This is the road to hell


One of Brown’s plans to boost the economy and his poll ratings, sooner rather than later, regardless of the costs, is the “biggest financial stimulus the world has ever seen". Few think Britain is in the right shape for a stimulus. Mervyn King has warned against it, markets warned too, and voters will only support it in the hope that the economy will recover.

It seems Brown will undertake any frantic measure available to boost the economy during his term, without regard for future burdens. He is playing a political and irresponsible game, inconsistent with his supposed focus on economic stability.

To make things worse, it is not even clear that the fiscal stimulus is a viable method of addressing this recession. To ‘stimulate’ Gordon must tax, borrow, or print.

If he taxes, he takes with the left hand, and dishes out with the right: a mere transfer. There may be positive multipliers on government spending, but there is a negative multiplier on all the lost private spending. As government investment is less efficient than that undertaken privately, the net effect will be negative.

If he borrows, then our debt burden will balloon into a debt bombshell of mass economic destruction. Borrowing will also take funds out of the market for loanable funds, and thus may limit the private sector’s access to funds. People will also make some adjustments in light of eventual future pain, further negating any positive elements.

If he prints, then he starts a very risky game. The private sector’s changed expectations in light of monetary inflation will mitigate the stimulus. This would then lead to redistribution rather than growth. Inflated money supply may also lead to overshoot and severe inflation, and even if that is avoided, if it is excessive it will almost certainly create the conditions for the next money-fuelled bubble.

Brown should stop trying to get the economy to a quick fix ‘boom’ for political gains, and think more about long-term stability. One hopes his G20 counterparts have restraint, and block him following what Topolanek the EU president called, the “road to hell".

Win a copy of The Rotten State of Britain


You still have time to win a copy of The Rotten State of Britain over at the Liberal England blog. All you need to do is answer the following questions:

1. In which town was Adam Smith born?

2. Which Scottish Football League team plays its home games there?

3. Who was arrested outside the entrance to Downing Street on 18 June 2006 for carrying a placard saying: "In a time of universal deceit, telling the truth is a revolutionary act"?

4. What is the name of the proposed government database that will hold details of every child in England?

5. Who was appointed to head the Better Hospital Food project in 2000? (Correct spelling please.)

Click here to find out more.

G20: What can be achieved?


I don't know what the G20 world leaders expect to achieve in under five hours of talking. My only hope is that they do as little harm as possible. But I'm not optimistic that they will succeed.

The one good thing is that there's going to be no agreement on hare-brained Keynesian spending packages. Countries like Germany feel they're quite indebted enough, and have no wish to borrow more. And for all the G20 leaders, the needs of voters at home are more pressing than Gordon Brown's need to be seen producing some agreed wheeze to 'save the world'. So I'm glad, because government job-creation plans actually cost jobs. They take money from where the market says it should be and put it to where politicians think that, possibly, it might give the appearance of doing good. And a bit disappears into the pockets of the civil-servants along the way. The Keynesian multiplier is really a minus.

But you can't stage a big event like this, with 10,000 extra police shifts and vast other costs, without having something to show at the end of it. So there will be agreement to look at global regulation. With luck, it won't go much beyond looking, because the last big regulatory initiative, Basel II, was ten years in the making but proved worse than useless – adding to the banks' problems – on its first outing. If our regulators had actually enforced the existing rules, we'd have been better off than we will be with lots of new ones.

And they'll agree that tax havens have to go. Which is a pity, because it means the end of effective tax competition between governments. The fact that people can shift their capital somewhere else is a good discipline on governments to run a tight ship. If they're trapped, because every state is a high-tax state, then the politicians can all relax. And that's not healthy.

I suppose there is a twenty percent chance that our world leaders might do one thing that would help us out of this pit they've dug for us, and that is to re-commit to the Doha free trade round. Global export markets have plummeted in this recession – exports are risky and hard to finance, especially now – and protectionism is rising. Easier world trade won't solve our problems, but it will certainly help, and help the developing countries in particular. But I suppose there's only a one percent chance of that twenty percent chance actually happening.

Dr Eamonn Butler's new book The Rotten State of Britain is published this month. Click here to find out more.

Blog Review 916


One to watch: is there really one rule for them and another for the rest of us? Just what will the Vice President's daughter get for taking cocaine?

A ringing declaration of what it is to be a liberal. The sadness is that all too many of those proclaiming themselves liberals are no such thing.

Now the free movement of capital is being blamed. But please do compare the effects of it (if true) to not having the free movement of capital.

This late in the day it's simply appalling how many don't understand the simplest things about capital markets.

The true meaning of that Dan Hannan video.

Hurrah! A decent idea for government.

And finally, a decent piece of conceptual art (is that even possible?).

The Spirit Level


There's yet another attempt to show us that inequality is the root of all that is wrong with society. That if only we were more equal in incomes then, well, apparently bunnies would be fluffy and there would be a pony for every little child.

Now it is true that they can show a correlation between economic inequality and a variety of effects and yet, yet:

Wilkinson draws on some eclectic illustrations. When monkeys are kept in a hierarchical environment, those at the bottom self-medicate with more cocaine; a caste gap opens in the performance of Hindu children when they have to announce their caste before exams; the stress hormone, cortisol, rises most when people face the evaluation of others; and so on.

Those are all the results of a status heirarchy, not an economic one.

Wilkinson believes the answer lies in the psycho-social areas of hierarchy and status.

Well, quite. Which leaves us with an interesting question. Is the economic inequality actually the important point here? Further, can the ill effects of heirarchy and status be wiped out by reducing the economic inequality?

Allow me to put forward an alternative thesis, one that matches the correlation but reverses the causation.

Some societies are, for whatever reason, more egalitarian than others. Sweden, say, is more so culturally than the UK is. This leads to, amongst other things, their acceptance of a taxation system that reduces economic inequality. That same egalitarianism also leads to less heirarchy and status competition, leading to fewer of the harmful effects the authors say those have. But it is not the economic equalising that performs this, it's that both are inherent in the society itself.

I don't insist that this is true of course, merely propose it as an alternative explanation. But if it is this way around then the attempted economic equalising won't clear up those ill effects. We'll just get the same problems but at a lower general standard of living as we carry the deadweight costs of the taxation.

One of the things that makes me suspect that matters are my way around is looking at England itself. We certainly have heriarchy and status, we also have a certain amount of economic inequality. But no one who has ever even vaguely looked at the English class system is going to assume, even in jest, that status or your position in the heirarchy depend upon the amount of money you've got. Shifting the money around isn't going to have all that much effect on status then, is it?

The end of newspapers?


There is a generally held truth that the days of newspapers are numbered as people increasingly turn to the internet for their news. There is clearly some truth in this and a number of papers will go to the wall accordingly. But instead of trying to turn papers digital, owners would be better advised to look to the past to find a model for the future.

Whatever your political predilection, the standard of your paper in this country is invariably poor. A search of articles in newspaper archives shows a cavernous gap in the quality of journalism between past and present. Much of our current papers are full of vacuous opinions that would fail to challenge the intelligence and opinions of a twelve-year-old child.

Clearly in the age of instant information newspapers will no longer be the place people turn to in order learn about what is going on in the world. However, this need not be the end of newspapers. They have a place for investigative reporting and considered analysis of the news. The model for this is not to try to copy what independent blogs do so well, but to look to the past where journalism was of a higher standard and less inclined to unthinking reactions to current events.

With the declining sales of newspapers it is probably not the time to consider the viabiliity for starting a new paper. However, as there always exists opportunity in adversity, perhaps it is worth some consideration. No paper at present caters for believers in both economic and social freedoms. There might just be room for one on the UK market...

The Rates, the Poll Tax and Council Tax


This April marks the twentieth anniversary of the Community Charge – universally known today as the Poll Tax. Or 'the ill-fated Poll Tax', because its implementation led to violent demonstrations in Glasgow and London, and it was quickly replaced. Arguably, it was the turning point for the Thatcher Administration.

We have to fess up to some involvement. It was an ASI report Revising the Rating System, written by my colleague, the late Douglas Mason, that put the idea on the public agenda. Mason recommended a flat-rate, per capita charge for local services, balanced by improvements in welfare benefits for those who would face the charge for the same time. He recommended gradual introduction, and lengthy testing. In the event, none of that happened. If anything sunk the poll tax, it was disastrously bad implementation, rather than the idea itself.

Everyone agreed the rates system – a local tax based on property values – was unfair. A house occupied by a large family with teenage kids, using lots of health, education and other services, paid the same as an identical house occupied by a single pensioner. Worse, only a minority actually paid the tax – just one in seven in Scotland. So the other six voted with impunity for high-spending local authorities. Councillors became unaccountable, and extremism took hold. Spending rose, the higher rates drove out local businesses, unemployment increased, social services were expanded, and rates rose again in an unbreakable cycle.

There had been various government commissions to review alternatives – a sales tax, a local income tax, and even a flat charge. They were all flawed. But Mason's report plumped firmly for the per capital charge as the least of several evils, and eventually that idea came through.

Scottish Conservatives, knowing that the scheduled rates revaluation would be electorally disastrous, insisted that the Poll Tax should be introduced right away, before its problems were ironed out. There were some welfare changes to help those paying for the first time, as Mason had proposed – but they were introduced a year earlier, and by the time the tax came in, everyone had forgotten about them, and the new tax was still a shock. There were problems with students and other mobile people. And some unscrupulous councils used the tax change to increase their total budgets – by up to 30% in one case – and then blame the government.

So the Poll Tax was scrapped and a compromise Council Tax introduced. Even that is getting to be as unpopular as the rates. Everyone knows that, if we are to revive local communities, more money needs to be spent and raised locally, instead of being handed out by Whitehall on their terms. So we really do need a better system of local taxation. No system is perfect, so, getting there will be painful. But until we find something that reflects Mason's ideals – a charge that reflects the volume of local services that people actually consume, but protects the poor, then we will continue to muddle along, with an over-mighty government in London dictating exactly what happens at the local level.

Dr Eamonn Butler's new book, The Rotten State of Britain, is now available to buy now. Click here to find out how.

What went wrong?


Dr Gordon Brown and his G20 colleagues have made the wrong diagnoses about the financial crisis and will end up prescribing the wrong cures that will probably make the patient even worse. That's according to the leading financial analyst Miles Saltiel in a new Briefing paper for the Adam Smith Institute.

In the paper, What Went Wrong? An Agenda for the G20, Saltiel identifies a number of the wrong diagnoses. Among them are the arguments that China's saving and America's spending made trade balances unsustainable; that financial derivatives had become unfathomably complicated; that bank deregulation is to blame; and that excessive bonuses promoted excessive risk. These and other false explanations he dismisses with concise rebuttals.

Much more probable explanations, he concludes, were the US and UK's loose monetary policy and their hubristic social engineering that forced banks to make bad mortgage deal. And the fact that regulation had created banks 'too big to fail' – not helped by the inept Basel protocols. These, and other explanations, are what the G20 should be concentrating on. But they probably won't.

To read What Went Wrong? click here

Blog Review 915


It doesn't do to be too cynical. But then you do have to be sufficiently cynical about regulation and the regulators.

A look at the latest proposals for solving everything from the left.

Get the couch and the popcorn ready. This fight could be interesting. More here.

Too good not to note: a journalist who once declined to give Netsmith some work gets a kicking.

Econ geek joke. If you're not an econ geek, don't worry. Even when explained, it's not all that funny an econ geek joke.

What we really need to fear rather than fear itself is progressive corporatism.

And finally, politics is show business for ugly people, right? Well, not entirely. But how far would Ms. Bonk get in UK politics?

G20: probably a waste of time


I've done a few media spots lately talking about the forthcoming G20 Summit, and its possible implications for Gordon Brown and British politics. The main point I've been making is that political commentators are making too big a deal out of the summit: outside the Westminster bubble, no one is really expecting anything useful to come out of it, so its not likely to do Gordon Brown much damage even if, as most people assume, meaningful agreement proves hard to come by.

The other point is that even though I don't expect anything particularly helpful to come out of the G20, I'm sure they'll be able to cobble together enough points of agreement to make the whole jamboree look worthwhile.

Funding for the IMF is likely to be increased, and then there will be a host of populist measures to get the media's attention. I expect the G20 will agree to regulate hedge funds and private equity groups (something old Europe has wanted for ages), even though they are almost entirely un-implicated in the current crisis. They'll probably announce a pointlessly harsh crackdown on tax havens, which (again) had absolutely nothing to do with this mess, as well. And there's almost certain to be some bland declaration of the G20's commitment to free trade, accompanied by absolutely no action whatsoever.

One area where there doesn't look like being any agreement is on the co-ordinated fiscal stimulus that Brown and the Americans have been pushing for. The other EU member states are, for the most part, strongly opposed, arguing that they'll already done a fiscal stimulus and a monetary stimulus, and that these things take time to work through the system and have an effect. There's no point running up huge deficits just for the sake of it, they say. And if Gordon Brown can't convince his own finance minister, or the Governor of the Bank of England, I doubt he's going to be successful with the G20.

Quite right too: the IMF says our budget deficit is going to by the highest in the G20 by 2010, at 11 percent of GDP, so the earth is scorched enough already.