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.

Blog Review 947


There are almost no lengths a bureaucracy won't go to in order to garner more of your money. Almost none.

It looks like there's a very nice little scandal brewing over the Vice President's son and brother. Absolutely no proof of anything as yet, of course.

Something for Green types to think on. Self-sufficiency is the route to poverty.

If industrial production is a much smaller share of our economy than it used to be, does declining industrial production matter quite so much?

Schumpeterian creation in unusual places and unusual markets.

Perhaps the libertarian (or classically liberal) discussion around climate change should centre on what we're already good at: the economics of it all?

And finally, well, why not?

The pips squeak


Mark Steel thinks the argument that the 50p tax rate won't bring in any extra money is "mad on lots of levels".

But is it mad to assume that taxes affect behaviour? If so, why do the left keep insisting we should put more tax on alcohol to stop people drinking, more tax on cigarettes to stop people smoking, and more tax on petrol to stop people driving? Maybe they just like taxes.

But tax does affect behaviour, and the 50p tax rate is likely to have a number of consequences.

Some dynamic, innovative and productive people will choose to leave the country rather than have so much of their income confiscated. Companies too are likely to find that they can't attract the best and the brightest to Britain anymore, and will be tempted to relocate. Other people will find that higher tax rates make it worth their while to expend effort on avoiding paying the tax rather than on working and creating wealth.

Higher taxes also lessen incentives to work, and therefore reduce economic growth. That doesn't just apply to people on high incomes either: why take the risk of setting up a business when, if you're successful, your reward will be the government taking half your income?

All those factors point to less revenue, as does the fact that the 50p tax rate will encourage sole traders and unincorporated companies to incorporate, and pay corporate taxes rather than personal ones.

But I don't mind about lost revenue: the government spends far too much, and government spending can damage the economy just as much as tax by crowding out productive, private enterprise. The real point is that if we insist on blunting incentives, driving away the talented and successful, and creating a culture in which success is penalized, any economic recovery is going to be sluggish at best. And whatever Mark Steel thinks, that will hurt the poor every bit as much as the rich.

One last point: does government really have the right to forcibly confiscate so much of someone's income? I don’t think so. If anyone here is being "greedy, avaricious and selfish", it's the state.

The return of Thatcherism?


For anyone who has ever read Simon Jenkins excellent Thatcher and Sons, the mistakes of Margaret Thatcher and her offspring are clear: the centralisation of power being the most pernicious. Her weaknesses have been the focus of many a negative summation of her time in office. Now Thatcher is back in vogue, at least among those on the right.

Under the illusions of a credit boom, most were content to ignore those decrying the prodigal spending as the Labour Party as it became increasingly confortable with power, even believing spin that Brown was a prudent Chancellor. However, now even the BBC is reporting the death rattle of this government’s reputation for financial competency. On Monday the thirty-year anniversary of Thatcher's rise to power will come around, and so many – including Simon Heffer – are starting to feel nostalgia for the iron lady. As he wrote in the Telegraph yesterday::

The collectivist nightmare was over. A Britain of endless strikes, food subsidies, third-rate products and jobbery was, suddenly, consigned to history. If there has been a better time to be 19 than in 1979, I wait to be told.

In the same paper, Irwin Stelzer wrote about the fact that John Smith’s ideology is resurgent in the party, the belief in the government “to shape the economy, to allocate resources in a way that would produce results far superior to what "the market" could accomplish." This he argues can be seen in fact that the car industry is to be shored up by taxpayer subsidies and in the government directing what it believes to be "green winners".

For Conservatives fearful of more time in the wilderness, coming to power on a radical agenda for reform appears a risky gamble. After all nobody thought Thatcher was going to be as radical as she was. However, risky as it might be, a platform of radical policies would be the right thing for Britain. Those that have dyed their hearts blue, red or yellow come what may, might have determined that power over policy is the priority, but lest it be forgotten that wrapped in the spin of the newness, the Labour Party did much the same thing and we all now know how that turned out.

Adam Smith and the UN

"I wonder what Adam Smith would make of all this?" pondered Mr. Annan (although he wasn’t referring to the failure of his own hardwired redistributionism). “Maybe he would see the crisis as the consequence of failure to put economics at the service of the common good."

Maybe not.

Smith believed that great common good was provided by the pursuit of self-interest. He also believed that great danger lay in “partnerships" between government and business. Mr. Annan has done more than anybody (prodded by advisers such as Maurice Strong and Jeffrey Sachs) to promote such partnerships and lumber business with social and environmental “leadership," thus diverting them from job creation.

Peter Foster, 'Kofi Sends Adam Spinning', National Post

Why taxing the rich could make us poorer

Dr Eamonn Butler argues that the “taxing of the rich”  will do no good for our economy and explains what the future may hold, for Britain and the Conservatives, because of this policy.

Hope springs eternal in the breasts of politicians. None more so than Alistair Darling’s in his Budget speech.

He conceded that Britain’s economy was in a bad way. It would shrink by 3.5 per cent this year, rather more than the one per cent dip he forecast only in November. But hey, every country is in a bad way right now, and by 2011-12, the UK will be growing again at a record, rip-roaring rate of 3.5 per cent. Crisis? What crisis?

Unfortunately, British Budgets tend to unravel pretty quickly. Ever since the £5bn “stealth tax” on pension funds that Gordon Brown somehow forgot to highlight in his 1997 budget speech, and which helped to kill half of Britain’s workplace pension plans, people listen to the Chancellor with more than the usual scepticism.

We only had to wait a couple of days before the Office for National Statistics punched a hole in the Chancellor’s optimism. It reckoned that the UK economy had just suffered the biggest six-month fall since records began, in 1948, and much more than the Government had assumed.

The International Monetary Fund piled on even more gloom by predicting that this year’s drop in British growth would actually be 4.1 per cent, and that the economy would also shrink next year.

It is all bad news for a government trying desperately to borrow its way out of the crisis while soaking the “rich” by raising the top tax rate to a confiscatory 51.5 per cent.

There comes a time when short-term borrowing turns into a long-term problem. Already, with the increase in the top income-tax rate, the Government is beginning to look desperate.

This is all eerily reminiscent of Denis Healey, the Labour Chancellor of the late 1970s, who promised to “tax the rich until the pips squeak” with rates as high as 83 per cent on income from work and 98 per cent on investment income. In the end, he had to ask the IMF for an embarrassing bail-out.

The trouble with taxes is that raising them above a certain level becomes counter-productive. People will find it economical to hire expensive accountants to avoid paying the full amount. If everything else fails, they may take themselves and their money abroad to gentler tax jurisdictions, as the actor, Sir Michael Caine, just threatened to do.

The Treasury claims that the new 50 per cent rate will bring in £1.3bn next year, but the Institute for Fiscal Studies says it might not raise anything at all, since perhaps 70 per cent of top earners will either evade or avoid it. The Centre for Economic and Business Research thinks that as many as 25,000 top earners may leave the country, costing the Government – and the London financial market – hundreds of millions of pounds in lost tax revenues and investments.

Taking 51.5 per cent of people’s earnings sends all the wrong signals. It suggests – absurdly – that the Government is better at spending our money than we are. Higher taxes will simply induce people to spend less and leave entrepreneurs with less for investment, neither of which will help Britain recover.

When Margaret Thatcher slashed the top rate to 40 per cent, high income earners actually paid more, and contributed a far bigger proportion of total revenues, than they had before. Even former Labour Prime Minister Tony Blair denounced the 50 per cent tax rate as “wrong, seriously wrong”.

Interestingly, while higher income earners are supposed to bleed for the nation and businesses have been hit by the full force of the recession, government workers and their generous index-linked pensions have been left largely unscathed.

And what of the Conservatives? They are the clear favourites to win next year’s election. It would then fall to David Cameron to sort out Britain’s debt. Will he have the steel to bring the public finances back into order?

He has spent much of the last few years trying to make the Tories look kinder, gentler – majoring on social justice rather than tax cuts. He’s even said that, although the new 50 per cent rate was a “pathetic piece of class-war posturing” rather than sound economics, removing it would “not be a high priority” for any future Conservative government.

Although Mr Cameron may have tried to rebrand the Conservatives, he still shares one of Mrs Thatcher’s core principles – that a nation, like a family business, has to balance its books.

He must know that if he becomes Prime Minister and fails to deliver a leaner, sounder, less indebted government, his party will be finished. Even worse, so will be Britain.

Dr Butler is director of the Adam Smith Institute and author of The Rotten State of Britain: Who Is Causing the Crisis and How to Solve It, published by Gibson Square Books, price £12.99.

Published in the Yorkshire Post here

Blog Review 946


The essential points about swine flu laid out for you. Although, it has to be said, the responses might not be entirely 100% accurate.

This however appears to be 100% correct. You'll need a licence to dispose of those face masks.

Should we be optimistic about the economic future? Depends how classically liberal we are about it really.

Yes, that is classically liberal, rather than the way some "liberals" get confused over matters.

The difference between how good ideas get picked up and promoted and the ideas that government picks up and promotes.

More interesting numbers: those governments which take less than 40% of GDP in taxes have economies growing faster than those that take more.

And finally, Harriet is about to make it legal to sack socialists.