A gradual tightening
Ayn Rand’s Howard Roark succinctly summarises the only real obstacle to individual achievement in a single line: “the question isn’t who is going to let me; it’s who is going to stop me.”
Fans of Rand (and private sector workers) know that few forces in the world have more stopping power than a government. With its monopoly on violence and its ability to rewrite the rules, government possesses the power to interfere with the private lives of those who live under it even when these persons are willing to abide with the multitude of other laws, regulations and taxes, not all of them fair, to which they are subject. And in the exercise of this power it can be unfair and arbitrary; democracies and tyrannies alike have the power to reduce the efforts of a single person to nothing, to crush him utterly for any reason such a government might choose. Last month brought the news that, as has happened many times in many nations, our government has done exactly that.
By revoking the “very highly trusted” status of London Metropolitan university without providing for any transitional arrangements, the Home Office gives that institution’s current and future students a mere 60 days to either find an alternative sponsor or to self-deport. These are not very good options.
Those who would see themselves as members of Middle England, whether working or not, will doubtlessly be delighted by the news. In a Daily Express piece calling for further crackdowns on illegal immigration three days ago, the London Met debacle received an Express mention; and though I do not ordinarily recommend the Express to my friends and readers at the Adam Smith Institute, as it is illustrative of Middle English sentiment to foreign migration, I will make an exception on this occasion.
Adorning its article with a photograph of our deadly serious-looking Home Secretary, Theresa May, the Express trumpeted the government’s efforts to “block sham marriages,” restrict access to credit and mobile phone contracts for over-stayers, deport prisoners, capture abscondees, and track down failed asylum seekers. All of this, the Express tells us, is part of a broader initiative to reduce “net migration” to “tens of thousands” – a stupid, relative concept with no economic basis and, in any case, a move which both industry and academia have vociferously opposed.
But the relevant point for present purposes is the conflationary link, where the Express betrays that it really views all immigrants to be the same, found at the article’s very end: “no decision has been taken on whether to strip London Metropol itan University of its right to take foreign students” – legal immigrants, who jumped through all the hoops, filled in all the forms, paid the fees, and at any rate who should commence studying at London Metropolitan university in a month. As a consequence of government action, these young people will be made to suffer a serious, life-altering disruption in the course of their lives. Given competition for university places and this very late stage, without rapid government intervention to fix its own mistake, individual remedies will not be readily found.
The structure of the Express’ article reveals, and is illustrative of, the struggle for establishment that immigrants in the UK face: whether legal or illegal, well-off or poor, studious and energetic or lazy and dull, immigration is a political question, and immigrants – current and future – are the collateral which unpopular governments post to offset the risks from their other political liabilities. As a political football, therefore, all immigrants are equal and equally problematic.
Take my own case, for example. A few years ago, after finishing my undergraduate, I had planned to finish graduate school and continue my leave under the “Highly Skilled Migrant,” or the “Super-Immigrant who is rich, pays taxes, and is not entitled to benefits” visa; however, before I could do that, the regime was revoked and replaced. I joined its replacement, the “Tier 1 – post-study” visa, and jumped into “Tier 1 General” class as soon as I could.
Clearly some other people had the same idea as, shortly afterwards, “Tier 1- post study” was abolished and the income, available funds, and educational thresholds for T1General extensions were increased. When this failed to stem the tide of rich, well-educated, taxpaying people remaining the country, the income and funds criteria for extension were increased yet again, and new applications in T1 General were abolished entirely. What was once a quiet and predictable legal environment under Blair has been in complete disarray and subject to constant chance ever since there was a threatening opposition in parliament; over the course of six years, the immigration rules to which many legal immigrants have been subject have been changed, in a fundamental way, at least six times, possibly more. Each change presents new challenges, and more failed applications as migrants cannot meet the higher thresholds. And this, our government tells us, is an indication of success.
I am not alone. From my immediate circle of friends, I can think of a half-dozen examples of well-educated people on the road to success and high taxation whose lives have been hampered by the veritable orgy of recent legislative activity concerning migration. One investment banker I know decided, after a few years in exile in her home country, to return to Britain; she is now tethered to her current employment due to the abolition of T1 General, whereas if she had come but two years earlier, she would have been able to choose her employment freely. Another banker I know who was similarly tethered quit the country and returned to Texas rather than stay tied to a job she despised; still others are prevented from obtaining jobs for which they are qualified, as the administrative burden to smaller companies of complying with Tier 2 visa sponsorship is, for many, absurdly high.
Bankers, with their relatively high incomes, have it relatively easy – others are less lucky. Take, for example, the couple who had to fly abroad for a quickie wedding – planned, but two years early – in order to get around the fact that Tier 1 had tightened up. Or the self-sufficient lighting designer and AV technician who could not start his own business and legally remain after finishing an Open University course, despite having all the resources and connections to do so. Or the law graduate who, being supported by her parents, not eligible for (or taking) benefits while working as a paralegal, self-deported when she could not afford to jump into Tier 1. The young lawyer who tried to get a mortgage, but was rejected by the bank because the credit risk of a time-limited visa was too high due to the high probability of rule changes or non-renewal. The finance professional who, on account of the fact that her visa allowed her only to work in Scotland, was ordered to leave (which, being a law-abiding American, she promptly did) after being successful enough to find work in London in spite of the recession.
I could go on. What is clear from my view in the trenches is that the government’s obsessive tinkering with the rules is hugely disruptive and damaging to business and individual lives, and it must end.
It pains me greatly to have to hyperlink again to the website of the Express, doubly so as the article concerned features Tory MP Douglas Carswell – one of my favourites – arguing in favour of further tightening, in this case by “[insisting] on medical insurance” for all incoming migrants. For certain sorts of immigrants this is a proposal I would support (there are some stories I would like to tell to support this point which, for a number of reasons, I cannot). What is not made clear is whether the enterprising young things – the university students who are destined to pay taxes and NI and work in banks and law firms, for newspapers and insurance companies, in your productive industries as well as in enterprises of our own – would have to buy independent insurance, too.
If this were the case, I should object, since including bright and promising migrants in such a proposal would be, in economic terms, a silly thing to do. Tighten the noose if you wish, but this is the 21st century and we are young, we are hungry and we are mobile. If this country tries to stop us, there are plenty of others that won’t.
Ayn Rand’s Howard Roark succinctly summarises the only real obstacle to individual achievement in a single line: “the question isn’t who is going to let me; it’s who is going to stop me.”
Fans of Rand (and private sector workers) know that few forces in the world have more stopping power than a government. With its monopoly on violence and its ability to rewrite the rules, government possesses the power to interfere with the private lives of those who live under it even when these persons are willing to abide with the multitude of other laws, regulations and taxes, not all of them fair, to which they are subject. And in the exercise of this power it can be unfair and arbitrary; democracies and tyrannies alike have the power to reduce the efforts of a single person to nothing, to crush him utterly for any reason such a government might choose. Last month brought the news that, as has happened many times in many nations, our government has done exactly that.
By revoking the “very highly trusted” status of London Metropolitan university without providing for any transitional arrangements, the Home Office gives that institution’s current and future students a mere 60 days to either find an alternative sponsor or to self-deport. These are not very good options.
France provides a lesson in how not to cut a deficit
The French government seems determined to drive out its wealthiest and most productive citizens. President Hollande is striving forward with his anti-rich campaign, setting a target of raising €7.2 billion through taxes and levies on high earners, wealthy households and big corporations. Steadfastly ignoring evidence that suggests imposing high taxes on the most productive and those who are most able to move abroad will be at best inefficient, at worst ruinous, he proudly boasts of the huge revenues he expects to bring in.
One big idea is to raise the top rate of income tax for those earning above €1m p.a. to 75%. European Affairs Minister Bernard Cazeneuve defended against the notion that high earners and spenders will simply move out of the country by stating that there are ‘French bosses who are patriots’ and ‘there is a range of measures we will take in favour of business, measures that will support investment and encourage business to stay in France.’ Leaving out the odd notion that businessmen and wealth creators put patriotism above financial security, why not encourage businesses to stay by not taxing them and the people that run them? This would have the double benefit of not trying to redistribute the collected taxes into businesses that the government think are best for the people rather than those that the people think are best for the people. Cameron gleefully offered to roll out the red carpet for French ‘tax refugees’ (to which French Labour Minister Michel Spain rather weakly reposted that rolling out a red carpet over the channel would ‘risk taking on some water’).
This August, France became the first EU country to impose a financial transactions tax for publicly traded businesses with a market value above €1bn, deciding that the originally proposed 0.1% wasn’t high enough and doubling it to 0.2%. FTTs are supposed to reduce incentives to destabilise the market through speculation, but in reality increase volatility and reduce price discovery and liquidity on the market. Further, unilaterally implemented FTTs will not raise the revenues expected due to tax avoidance strategies by traders and businesses. A prime example is Sweden in the 1980s, which imposed a 0.5% (later 1%) FTT on all purchases and sales of equity. This resulted in a mass exodus of between 90-99% of Swedish traders to London and the tax was eventually abandoned as it did not raise the revenues expected.
Not only is Hollande driving out domestic productive individuals and businesses, it seems he would also like to discourage wealthy tourists from contributing to the national economy. The French Constitutional Council has approved a tax on foreigners with second homes in the country, raising capital gains tax on the sale of second homes from 19% to 34.5% and raising the rate rented home owners have to pay from 20% to 35.5%. The extra capital gains tax mirrors the tax on French residents that they pay in exchange for the social benefits they receive from the state; note that foreign homeowners will not receive these benefits, which is believed by some to make the tax discriminatory and therefore against EU law. Because of the ‘social’ nature of the tax, those affected may not be covered by the UK-France double tax treaty, which prevents individuals from paying income and capital gains taxes twice. Again, revenues collected from this move won’t be nearly as high as the predicted €50m, as foreign homeowners will just relocate elsewhere.
Other easy sources of revenue come from a €2.3bn levy on wealthy households and €1.1bn in one-off taxes on large banks and energy firms. All of this comes amid bizarre schemes such as temporarily cutting fuel taxes for three months and hypocritical policies such as bailing out ailing bank Dexia and guaranteeing the debts of non-systemic mortgage lender Credit Immobilier de France. Scapegoat policies against the wealthy might win Hollande votes from the disenchanted poor, but they won’t help them get back on their feet in the long run.
Monte dei Paschi di Siena - we've been here before
In June, the Italian Parliament approved Italy’s struggling third-largest lender, Banca Monte dei Paschi di Siena (MPS), for another round of state aid. This week, Reuters reports the Italian state may have to take a stake in the bank after it posted larger than expected first-half losses of €1.6 billion. MPS’ ongoing difficulties stem from imprudent lending and acquisitions during both the Europe-wide credit expansion and the “consolidation frenzy” which swept the Italian banking sector in the late 2000s, leaving it with low reserves compounded during the downturn by the bank’s €25 billion exposure to Italian government bonds – described as “proportionally higher than that of its domestic peers”.
One other interesting piece of information: founded in 1472, the Sienese institution also happens to be the world’s oldest surviving bank.
I say “surviving”, of course, because the city of Florence had a history of much older banks, many of which went bankrupt over a hundred years before MPS was even founded. Their story, recalled briefly in Jesús Huerta de Soto’s Money, Bank Credit and Economic Cycles, is worth revisiting here because it reveals a similar set of preceding circumstances:
“Around the end of the twelfth and beginning of the thirteenth centuries, Florence was the site of an incipient banking industry which gained great importance in the fourteenth century. The following families owned many of the most important banks: the Acciaiuolis, the Bonaccorsis, the Cocchis, the Antellesis, the Corsinis, the Uzzanos, the Perendolis, the Peruzzis, and the Bardis. Evidence shows that from the beginning of the fourteenth century bankers gradually began to make fraudulent use of a portion of the money on demand deposit [ie. non-saving deposits], creating out of nowhere a significant amount of expansionary credit. ... [A]n increase in the money supply (in the form of credit expansion) caused an artificial economic boom followed by a profound, inevitable recession. This recession was triggered not only by Neapolitan princes’ massive withdrawal of funds, but also by England’s inability to repay its loans and the drastic fall in the price of Florentine government bonds. In Florence, public debt had been financed by speculative new loans created out of nowhere by Florentine banks. A general crisis of confidence occurred, causing all of the above banks to fail between 1341 and 1346.” (pp. 70-71)
A familiar pattern emerges from de Soto’s work: banks drawn into excessive lending on ever-diminishing reserves, triggering in turn credit expansion, recession, and financial vulnerability compounded ultimately by over-exposure to questionable government debt.
It is a pattern which demonstrates a weakness in our current economic system that is older even than the oldest of its contemporary institutions. More properly, it is a cautionary tale against state collusion in the active encouragement of excessive lending and credit expansion. In the fourteenth century, this was achieved through the privileges granted to banks by their avid state-borrowers, allowing them ignore the earlier legal principle of maintaining full reserves on non-saving deposits. In the twenty-first century, however, the pattern of depletion was significantly amplified by the availability of easy lines of credit through the European System of Central Banks.
De Soto would argue, as he does in his conclusions, that the way to avoid the kind of insolvency crisis which struck medieval Florence and threatens modern Italy is a system of free banking (ie. without central bank interference), accompanied by full-reserve requirements on non-saving deposits. The efforts of the Italian government to boost MPS’ reserves aim to address an important weakness, but as long as the European Central Bank retains the capacity to expand credit artificially in the name of “stimulus”, the risk of state-induced asset bubbles and sovereign-debt crises still exists.
Although today we use the euro instead of the florin, those two issues are still very much two sides of the same coin.
President Obama's blue chart of death
The American Enterprise Institute's James Pethokoukis posts an updated version of the Obama jobs chart. Note the green dot — what the unemployment rate would be like without the early retirements and other people who, in one way or another, have decided to stop looking for jobs altogether.
Of course a stimulus fan would say that this simply proves that the recession was deeper than was initially believed. That's circular logic, but is surprisingly (or unsurprisingly) popular among the upper levels of the Obama Administration. Another interpretation would be that the stimulus made things worse, as I mentioned this morning. The third possibility, compatible with either of the other two, is that this sort of prediction is inherently bogus. Maybe we can't predict the future — and should stop acting like we can.
Illegal everything
I'm away in Ireland at the moment, but I enjoyed watching this video last night and thought readers of the blog might too. It's a surprising look into the American regulatory state, with plenty of points that will be (sadly) familiar to viewers on this side of the Atlantic as well. (Quite a few of the points are also rather surprising to see on Fox News — in a funny way it's quite a subversive film.)
The monkey's paw
One way to catch a monkey, it is alleged in parts of Africa, is to place fruit at the bottom of a narrow-necked jar. The monkey reaches in for the fruit, but when it makes a fist holding it, its hand is too big to withdraw. The monkey is trapped, and remains so until the villagers come to collect the jar. Of course the monkey could just let go of the fruit, but it wants it so bad that it will not do that.
There are some parallels with the euro. The single currency was created for political, not primarily economic, reasons. Its purpose was to bond its members into a closer union that can be translated into closer political union. And it had the side aim of challenging and later unseating the dollar as the world’s reserve currency of choice, thereby elevating what were perceived as European interests over American ones.
Their hand closed around it, and now they are trapped, like the monkey in the jar. Danger approaches, but they want unity so bad that they won’t let go. If Greece, and maybe others, had left two years ago, there would have been defaults and devaluations, and the basket-case economies would probably by now be lifting themselves up and starting to grow again. But they won’t let go because they are reluctant to loosen their hold on the fruit of ever closer union. To let go of that fruit would be to dispel the myth of one-way progress.
Economic growth in the eurozone might be gone for a Japanese-style wasted decade. Some of the EU’s bigger economies might be unable to finance themselves. The euro itself might ultimately go down. But even if it took the EU down with it, and even the whole world’s economic prospects, they won’t let go. They prefer to convince themselves that if they simply keep trying, they’ll be able to keep the fruit of unity and extricate themselves from the trap. The monkey didn’t escape.
The blunder that is France's Tobin Tax
I'm in City AM this morning writing about the new French Tobin Tax, something we're particularly interested in here at the ASI:
WHEN Napoleon Bonaparte’s regime executed an aristocrat on trumped-up charges of treason, stirring up bloody memories of the Revolution, his chief of police is said to have remarked that it was “worse than a crime; it was a blunder”.
The same could be said of this week’s introduction of a Tobin Tax in France. The measure imposes a 0.2 per cent tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading.
This is a form of the EU-wide Tobin Tax on all securities exchanges proposed by Nicholas Sarkozy last year. Though less disastrous than that would have been, the unintended consequences of this tax may leave President Francois Hollande wishing he had let these proposals die along with the Sarkozy government.
The time bomb keeps ticking
Last Saturday’s Wall Street Journal (US edition) carried an essay by David Wessel, author of the forthcoming book, “Red Ink: Inside the High-Stakes Politics of the Federal Budget”. It provides an excellent breakdown of the budget crisis looming over the US federal government.
Perhaps the most striking fact contained in the essay is that 63 percent of the US federal budget is on auto-pilot: “Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds.” In technical jargon, this is non-discretionary spending – unless Congress actively stops it, such spending continues every year without the need for any further authorization. Throw in an ageing population and inexorably rising healthcare costs, and it becomes clear that such spending is only heading in one direction – skywards.
What is most worrying is that the US federal government currently only funds 66 percent of its spending through taxes. For the rest, it has to borrow. And while that may be bearable in the short-term, as nervous investors around the world pile into US Treasuries and push bond yields to record lows, it spells big trouble in the medium- to long-term. Every cent the government borrows now means more debt interest payments – and even more non-discretionary spending – in the future.
For an idea of just how bad it could get, take a look at this 2010 working paper from the Bank of International Settlements (BIS). Its projections indicate that without a policy shift, US public debt would rise to more than 400 percent of GDP by 2040. That would translate into annual debt interest payments equaling 23 percent of GDP – well in excess of total federal tax revenues, which have averaged a little over 18 percent of GDP since the Second World War. Such a scenario is plainly impossible: the US would be forced to default on its obligations long before things reached that point.
The policy implication here is straightforward enough: non-discretionary spending programs like Social Security, Medicare and Medicaid need urgent, drastic reform to put them on a more sustainable footing. The problem is politics: neither party is really serious about dealing with this fiscal time-bomb. Politicians’ electorally-driven time horizons are just too short to permit the sort of significant, structural changes that are required. Perhaps a rise Treasury yields will force the issue. Maybe another showdown over the debt ceiling will do the trick. But I won’t be holding my breath. As Detlev Schlichter puts it, when it comes to debt, governments around the world are determined to “extend and pretend”. Sadly, it is only a matter of time before reality catches up with them.
Tom Clougherty is managing editor at Reason Foundation, a libertarian think tank with offices in Los Angeles and Washington, DC. This article was originally published at reason.org.
New at AdamSmith.org: 'We built it together, Mr President, through the division of labour.’
Is Barack Obama right that entrepreneurs 'didn't build it' when they look at their own achievements? No, says Stephen MacLean - he should re-read his Adam Smith.
Friday the thirteenth wasn’t kind to Barack Obama. In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world: ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.
Obama privileges ‘corporate’ co-operation at the expense of individual achievement. It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing. No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’
Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy. By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’ Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Commonwealth’ (which occasions opprobrium from contemporary libertarians). Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected.
What is it with these people and trade?
So some swarthy foreigner sidles up to you and offers a deal on something you desire. A very good deal, real cheap. Clearly the correct response is to take the deal: you're getting what you want cheaper than you can elsewhere and are thus being made richer. If this swarth foreigner was an agent of the Sultan of Constantinople and was being subsidised by hte Sultan in order to create work for his subjects to do: the answer is still the same. Take the deal for it is a deal. Your own resources have been increased and you are richer.
Your delight at being offered such an opportunity would be even greater if it was being offered on something that you just must have. Imagine, for example, that the oceans would boil and Flipper be left floundering on a desolate shore if you did not immediately install solar PV in order to generate the electricity you need (need note) to be able to watch a Simon Cowell program for the opportunity to sneer. One would, and one would expect our politicians to agree, take such an offer in an instant and be very happy with it. So what's happening here?
Solarworld AG (SWV), Germany’s biggest solar-panel maker, led a group of manufacturers asking the European Commission to investigate whether Chinese competitors dumped their products on the region’s market.
The so-called EU ProSun group filed the anti-dumping complaint in Brussels after a similar request in the U.S. resulted in duties on solar imports from China. The group has 25 members including companies from Italy and Spain, and Germany’s Sovello GmbH, EU ProSun President Milan Nitzschke said today.
“A majority of the European solar industry backs the complaint,” Nitzschke said by e-mail. “Chinese companies are offering their products below manufacturing costs despite their own massive losses.”
Strangely, I was in the Solarworld offices a few weeks back but I didn't need to be in order to work out what is happening here.
As Adam Smith pointed out the purpose of all production is consumption. We the consumers desire cheaper solar panels and if we're to get them by bankrupting Solarworld and sucking subsidies out of the Chinese taxpayer then that's all well and good. We're better off and the Chinese government is foolish for gouging its own citizens to make us so.
What is going on here is that trade policy is being made to suit the interests of the producers, not the consumers: and that ain't the point of it at all. The correct response to this "suit" is to reject it with the words "Tough luck Sonny". The aim and point of trade policy is to improve the life of the consumer, yea even if that means accepting foreign subsidies.
That it won't work out this way we also know but then that's what's so wrong with the trade policy we have. In fact, that's what's so wrong with any trade policy other than unilateral free trade: we're trying to make life better for you and me and all who want to buy things, not the producers of anything at all.