Falling food prices


One of the things that bugs me about the all too sterile political debate at times is when we're told that inequality is returing to levels not seen since the 1920s. No, not just that this point is marched out with the rhetorical equivalent of pursed lips and a "Well, what are you going to do about it?" look, but the way in which the other half of the point is never made, not even mentioned: what's happened to the absolute numbers, not just the relative ones?

As an example of the way in which life has become vastly better for all, have a look at Mark Perry's figures for food as a percentage of household disposable incomes over the decades. Since the 1920s the number has fallen from 25% to just under 10%: seriously, housholds used to spend a quarter of their net income on food, now they spend under a tenth. Yes, the food is better, choice is greater and incomes are vastly higher as well, but isn't that a stunning advance in human welfare?

That in less than a century the food needed to keep body and soul together declined in price, as a portion of income, so much?

There's also a technical point that needs to be made about US poverty figures. To remind you, the US measures poverty entirely differently from every other nation: they took the necessary food budget in the early 1960s, tripled it and said that this was the poverty level (everyone else is using 60% of median houshold income) and they've simply updated it for inflation ever since.

What they haven't done is update it for the changes in portions of spending on different goods and services. We can thus say that the position of the US poor, those on or below this poverty level (which, just to remind everyone again, is before the impact of poverty alleviation measures, everyone else counts after whatever we do to reduce poverty), is rather better than the simple stated figures suggest. For food has declined massively in price and thus that inflation adjusted standard goes further than it used to.


Housing: Aspirations and the reality


Amongst the most serious losers of the ongoing recession have been the UK house-builders. Demand for new houses, despite historically very low interest rates, has plunged. Bullish targets for new UK house-build volumes, such as the Government’s 240,000 new homes per year by 2016 and 300,000 by 2020, have been replaced by unremitting gloom. After all, last year, just 160,000 new houses were built in England, probably around 30% less than actually required.

This pessimism has been reflected in the dramatic decline in the share prices of leading house-builders, most notably, Taylor Wimpey and Barratt Developments. Several house-builders have taken heavy write-downs of their land-banks. Whilst the recession has been a key factor for the decline in new house-building, it has been the disinclination of the banks to lend that has been crucial: the easy lending terms of the past in the housing market have been severely cut back.

No longer do such controversial offers, as Northern Rock’s 125% Togther mortgage, power the market. Instead, leading banks – two of whom, RBS and Lloyds, have received some £37 billion of new equity from the Government – now expect sizeable down-payments for any mortgage deal.

But, out of this gloom for the housing market, there is some evidence that the bottom has now been reached. Persimmon, the UK’s leading house-builder, confirmed in its trading statement of July 7th that sales volumes in recent months have exceeded those during 2008. The Company also indicated that, whilst prices were still declining overall, there was price stability in some UK regions.

The house-builders recognize that any recovery is likely to take time, especially since interest rates are expected to rise over the next 18 months. Some, though, believe that the worst may now be past. However, any recovery in house-building volumes will be way below the Government’s aspirations set out during the boom years.

How should interest rates be set?


The economy would benefit from a weaker Bank of England, stripped of its principal power to set interest rates. No one should be allowed to set interest rates. Interest rates are simply prices of borrowing. As with all prices they should be determined with market mechanisms. When they are set by a ‘wise man’, or by a ‘wise committee’, they do not carry the information about the preferences of consumers and the scarcity of resources. Quite the opposite, interest rates set in this way are bound to be a kind of misinformation, leading those who act on them into error.

Take for example a car tyre. In a free market, the price mechanism would find the optimum price for the tyre to be supplied and consumed at, in order that it is allocated efficiently. If the price of the tyre is fixed higher than this price, then tyres will be under consumed; similarly, if it were fixed below this price, the firms would not be able to meet the excessive demand. In both instances, the resources are not allocated as efficiently as they could be.

This also applies to money. Suppose the demand for borrowing rose. This would increase competition for access to the scarce supply of savings and drive up interest rates. Saving would now be more rewarding, so more people would do it, and the supply of savings would rise. However, when interest rates are set by a central bank, demand for borrowing can increase without interest rates changing and moreover without the price signal that would cause people to save more. When dictated, interest rates stop playing their market role of optimally allocating resources between current consumption, and investment that will deliver future consumption.

Had interest rates been set by the free market, interest rates would not have been so low for so long, and this recession would have been a lot less damaging.

Much of the argument for this blog was inspired by this piece in The Times by Jamie Whyte.

Authors against the database state


Anthony Horowitz, Anne Fine, Quentin Blake, Philip Pullman and Michael Morpurgo will stop visiting schools in protest over the government’s desire to put them on a database. This is part of the Vetting and Barring Scheme (VBS), managed by one of those pesky quangos, the Independent Safeguarding Authority. One for the dustbin, I suggest, Mr Cameron.

Respected author Philip Pullman has described the policy as “corrosive and poisonous to every kind of healthy social interaction." He went on to state: “I've been going into schools as an author for 20 years, and on no occasion have I ever been alone with a child. The idea that I have become more of a threat and I need to be vetted is both ludicrous and insulting. Children have never been in any danger from visiting authors or illustrators, and the idea that they should be is preposterous."

Former Children's Laureate Anne Fine has set out that: "When it [the VBS] becomes essential, I shall continue to work only in foreign schools, where sanity prevails…The whole idea of vetting an adult who visits many schools, but each only for a day, and then always in the presence of other adults, is deeply offensive."

Anthony Horowitz hits the nail on the head in questioning the thinking behind this move: “What I really hate about this database is the way it poisons the very special relationship that exists between children and the authors they admire. What sort of sick mind could whisper that there might be something suspect in that relationship, that children should be wary of all adults – unless they're government-approved?"

This move is indicative of a government ideologically compelled to control. It is time that schools were trusted with the care of children, backed up by parents through PTAs and other internally determined processes. Unless power is taken back from the state, we will increasingly see the destruction of the institutions and informal ties that bind people together. Moves such as these undermine further the fabric of society, and the best thing the authors can do in response is ignore the government and carry on attending schools regardless.

Feminism has become just another special interest


We recently learned from Tim Worstall that the so called gender gap is actually a motherhood gap. But meanwhile. the recession is about to  reverse even that gap. Since men still dominate the construction and manufacturing sectors, which have been hardest-hit by the recession, they are much more likely to lose their jobs than women. This is likely to be true in most Western countries, not only the US, where 80% of the 5.7 million jobs lost between December 2007 and May this year were held by men. Far fewer jobs are expected to be lost in the service sector, especially in public services like healthcare and schools, where women dominate. These sectors even gained 588,000 jobs in the same period in the US.

Therefore, economists are already speaking of a “man-cession" with deep implications to the social fabric of society. It was not only market forces which brought this about. Organized feminist lobbyism played a major role here, manipulating president Obama’s stimulus plan, the $787 billion American Recovery and Reinvestment Act of 2009. Originally his emulation of the 1930’s New Deal aimed to protect jobs in exactly those hardest-hit sectors by investing in “shovel ready" programs to modernize roads, bridges, electric grids and other infrastructure.

Woman’s organizations immediately denounced this as a “Macho Stimulus" and about 600 feminist economists and 1000 feminist historians managed to press the president to scrap his “sexist bailout". The anti-stimulus feminist action group called WEAVE – Women’s Equality Adds Value to the Economy was a huge success. They managed to get the Obama administration to completely rewrite his stimulus along gender-correct lines with 42% of new jobs going to women. Yet since women had only held 20% of the jobs lost in recession the stimulus as it passed through Congress on February 17 skews the creation of new jobs heavily towards women. And its working: the Labor Department’s latest June data revealed a 2.5 percentage-point gender gap for women over men.

Marriage and the welfare state


There is a rather interesting debate between Peter Hoskin and Fraser Nelson over at the Coffee House blog on the value of Conservative Party plans to use the tax system to encourage the institution of marriage. Following the lead of the Centre for Social Justice, there are plans afoot to encourage marriage via a £20-a-week tax break for married couples.

The exchange can be viewed, here, here and here. With the original post inspired by an excellent article by Philip Collins in The Times. Central to the debate is the efficacy and morality of giving tax breaks to encourage marriage. Peter Hoskin and Philip Collins win the efficacy side of the argument. £20 per week really won’t make much of a difference. This in turn makes Fraser Nelson’s defence of the morality of the scheme mostly redundant. Yet without other reforms the poorest are nevertheless incentivised to stay unmarried or pretend to be apart. However, rather than introduce more incentives to mitigate the unintended consequences of current policies, the Conservatives need to deal with the original government interventions.

This of course involves radical welfare reform as well cutting tax for the poorest. Alongside a flat tax, we at the Adam Smith Institute have long argued for raising the personal allowance to £12,000. With only basic welfare and a fair tax system the effects of welfarism that rightly concern Fraser Nelson and the Centre for Social Justice will be dramatically reduced, without the need to rely upon the state to try (and fail) to correct its own mistakes.