Global inequality and the "99%"
Scott Sumner has a superb piece up today, on the different kinds of inequality:
2. Inequality of talent. Some people are blessed with the ability of a Michael Jordon, or a Brad Pitt.
3. Inequality if liberty. I know one Chinese person who used to listen to Russian classical music very quietly, least the neighbors overheard. It was viewed as counter-revolutionary, and she could have gotten in a lot of trouble. Least we think America doesn’t have these problems, think of the many 100,000s of people in prison for using drugs.
4. Inequality of money (i.e. income/wealth/consumption.)
5. Inequality of personality. I know one part time instructor who always looks happy. He always whistles while he walks, and greets people with enthusiasm. He’s about 85. And I know lots of grouchy professors making 5 times more money.
6. Inequality of mental health–actually just a more extreme version of point 5–but a big driver of utility. . . .
13. Inequality of preferences. I am cursed with expensive taste. If I walk into a rug store, my eyes are immediately attracted to the most expensive oriental carpet. My daughter just bought a teal shag carpet from Target that she likes. Lucky her.
14. Inequality of pain. A hugely underrated factor in utility. And let’s not forget the poor hypochondriacs. There is no statement more stupid in the entire English language than “it’s all in your head.” Everything is all in your head, including pain. See the studies of phantom limbs. Pain is pain.
And so forth. The whole list is required reading, because it underlines the strangeness of some people's preoccupation with inequality of money. (Sumner says these people are economists, but I've known plenty of non-economists for whom that's true as well.) He concludes:
It’s important to keep in mind that there is much more to life than income inequality, and much more to the world than the US. In the grand scheme of things, tinkering with government programs to help the poor, pitiful, beleaguered American middle class isn’t likely to make much difference, at least from a utilitarian perspective. We need to broaden our outlook.
That's more or less my main problem with redistributionist rhetoric in Britain. OK, you want to improve the lives of the worst-off – good for you. But why do you only focus on Britain when we know that even the poorest Britons are better off than the "Bottom Billion"? If I was a socialist, I wouldn't care about the NHS, the welfare state, or the "99%". I'd be fighting for more free trade, more open borders and (in the US especially) more liberal drug laws – things that will benefit the truly worst-off. Indeed, those are already the things that I try to fight for – they are so fundamental to improving people's happiness that they should transcend ideological lines.
There are lots of different inequalities and wealth inequality is an important one. Caring about the poor shouldn't stop at a border's edge, and shouldn't prioritise people who are nearby over people who are far away. Especially if they're still among the richest people in the world.
Willetts' revenge
Just before he became a minister in the UK’s coalition government last year, David Willetts published the insightful The Pinch: How The Baby Boomers Took Their Children’s Future – And Why They Should Give It Back. As the title suggests, the book details how the baby boom generation has had it pretty much its own way – free university education, unfunded but generous pensions, a supply-restricted housing bubble and lots of other goodies to glide its way through an easy and prosperous life. Much of the western world’s current financial woes are largely due to the baby boom generation living way beyond its means.
Well, it’s payback time! Around the world, revenue-hungry governments are casting about for cash and pension funds are a big target. Some time ago on these pages, Jan Iwanik noted how various governments were blatantly helping themselves. In Hungary, the government gave citizens the choice of remitting their retirement savings to the state or losing the right to the basic state pension. France earmarked EUR33 billion from the national reserve pension fund to reduce the short-term pension scheme deficit, in effect taking money set aside for 2020-2040 and using it in 2011-2014. Argentina didn’t fool around – in 2008, it simply nationalised the top 10 private pension funds.
We’re a little more subtle here in the UK but, make no mistake, beggaring pension-fund savings is well underway. Gordon Brown kicked things off back in 1997 by abolishing the Advanced Corporation Tax which may have cost pension schemes something around £150 billion. The current government has now capped at £50,000 the annual tax-free pension contributions and limited total pension savings to £1.5 million.
More surreptitiously, the old stand-by tool of inflation is doing its work to erode the real value of pension savings while the low interest-rate policy of recent years is severely limiting the growth prospects of safe saving instruments like term deposits and government bonds. Elsewhere, the increasingly vilified “profits” of banks, utilities and large corporations are under attack even though the biggest shareholders of such companies are investment and pension funds – ie. folks saving for their retirement.
Now the Bank of England’s latest round of quantitative easing is forecast to further batter pension savers. A number of analysts have pointed out that the effect of the move will be to cut annuity rates even more. Accounting firm PwC reckons that a pension pot of £300,000 will now buy an income of just £18,500 a year compared with £22,500 three years ago.
None of this is Mr Willetts’ actual doing and he remains one of the government’s most thoughtful brains (if not two). Whatever else he accomplishes while in government, we can thank him for the broader historical perspective provided by The Pinch on the current mess we’re in. We may not like it but at least we understand it.
Printing money like a drunken sailor
The excellent Richard Jeffrey, Chief Economist at Cazenove Capital, makes a good point in his latest newsletter (available only to clients, sadly). The Monetary Policy Committee, he notes, now estimates that UK economic growth during 2011 will be about 1.5% – markedly less than the 2.6% it was predicting just a year ago. Meanwhile, the MPC's forecast for inflation is now 4.8%, considerably higher than the 3.3% that it predicted just a year ago. "If the MPC's short term expectations are so unstable and prone to error," says Jeffrey, "the basis on which shifts in monetary policy are made must be called into question."
Quite. The Bank of England has just 'printed' another £75bn of new money – around 5% of GDP – to try to stimulate growth, on top of the £200bn it has already conjured up. A total stimulus of nearly 20% of GDP is a big stimulus indeed. As Milton Friedman never tired of telling us, monetary policy is a very powerful and brute tool, and an expansion on this scale in such a short time is brute indeed. If it is being made on the basis of flaky figures, that makes it even more worrying.
There are two reasons why things in the UK look so bad (and why firms are battening down rather than investing and expanding – as the latest unemployment figures show all too clearly). First, incomes are not growing fast: some people have taken pay cuts, in fact, while others have lost their jobs entirely. That is what you expect in a recession, if you are a Mises fan, at least: after the fake, credit-fuelled binge of the last decade and a half, the inevitable hangover is painful but inevitable.
The other reason is that inflation is eating into what pay rises people are getting, leaving them generally worse off. And (Friedman again) you can put that down to monetary policy. Like anything else, creating too much of the stuff just makes it worthless, and the MPC has created too much of the stuff. If overseas investors come to the same conclusion and sterling becomes devalued even further, the prices of many essential imports like food and fuel will rise even more, and UK consumers will feel themselves even worse off.
The solution? Hayek this time: inflation must be stopped dead. It is corrosive, and it stops markets from working properly. And if you want to get out of a recession, you need your markets to work as well as you can possibly make them. On that front, high taxes and bad regulations are bad enough, but inflation is a disaster. Present policies may just make things worse, rather than better.
Government intervention has caused the problems of the rental sector
Another day brings another call for more government intervention. A report published yesterday by the charity Shelter suggests that rent levels in the private rental sector are ‘unaffordable’ in 55% of English local authority areas. One might raise the question of the ultimate arbitrariness of the measure of affordability used, but there are more serious concerns. The Guardian reported that Director of Shelter Campbell Robb ‘[S]aid it was time for the government to urgently consider how private renting could become a stable, affordable option for families "and not a heavy financial burden that makes parents choose between buying food for their children and paying the rent."’
To me that sounds worryingly like a call for rent controls, which was certainly how the question was approached on the Today programme yesterday morning. Similarly, the Borough of Newham has introduced a mandatory licensing scheme in an effort to reduce the problems caused by ‘rogue landlords’.
Fortunately, the Housing Minister Grant Shapps seemed rather more sensible. He dismissed rent control as folly and argued that the answer to the problem was more house building. I would observe that the oft-repeated call for building more ‘affordable’ housing is a logical nonsense; if more housing is built where there is demand, all housing will become more affordable.
For those of us who wish to be reminded of the damage that rent controls can do to housing supply and rent prices we need look no further than the disastrous experience of the UK itself or in the USA as demonstrated by William Tucker’s Zoning, Rent Controls and Affordable Housing. Licensing, aside from the costs of administration, will only reduce the number of properties available by making it harder for landlords to rent properties and will encourage landlords to evade enforcement, thus further reducing the ability of tenants to protect themselves.
What Shelter et al. seem to have overlooked are the causes of increases in rent prices – these are complex but the root cause is excessive demand for housing over supply, largely caused by government manipulation of the housing market via interventions in planning and zoning.
Perhaps even more significant as a cause of the problem are the monetary interventions which have inflated and continue to inflate a housing price bubble. Moreover, the control of a large stock of ‘social housing’ further distorts the operation of the market. What Shelter are calling for is more intervention to correct problems caused by intervention!
The rise of mass poverty
Poverty is on the march. The “we’re all doomed” message still makes people giggle, but there is ample evidence that unless we U-turn our policies towards aspiration and wealth creation, very many of us will indeed be doomed to a steady increase in poverty for ever larger parts of the population. Yes, unless we change tack, many of those rioters will never ever be in work. I have no doubt that many will be fine – but then, even Sierra Leone has people who do more than just survive.
According to Shelter private rents are now unaffordable in 55% of local authorities in England, with rents costing more than 35% of average local take-home pay. Unemployment has reached a 17-year high, with 2.57 million people out of work. Home ownership has been falling since 2003 according to Andrew Heywood of the Royal Institution of Chartered Surveyors. The IMF has cut the UK’s economic growth forecast to 1.1% in 2011.
In most cases, the increase in poverty stems from bad government policies pursued by previous governments:
- The Bank of England's Monetary Policy Committee dug the double dip. The artificial boom, created by loose monetary policy (elastic money), has burst. The first dip was treated with some more money printing which has now (almost) led to a double dip. Through QE, the MPC has opted for more infection to battle the disease. And inflation has impoverished savers and disincentivized saving. Today's savers will be tomorrow's poor.
- We are paying the bill for yesterday’s party. Excessive state spending, the increase of which has been reduced by the present government, was largely funded by borrowing. In other words: the economic prosperity of our children was mortgage for today’s pleasures.
- We are effectively banning wealth creation. Excessive tax drives wealth creating individuals and businesses overseas and disincentives people to set up businesses.
- We have an Everest of red tape. Excessive regulation – usually EU regulation gold-plated in Whitehall – makes us uncompetitive.
- The Chinese love our employment protection laws. The main beneficiaries of labour protection laws have been labourers in developing countries, who now suddenly find themselves in a job, while ours are on the dole.
- "Little Europeans" hide behind walls to keep wealth out. EU trade barriers hinder wealth-creating free trade.
- Shifting resources from the private sector to the state results in a net loss of wealth. The growth of the size of the state (state spending) comes at the expense of the private sector, which has to pay for it. The public sector is usually less productive than the private sector, so a pound taken from the private sector produces less than one pound's worth of value in the public sector.
Why not choose a return to free market economics instead? When the Conservative Party held its party conference in Manchester last week, the formula for success was staring them in the face. Magnificent buildings built in the free market period between 1850 and 1900 are sprinkled all over the city. Maybe we could create the climate to build such magnificence again, so our children can say, “Our parents did things right”, instead of, “Our parents robbed us blind”.
Notes on Sweden's welfare state
Most people are familiar with what I call the Swedish Fallacy – the reliance on Sweden by people on all sides of the spectrum to back up whatever policy proposal they're making, as if Sweden is a paradise on earth that everybody can emulate by adopting the same policies. It's especially common on the left: they have high taxes and a dynamic economy, so higher taxes must not be a bad thing! A new report from the Libera Foundation, a Finnish think tank, throws a spanner into those works:
One should remember that the golden age of Swedish entrepreneurship, where one successful firm after another was founded in the small country and gained international renown, occurred during a time where taxes and the scope of government were quite limited. Sweden shifted to radicalized social democratic policies in the 1960s, 1970s, and the 1980s. . . .
It is, however, important to remember that Sweden, like other Nordic nations, has compensated for these policies by improving economic liberty in other fields. Some reforms, such as the partial privatization of the mandatory pensions system and voucher systems in schools and health care surpass what has been possible to implement in most developed nations.
Swedish society is not necessarily moving away from the idea of a welfare state, but continuous reforms are implemented towards economic liberty within the scope of welfare. The rise of government has been stopped and even reversed in recent years. The nation is again returning to the free market policies which served it so well in the past.
This is a point that Tim Worstall has made in the past as well. The report also discusses the cultural factors that make such high taxes tolerable. Yes, Sweden is a high tax, high welfare country, but it's also remarkably free market by most other measures. Indeed, it might be that the only way they're able to pay for so much welfare is because in many other respects they take a more laissez-faire approach to their economy than we do.
That should be food for thought for socialists who want to take from the rich to give to the poor – if a free market maximises the money they have to redistribute in the medium-term, the most sincere socialist position might be to favour fairly high taxes and low regulation. It's not something I'd support – high taxes are still bad news for lots of reasons – but I'd prefer it to the primitive central planning that many on the left still favour. I don't think Sweden's a paradise, but it might still be able to teach the left a thing or two about how to pay for the welfare state they want.
Taxing talent: How Britain can attract and retain the world’s best workers
Our new report, ‘Taxing Talent: How Britain Can Attract and Retain the World’s Best Workers’, looks at the challenges the UK will face in terms of migration policy over the coming years. It argues that Britain must focus on attracting highly skilled migrants and that the key to doing this is to lower income taxes.
The report reveals how critically important immigration is to the British economy. With an ageing population and a looming pensions crisis, the UK needs to attract about 270,000 new migrants each year. Furthermore immigration is important in creating a flexible workforce, which is necessary if we want to see economic prosperity.
Although we have the 4th highest number of highly skilled immigrants in the OECD, we also have one of the highest rates of emigration by highly skilled workers. In light of this, the government needs to focus on policies that will both attract and retain the most valuable migrants and native workers.
The report reveals that there are a number of factors that impact a migrant’s decision to move to or stay in Britain. These include social and professional networks, employment prospects, wages and professional development prospects. However the report also revealed that the tax burden is a crucial factor influencing highly skilled workers’ choice of where to emigrate to. Furthermore it is one of the only variables that the government can influence in the short run with any success.
Where tax breaks have been tried, they have failed. Tax breaks don’t retain migrant workers: Instead, the government should abolish the 50p tax rate and reduce the 20p and 40p rates to attract the most productive migrants to Britain. We need to have an internationally competitive tax system if we want to keep our native highly skilled workers and attract talent to Britain.
The government’s current policy of an immigration cap could lead to negative economic consequences. Instead our report proposes introducing an “open borders, closed public accounts” system, which would make migrants use private insurers for healthcare and other large welfare expenditures. This would make the UK open to migrants whilst addressing concerns over public service abuse.
If we want to see the UK’s economy revitalised, we need to make Britain amongst the top places in the world for highly skilled workers to live. As our previous report on the 50p tax outlined, it’s crucial we cut taxes to remain internationally competitive. As our report argues, we cannot afford to keep on taxing talent out of the UK.
Allister Heath joins the Hayek Club
Today's a big day for the Hayek Club – Allister Heath, editor of City AM, is our newest recruit. The Hayek Club, you'll recall, is the collection of pundits, economists and politicians who have accepted a loosely Hayekian narrative to explain the Great Recession. (It's inspired by Greg Mankiw's remarkably popular Pigou Club – nobody asks to join; membership is thrust upon them.) In his Editor's Letter today on the Nobel Prize winners, Heath writes:
While a lot of the new classical economists’ conclusions were right, and they did actually warn about bubbles, the way they reached them and their methodology and philosophical understanding of the limitations to knowledge were flawed. People aren’t as rational as they assumed. They also wrongly downplayed the role of the money supply in causing cycles.
Hence why I find the second category of non-Keynesian economics more interesting: the latest incarnation of the more traditional classical school, including the better Austrian thinkers, whose conclusions are similar but whose approach is much more realistic. Keynes was wrong, as yesterday’s Nobel prize winners rightly point out, a lesson many need to rediscover. But he wasn’t always wrong for the reasons Sargent and Sims thought.
The whole article is worth a read. It's great to see serious, mainstream thinkers like Heath giving the Austrians another look. He joins a growing club of heavyweights, including the Chief Economist of Deutsche Bank, an influential backbencher, a former President of the Kansas City Federal Reserve Bank, and many others. The road to widespread acceptance is long and winding, but the Austrians may be getting there.
The decline of British retail
With the on-going eurozone crisis, the UK economy is now enveloped in unremitting gloom. Of course, if you over-spend as conspicuously as has been the case over the last decade, the return to normalcy will be immensely challenging – and time-consuming. After years of excess debt, the UK is now experiencing the first elements of a ‘hard landing’.
Last week, the UK retail sector had a shocker, possibly its worst week for generations. The mighty Tesco announced that its core UK like-for-like sales growth over the last quarter, excluding petrol and VAT, fell by almost 1% - its worst performance for 20 years. Whilst Sainsbury’s underlying figures were less gloomy, recent data from other less defensive retailers is far worse. The retail electronics sector remains in a desperate state. Both Dixons and especially Comet (owned by Kesa) are struggling whilst HMV’s share price continues to plummet. Last Wednesday, Mothercare stunned the market, with a trading statement that sent its shares spiralling down by 42% - an astonishing fall for a reputable high street retailer.
In assessing these figures, remember that annual inflation is c5%, so that these like-for-like sales figures are, in real terms, even more depressing.
Currently, optimism is a rare commodity in the retail sector, which partly explains the widely reported last-minute re-drafting of the Prime Minister’s conference speech. The prospects for Christmas already look very grim. Few retailers expect their post-Christmas trading statements to be favourably received.
However, the benefits of a market-led economy mean that it can adjust readily to changed circumstances. Tesco, for example, has already launched parts of its ‘Big Price Drop’ campaign, which – despite an adverse impact on margins – should boost sales. In time, as debt levels revert closer to equilibrium, shoppers will return in greater numbers and lift the high street gloom. But the stark lesson for governments remains – never lose control of public borrowing.
How to not learn from other people's mistakes
I first heard about the government's new "credit easing" plan from David Gauke MP, who spoke at at one of the ASI's tremendously successful events. The idea to give government backing to small business bonds in some form sounded strangely familiar. Allister Heath, who also spoke at the event, had the same feeling of deja vu:
It is hard not to see the parallels between Osborne’s plans, which would involve massive government intervention, and what happened to the US mortgage market. If it decides to start a vehicle to purchase bonds issued by small companies, as hinted yesterday, the UK government would encourage their issuance. But it will also mean that the private sector will no longer have an incentive to check their quality, which means that we could soon see an explosion of dodgy, sub-prime small business debt.
Thousands of businesses could over-extend themselves and go bust, and the taxpayer would risk losing a fortune, especially if sound firms continue to borrow from banks and the bad ones tap into the government’s scheme. Osborne may also want to encourage the securitisation of small firms’ loans. Again, this may be a good idea but not if moral hazard destroys the idea as a result of government guarantees. Osborne’s real plan is probably to create a system that could be extended to guarantee all private bond issuance in case the Eurozone implodes; but this would threaten the UK’s solvency by over-extending the government’s balance sheet.
If there was one lesson from the subprime mortgage crisis, it was that government backing for risky loans creates perverse incentives. But the government seems to be completely preoccupied with debt and credit. Instead of cutting back on the state to encourage economic activity, Osborne focuses solely on doing so to cut the deficit and reducing the government's cost of borrowing. In other words, in doing the least amount necessary to fix the debt burden. That's important, but only one part of the story.
The same myopia can be seen here, in small business policies – where firms need tax and regulation cuts, he gives them government-backed credit with all the financial danger that will create. We need a passionate free marketeer running the show to get the economy moving again. But in Osborne, we've got a zero-conviction manager.