Decisions, decisions

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As most of the world knows, the AIG bonus situation is quite a sore spot for the United States right now. Even though the company received $182 billion in bailout money, AIG will have distributed $165 million in bonuses total to over 400 executives by the end of March. The bonuses were written in a contract created in late 2008, so there is a limited amount of options the government can take at this time.

There are two aspects of the solution that the government should look toward. The first involves incentives, meaning that the original intention of this bailout was to help save a company that the country’s commerce depends upon. The media has already begun demonizing every executive at AIG, even though many of them are opting out of the bonuses. What this means for the future of the company is not difficult to predict. Employees from AIG will seek jobs at other companies, whose names might not bear the same stigma. The company will soon lose the most talented individuals who were able to find other positions, possibly resulting in a worse performance than if those employees had stayed. This is not what the United States was originally hoping for when they signed off on the bailouts.

The second aspect of the solution deals with the constitutionality of government intervention in such a situation. Obama has been evaluating the house’s bill, passed last week, which will place a 90% tax on bonuses received by employees with salaries above $250,000 at companies receiving federal aid. This is a pretty serious move by the House, it is essentially breaking a contract that the US government approved quite a long time ago.

Obama himself said on 60 Minutes that, "As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals. You want to pass laws that have some broad applicability. And as a general proposition, I think you certainly don't want to use the tax code...to punish people."

Whether the bonuses are ethical or not, it is no small matter if the government uses the tax code to sidestep contracts. Let’s see what Obama decides…

Blog Review 908

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If government is willing to violate a contract only a month after passing a law stating that government will uphold that contract, why would anyone believe promises made by government?

Such loss of faith in the word and bond of government will of course make everything worse.

Repudiating the AIG bonuses is an excellent way of killing any method of rescuing the banks. Doesn't achieve much else though.

For example, this on the face of it sensible plan will not work if investors believe that any profits will be taxed at extortionate rates.

Yes, we're in a recession. So worth asking perhaps, "What has capitalism ever done for us?"

A quote on a quote of the day: "In other words, capitalism gets the job done, other systems don't."

And finally, how health and lifestyle issues are decided these days (naughty words alert).

A sorry state of affairs

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In The Times, Camilla Cavendish delivers a damning and spot-on criticism of the government and public services. She touches upon the fact that average public sector wages are rising whilst those in the private sector are rapidly falling and this brings into question ‘who is working for who exactly?’ I have blogged on this before.
 
The claim that the government has ‘mortgaged’ our futures is sadly all too true. It is indicative of a government who only consider winning votes and cannot see past the end of their noses towards the long-term prosperity of Britain. Indeed, in his new book, The Rotten State of Britain, Eamonn Butler has calculated that the average public debt is now almost £270,000 per household. This includes future costs which the government has tried hide, such as unfunded public sector pensions, PFI liabilities, and the cost of nuclear decommissioning. 
 
The article shows how our public services really have become a sorry state of affairs – almost an embarrassment. There are examples of failure in healthcare, education and welfare. It is absurd to consider that the NHS is the third largest employer in the world, yet the service it offers is so far behind other developed nations. It would be easy for the government to blame current failings on the global recession, which in turn they blame on America (or anybody besides themselves). But this lack of quality in our public services just highlights how inefficient they have become. You cannot simply pour resources into a service in the vain hope it will boost the quality of output.
 
Essentially, the government seems to feel it has a right to spend our hard-earned money. They don't see it as the privilege that it is. Unfortunately, it is not the current crop of politicians who will suffer the consequences, but future generations and future governments. Perhaps a severe lack of accountability is to blame.

Risk

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In his first pre-Budget report as Chancellor, the infamous ‘boom & bust’ phrase, that mantra Gordon Brown came so steadfastly to believe in, can be seen lurking in the opening paragraphs. What this showed was that Gordon Brown held no singular understanding of risk, and/or the global economy.

Over the past 18 months we have heard continual cries for risk to be curbed. Yet risk is something that humans curb naturally: by learning from their errors. What bailouts and new systems of regulation achieve is that the various parties involved in the financial meltdown do not learn, as the bonuses at AIG show.

Lawmakers have to understand that risk is inherent in all that we do, which is why we have a ‘natural’ system that ‘booms and busts’. Unfortunately for us, lawmakers have taken it upon themselves to concentrate the control of the economy in their own hands with the result that the peaks of growth and the troughs of contraction become ever higher and deeper respectively.

Gordon Brown and those who invested based on his assertion that boom and bust were over are much like King Canute and the tide. They failed to understand the risks involved, and also misread all of the information that was available that would assist them in investing wisely.

Gordon Brown had to make a quick buck so as to cover the 50% rise in taxes that he had implemented, whilst others believed that the prices could only ever rise and that somehow risk had been vanquished. Those in the business and banking world should now be made to learn from their failures, not through new legislation and regulation but through the cold hard fact that the risks they took were wrong; they should be the warning to us all not to allow risk to be undervalued and taken for granted.

Risk is a cold-hearted mistress.

Play games and die?

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In a move that'll shock no one, but will further antogonise Britain's successful and profitable game industry. The Advertising Standards Authority has rejected objections to the "play video games and die early" advert.

The MCV reports that the ASA responded with this terse statement:

Whilst the ASA Council understood the concerns of Tiga and those complainants who worked in the video games industry, it noted that the ad did not claim that playing computer or console games alone would lead to illness or premature death.

Funny that anyone seeing the advertisement in the article might come to a rather different conclusion. If you want to see the ASA make excuses for its decision the article has their complete response.

Blog Review 907

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If you were to look around the world and pick a country whose agricultural system you'd like to emulate: well, it wouldn't be Cuba's system, would it?

You know how so many say that if only the banks had been  mutuals, credit unions, then the disaster would not have happened? Ooops!

And Oops! again as those credit unions that did not go bust have to bail out those who did.

Blogs doing what newspapers no longer do. Long investigative pieces. Here on the NSPCC.

Some argue that the growth of the past few years was phantasmal. We recorded as GDP growth what never actually existed. Well, yes, but doesn't that mean that we're not in a recession now:  writing off GDP that was never there isn't a fall in GDP?

The utter cluelessness of the regulators in the lead up to the storm. Plus Alistair Darling is being blamed for Lehman's falling now.

And finally, spare a thought for the poor bureaucrats in their time of need.

The Governor's Eyebrow

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Apologies for stealing the headline to this interesting Matthew Parris piece. He's pondering upon the difference between rules based regulation and judgement based. For example, was the earlier system when the governor of the Bank of England could simply raise an eyebrow and an activity would stop better than the current FSA system of rules....leading to box ticking rather than a consideration of the underlying reality of said activity.

In this instance I find myself agreeing that the eyebrow system works better. Yet Parris goes on to another example: wouldn't a tax system that depended upon HMCR simply saying "Oi! That's not on!" be better than a rules based, box ticking one. And I find myself disagreeing.

Which leads to something of a conundrum. If judgement, the eyebrow, is better sometimes than the strict interpretation of the written down rules and yet at other times the reverse is true, is there any sort of sorting mechanism that we can have to work out when for which? Erm, a rule as to when to use judgement or a judgement as to when to use rules as it were?

I don't claim that this is the final word and would welcome comments which would help sharpen this up. But I would say that judgement is correct when we're talking about a voluntary activity and rules when we're talking about the power of the State over us.

Being in the City, being able to rely upon the Bank of England as the lender of last resort, as an example, is a choice made by your business model. I see no problem with that meaning that you've also accepted the judgement based control of your activities as a quid pro quo. To use a sporting analogy, by agreeing to play the game of rugby you've accepted that the referee has the last word and can indeed send you off for anything he likes and no arguing.

However, how we are taxed is not voluntary. This is something imposed upon us by the State and at this point we want to know exactly what the rules are, in detail, in advance. Thus we need to have a rules based system,. the legislation which we can all read and understand (well, if tax law was in fact comprehensible by ordinary mortals).

To use another analogy, that of the criminal law. I want to know what is legal and what is not in advance. I don't want myself (or anyone else) to be dragged off the street and incarcerated just because someone has judged that I am a bad 'un. I've done what that is illegal? And how have you proven this and have you ticked all those boxes of evidence, trial, jury, of justice?

As I say I'd appreciate some help fleshing this out but I'd say judgement is appropriate when we voluntarily submit and rules when we are forced to.

How much would a minimal state cost?

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Most libertarians would say that the core duties of government are few in number: defence and diplomacy, policing, the courts, and so on. Essentially, government is there to protect individual liberty, and not a lot else.

I don't expect we'll ever see such a state – as Bastiat noted, the state, like any living organism, tends naturally to grow – but I thought it might nonetheless be interesting to work out how much it would cost.

Using ukpublicspending.co.uk, I worked out that the annual budget for 'defence' and 'protection', the categories which more or less correspond to those 'core duties' of government mentioned above, is about £70bn. Interestingly, that's about how much VAT set at the minimum rate of 15 percent should raise. Wouldn't it be nice if that was the only tax you paid?

OK, so maybe that's not realistic. But here's a still-radical proposal with a little more relevance to the real world: first, go ahead and restrict the Westminster Parliament to those core functions, and that limited tax base.

Then replace the welfare state with the kind of compulsory savings system that they have in Singapore and Chile, and which the ASI advocated in our reports on the 'Fortune Account'. Essentially, national insurance contributions, rather than going to the government, would go into personal, privately-owned accounts, consisting of health savings, health insurance, unemployment insurance, and a retirement fund.

Then leave the provision of any other services to local government, each unit of which would be responsible for raising its own revenue. They would have to compete with one another to attract residents and businesses, so they would have an incentive to provide the best possible services for the lowest possible cost. It would be a bit like having a free market in governments.

Well done, Prime Minister

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In 2000 Gordon Brown stood at the Labour Party Conference and said the following:

In 1997 we said that the future depended upon first building strong and long term foundations for economic stability. We all remember the early 90s. It was Britain's hard working families – the one million who lost jobs in manufacturing, the one million businesses that went under, the million homeowners with negative equity. It was hard working families who paid the price and bore the brunt of economic failure. And by 1997 with the deficit nearly 30 billion, the national debt doubled, debt payments bigger than the schools budget, inflation rising, and the economy on the way back to the old familiar cycle of boom and bust, we resolved to, and under Tony Blair had the strength to, take difficult long-term decisions. Bank of England independence. Tough controls on public spending. The difficult decision to raise fuel taxes. The decision to pay back debt and cut the costs of debt.

We can now quantify those long-term decisions: they were all lies.

Back in March 2001, "unemployment dipped below the 1m mark this morning, for the first time in more than 25 years." 8 years later, this is the situation, "The number of unemployed people increased by 165,000 over the quarter and by 421,000 over the year, to reach 2.03 million. The unemployment level and rate have not been higher since 1997."

And we are all aware of the housing crisis, which is now set to get worse: "The FSA has today issued a statement suggesting that more than 2 million UK homes will be in negative equity within the next 12 months."

The current deficit stands at £77.72bn for the current fiscal year and net national debt stands (using the government's version) at, "a record 49 percent of GDP, or £717.3 billion pounds, in February". And it could rise to £1.5 trillion or just over 100%. And as for debt interest repayments, they will be around £35 billion this year.

So congratulations, Mr Brown. You've managed to make boom and bust twice as bad as it was.

Blog Review 906

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A short guide to the defense of liberty.

Regulators are like generals, always ready to fight the last war.

Are fat tails in a financial market a new discovery? Well, no, they aren't.

Mild mannered economist driven to paroxysms of rage by the AIG outrage.

Not mild mannered economist similarly enraged.

Another explanation of where all the money goes.

And finally, poster design competition.