Don't believe the austerity hype

UK Chancellor of the Exchequer George Osborne has been warned by the International Monetary Fund that he risks further damaging the economy unless he slows the pace of austerity and faces up to Britain's 'growth challenge.

Er…what austerity? This graph, compiled by Veronique de Rugy of the Mercatus Centre, shows that UK public expenditure has been growing at a pretty solid pace, even in real, inflation-adjusted terms. If you or I were in debt as deep as the government's, we would aim to cut our spending and reduce it. But the government continues to increase its spending, and continues to borrow and add to its debt to finance it. Indeed, the Treasury expects that UK government debt will increase three times, from around £581bn in 2008 when the present crisis hit, to £1,500bn in 2015/16 which is as far ahead as the Treasury forecasts.

Public expenditure is, of course, notoriously difficult to cut. It involves making politically difficult and unpopular decisions. And indeed, during difficult times there are more people drawing unemployment and other social benefits, which are a very large part of the UK government budget. George Osborne's hope was that he could finesse things by hoping that the growth of people's incomes would outpace the growth of public expenditure, so that the relative burden of public spending would diminish, and less borrowing would be required. But given the general economic malaise in Western economies, and the disarray in the euro area in particular, our customers are not buying much more, even at the cheaper prices made possible by the downward slide in the value of the pound.

There is little sign of this changing in the near future. The only way to boost our earnings further is with a growth agenda of deregulation and tax cuts on business (such as a National Insurance holiday for small businesses), which would stimulate employment and investment. In the long term, however, we still need some mechanism to prevent governments simply borrowing to spend – such that they get the benefit while in office, but future government or future generations get the bill to pay. And it needs to be a mechanism that, unlike the eurozone's borrowing rules (or former Chancellor Gordon Brown's), does not fall at the first hurdle when the going gets tough.

Whether governments are ever capable of such self-restraint, however, remains a moot point. So let us start right now by looking at the things that are preventing businesses, particularly small businesses, from hiring and investing and expanding – and get government and bureaucracy out of their hair.

Ten very good things 10: Inequality

Where some look at people and wish we were more equal, I revel in the diversity of humankind, and in the different talents and skills we can make available to enrich the lives of others.  Inequality is my good thing number ten.

10.  Inequality

One of the great virtues of the human race is its variety.  We all have different tastes and different talents.  We value things differently, and through our choices, we give expression to our unique characters.  Freedom is valuable because it allows people to give effect to their own values and to live by the precepts they think are important.

It is because we are different that we co-operate in trade, with each party to an exchange preferring what the other offers.  Some of us are talented at music or sports, and have abilities that others enjoy seeing us exercise.  Some of us are creative and can think of new ideas to offer.  Some of us are risk-takers, eager to undertake new ventures in the hope of success.

This diverse and pulsating pool of different talents is what enables human beings to progress, to innovate, to strive for excellence.  People who want equality more than freedom are sacrificing the diversity that makes people strive for different goals, and they are compromising the creativity that leads humanity to improve and to progress.

Some people imagine a world in their mind in which people are equal.  This is not the real world with its rich diversity, so they often try to make that real world behave like the imagined one.  In doing so they sacrifice the freedom that enables people to live by their own values, and the variety that provides examples we might choose to emulate if we can.

It is not equality we should value, but opportunity.  An equal, but static society is less likely to provide people with the chances of fulfillment than one that allows them to advance towards the goals they think worthwhile.

Well, let's face it, they weren't going to give the creators of the euro the Economics Prize now, were they?

I suppose we'll just have to swallow hard and accept it, this award of the Peace Prize to the EU. That's after we've recovered from the fits of hysteria and laughter. Quite by chance the same day the news came though this was said about Owen Paterson:

Paterson's plan for protecting the UK's seas from overfishing was widely praised by environmentalists as "having its heart in the right place", but was founded on an impossible unilateral withdrawal from the European Union's fisheries policy.

Paterson's plan was drawn up with heavy input from Richard North, of the EU Referendum blog. Further, it was based on an impeccable understanding (no, no, I did not aid them, they managed to get it right on their own) of the basic problem of fisheries. Which is Hardin's oint about open access commons. Simply, when demand for the resource exceeds the regenerative capacity of that resource then access limits must be imposed. In theory it could be either regulation or pricate property rights. In practise, it depends: and we've tried the regulation for 30 years now and it ain't working. Time to move over to those private rights which have been shown to work in every fishery that they've been applied to.

Excellent, we've a real plan to solve a real and agreed problem and the reason we cannot do it is: the bureaucratic structure we are tied into. Even though the plan is correct in theory and has been tried in the real world and it works there and we cannot do it because of the EU.

Still, at least they didn't offer the Economics Prize to the creators of the euro, eh?

The most astonishing economic change going on around us

Almost at random from my RSS feed two little bits of information that tell of the quite astonishing economic changes going on around us at present. The first, that the world is now pretty much wired:

According to new figures published by the International Telecommunications Union on Thursday, the global population has purchased 6 billion cellphone subscriptions.

Note that this is not phones, this is actual subscriptions. It's not quite everyone because there are 7 billion humans and there's always the occasional Italain with two phones, one for the wife and one for the mistress. But in a manner that has never before been true almost all of the population of the planet are in theory at least able to speak to any one other member of that population. The second:

The most recent CTIA data, obtained by All Things D, shows that US carriers handled 1.16 trillion megabytes of data between July 2011 and June 2012, up 104 percent from the 568 billion megabytes used between July 2010 and June 2011.

Within that explosive growth of basic communications we're also seeing the smartphone sector boom. Indeed, I've seen figures that suggest that over half of new activations are now smartphones, capable of fully interacting with the internet.

One matter to point to is how fast this all is. It really is only 30 odd years: from mobile telephony being the preserve of the rich with a car battery to power it to something that the rural peasant of India or China is more likely to own than not. Trickle down economics might have a bad reputation but trickle down technology certainly seems to work. The importance of this event is very difficult to over-estimate. There has been good and solid research showing that an increase in 10% of the population having a mobile phone (the simle, not smarthone kind) boosts economic growth by 0.5% of GDP each and every year. That's the power of being able to communicate about prices, supply and demand, in an economy where there is no landline network and thus no swiftly efficient market.

The second is that smartphones are moving even faster than simple mobiles. It's been shown that the smartphone is the fastest to be adopted technology ever: all the way from fire and agriculture to cars and computing. They are, after all, only a decade or, if you mark it from the iPhone, only 5 years old. The two together, what I think is the obvious likely position in a decade or so, of near everyone, rich or poor, having access to both communications and the store of information that is the internet is going to rather change things.

But not, perhaps, all that noticeably. I'm not expecting revolutions, just slight and incremental increases in the efficiency with which things get done. These will be greater in those places without comms systems until recently, greater where there is less access to knowledge. In the poor places that is. But effects there will indeed be and they will be cumulative. That's the thing about cumulative changes though. 0.5% of GDP might not seem like much but if half a population have phones then GDP doubles every generation, every 30 years or so, from this one single cause alone.

My expectation is that by the time I reach my scheduled check out time the world will be a much richer and better place. And all because people can chat to each other: ain't that great?

The problem of BBC bias

The Chairman of the BBC Trust, Chris Patten, has launched an enquiry into impartiality in BBC news reporting. It should be noted that the BBC controls 60% of the broadcast news audience in the UK, which makes a mockery over any fears that Sky might pose a threat to competition in the market. The BBC is required by its statutes to adhere to impartiality in its reportage. This position is reinforced by the requirement that all broadcasters in the UK present impartial views on news. Clearly this presents some serious issues for freedom of speech; it allows politicians and bureaucrats to have general oversight over the content of news broadcasts as they are in a position to arbitrate what constitutes impartiality.

Most on the 'right' accuse the BBC of a 'liberal' bias - that is socially liberal and economically interventionist. In this article, Prof. David Miller suggests that the BBC is not necessarily liberal but instead takes 'establishment' views. According to this viewpoint, the BBC's reporting holds views on immigration or Islam which are markedly illiberal. We Classical Liberals will laugh at this absurdity - this simply means that none of the BBC's views are worthy of the name Liberal at all, but this is unsurprising from what is essentially an organ of the state (although not any particular government). What would be more remarkable would be if the BBC were biased towards free enterprise and economic laissez faire, however, this would make the BBC no more acceptable to Classical Liberals. 

Miller argues for an independent enquiry - although one doubts that this would make any substantial difference as it would, of course, be led by a member of the establishment. On the other hand, it strikes one as slightly absurd to think of there being 'an establishment' which has one homogeneous set of views - Prof. Miller is guilty of reification, as indeed am I by referring to the BBC as having a view. The Archbishop of Canterbury and a member of the Conservative Party Free Enterprise Group are both members of the 'establishment' but they have very different views. That said, I do agree that there is a prevailing set of étatist views which dominate most opinion in the UK and the bulk of BBC output is certainly in line with that.

I would suggest that it is the function of these enquiries to find that the BBC is somewhat biased towards certain positions and to offer some mild programmes for how to ensure impartiality. I would be pretty surprised if it found that the BBC was wholeheartedly neutral, not only because it is not, but because that would lessen the apparent impartiality of the enquiry itself! On the other hand, it would be surprising to hear that the BBC's news broadcasting is rotten to the core, as this would suggest that the organisation is in breach of its statutory duties. It would be a brave enquiry, internal or external, which took such a position.

To my mind, the whole impartiality debate is entirely misleading and that, of course, is the point. I would argue that it is impossible for news reporting to be impartial and it is impossible for any enquiry to assess impartiality. No amount of study or research could possibly discern the motivations and detect the subtle sins of commission and omission which such assessment would require. Moreover, such researchers would necessarily have their own bias . Rather more abstractly, it is impossible for any human being to be impartial in a field so complex, diverse and unfalsifiable as human social activity i.e. 'the news' - only an omniscient god could make such a claim of knowledge.

This realisation should not lead us into some postmodernist nihilism; it simply means that we require pluralism and freedom in our media so that we can select that position we believe to be most accurate, not have it selected for us (as mentioned above and here it is clear that the BBC also presents a threat to media plurality and undermines competition). This does not mean that organisations should not strive for impartiality, but that they will not achieve it. The problem, therefore, is not that the BBC might be biased but that we cannot tell whether it is biased or not. Or, rather more simply, the BBC must ipso facto be biased.

Naturally, every news outlet must be biased, even one which claims impartiality. In a free market, this presents no problem as there is plurality; one pays one's money, one takes one's choice, as with newspapers or internet media where competition thrives. We all know that the Telegraph tends to the right, the New Statesman to the left and the ASI Blog to logical and sound positions. The BBC is different as it is funded by a forced public levy (find out what happens if you don't pay) - but as a publically funded organisation it cannot be allowed to be partial. But hold on, I hear you cry, have we not just observed that it is impossible for any human being or organisation to be impartial? Well then, the only logical and sound position is that a publically funded organisation should not broadcast news. 

Tweet of the day

The Nobel prize is sufficient to fund the EU agricultural policy's destruction of food markets and third world countries for 14 minutes.

— Johan Norberg (@johanknorberg) October 12, 2012

Ten very good things 9: Globalization

There is talk of food miles, of buying locally, and of self-sufficiency, as if these were virtues.  The good thing (my number nine) is globalization which gives us all access to each other's special skills and products.

9.  Globalization

Over the course of decades globalization is turning the world into an integrated economy instead of what it has been for most of its history, a series of relatively isolated economies.  The more trading that takes place, the more wealth is created, and global trade across international frontiers has created more wealth than ever before in human history, and had helped lift more people out of mere subsistence than ever before.

To poorer countries globalization brings the chance to sell their relatively low cost labour onto world markets.  It brings the investment that creates jobs, and although those jobs pay less than their counterparts in rich economies, they represent a step up for people in recipient countries because they usually pay more than do the more traditional jobs available there.

To people in richer countries globalization brings lower cost goods from abroad, which leaves them with spending power to spare and a higher standard of living.  It also brings opportunities for productive investment in high growth industries in developing countries.

Those adversely affected by the global exchanges are the people in rich countries whose output is now undercut by the cheaper alternatives from abroad.  They often need to find new jobs or to be retrained to do work that adds higher value.  The extra wealth generated by globalization has brought an increase in service sector employment, which provides many of the new jobs needed.

Competition from abroad forces firms to become more efficient and to use resources more efficiently.  Often they choose to go upmarket, seeking higher added value products that face less competition from relatively unskilled labour.  Thus firms which once sold cheap textiles move into fashion and design, and find customers among the rising middle classes in developing countries.

The integration of the world economy has brought with it an interdependence.  As countries co-operate in trade with each other, they get to know each other and grow into the habit of resolving disputes by negotiation and agreement instead of by armed conflict.  The 19th Century French economist Frederic Bastiat expressed this pithily: "Where goods do not cross frontiers, armies will."

Ten very good things 8: Growth

Although some people look out from their centrally heated balconies, with their bathroom cabinets full of modern medications, and their refrigerators full of well- preserved nourishing foods, and affect to despise growth, growth fills life with more opportunities, not just material ones. It is good thing number eight.

8. Growth

There is a certain temperament which dislikes progress because it is emblematic of change and struggle. They share the Elysian dream of Tennyson's Lotos Eaters for peace and contentment: "Is there any peace in ever climbing up the climbing wave?"

Such people disdain economic growth and advocate instead a contented life which does not seek to improve its lot. In fact some important studies on happiness suggest that it comes with the prospect of improvement rather than with a comfortable standard of living.

Adam Smith spoke of "The uniform, constant, and uninterrupted effort of every man to better his condition," and it applies equally to women. People are motivated to better their lot, and it is partly from this drive that large numbers of us do not now live near starvation and at the mercy of bad harvests and crop failures. We have learned how to generate surpluses that can tide us through bad times, and which can offer us greater opportunities than previous generations could conceive of.

We use wealth to invest in creating more wealth in the future. This is what economic growth is. It has enabled us to afford an improved diet, sanitation, clean water, education, healthcare, better transport, and has given us the means and the leisure to cultivate the arts.

There are those who say that enough is enough, without making clear why it is today's standard which is enough, rather than that of 50 years ago or of 50 years hence. Some suggest we are using up the Earth's resources, even though our ability to access new sources seems to increase faster than our use of them, which is why the price of most of them has fallen in real terms. Others suggest that we cannot produce sufficient energy to fuel more growth,even though recent technological innovation in gas extraction has increased the available reserves by decades, if not a century or more.

Growth means a higher standard of living. It means better and smarter goods and services. It means one generation having access to the choices that only the very rich of the previous generation could afford. Growth offers the chances of more leisure, of self-improvement, of raising the standards of education. It is what brings to millions the chance of a better life.

Why Hayek matters

I was away when Eamonn gave the lecture above on the continuing importance of FA Hayek, but having had a chance to watch the speech I can understand why the room was packed out. It's a fabulous, concise explanation of why people like us at the Adam Smith Institute still revere the old economist born in Vienna a hundred years ago. Eamonn's new primer on Hayek is available from Amazon now in paperback and Kindle editions.

Ten very good things 7: Risk

There is a modern idea that risk is equated with danger and should be eliminated if possible.  In fact risk is my good thing number 7, and makes progress possible when innovators embrace it.

7.  Risk

There is a modern idea that risk is a bad thing to be avoided, whereas the reverse is true.  Some people do indeed feel comfortable in a safe and stable environment, but this is not where progress and advances are made.  Risk is essential to the learning process.  We make experiments and we try things out.  We learn from both the ones that work and the ones that do not.

Health and safety officers post recommendations to reduce risks, especially those faced by children.  The approach seems to derive from a zero risk mentality that makes no attempts to weigh the benefits of an action against any adverse consequences it might bring.  It is true that when children play conkers, a few might sustain injuries if not wearing helmets and goggles.  But playing conkers is part of the fun of childhood, and will not be done at all if made inaccessible by unrealistic safety demands. 

Some activities are risky, and some bring benefits that outweigh any adverse consequences.  People wrapped in cotton wool develop no resilience or resistance to what life throws their way.  They are also denied the gains in terms of the personal achievements and advances which those activities can bring if successful.

Entrepreneurs take risks.  Investors do, too.  Trying to estimate what the future may bring is risky, especially if one has money riding on the outcome.  But those who undertake those risks successfully bring benefits to others than themselves.  Innovators and inventors bring new products onto the market that improve the lives of others, in addition to the rewards they might gain themselves.

Risk is a part of everyday life.  Farmers take risks in deciding what crops to plant and when to treat them.  Students take risks in choosing courses that may or may not lead the way to a fulfilling career.  Businesses take risks in deciding what products to produce and to market.  People take risks when they buy products that might or might not bring the satisfaction sought.  Risk is all around us and it helps us to learn and to advance.  As with evolution, some things work and some things do not.  In nature the organism usually dies with its unsuccessful innovation, but in human affairs we learn from the unsuccessful and gain the wisdom of experience.