Business as usual

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cameron_and_osborne Speaking at the World Economics Forum on Friday, Cameron gave a clear sign that any Conservative government deficit-reduction would be far from radical. While emphasizing that the party would act soon after their election, he also noted that any steps would not be particularly ‘extensive.’ He further entrenched his intentions on Sunday’s BBC Politics Show, insisting that the party is “not talking about swingeing cuts. We’re talking about making a start in reducing our deficit."

Cameron is well aware of Britain’s gloomy credit rating outlook, and knows the danger of following Greece into a world of higher interest rates. He should be keen to keep the rating agencies’ day of reckoning at bay (shouldn't he?). When Cameron speaks there is a noticeable lack of drive to transform Britain’s economy. He has demonstrated no passion to remove the government’s stifling hand from the economy, to reform public services, significantly lower the tax burden or slash regulation for small businesses. Similarly, Osborne seems much happier waxing lyrical about micro social-engineering through behavioral economics than tackling heavy issues and leaving a mark on Britain for the better.

If this type of rhetoric continues, we are likely to see a Conservative government overseeing ‘business as usual’. They will tinker at the peripheries of systems and pass reforms to prevent major economic disasters, but do very little else. It seems like Britain will continue to trundle along with a huge public debt, bloated, inefficient bureaucracy, an unreformed political system and mediocre to poor public services. A political elite that feels they know better than the people will continue to make lifestyle choices for us, while Britain’s international reputation and competitiveness will continue to slide.

The Conservative’s middle of the road and unadventurous economic plans may all be part of a scheme to attract wavering floating voters set to become a vessel for radical and effective change if they make it to power. However, seeing the direction that the front bench is leading the party, this is almost certainly wishful thinking.

An announcement

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As readers may have noticed, the ASI website was offline for a while over the weekend while we moved to a new server and installed some technical upgrades. Needless to say, there are still a few glitches that we need to iron out, but normal service should be resumed from now onwards. However, if you spot any problems on the website in the meantime - from missing images to broken links - it would be very helpful if you could email the details to info@old.adamsmith.org so that we can make sure they are rectified.

General Election 2010 - Bashing the bankers

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President Obama’s savage attack on Wall Street’s bankers was primarily politically-driven on the back of the disastrous loss of one of the Democrats’ prized Senate seats in Massachusetts. Undoubtedly, Main Street, USA, is profoundly unhappy about events on Wall Street – unprecedented levels of taxpayers’ money being used to prop up leading US banks, not forgetting AIG, and now monster bonuses. Bankers’ message to Main Street – heads we win, tails you lose.

In the UK, Labour Party apparatchiks will be poring over any available focus group data to see how this presidential attack has played out. Whilst the forthcoming General Election will be dominated by the economy, bankers may be the political target – not the clerks behind the window of the local Midland but the strutting investment bankers clutching their chunky bonuses from RBS, which has received over £45 billion of taxpayers’ money.

The Prime Minister, of course, will be portrayed – rightly or wrongly - as the man who saved the UK economy as RBS and Lloyds – two of the four clearing banks – faced financial oblivion. And indeed, with the injection of massive amounts of new capital, nationwide bank branch closures were averted.

In truth, the Election should focus on the compelling priority to return the UK’s public finances - so grievously damaged by 12 years of Labour Government - to stability. In particular, public sector net debt (PSND) has soared and is currently way above the percentage of national income when the IMF was called in by the Labour Government in 1976.

But the reality is that the Election campaign may degenerate into a ‘bare-knuckle fight’ – to use a notorious CBI phrase – between the Labour Party and the Conservative Party’s City friends, including bonus-fuelled investment bankers.

And, with Obama’s fighting speech, are the gloves now off?

New report: Everything is terrible

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We're told in a new report that, well, everything is just terrible:

A detailed and startling analysis of how unequal Britain has become offers a snapshot of an increasingly divided nation where the richest 10% of the population are more than 100 times as wealthy as the poorest 10% of society.

The thing is, this just isn't true. What has been measured is the wealth disparity before the attempts we make to reduce that wealth disparity. For we do indeed make attempts to reduce both income and wealth disparities and we really ought to be measuring the gap after such attempts.

One of the figures used is that the bottom 10% have less than £8,000 in assets and this just isn't true at all. Think of it this way for a moment: if interest rates are 5% and I've got £100,000 in savings then I've got an income stream of £5,000 a year. We can also look at this the other way around. If I've got a guaranteed income stream in perpetuity of £5,000 a year then I've an asset of £100,000. I have, in short, wealth of £100,000.

Now I'm not about to delve into all of the details of the UK welfare state but we do know that there are a number of benefits which are paid as of right. Some depend upon certain circumstances (unemployment say) some upon other income received or not received (housing benefit say) some as a result of contributions made (the State pension) but the net summation of this entire system is that just about no one cannot claim at least £5,000 in income from that welfare state. No one, that is, who has less than £8,000 in savings (have above that amount and some of these benefits are not payable). Which means that everyone has at least wealth of £100,000. It may be in the form of benefits which can be accessed, but it's still an income stream payable off into the future and is thus wealth that we can assign a net present value to.

We might need to alter that NPV for interest rates (about 4.3% on the current 30 year gilt), for inflation proofing (raising the NPV), for lifespan (lowering the NPV again). We can make all sorts of adjustments, but the basic point still stands.

Everyone in this country has an asset worth vastly more than that £8,000 which we are told the poor don't have. It's called the welfare state. And yes, we do have to include this in our calculations of the wealth gap, for how can we argue that there should be more or less done to shrink this wealth gap without looking at the effects upon it of what we already do?

Support for less government?

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There has already been plenty written about the latest British Social Attitudes survey. Many, like Tim Montgomerie, have noted that the survey shows a shift towards the political right. Mark Wallace, meanwhile, has talked about ‘Libertarian Britain’. They are both half right. Firstly, the survey does show a significant swing towards the Conservative Party, which is more popular than Labour for the first time in 20 years. And secondly, the survey does show a more relaxed attitude towards homosexuality and family structures (though not towards cannabis use) than has been previously been the case.

But I’m not sure I’d describe the results of the survey as signifying either a move to ‘the right’ or a libertarian nation. The key figures, to me, are the ones cited in this week’s Economist, on support for tax and public spending. Basically, 50 percent of those surveyed wanted the state to remain the same size (that is, taxes and spending should remain at their current levels). 39 percent want a bigger state (higher taxes and more spending). Just 8 percent, meanwhile, support a smaller state (i.e. lower taxes and lower spending).

On the plus side, these figures are moving in the right direction. 62 percent of people wanted a bigger state in 1997. Meanwhile, support for a smaller state is higher than it has been since the height of Thatcherism in 1983. But still, the idea that 90 percent of people think the state should remain as it is, or grow even bigger, is not one I find very comforting.

But on the other hand, all polls can be misleading, and this one is probably no exception. Perhaps a more accurate reflection on the results would be to say that most people are happy with the state providing the range of services that it currently provides, and that they would rather not have lower taxes if the price of that were fewer services. However, if they could keep the range of public services currently on offer but also have tax cuts, it is not unreasonable to suppose that they would go for such an option. And that, of course, is perfectly possible – partly because many of the things the state currently are not really ‘public services’ at all (most of Britain’s ‘bureaucracy’ is both unpopular and pointless), and partly because cutting taxes does not necessarily mean reducing revenue.

So how’s this for a populist agenda: tax rises will be avoided by focusing public spending on core services while getting rid of the rest, and targeted tax cuts will be used to boost the economy without compromising those core services. You could argue that the British Social Attitudes Survey suggests such a programme would be supported by more than 50 percent of the country, more than enough to deliver a very sizeable parliamentary majority.

One last thing to be hopeful about – while the survey does not appear to show a significant desire for ‘small government’ or, indeed, ‘libertarianism’ is also indicates a clear swing away from redistributive socialism. Less than 40 percent think government should redistribute income from the rich to the poor (compared with 51 percent in 1994). Meanwhile only 21 percent think unemployment benefits should be higher today, compared with 53 percent in 1994.

Sunk’ by the creative forces of capitalism

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Avatar has sunken the old ship. James Cameron’s new film has generated revenues of $1,878,025,999 in 40 days (and rising), making it the highest grossing film of all time worldwide (not adjusted for inflation), finally overtaking his other blockbuster, Titanic. Regardless of the film’s artistic quality (or lack of it), Cameron has proven himself to be an incredibly talented wealth generator. For this entrepreneurial triumph, he should be commended.

On a political level, some have seen the film as a damning indictment of Capitalism. The ‘evil’ exploiting Capitalist humans are driven by their greed for unobtanium, an extremely valuable resource. They are willing to destroy the wonderful environment of the ‘Navi’ alien planet of Pandora and its inhabitants, in order to acquire it. The injustice is further highlighted by the sheer magic of this 3D world, which has reputedly had such an impact on some moviegoers that they have been driven to despair and are struggling to cope in the real world. Either that or their depression has been onset through realisation that in the real world, far away from Pandora, our public finances are in a dire state and as taxpayers; they will be footing the bill.

Despite the anti-capitalist interpretations, the film is quite the opposite: an anti-imperialism movie. Perhaps instead, it is a story of property rights (held by different humanoids) being infringed, and a journey of discovery for one of the imperialists (perhaps driven primarily by love interests). He comes to sympathise with those his side intended to coerce. Avatar also has a clear strand of thought on the environment, warning us about the sustainability of human action. However, with adequately defined property rights, a functioning market and a process of voluntary negotiation, humanoid agents should well manage environmental resources.

Regardless of the plot, Cameron has played a classic entrepreneurial role, in which he and his backers undertook significant risk, developed innovative technology, and are now reaping significant reward for their creative investments. Overall, another victory for capitalism, in an industry not famed for these sympathies.

ISOS - Renewing Britain

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On Tuesday 9th March the ASI will be holding its first Independent Seminar for the Open Society of the new decade. A one-day conference for sixth-form students interested in politics and economics, it is named after Sir Karl Popper’s book The Open Society and Its Enemies and as such is based upon the principles on open and tolerant society.

ISOS always attracts prominent and distinguished names from all areas of politics, journalism and business; past speakers include the likes of Boris Johnson, Andrew Marr, Vince Cable and Yasmin Alibhai-Brown. It allows students to get involved with the issues discussed; after a 15-20 minute talk students have the opportunity to question the speaker, and voice their own opinions and reactions. Following the success of last October’s trial, ISOS will also be hosting a debate between two panels of experts.

The theme for March’s seminar is ‘Renewing Britain’, and will examine the difficulties and opportunities facing the UK. As always, the talks promise to be on the cutting-edge of politics and economics, whilst complementing A-level syllabi. To book a place at ISOS, please e-mail isos@adamsmith.com. Both individual and school bookings are welcome.

Do we need a Central Bank?

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The Bank of England is the only entity allowed to create or destroy our currency. It uses this power to lend money or accept deposits at a defined interest rate with the aim of controlling the economy's growth and inflation. Not everyone can borrow from or deposit money at the Bank; it only lends to other banks or building societies, and even then only over a few fixed (and usually very short) periods. If a bank wants to borrow or deposit money for a different length of time, or needs more flexibility on how much and when they borrow or lend, they have to go to another bank. However, the rates the banks lend money to each other (indicated by LIBOR) are higher than the Bank of England's rate as other banks can't produce money and so may not be able to pay back what they borrow. Banks make a profit by loaning money to other companies (including other banks unable to borrow money from the Bank of England) at rates higher than LIBOR and credit their deposits at lower rates.

But what if Britain had no central bank? If no one could create money and there were no (effective) money controls then Britain's net imports may eventually lead to a shortage of pounds; people would be forced to use another currency for day-to-day business. However, if the money controls were too tight exports would be hurt, as international investors would find it hard to get the money needed to buy British goods. We would therefore need a way of creating new money. With no central bank, and therefore no variable monetary policy, the value of a pound would have to be fixed relative to either another currency or one or more goods. As the government (or an independent institution) could only provide new notes when the appropriate deposits were placed with it, inflation would only depend on the changes in value of the deposits.

In an economic downturn, credit would be harder to come by as there would no longer be an infinite supply. Banks would still loan money as they need income, but they would be far more selective in who they loaned to. Demand for credit would quickly outstrip supply, bankrupting unprofitable companies and halting unsustainable lifestyles - but this reduction in private and public debt will speed the return to growth.

Unlimited sources of cheap credit have fuelled many asset price booms. Without the Bank of England, the amount of money a commercial bank could lend is limited by its deposits. During a boom speculators withdraw their deposits and take out loans to invest in the booming assets, and so the laws of supply and demand will limit its extent by driving up the cost of credit.

Many countries experience tremedous growth and stability without the aid of a Central Bank - would Britain be better off too?

Libertarianism and the Conservative Party

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Mark Wallace on ConservativeHome argues that based upon British Social Attitudes Survey the people of this country are becoming increasingly libertarian. This would certainly be a welcome development, which if it were to continue would leave the Conservative Party in need of another rebranding.

At present, those in positions of power within the Conservative Party are not keen to be associated with the perceived radicalism of many in the libertarian movement. Cameron’s speech writers have many times built up the straw man of libertarianism in order to try to sell an alternative compassionate communitarian message. Perhaps for electoral reasons they have had good reason to do this (although Thatcher’s success rather questions the logic of this position), but they may be advised by changes in social attitudes to alter their message.

How then could the Conservative Party join up the gaps between its present position and libertarian ideas? As this thoughtful article by David B. Klein sets out, an understanding of Adam Smith would guide the way. Klein argued that “The communitarians should give more consideration to the Invisible Hand, that is, to the beneficial decentralized processes whereby individuals and families choose voluntarily for themselves". As Alexis de Tocqueville learned from his studies of America, when the country was somewhat freer than it is today: “Local freedom, then, which leads a great number of citizens to value the affection of their neighbors and of their kindred, perpetually brings men together and forces them to help one another in spite of the propensities that sever them."

From the welfare state, to schooling, through to regulations and on to almost every facet of government action, the state undermines the community. Cameron’s post-bureaucratic age acknowledges this, but as the new quangos pile up, it looks set to require a lot of bureaucrats to administer. The Conservative Party need to instead embrace the communitarian results of libertarian policies, and build a party that can deliver real radical reform to reflect an increasingly libertarian electorate.