This is a political problem, not an economic one


Keynesianism that is, or the management of the economy through fiscal policy. Allow us, for a moment, to pretend, and assume that we've found ourselves miraculously in agreement with all and every of Keynes' tenets. We will even agree that borrowing £175 billion in the coming year is a good idea (and that no, it doesn't matter what we spend it on) because we really could do with some fiscal stimulus.

So, where does this leave us? Well, we're saying that we need this fiscal stimulus because there are unused resources in the economy and that growth is going to be below trend. Right, but as the IFS points out, this gives us something of a problem. For if we are below trend now it's fairly easy to show that in recent years we were above trend. As indeed the IFS points out.

Now remember that we have drunk the Keynesian Kool Aid in its entirety. Just as we believe in fiscal stimulus when growth is below trend, we also believe in fiscal contraction when growth is above it. And can anyone see that happening in recent years?

Such a contraction would have meant raising more in taxes than was being spent by government. Instead of public borrowing, we would have had debt repayment. And can anyone really believe that was going to happen? When you've Polly Toynbee screaming that we can and must abolish child poverty for only a few billion more? When every policy panhandler is pronouncing on how this or that evil of the world can be solved for just a little more taxpayers' cash and anyway, isn't this what a Labour government is for?

Well, quite. The failure of the system is thus a political one at the very least. Whether it works as an economic system is for others to determine but if it's politically impossible to have fiscal contraction when the theory says that there must be fiscal contraction then it's not all that useful a theory, is it?

Changing our ways


I haven't yet heard anyone yet say that Swine Flu means we must abandon the acquisitive society and all learn to live more simply, but I have no doubt at all that I will. I anticipate this because the mantra is used every time anything of significance happens, and even when insignificant things do. There are always people who yearn for a simpler life when people were nicer neighbours and the Hovis boy pushed his bike up that sepia cobbled hill. Things were under control more in those days.

Now they wail that everything has gone manic with people pushing and shoving and trying to improve themselves. The spread and speed of our interaction with others has led to a world which cannot be controlled and which occasionally seems to run wild.There are just so many interactions that no directing brain can hope to slow it down and make it behave as some idealists would like it to.

In despair over these developments, and over their failure to persuade the world to behave differently, they clutch at each new development as a sign of the imminent collapse of the modern world, and the emergence of a quieter one in which people have more limited ambitions and know their place. They rather parallel the environmentalists who hail any weather that happens as evidence of coming catastrophe.

It is true that the world faces a series of challenges and shocks; it always has. It is also true that modern speed and interconnectivity can highlight and intensify some of those challenges. But there is another side to that coin: it is that the speed of scientific and technical advance, and the rapid transmission of information, mean that humans can respond more quickly and more effectively. Our ability to deal with crises has increased, too.

It is unlikely that Swine Flu will overwhelm us. Humankind will rise to its challenge and emerge from its threat, just as it does from the others. And no, it will not abandon its quest for self-improvement, or the speed and range of its reach. But its success will not prevent some people hailing the next crisis as the one to curtail our unlimited ambitions.

Tax Freedom Day 2009 falls on 14 May


But you'll have to work until June 25 to pay off Brown's borrowing binge.

Tax Freedom Day, the day in the year when the average Briton has earned enough to pay his annual tax bill, will fall on 14 May this year. This means that for 135 days of the year, every penny earned by the average UK resident will have been taken to support government expenditures.

This is the earliest Tax Freedom Day since 1973 – on the face of it, good news for taxpayers. But there is a downside: the traditional Tax Freedom Day measure only reflects the money actually raised by the government in taxes, not the full amount it spends. If the government deficit is factored in, Tax Freedom Day does not come until 25 June (the worst figure since 1984).

This gap between Tax Freedom Day based on actual revenues and Tax Freedom Day based on government spending is now the widest it has been since the early 1970s – and possibly since World War II.

These figures indicate a bleak future for British taxpayers. Running up deficits can be described as a form of deferred taxation. The effect will be that when the economy recovers – as it eventually will – the UK tax burden is likely to rise much faster than would otherwise have been the case and Tax Freedom Day is likely to creep later and later in the year.

Moreover, the reason that Tax Freedom Day will arrive so early in 2009 is not so much that the tax burden has been dramatically reduced – although the temporary reduction in VAT is certainly significant – as it is that tax revenues have collapsed due to the sharp downturn in the economy.

Overall, our research doesn't give much cause for optimism. Under Gordon Brown's stewardship of the economy, the government's annual deficit went from near-balance in 1998 to more than 3% in 2007. And that was with the UK economy was growing strongly. Now the Chancellor is forecasting a 13.3% deficit. We'll be carrying the burden of these mistakes for years to come.

Click here for more information about Tax Freedom Day.

Blog Review 948


What we do about the current troubles of course depends on what caused them. And there's still some confusion around as to what actually did cause the current troubles.

We used to have a Man in Whitehall who really did know best. Unfortunately, he retired, which explains a lot about the modern world.

This is known as "ripping a new one". About time it happened to Thoreau.

Rarely is the correct reaction to a tragedy to ban something.

Why Government procurement always costs so much.

Has Gordon really lost the plot?

And finally, some appear to think so.

Sniffing the political wind


Although some university departments like to call it "political science," it is at least as much an art, calling for intuition as well as systematic study.  Sometimes there are cases when a government seems able to do no right.  Even though some of its individual initiatives and responses might seem worthy, it seems unable to get its act together.  Observers can smell decay in the air.  It happened with the government of Harold Macmillan, that of James Callaghan, and that of John Major.  It is happening again.

Partly these governments were past their sell-by dates and had been too long in office to react with fresh awareness as governments need to do.  In quick succession Gordon Brown has presided over his Chancellor's disastrous and much-derided budget, his defeat over the rights of Ghurka soldiers to live in the country they fought for, and now his humiliating climb-down on MPs expenses. 

Commentators can recognize the signs by instinct.  They have seen it before and they know what it means.  It represents the erosion of authority.  People have decided that Gordon Brown has no future and will therefore be able to deliver no goodies.  They look elsewhere for prospects of promotion and reward.  The power of patronage ebbs away.  This government is headed for ignominy and oblivion; commentators have seen it too many times to need scientific studies to tell them that.

A new capitalism?


Robert Peston has released a publication entitled ‘The New Capitalism’, outlining his thoughts on why the crisis happened and what our post-recession economy will look like. Just like most of the BBC’s economic coverage this takes a very skewed view upon events.

Peston's claims that “Capitalism is changing in fundamental ways", even going so far as to suggest that it might be a change with more impact than the end of Communism! He states that, "For many years to come, what's happening will affect the relationship between business and government…" Quite. We will witness a greater distortion of capitalism in the form of further regulation, taxation and government debt. Naturally, the relationship between government and business will change, within the financial sector, but almost certainly not for the better.

The publication also claims that trade between ourselves and growing economies such as China exacerbated the problems:

“They were working to improve our living standards, because they made more and more of the stuff we wanted at cheaper and cheaper prices."

Although it is true that imports from China and other Asian economies grew, Peston has forgotten the fundamentals of trade. When trade occurs there is mutual benefit – the Chinese were not producing and exporting goods for only our benefit but also for theirs. The view that China’s only role in the past decades has been to work as a factory, churning out home comforts for the west, is naïve, archaic and dangerous.

It is fair to say that there is currently a lack of confidence in capitalism, the consensus within the media is that we need to boost regulation and control our industries to a greater extent. But during the boom years I can’t remember Peston, jumping off the bandwagon, telling us to slow down and warning us of the danger ahead.

Us vs. Them? The global economy in a time of economic nationalism


Rising unemployment and economic contraction spawned by the financial crisis have inspired governments in almost every major economy to “do something."  Often that has included raising barriers to trade, subsidising domestic industries, compelling local lending while deterring lending abroad, and preventing the benefits of Keynesian “stimulus" spending from “leaking" outside national boundaries. The mantra of both the Right and the Left has become “British jobs for British workers," while the American government precludes “bailed-out" financial institutions from hiring foreign workers.

But is this inward-looking thinking anachronistic for the modern global economy? Over the past 50 years, falling barriers to trade have led to an unprecedented division of labour.  Where supply chains were once very small and usually entirely domestic, they have evolved into highly efficient transnational operations, often spanning several countries.  It’s no longer “our" producers vs. “their" producers; nowadays our producers are the customers of their producers and vice versa.  Collaborations of our producers and their producers compete against other collaborations of our producers and their producers.

The impact of rapidly increasing levels of trade in recent decades has been overwhelmingly positive in terms of innovation, job creation, growth, and poverty reduction around the world.  But changes in trade policy thinking didn’t keep pace with changes in commercial reality, which has kept the door ajar for a resurgence of economic nationalism.  Does that spell the end of the global supply chain?  Daniel Ikenson, trade expert at the Cato Institute in Washington D.C., will discuss these issues in an upcoming event hosted by The Adam Smith Institute and International Policy Network:

Date: 28th May 2009
Time: 12:30 - 2:00pm (buffet from 12:30, talk from 13:00)
Location: 23 Great Smith Street, London, SW1P 3BL

If you would like to attend this event, please email

Lessons from the Great Depression


Click here to see an excellent video from Freedom to Trade (F2T).

F2T is a joint initiative of IPN and the Atlas Economic Research Foundation to alert the public to the looming dangers of protectionism and to oppose existing and new protectionist measures. We have formed a coalition with 68 other think tanks and civil society organizations around the world, including the Adam Smith Institute.