How not to start negotiations with the EU
David Cameron is expected to make his long awaited EU policy speech shortly. We are told it will be radical and bold. The consequence, we are told again, will be a major renegotiation of our EU terms or departure with our head held high. That choice will be for the UK to make on the basis of an in/out referendum.
Cameron is in the weakest negotiating position of any British Prime Minister since Edward Heath. With her Bruges speech, Thatcher turned us from a respected contributor to a moaning Minnie, complaining at every step of the EU way and thereby alienating our friends. Major dismantled what could have been a powerful trading partner for the EU leaving a rump EFTA today. He led our potential allies into the arms of Brussels. Now they want our money but not us. Blair, to appease the unions, gave away John Major’s opt-outs and, to curry favour with new EU members, much of the Thatcher rebate. Brown handed City regulation over to Brussels.
So far Brussels has been helpful on Scottish independence because Spain is terrified that Catalonia will go the same way. But if the Federalists can use Scottish independence as a further way to undermine the UK position, they surely will.
The track record of our City, regulators and civil servants has been weak. Much of the EU treaty and regulatory wording has been drafted by our people. They claim, naturally, that the treaties and regulations are better than they otherwise would have been. From the Federalist perspective these civil servants look remarkably like a Fifth Column, advancing the EU cause under British colours.
And finally consider the witlessness of our MPs. Have any have sat down and worked out what we are trying to achieve and how that can be done? Bill Cash is thoughtful but no one listens to him any more. On fisheries, did we not sell most of our rights to Spanish fleets? Will the courts allow us to repatriate those rights without compensation and will the compensation not be higher for an independent UK?
Our MPs and our media have further alienated Brussels and other member states by blaming them for UK intervention and undermining our sovereignty when, for example, far more regulations have arisen from Whitehall and Westminster than ever came from Brussels. Transparently, it has suited Whitehall to escape the odium that should be theirs.
In short, the UK will begin the negotiations with the worst possible background.
If elections have consequences, then so does economics
Speaking on Fox News Sunday following the U.S. presidential election, Bill Kristol, editor of The Weekly Standard, said that Republicans, having lost to the Democrats, could no longer hold out free market principles with respect to taxation. ‘I think there is a very good chance that [President Obama will] pass major consequential legislation in the second term, and people like me won’t like it that much. I think Republicans will have to give in much more than they think,’ he said.
Kristol elaborated on the GOP fallout: ‘The Democrats picked up seats in the House and Senate, and the President is in good shape ... the Republicans in the House will be able to get some concessions and some compromises, but I think there will be a deep budget deal next year, it will be an Obama-type budget deal, much more than a Paul Ryan budget deal, type budget deal. And elections have consequences.’
Kristol’s musings were the subject of much Democratic smugness and Republican alarm, with his singular sacrifice for the greater good echoing Cato’s 10th Letter:
No man living laments the calamities brought upon his country, more than I do those brought upon mine: Yet I freely own, that I think the paying off the nation’s debts, and restoring, by that means, the kingdom to its power, its grandeur, and its security again, was an end worth all the evils which we have yet suffered; an end which ought, if possible, to have been purchased with greater than we have yet suffered, if it could not otherwise have been purchased. I think that it ought to have been done, though attended with many ill circumstances; and might have been done, even upon those hard terms, with justice to private men, and honour to the nation. We are not a people without it; nor is it worth while to dispute about the best cabin in a ship that is sinking.
But not only elections have consequences; so do economics. For those who believed that GOP intransigence on ‘tax cuts for the wealth’ — or ‘tax cuts for the economy’, a rhetorical ploy by one knowing Republican wit — was motivated by selfish greed, no doubt this volte face must come as a welcome return to common sense. To their peril, they ignore the findings of the Laffer curve.
Named for Reagan-era economist Arthur Laffer, the curve charts government revenues against taxation rates, based on the idea that at both zero and one hundred per cent taxation the State will collect no monies, but that somewhere along this curve are rates for optimum private sector growth (nurtured by the provision of public goods by the State) and optimum government revenue. ‘The uniform, constant, and uninterrupted effort of every man to better his condition’, wrote Smith, ‘the principle from which publick and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration (II.iii.31).’
Ultimately, the question must be focussed on what the market will bear. It is one thing if additional taxes will be no more than an irritant for entrepreneurs and corporations; quite another, though, if these additional burdens occasion distortions and disincentives to economic activities. Such conditions met one of Smith’s definitions of a bad tax, for ‘it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes (V.ii.b.6).’
For adherents of Laffer, studies indicate that the threshold lies at government expenditure at about 18-20 per cent of GDP; that is, up to this point most business activity will continue unabated, but once this nominal level has been crossed, then extraneous considerations enter into business calculations. (Thus, there is a gap between growth-maximisation and revenue-maximisation on the Laffer curve, the difference being that greater government pressure via increasing tax rates will result in slowing private-sector profits.)
What this means is that applying additional taxes past their maximisation point will not result in higher revenues, but lower — bringing neither justice to private men nor honour to the nation. The nineteenth-century French economist Frédéric Bastiat popularised this economic phenomenon as ‘That Which Is Seen, and That Which Is Not Seen’:
Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.
A step in foresight to improve the nation’s finances proves in hindsight a wounding blow to the public treasury. A century earlier, Bastiat’s compatriot the Baron de Montesquieu proclaimed pithily in The Spirit of the Laws that when savages ‘are desirous of fruit, the cut the tree to the root, and gather the fruit. This is an emblem of despotic government.’ Now savagery and despotism are camouflaged as enlightened policy.
Though unaware of Laffer curve economics, Cato was not unmindful of its effects. ‘If, in taxing labour and manufactures, we exceed a certain proportion, we discourage industry, and destroy that labour and those manufactures,’ he astutely noted. ‘The like may be said of trade and navigation; they will bear but limited burdens: And we find by experience, that when higher duties are laid, the product is not increased; but the trade is lost, or the goods are run.’
Key to policy formation is whether America has reached or exceeded the optimum marginal tax rates for optimum government revenue; and whether increases in the one will lead to increases in the other. Indicators are that the threshold has been met: record amounts in bank reserves and corporation coffers suggest that current levels are curtailing business growth, as does anecdotal evidence from CEOs and small business owners who fear that further taxes and regulations will eat into viable profit margins. Yet, were the highest marginal tax rates decreased toward growth maximisation levels, innovators and entrepreneurs would doubtless invigorate the market, boosting tax revenues further — another facet of Bastiat’s counterfactual analysis.
‘You know what?’ Kristol concluded, ‘It won’t kill the country if we raise taxes a little bit on millionaires. It really won’t, I don’t think.’ But the financial argument is not about the supposed merits of any nominal marginal tax rate on the highest incomes (moral issues are another matter), but on its effects on the total American economy. Kristol sees only short-term political compromise and is blind to long-term revenue shortfalls; his apparent graciousness in electoral defeat is economic illiteracy in disguise.
Political equivocations cannot trump economic realities. By masquerading as a commendable compromise to save the nation’s sinking finances, will the ship of state surely be lost.
On the false precision of mathematical economics
Halfway through an MSc Economics at a well-respected department, I have found myself learning no new economics, but only struggling unpleasantly with a level of maths that seems relevant only for pure scientists.
The students, for their part, wish only to master the equations in order to pass the qualification and get good jobs. Broader economic ideas are seen as an optional module, rather than the core that they are. Microeconomics seems exclusively to rely on comparative statics (holding one variable constant whilst you assess another, in a state of equilibrium, using differential calculus).
But since we are not rational beings, the irrationality of this seems profound. The recent trend in "Behavioural Economics" is a step in the right direction (intertwining psychology into statistical assessments of activities), but again, one isn't certain if the exercise is just a ruse to further complicate the statistics.
I remain a fan of Schumpeter, and though for a time, he was head of the Econometric Society, he was also concerned to integrate more sociological understanding into his economic theories. The profession would not do too badly by trying to revitalise this (more integrationist) approach, utilising more of the core social scientific developments, and perhaps fewer of the natural science attempts at mapping certainty.
In order to be useful, the computationalists argue, we have to quantify our actions and be able to replicate them - anything else is simply hokum, and lacks both scientific rigour and logic. These, the theorists demand, is the key to everything. Maybe. But with increasing numbers of economists stemming from maths and engineering, what they are bringing with them is not economic understanding. Well-equipped critical thinkers are being discouraged from entering a discipline that is obsessed with the false certainty of mathematical analysis.
In a lifetime of work, study, family interactions and educational exposure, I have known very few people who are logical and rigorous, consistent and replicable. And the financial markets? Again, comes the argument, if we had cracked the phenomena of financial dynamics, software programmes that have automated actions following trends' analysis, we would not have brought august institutions to the ground in hours and there would probably be no business cycle.
And yet after decades of mathematical economics, we haven’t cracked these things. Institutions still fail, cycles persist and the human nature underlying it all remains just as unquantifiable. Perhaps by embracing the lack of clarity, the human “fuzziness” we can promote the contemplative again and start teaching and learning some real economics.
Damian Merciar is a Business Economist and Strategist, with 20 yrs experience of public and private sectors. He is also currently studying part time for an MSc Economics.
Article: If elections have consequences, then so does economics
Speaking on Fox News Sunday following the U.S. presidential election, Bill Kristol, editor of The Weekly Standard, said that Republicans, having lost to the Democrats, could no longer hold out free market principles with respect to taxation. ‘I think there is a very good chance that [President Obama will] pass major consequential legislation in the second term, and people like me won’t like it that much. I think Republicans will have to give in much more than they think,’ he said.
Kristol elaborated on the GOP fallout: ‘The Democrats picked up seats in the House and Senate, and the President is in good shape ... the Republicans in the House will be able to get some concessions and some compromises, but I think there will be a deep budget deal next year, it will be an Obama-type budget deal, much more than a Paul Ryan budget deal, type budget deal. And elections have consequences.’
Cut spending? If only it were that simple
In between the turkey, spiced beef and mugs of hot port, I spent some of Christmas thinking about the state. Specifically, how to make it smaller.
Milton Friedman used to say that cutting taxes would force governments to cut spending to make ends meet. The last ten years has basically proved him wrong. Why cut spending when you can spend more, tax less and let the next lot pay the bill?
The old ‘tax cuts first’ strategy is dead. For a smaller state, we need to cut spending as we cut taxes, and avoid government borrowing as much as possible.
But it’s not quite that simple. The problem is that there aren’t many places you can cut without also changing quite a few other things as well. “Cut spending” sounds good, but, without much more fundamental reforms, almost any big spending cut would leave a lot of people high and dry.
The five biggest areas of government spending are health, welfare, pensions, education, and defence. To really shrink state spending, we need to cut all of these things. But without a complete overhaul of policy in general, no real cuts can be made.
The NHS is a socialist bureaucracy, but until we liberalize the healthcare market and make health insurance a viable alternative for NHS users, cutting the NHS might very well make patients’ lives a lot worse. A simple cut to the NHS would be bad because, thanks to the state, a lot of people depend on it for their healthcare.
The same goes for all the other big areas of spending. Want to cut education spending? Fine, but without something like school vouchers or private education tax credits, things will probably get worse. Some bits of welfare can and should be cut, but without planning reform to reduce the cost of rents and employment deregulation to increase the number of jobs going, people who genuinely cannot find work will suffer. And a tax system that takes £1,500 from a minimum wage worker is utterly morally bankrupt.
Try explaining to granny why her pension is being cut after spending her life paying National Insurance (under the impression that it was something other than a tax in disguise). And defence cuts – great, but not until we’re out of Afghanistan and servicemen’s lives won’t be threatened by a shortage of bullet-proof vests.
Of course deep spending cuts are needed. But, unless you’re happy to mess over people who rely on state services through no fault of their own, they can only work in conjunction with big changes in how we do things.
Spending cuts are a little bit like Brussels sprouts: quite good for you, but not very appealing on their own. But as part of a bigger meal, they can be wonderful. Deeper cuts are only possible with fundamental libertarian reforms of the state. That will be a bigger task than many would like.
We've reached Peak Farmland
We're all familiar with the screams of woe from the environmental movement. Peak oil, peak fertiliser, peak water, there's even a peak copper scare out there. The idea, if it can be flattered enough to be described as one, is that we're all using too much of whatever it is, there ain't no more and we're all going to die. Aieee!
And now we've got peak farmland approaching:
"We believe that humanity has reached Peak Farmland," said Jesse Ausubel, director of the Program for the Human Environment at the Rockefeller University in New York.
So there's no more land to grow more food on and we're all going to die Aieee! etc?
No, this is sensible people, not the usual envorinmental wailers. What they're actually saying is that given the increasing efficiency with which we use farmland we're not actually going to need any more. The true quote is:
"We believe that humanity has reached Peak Farmland, and that a large net global restoration of land to nature is ready to begin," said Jesse Ausubel, director of the Program for the Human Environment at the Rockefeller University in New York.
The one caveat is that we have to make sure we don't mess it up by growing biofuels: but even FoE and Greenpeace agree this is a bad idea now so we've only the politicians left to convince.
And it's entirely possible that this report is actually not optimistic enough. OK, this is the Mail but still: plantscrapers anyone?
Crops could soon be grown in greenhouses the size of skyscrapers in city centres across the country, it has been claimed. Birds Eye and other food producers are investigating building ‘plantscrapers’, which could accommodate hundreds of storeys worth of crops, in a bid to make farming more economical, sustainable and meet increasing demand.
Or another development, hydroponics using seawater as both the growing medium and the cooling necessary in a desert.
The old mantra was that we should buy land because they're not making it anymore. But the truth is, by making what land we do use more productive through the application of technology we are indeed making more of it. We're making more farmland, even if not more actual land.
One joy of this is that some good part of the land that is currently being farmed can be allowed to revert to nature. Which should of course please all those environmentalists: but it won't, they'll still be complaining. You see, hydroponics isn't organic. Ho hum.
How have we ended up with immigration restrictions this darn bad?
We around here are pretty much in with the idea of free immigration. Even the scary statistics coming out of places like MigrationWatch show that there's a very small (about £4 a year I recall) benefit to the indigenous population. And of course the value to the immigrant is vast making it a definite pareto improvement. And as Bryan Caplan likes to point out, the immigration of low skilled immigrants still enables a more fine grained division of labour within the country to everyone's benefit.
But OK, let's be a tad political and realise that not everyone agrees with these obvious truths. That immigration must be limited in some manner. So, err, how have we ended up with a set of immigration restrictions that are so stupid?
The Royal Society says a separate government scheme introduced in 2011 to attract 1,000 top academics and artists had allowed only 50 people in.
That a government policy fails is hardly a surprise. But OK, they're trying to get top academics in. So why would the new rules have meant that one of our recent Nobel Laureates couldn't have got in?
Russian-born physicist Professor Sir Andre Geim said new restrictions on non-European Union immigrants, including minimum salary requirements of at least £31,000 and tighter student visa rules, are blocking the brightest academics from working at British institutions.
Well, you see, the thing is that British academics aren't all that well paid:
Sir Andre, 54, first arrived in the UK in the early 1990s as a Russian citizen with a permit to work as a post-doctoral fellow at Nottingham University. His salary would have been around £27,000 in today's money, meaning that he would have been barred from entry under the minimum salary requirement.
So the government wants to get all these top academics coming in, to the point where they've got a scheme to aid them in coming in. At the same time its own salaries that it pays to top academics (and yes, post-doctoral students are indeed that, they're all the people having the bright ideas. Professors are those who are old enough to have stopped having new ideas) mean that they cannot immigrate into this country under the requirements for immigrants to have a high salary.
Something of a facepalm moment that.
Which brings us to an important point. Government just isn't capable of doing these complicated things. Is incapable of the finesse necessary to achieve solutions to tricky problems. So we might well be better off if they didn't even try. You know, cut government back to the basics of defending the country and maintaining at least a semblance of law and order. Once they've shown they can manage that we might allow them to at least trying more difficult things. But not until they've shown they can master the basics.
No Mr. Cameron, the UK has no moral obligations at all
David Cameron tells us that:
“The argument of the heart is even when things are difficult at home we should fulfil our moral obligations to the poorest of the world. There are still more than a billion people living on a dollar a day,” Mr Cameron said.
That's fair enough.
The Prime Minister acknowledged that the Coalition’s commitment to spending 0.7 per cent of GDP on overseas aid
That's not. It does make me wonder what, if anything at all, they teach in the philosophy part of PPE at Oxford. Only a moral actor can have a moral obligation: a country ain't such so it can't. We as individuals are indeed moral actors and we might well have a moral obligation to do something. Which, amazingly, many of us so with our donations to various international charitable causes. And well done us: but this does not extend to it being moral to confiscate our money to assuage the egos of politicians in alleviating foreign poverty.
Quite apart from which there's a more important point:
Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa's problems. If the West were to cancel these payments, normal Africans wouldn't even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.
Governmental aid is simply the wrong way to discharge that moral duty even if it existed. I'm sure I recall the British Council spending some of that much vaunted 0.7% on a female dance troupe (most feminist you see?) to interpret the dangers of climate change just as a weird example.
The correct way to alleviate poverty is as Madsen has been saying for decades now. Buy things made by poor people in poor countries. And the government's aid to our doing so could and should be the breaching of all the trade barriers that prevent us from doing so.
As an example, abolishing the Common Agricultural Policy would do more for poor peasant farmers elsewhere than anythinhg else we could possibly conceive.
I have to admit that what confuses me is that all of the above is entirely clear and obvious. And if we really did elect the just, righteous and intelligent to rule us then all of the above would already be happening. It isn't so what is it that this tells us about those elected?
Why the Resolution Foundation and IPPR can go boil their heads
There's a joint report out from the Resolution Foundation and the IPPR about the "Living Wage". It's here. And having actually read it, so you don't have to, I can confirm that the two groups should go boil their collective head. For they've missed the most obvious point of the matter they're whining about.
Their argument is that paying everyone a Living Wage would be better. It most certainly would be, no argument there at all. It would be even better if everyone earned more than that too. As we all do earn more than the living wage of, say, 1900. That we all get richer is known as progress and I'm all for progress. They then try to work through what it would cost to pay everyone that living wage. The answer being that, in companies that pay very few people below it not a lot. And in companies that pay many people below it a lot. Something I think we could have worked out without the aid of our proto-Labour MPs in the making.
However, the real reason they can go boil that part that they don't think with is that they manage to write their entire report without even mentioning that the Living Wage is a pre-tax number. They completely ignore that anyone earning minimum, living, or somewhere in between wages gets a couple of grand a year nicked off them to pay for duck houses and diversity advisers. Further, they completely ignore the point I've been screaming about here for several years now. If you didn't tax the minimum wage then it would be, to within pennies an hour, that very post-tax living wage that they're arguing for. In turn meaning that creating that living wage is well within the power of the political class, the Chancellor in particular. Simply raise the personal allowance for income tax and NI and there we are, job done, everyone in employment is not on the Living Wage.
And I['m afraid that anyone at all who wants to discuss this project and who is not willing to make this point will indeed be told to go boil their heads. Because, if you want to improve the incomes of the working poor then stop bloody taxing them so much. End of.
I will admit to being amused by one part of the report though. They point out that if instead of insisting on the full living wage we insisted upon payment of 90 % of it then....wait for it....it would cost companies less to do so. No **** Sherlock.