The 'party of opportunity' and the 'age of aspiration'

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It is election year and the battle has begun in earnest. Against the Tory message of Austerity, Mr Brown has drawn a clear dividing line; his party of ‘opportunity’ will usher in an Age of Aspiration after ‘only’ 12 years in office. If by aspirational, he refers to the aspirations of socialists to centralise, control, distort, burden, and hinder, then perhaps he has credibility.

Austerity and opportunity are not mutually exclusive. The principles of strict economy are sound, which although forgotten or unknown in Number 10, drive growth and create opportunity. Saving is fundamental to economic growth. The process of investment in capital requires prior saving. By relinquishing immediate consumption below its potential level one may engage in capital formation.

Brown’s disregard for strict economy is made evident by the horrendous state of the public finances due to terribly excessive spending in times of growth. There is nothing complicated about living within ones means, about balancing the budget. However, when Labour entered in 1997 the budget was in balance, but by the Treasury’s own forecast by 2011 we will be over £1 trillion in debt, and this doesn’t include our obligations off the balance sheet.

With business stifled, interest rates rising, our credit rating at risk, and huge amounts of debt that you and future generations will have to pay, Brown’s record for burdening the future is perhaps without comparison. Our growth statistics show that you cannot spend your way out of recession, and we cannot borrow our way out of debt. Brown’s economic illiteracy is simply depressing - No sustained recovery can be achieved without focusing on debt reduction.

The aspirational people who achieve overall success and generate the most wealth will be penalised with at least half of their income taken by the government in taxes. Regulation costs under conservative (small c) estimates work out to over £100 billion. For those still in education, who aspire to success, rather than having an education based on their own choices and needs, it is centralised and focused on government targets.

As Smith put it, “there is a lot of ruin in a nation". We need a competent and genuine strategy in Number 10 which tackles debt and returns power to the people.

Inflation is not a cost-push phenomenon

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6. Inflation is not a cost-push phenomenon.

Many economic commentators used to believe (and some still do) that inflation could result from rises in the input costs of production. An increase in the price of raw materials or in the wages paid to workers would have to be passed on, it was supposed, leading to a rise in the price of the finished product. If enough goods were thus affected, this would bring about the general rise in price levels which is popularly called inflation.

If the money supply is unchanged, then price rises for some products will be matched by lower prices elsewhere. If people have to pay more for their essentials, for example, following increased prices brought about by higher input costs, then they will have less money to spend on non-essentials, the demand for which will go down.

The reverse is true, in that if people pay less for essentials because falling input costs allow lower prices, they will have money left to spend elsewhere, with the increased demand leading to higher prices in other sectors. The significance of this is that for over a decade cheap imports from China meant lower prices in developed countries for many household goods. The result was downward pressure on the consumer price index, leading central banks to keep interest rates low, with easy credit and cheap money.

The fall in prices was mostly in goods which show in the various price indices. It left people with money to spare elsewhere, some of which found its way into asset bubbles, including housing. Some of the goods which saw increased demand and higher prices did not feature in price indices, and therefore did not undermine the visible fall in prices. The choice of some items and not others to feature in price indices means that some price rises are effectively hidden from consideration.

With a stable money supply, price increases in some economic sectors will be matched by reductions elsewhere, and vice versa. If the money supply is increased when prices are stable or falling, the result might well be asset bubbles as people seek places to gain good returns on it, given falling prices and narrower profits elsewhere. Inflation is not caused by the push of higher input costs, but by extra money in the economy, or by its faster circulation.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

Looking at CCTV

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Britain is the most watched nation in the world with around 4 million CCTV cameras installed across Britain. The London Borough of Wandsworth has a higher number of them than Dublin, San Francisco, Johannesburg and Boston combined. Cameras can be easily installed by local councils, and are a way to visibly display that an issue is being ‘tackled’. However, the exponential rise in cameras simply serves to suggest that as a nation we cannot be trusted, and that if we are not being watched over we are somehow unsafe.

The ‘success’ of CCTV cameras in securing convictions has often been used as an excuse to support even more invasive forms of state monitoring. However, statistics show that CCTV cameras simply do not work. The crimes actually caught on camera fell by 70% between 2003/4 and 2008/09, while in London only one in seven crimes solved involved the use of CCTV. Many cameras are ill-positioned, lack film or are of such poor quality that they can’t be used as evidence in court.

Spending on CCTV guzzles three-quarters of the crime prevention budget, and so provides very little bang for our buck. £500 million was spent on new cameras in London between 1996 and 2006. This is £500 million that could have been spent on a number of better measures, such as employing or training police, and tailoring crime-fighting strategies to suit local areas. Coating the country in all-seeing-eyes has proved to be an expensive and inefficient use of resources, and dramatically reducing the number of cameras in the UK would be a good way to rein in profligate spending and create a freer society.

Two out of three

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Today the Chartered Institute of Personnel Development launches a package of proposals that they say will improve the jobs market, and indeed the whole UK economy. Controversially, perhaps, they involve freezing the National Minimum Wage for younger workers in order to tackle youth unemployment. They also want the government – or the next government – to abandon the National Insurance Contribution hike planned for 2011, and to delay measures to reduce the deficit.

Well, two out of three ain't bad. Yes, we should freeze the minimum wage for younger workers. Younger, and unskilled, workers are always the worse sufferers in a recession. That is why there are nearly a million 16-24 year-olds who are not in education, employment, or training (NEETS). Because they have few skills and experience, they just aren't worth as much to employers. When unemployment is rising, and employers have their pick of experienced and qualified staff all queuing up for interview, why should they taken on youngsters who they would have to spend time and money training up? When the economy's booming, employers can afford that. When it's not, like know, they can't.

As for NICs, it's a no-brainer. National Insurance was originally planned as a social insurance premium to cover pensions, health, and the rest. Now it is a straight tax – and a tax on jobs. Most people do not notice it, because the employee's contribution is tiny – just 1% of earnings for some people, 1.6% for most others (who said tax was 'not taxing'?) But the employer's contribution, conveniently hidden out of the sight of most electors, is 12.8%, and rising. A few weeks ago our Tax Fellow Richard Teather showed here just what the effect of that is – basically, making it very expensive to hire people. And the more the tax rises, the more expensive it is. Again, in a recession, who is going to take the risk of taking on new workers?

As for deficit reduction, well, as Jeremy Warner said in yesterday's Daily Telegraph, the economy has been running on the steroids of cheap money and government spending for far too long. Time to get down to reality. You cannot spend and borrow your way out of debt. And we are in a lot of debt right now. Nor is government spending somehow more magically efficient at creating jobs. In fact it is less so, because so much of it is wasted. No, CIPD, we do need to get the government deficit under control, and fast. If we do not look serious about it, investors will get nervous, The UK's credit rating will fall, and we will be cap in hand to the IMF again, just like the last time. And what do you think that is going to do for our job prospects.

See Dr Butler's new Alternative Manifesto here.

For every multiplier there is a de-multiplier

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5. For every multiplier there is a de-multiplier.

Governments sometimes justify moves to stimulate the economy by pointing to the multiplier effect. There are, indeed, multipliers. In a simplified example the government might inject a million pounds into the economy. If the recipient buys a boat and two cars and redecorates their house, this provides jobs for boat-builders, car manufacturers and dealers, painters, plasterers and handymen. And when these people in turn spend what they receive, yet more economic activity is generated.

There is a catch, of course. It is that government gets that money from the private sector. It takes it in taxes, leaving people with less spending power; or it borrows it, thereby increasing the interest rates the private sector has to pay, discouraging private investment. Or the government can print the money, ultimately taking out spending power by reducing the value of everyone else's money.

The money the government takes out of the private sector to finance its stimulus is money that would have been involved in other economic activity. Unless it were buried somewhere, it would have been working its own multiplier as it passed from hand to hand. It might have been used to buy the boat, cars and home redecoration that the government stimulus financed, or it might have created a stimulus in other sectors. The removal of this money in effect constitutes a de-multiplier, inhibiting the second, third and subsequent waves of economic activity it might have triggered.

There is a problem in that the private economic activity now squeezed out was a real response to demand, whereas the government stimulus does not necessarily go where it is needed for resources to be allocated efficiently. Furthermore, because the private sector is generally more efficient in its use of resources than the state sector, the chances are that the de-multiplier is larger than the multiplier the government claims credit for. The problem is that on the political landscape everyone can see and identify the government stimulus, whereas few people can spot the private sector activity which it has thwarted. Political leaders claim credit for the one without attracting blame for the other.

Governments sometimes argue that their activities shorten the time it might take for resources to be reallocated, and thereby minimize the hardship engendered by an economic downturn. This misses the point that it reallocates them to areas where production cannot be sustained without that government demand, and builds in imbalances that will cause later hardship when they readjust to real economic conditions. Instead of trying to create public multipliers at the expense of private ones, governments should boost the private ones by cutting the taxes it imposes on them.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

Capisca!

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For the last few weeks my wife has been working her way through the BBC's online Italian Steps language course, so that she can make herself understood next time she visits the Italian relatives in Garfagnana. She reckons it's actually just as good as the Italian evening course she signed up to at the local college. I had a look at it, and yes, using interactive web technology, it looks quite effective. And of course there are other courses for other languages.

So do I think that the Beeb has done us all a great service, enabling people around the world to pick up at least a smattering of other languages before they go abroad? Certainly, but the trouble is, it has done this on my nickel. Or my £142.50, to be more accurate, the value of the licence fee. And in the process, it has queered the pitch for other language course publishers and online providers (such as Berlitz, Rosetta Stone, Linguaphone et al.). Why pay for something you can get free from Auntie?

I'm sure that most people who worked through an online language course like this would not mind paying a pound or two, just as they pay a dollar or to to download tracks from iTunes. I am certain that they would not mind a few ads in the sidebar. Maybe not even a bit of product placement ('Scusi, un cappuccino Lavazza per favore'.) So why should the BBC provide it to users for nothing, and charge licence payers – the vast majority of whom will never hear of its existence, let alone actually use it?

This, like so much on the BBC website, should be privatized. Spin it off into a private company and let the licence payers pocket the sale price. Going right through the website, this could bring in quite a bit of cash, just when we all need it.

Justice vs. social justice

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In justice, redress can only follow a breach of a rule. In social justice, a claim for a redistribution is not grounded on any rule. It is simply a good try. Whether it is satisfied depends on the politics of the time and place. Where political decisions ultimately depend on majority vote, claims in social justice that ostensibly or really favour the poor have a better chance of being satisfied than claims having no income or class bias, but this will not necessarily be the case. Measures favouring the poor at the expense of every body else will usually command sympathy, but sympathy does not make them less unjust.

Anthony de Jasay, Perspectives in Moral Science 2009 [no link available]