Voting, lending, and spending

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Commons to vote on electoral reform

You've really got to hand it to Gordon Brown. After nearly 13 years in government, and just a few weeks left until a general election he looks set to lose, he's suddenly decided we need to change Britain's electoral system. And yet he chooses to champion a reform that (a) won't win him any more seats, (b) won't persuade the Lib Dems to go into coalition with him, and (c) will do precisely nothing to 'restore trust in politics'. Indeed, by forcing politicians to stick even more closely to the centre ground than before, the alternative vote's main effect would be to empower the party machines and give people even less reason to care about who represents them.

MPs say the banks aren't lending enough

But why do we want bank lending to return to pre-crunch levels? Don't we all agree that that was an unsustainable credit boom, and that Britain has far too much debt as it is? Indeed, McKinsey say we are now the second most indebted industrial nation in the world – turning Japanese, if you like. And of course, isn't it funny how the government always forgets that it is discouraging lending by forcing the banks to increase their capital ratios by buying up lots of government bonds? They really can't have it both ways. Speaking of debt...

Stiglitz says keep on spending

But what does all this 'stimulus' actually achieve? The money has to come from somewhere, and whether it's taxes or government borrowing, that's cash that's being taken out of the productive private sector to fuel the unsustainable growth of a parasitic public sector. That may appear to boost 'growth' in the short term (hardly surprising when government spending is included in GDP stats) but in the long term it will land us with higher taxes, a sclerotic, imbalanced economy, and lower living standards.

The Conservatives' fall in the polls continues

I wonder if anyone at Conservative Headquarters has noticed that their decline in popularity has coincided with David Cameron's declaration that he wouldn't cut spending right away after all, thus leaving people with no real reason to vote for him? Let's face it: unless you are a corrupt African politician or an overpaid NHS bureaucrat, it really is becoming quite difficult to answer the question "what would the Tories do for me?"

And in other news...

Harriet Harman looks set to be nominated for The Sun's prestigious 'rear of the year' award. Well, she certainly has my vote – I'm just desperate to see the back of her.

Holding back recovery

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The government has struck a clear line on the economy heading into the election, vowing that it will be the party to guide Britain tenderly through the steps of recovery, nurturing new jobs and fostering enterprise. Nothing could be further from the truth.

In contrast to this rhetoric, the latest research from the British Chambers of Commerce shows that proposed employment legislation would cost businesses £25.6bn in new taxes and regulations if they are but into effect. ‘Employment legislation: holding back recovery?’ is a timeline that breaks down the plethora of the costs of proposed regulations between 2010 and 2014. Amazingly, these estimates are lifted straight from the government’s own Impact Assessments, so in all likelihood the unintended financial consequences would prove to be even higher.

What is interesting is that only two of the new proposals will be EU legislation; sixteen will be coming directly from the UK government. While the EU-enforced Agency Workers Directive is set to cost business nearly 1.5bn a year, the rise in NI contributions will cost a staggering 4.7bn a year, and the Pensions Reforms in 2010 4.8bn. None of these regulations are even attempts to make British firms more productive, competitive or attractive; not a good idea and at a time when the private sector doesn't need it.

This £25bn won't even be reaching the treasury to fix the gaping hole in our nation’s finances. Much of the estimated cost represents lost opportunities, such as the closing down of a venture and the decision not to expand or start one up to begin with. Given the colossal national debt, the government shouldn’t be wasting our money dreaming up wasteful Keynesian initiatives and adding ever more regulation to an already fragile economy.

Talking down Britain

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At the World Economic Forum in Davos recently, Lord Mandleson of The 32-Word Title criticised Tory leader David Cameron for 'talking down Britain'. Well, it's hard to talk up Britain when you see what a pickle Lord M and his colleagues have got us into. The huge, debt- fuelled, public-spending-powered boom inevitably had to end in bust, and it did. Both households and the government found themselves broke and overstretched.

Private households have done the right thing – cutting back on their spending and reducing their debt. The government, of course, keeps adding to its debt stockpile. This year alone it will increase its debt by an amount equal to £3,000 for every man, woman, child and infant in Britain, and it plans to do exactly the same again this year. Like the government, many households have found themselves unable to make ends meet, but do not have the same happy option of forcing taxpayers to bail them out. Last year there were 134,000 personal insolvencies in England & Wales, up a quarter on 2008. The more insolvencies there are, the more suppliers there are whose bills don't get paid, and the more loans and credit-card debts have to be written off by the banks. Really, it is bad business all round.

It means, of course, that potential investors have become more wary too. They are demanding bigger returns and higher interest to cushion them against the threat of their borrowers not being able to pay them back. Indeed, some investors even worry that the UK government might not be able to pay its debts. The markets have the jitters about Greece, and indeed Portugal. Britain of course has the benefit of not being in the Euro, and its falling exchange rate has at least kept its export trade alive. When trade is down all over the Western world though, the boost we get from that is limited. Yes, it's hard to talk up Britain, and it will remain so, until politicians realise that they have to do what households are already doing – cut their spending and their borrowing, and balance their budget, fast.

Dr Butler's new book The Alternative Manifesto (Gibson Square Books) is out now.

Mummy, what is that man Thomas Friedman for?

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Getting the wrong end of the stick would seem to be the correct answer. In his column in the New York Times, Thomas "Airmiles" Friedman, tells us that:

Banks, multinationals and hedge funds often hire foreign policy experts to do “political risk analysis” before they invest in places like, say, Kazakhstan or Argentina. They may soon have to add the United States to their watch lists.

He then goes on to say that this political risk analysis is all about how inflation might return, the currency crash, competitiveness erode....no Tom, that's not political risk, that's economic risk. Political risk is something entirely different.

Say, you invest in an oil and gas project in the Far East of Siberia, billions upon billion of dollars worth, and when you've started to pump out the fuels which will pay for it all then the government comes along and changes the rules on you. As happened to Shell on Sakhalin. Or similarly to BP with TNK. You sink hundreds of millions into a copper mining project having agreed the royalties you will pay and then when you've spent the money, when you're committed, the government decides to tear up the contract and impose higher royalties. As recently happened in Zambia. Or you spend $80 million prospecting for gold and are then told you can't lift it for "environmental reasons"....and when you try to claim back your $80 million under the original contract the government reneges. As is happening in El Salvador now.

That's political risk: that politicians will abrogate the rule of law, will violate the contracts they themselves signed.

As to why people might add the US to lists where they have to worry about such things how about this?

In 1995, when oil prices were very low, Congress tried to encourage deep-water drilling in the Gulf of Mexico by giving oil companies relief from some of the royalties they incur for producing oil and gas on public land.......Representative Edward Markey of Massachusetts hopes to put things right with a bill that would clarify the law and prevent companies from signing new leases in the gulf until they renegotiate the old ones and pay royalties that are due.

Now that BP has spent those billions and found oil 6 miles deep the politicians have them over a barrel (umm, sorry) and wish to renege on the deal. Or in our own sweet England, where we invented the very concept of the rule of law:

In an extraordinary ultimatum that has shocked some of the City's biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.

We're not even bothering with Parliament, just allowing a bureaucrat to provide that political risk.

Why might people be considering the political risk of investing in the US or the UK? Because the politicians in both countries have recently shown that political risk is something that has to be considered in those countries. The result being that just like every other country where there are such risks incoming investment will be lower and thus the people poorer.

Capitalism or Socialism?

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This week I debated the Socialist Party of Great Britain on Capitalism or Socialism? I have a soft spot for the SPGB because they share many of my ideals – reducing coercion, class, privileege and inequality, peaceful co-operation and mutual respect. They thoroughly reject the bureaucracy, the concentration of power and the barbarity of countries that call themselves socialist but in fact practice state socialism or worse. And they are genuinely willing to debate. So we had an engaging exchange. But I came away with three disappointments.

First is the tendency of idealists to confuse their own ideal world with their opponents' real one. They are driven to socialism by iniquities of the real world, like the huge wealth of the Duke of Westminster, the existence of monopolies, unemployment, and wasted resources like boarded-up houses. But you can't blame capitalism for creating these things. The Duke's wealth came from historic privilege, monopolies are bolstered by regulation, and human and physical capital are allowed to go to waste only because competition is not active enough.

Second, I just could not get my socialist friends to understand the knowledge problem. They need to read their Hayek. There are millions of production possibilities and millions of ways of producing. Capitalism is a daily referendum on what should be produced: people 'vote' with their cash for the goods and services they prefer – encouraging entrepreneurs to produce more of them. In agrarian societies, the production possibilities are limited, and in small groups, sharing is easily managed. In a technologically advanced world of endless innovation and six billion people, knowing what to produce and how to produce it leaves socialists with a real problem. There will be disagreements: so there will have to be power, and coercion, to resolve them.

Third, while we share many of the same ideals, I think the prospect of personal gain is a more powerful driver of co-operation than the idea of the general good. In exchange, both sides benefit – or they would not do it. We only gain personally if we can make someone else better off too. Exchange, though motivated by self-regard, spreads benefit far and fast across the planet. It encourages people to build up and look after their productive resources, allowing goods and services to be produced ever more cost-effectively. It works, even despite the best efforts of politicians to divert it for their own ends. Plumbers get up at three in the morning to fix people's blocked drains because they get a direct personal benefit from doing it. Would they get up at three out of the goodness of their hearts?

More on the stupidity of politicians

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And yes, it's stupidity about climate change again. Last week the Government released the subsidies that will be paid on feed in tariffs. The basic idea isn't silly at all. If people are going to use various forms of microgeneration then it does make (some) sense that they should be able to sell this to the grid. Storage technology for electricity is woefully inadequate, after all, so if some is generated it should be used.

It's also not silly that this price be higher than that for more conventionally generated electricity. Not entirely silly, at least: if we are trying to subsidise R&D into these new methods then there might be better ways of doing it and there might not, but the idea of a subsidy through price supports is not entirely insane.

The next step though can fairly be considered to be insane: for we've our old enemy government picking losers again. For they're offering different subsidies for each different form of microgeneration. And they've decided to calculate such subsidies so as to provide a guaranteed return on investment for each different type:

Tariff levels for different technologies:

The tariff levels for the electricity financial incentives (pence), calculated to offer between 5-8% return on initial investment in the technology are:

Aaaargh! No! Our aim is not to subsidise all and every attempt to generate electricity locally. It's to find out which is the best method of generating electricity locally! Thus whatever the subsidy is it should be uniform. So that those who generate at the lowest cost get the highest profit, leading to more installation of this lowest cost method.

For example, if medium scale hydro requires 4.5 p (per whatever unit) of subsidy and solar PV requires 41 p to make a 5-8% return then we absolutely do not want to be doling out 41 p to all those with solar cells. We want people to go build medium scale hydro instead. Perhaps the subsidy should be 4.5 p so that only hydro gets built, or 41p so that those building hydro make huge profits and thus resources flood into the most efficient method of doing this.

But to say to the solar PV folks, yes, we know your technology is wildly useless but here have lots of money anyway, so that resources are ploughed into this wildly useless technology, is simply nonsense.

Is there anything that politicians cannot make worse?

Dickens, poverty and progress

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Charles_DickensIt's Charles Dickens's birthday. He was born on this day back in 1812. He had a career in journalism, reporting on Parliament and writing in various papers and journals, though today we remember him as the most popular novelist of the Victorian age. Indeed, his name has given us a description of Victorian Britain – Dickensian, meaning depressing cities dominated by dark, polluting smoke-stack factories, with underpaid workers living cheek-by-jowl in overcrowded squalour.

So powerful is Dickens's writing that even historians have come to accept this description as objective fact. But we have to remember that Dickens was a social campaigner as well as a great wordsmith. He used his literary talents to highlight the problems of industrialisation through emotion and exaggeration. Indeed, he was brilliant at it, and his writings did actually change the Victorians' attitudes on issues such as poverty and class inequalities, which most thinking people at the time believed were the immutable condition of humanity and the working out of God's plan.

In fact, though, the factories, for all their ills, represented a step up for the working poor. The alternative was a life of equally long hours and backbreaking physical labour on the land in rain, sleet, snow or baking heat, a life made worse by the certainty of periodic crop failure, starvation and disease. The poor were not forced into urban factories: rather, they knew (in the words of William Barnes's poem) that they could 'make money faster, in the air of darkened towns' and that Linden Lea was not the rural idyll that it was painted. It was, of course, a revolution, an industrial revolution, in which things changed rapidly: with shoddy, functional buildings thrown up with little knowledge or understanding of the social consequences. How could anyone know? But before long, standards improved, hygiene and sanitation became standard, and the wealth generated by the new industries allowed even the poorest to rise out of the 'Dickensian' world.

Mandatory parenting needs assessment – ASBOs

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Daft Regulation of the Month

ASBOs provide "the last opportunity for young people to mend their ways before entering the criminal justice system. Parenting orders can be attached to ASBOs but the take up is
low and the ASBO breach rate for young people is 64%." In other words, two thirds of ASBOs definitely don't work. Correlation between a lack of further offences and fewer ASBOs does not prove that the ASBOs work, only that some kids don't get caught again or the authorities can't be bothered with another ASBO. So it's likely that 80% of ASBOs don't work.

Home Office remedial action? More of the same. They make no attempt to discover why ASBOs don't work or find a better solution to teenage misbehaviour. Their answer is this regulation which requires a "Mandatory parenting needs assessment." In other words, a council official will turn up at the naughty teenager's home and explain to mum and dad how the local agencies will identify their failings. This should be welcome news in most run down estates, but that is as far as it goes. There is nothing in this regulation on how these needs would be fulfilled once assessed? What happens if, as seems likely, the parents don't want to have their habits changed by the visiting do-gooders?

Being imaginative people, the Home Office considered three options to deal with this unruly teenager problem: do nothing; require parenting needs assessment through "non-statutory guidance"; or make it mandatory for the agency concerned. Apparently this third option is "is the only one that will ensure compliance". The implementation date is after Royal Assent (amazing!) and the Home Office states that the costs and benefits are "unknown". "Parenting assessments should ......theoretically lead to fewer ASBO breaches if parents are better equipped to care for their children." The Home Office suggests that a reduction in ASBOs would be an indicator of success. It might also be an indicator that everyone considers them to be a waste of time. Was this stupid regulation tested in a small part of the country? Of course not. There were no "specific impact tests".

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.

It's amazing how stupid politicians can be, isn't it?

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I think we all know that I'm slightly out of step with many of you: I think climate change is happening and that we ought to do something about it. However, when I watch the politicians stumbling in the dark as they attempt to do something I'm quickly reminded that it's normal for the political process to produce something which is worse than doing nothing.

As Lexington in The Economist notes there's a new suggestion in the US about what to do. Sensibly the idea is to do away with the entirely pork laden and counter-productive measures that have already passed the House and do something more sensible. Instead of cap and subsidise, have cap and dividend. This raises the price of carbon emissions, yes (which is the whole point) but returns the money raised by auctioning them all to consumers in the form of a dividend.

It would be simpler and easier to do this by imposing a carbon tax but that is regarded as a political non-flyer, sadly.

Then we're told about the details. In the trade part of the cap and trade thing (trade being an essential part of a cap and trade system, as the phrase indicates) the legislation would deny most opportunities to trade. More specifically, it would deny speculators from trading the permits (seemingly entirely unaware that speculators both provide liquidity and accept risk): and yet there could still be speculation but it would be pure speculation, without either providing liquidity in the real market nor accepting risk.

Some time ago some of us at the ASI (in our secret underground lair at which we sacrifice socialists and statists to our statues of Adam Himself, Bastiat and Hayek, as you know) were pondering this very point. A properly designed cap and trade system would be the best solution. Then we pondered on the politicians we actually have, rather than those we would like to have, and quickly concluded that a carbon tax would be better, giving less opportunity for said politicans to get it wrong: and in the absence of that perhaps nothing was better than whatever we would get.

Can't say there's been all that much to change that conclusion as yet.

Power 2010

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power2010_logoConsidering the expenses scandal and a looming general election likely to be fought on gesture politics more than real vision, it is all too easy to become disenfranchised-from our political parties, the state of democracy and our country's governance as a whole. However, the Power2010 campaign seeks to shake up this apathy and get the public involved in the functioning of our democracy. Created by the Joseph Rowntree Foundation, it aims to find the public's 5 most popular political reforms, and asks all prospective MPs to adopt them as a pledge.

In September, Power2010 asked the public to come forth with the democratic reforms they wanted to see at the next parliament. The response was huge; over 4,000 proposals were put forward. These ideas were whittled down by a representative sample of the population, and any securing above 50% support are now up as a shortlist of proposals on their website. Until 22nd February, you can vote for the changes that mean the most to you. Following this, the 5 most popular demands will form the Power2010 Pledge. This will be taken to all those standing for election, with a request for their own pledge to clear up politics.

There are some great suggestions on the shortlist such as 'Scrap ID cards and roll back the database state', 'English Votes on English Laws' and 'Expand the Freedom of Information Act'. The only way to ensure that the ideas that appeal to you make the final pledge is to vote for them. The campaign has brought about ideas from people across all backgrounds and party ties, and by keeping the suggestions limited to ways of enhancing democracy there is little political bias.

The number of parliamentary candidates that will take up the Power Pledge remains to be seen, but the more that those who care about parliament's health support the campaign, the better. Making it clear to parties where the public stands on civil liberties and transparent government is perhaps one of the best safeguards against the situation disintegrating further.

Click here to find out more.