is forced.

But politicians should take note. The report concludes that the youth of the country are not keen on being forced to act. The solution for Demos is simple: 'This response also reveals the importance of branding a scheme so that it appeals to the young people at whom it is aimed – which should be done in conjunction with them.' I don’t fancy their chances, slavery is a hard sell.

The policy suggestions in this paper are illiberal. School children would have to volunteer as part of the National Curriculum, while university graduates would be forced to do at least 100 hours of community service over the course of their degree. This will of course hurt poorer students who already work to fund their studies.

The term ‘slave’ might however be a more appropriate name for the rest of us. The report includes the ludicrous idea that public sector employees should be entitled to a week of service leave each year and the imposition of various entitlements open to those chosen few that are not forced, but paid to serve the nation. Demos are suggesting the creation of a new class of crypto-civil servants, feeding off the corpse of the already overburdened, shrinking and fleeing private sector.

Tax sovereignty

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Where does the right for a state to tax income stop? Traditionally the answer to this question has been at the border. However, this is no longer always the case. When many people try to move country, they will be faced with a long list of bilateral agreements and international regulations which oblige them to still pay taxes in the country from which they came. They can even be taxed in both countries. The free movement of labour is not so free after all.

So what about the movement of capital, does the taxation of capital stop at the border? The short answer is no, as Daniel Mitchell sets out in this video. International bodies like the OECD and the UN are being used by larger and more powerful jurisdictions to bully smaller jurisdictions known as tax havens to engage in various agreements. International institutions are being used to violate sovereignty in order to control citizens living in the UK. Should this really be the job of international institutions? I suggest not.

The sovereign right for a state to choose its own jurisdiction was obtained as a consequence of the experiences of the thirty years war 1618 – 1648. It was agreed upon in the peace of Westphalia in 1648. This international agreement has been a valuable institution for peacful relations between states and I can’t see why we should discard this in favour of bullying states.

Pondering inequality

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I think we're all aware of how the poverty debate has changed in recent decades, yes? That it's relative poverty (or inequality, to give it its proper name) which is the true horror, not poverty itself. That the world would be a better place if we were all more equal, even if we were all poorer?

I don't agree here, of course: there's far too much real and absolute poverty around the world for us to be ready to slip and slide on the wealth creation which alone can alleviate it. But I've been wondering is there was any simple or single point that could be used to enlighten those who worry about relative poverty. I've found one snippet that, well, perhaps you can help me refine it, see if it can be turned into something useful.

The usual measure of inequality (ie, a close analogue of relative poverty) is the Gini. Don't worry about what it is. The Gini for the UK now, based upon market incomes (ie, before we do the tax and redistribution bit) is around 0.5. That's higher than the US by the way, although it's lower than many developing countries. From Angus Maddison's research into economic history we can also see that the Gini for the UK just prior to the industrial revolution was also around 0.5. Which means that if it is relative poverty, inequality, which is actually the problem then we've the same poverty that we had before the Industrial Revolution.

But that's simply absurd, to state that poverty today is just as it was in 1750. No one could with a straight face actually argue that the standard of living of the poor then and the poor today is in any real sense comparable.

So how do we make the absurdity of the concentration upon relative poverty visible to people? Any ideas?

Confessions of a greedy banker denier

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I read that the great bank bailout had cost British taxpayers £5,500 for every family in Britain. I read, too, that the Treasury paid £107m of taxpayer cash to City firms for financial advice. Well, not quite. The £5,500 has not actually been taken from British families, it represents their liability, or the amount at risk for each of them. The odds are quite high that most of this (if not all) will never be called on, and that as banks earn money, they will be able to repay government, which will be able to sell the shares it bought. And of the £107m fees, over 90 percent of that is being charged on to the banks instead of coming from the taxpayer direct.

Still, though, it looks as though greedy bankers who brought about the crisis by reckless risk-taking are now back in the bonus culture, taking fat rewards at the taxpayers' expense. Well, not quite. It might be what the UK man-in-the-street thinks, along with the French President-in-his-palace, but some of us see other causes.

Those bankers were acting on signals sent out by governments and their central banks. Real interest rates were kept low for years, partly to smooth the politically unpopular down part of the cycle. Credit was too easy and money was too cheap. Cheap goods from China made for a misreading of inflation, and their build-up of reserves and savings habits curbed bond yields and sent more misleading signals that misled Western monetary authorities.

The bankers lent dubious loans because money was cheap. It was neither greed nor recklessness, but an understandable response to the distorted signals they were receiving. And the bonuses? We need banks to earn a big chunk of money so they can repay taxpayers, and we need incentives in place that will encourage their best talent to do just that. I think that makes me a greedy banker denier, but it's a good club to be in.

Madsen Pirie's "101 Great Philosophers" makes a first class Christmas gift.