That pesky growth agenda
Over on The Spectator’s Coffee House blog, Fraser Nelson has mischievously offered a bottle of Pol Roger champagne to the reader best able to articulate George Osborne’s growth strategy.
The joke, of course, is that many commentators don’t believe the government has a growth agenda. And it’s easy to see why they’d say that: various tax rises, a distinct lack of progress on cutting red tape, and a foolhardy determination to drive up energy costs certainly give the impression that the government doesn’t have a plan for growth.
But that isn’t quite fair. The government does, in its own mind, have a growth strategy: keep interest rates low and try to encourage lending and borrowing. Ultimately, that’s why they committed to spending restraint. That’s why they’ve been supportive of quantitative easing. And that’s why they’re now talking about credit easing – that is, subsidizing loans to SMEs.
Easy money and cheap credit – it’s all very 2007, isn’t it? And that’s my big problem with the government’s growth strategy (such as it is) – it is more about propping up a broken, credit-fuelled economic model than it is about creating real, sustainable growth for the future.
The trouble is that the most crucial policy for future growth – finally, after years of resistance, letting markets adjust – could bring with it a degree of short-term pain that many politicians would find unacceptable. Yet while recessions are undoubtedly painful, preventing the liquidation, deleveraging and capital reallocation they entail makes stagnation (at best) the most likely outcome.
Of course, I’m not suggesting that returning to growth is only about ‘letting go’ and allowing things to work themselves out. Supply-side measures to boost enterprise and entrepreneurship are vital too, and that means lower taxes, particularly on investment, and less onerous regulation. We also need a healthy savings ratio and greater capital accumulation, a sounder banking system, and the radical liberalization of public services.
So there is actually plenty the government can do to encourage growth. Right now, I’m just not sure they’re doing it.
A tax on death
Madsen has a piece in City AM today, on the benefits of getting rid of inheritance tax:
Perversely, inheritance tax rewards spending rather than saving. The spender enjoys 100 per cent of value, whereas the saver is allowed only 60 per cent. The incentive is to dissipate the pool of capital rather than preserve it. Some unincorporated businesses that could continue as going concerns under family stewardship are sold and dissipated. Other businesses guard against this by ceasing to be entrepreneurial and growing, diverting energies instead into ways of minimising their exposure to inheritance tax rather than into expanding their activity and their markets.
The tax’s adverse effects on entrepreneurship go much further than discouraging parents from building up and passing on businesses. Several studies have shown that ordinary bequests boost self-employment. They provide capital sums to children at just the time when some contemplate branching out from paid employment into their own business. The bequest makes it possible, and by taxing bequests we are inhibiting future self-employment and the new businesses it would bring.
Generations on war footing
Last week, we wrote about the assault on UK pension savings that is just one way to claw back some of the benefits the baby boom generation has enjoyed. Well, a wider campaign against the boomers is getting itself organised with the formal launch this past week of The Intergenerational Foundation which claims to “promote fairness between generations.”
The IF says it believes “each generation should pay its own way, which is not happening at present. British policy-makers have given undue advantage to the older generation at the expense of younger and future generations.” It’s hard to argue with the basic premise that politicians with a short-term view to the next election have been catering to the largest demographic group with scant regard for long-term costs.
Going through the IF’s detailed projects like education, employment, health, housing and taxation, its analyses of the issues sound reasonable but it’s short of practical solutions. Of course, it’s early days and the IF is mostly warning that it will be “monitoring” or “studying” policies for now.
So far, so good and we look forward to seeing the IF’s big ideas. However, a disquieting theme running through the IF’s material is a repeated call to “fairness.” This is a noble concept in theory but has generally been a disaster in practice as it leads our short-termist politicians to enact special privileges and convoluted schemes with unintended consequences.
Hopefully, the IF will come up with ideas that do away with existing privileges rather than proposing new off-setting privileges. It all comes down to money and we look forward to any proposals that simplify the tax regime, eliminate special-interest spending and just generally let people get on with their lives as they see best.
Unfortunately, early indications aren’t encouraging. On the matter of housing, the IF wants to deal with the “hoarding of living space” (ie. “under-occupation”) by chasing older people out of big houses into smaller ones. Its proposed policies include abolishing stamp duty for those downsizing, changes to planning rules to increase the supply of suitable housing for people downsizing, ‘nudge’ policies such as the withdrawal of some ‘universal’ benefits for those living in houses worth over £500,000, a property value tax and abolition of council tax concessions for single occupation.
If future ideas from the IF call for yet more taxes and more tax-code fiddling, it’ll be just another special interest group grasping at the public purse. This could be a very expensive intergenerational war. Maybe we can save a lot money by proposing pistols at dawn between IF co-founder Angus Hanton and Saga’s Director General Ros Altmann.
The morality of capitalism
What your professors won't tell you is the subtitle to Tom Palmer's new book The Morality of Capitalism (Jameson Books 2011). Tom – who travels the world beating the drum for liberty – has assembled a powerful team of contributors, including two Nobel laureates and the founder of Whole Foods Market. Though the authors obviously don't have a consistent style – some very academic, some didactic, others very personal in their approach – you can still strain out a huge number of interesting arguments and points about the morality of markets that you won't see in common circulation and certainly won't hear from your professors.
Cato's David Boaz, for example, points out that human beings are social creatures and the like to associate and collaborate. Sure, they are self-interested, but they wold be self-interested under any system, not just capitalism. The virtue of free-market capitalism is that people can only make themselves better off by helping others.
The Chinese economist Mao Yushi takes that further with an interesting paradox. If we were all completely benevolent – looking out for the interests of other people rather than ourselves – we would have just as much conflict as capitalism is said to give us. We would be fighting shopkeepers to charge us more and reduce their quality. The arguments would be just as red in tooth and claw, but the incentives would all be to reduce value rather than to create and increase it, as capitalism does.
Tom Palmer himself provides a heartfelt story of when he was in severe pain, but was treated with huge courtesy, kindness, and human decency in a private hospital. That contrasted mightily with his subsequent treatment in a public hospital, where he was bossed about and treated like a lump of meat. You can't raise or lower people's natural feelings of humanity by force, he concludes, but you can certainly prompt them to show their humanity – or inhumanity – by your choice of incentives. In one setting, Tom was a valued customer; in the other, a necessary inconvenience.
Palmer also has a chapter on Adam Smith, pointing out that the Sage of Kirkcaldy is too often caricatured as saying that 'greed is good'. It is plain from his writings, though, that he believed no such thing. Self-interest has its place, but there are limits to this as there must be to every human characteristics. Seeking wealth by helping other people, which is the essence of the market, is just fine, though. The desire to accumulate money is entirely benign if you want it to feed, and clothe your family or to spend for the public benefit. The more money that philanthropists have, the more philanthropy they can deliver: why do people think then, that the pursuit of money is immoral?
There are 101 more insights like this in the book. Congratulations to AtlasNetwork.org and StudentsforLiberty.org for doing it.
Yes, let's have real localism
Tom mentions that he'd be in favour of more local taxation. That's "more local" rather than "more" local of course. And I agree but we don't in fact need to try and devise such a system. We can just copy one that works very well elsewhere.
Let's have a national income tax rate of 3.76%. OK, if you really insist we'll have a top national income tax rate of 15% as well. That's plenty to pay for the things that the national government really does have to do, defence, the higher courts systems and so on. Everything else we'll raise the money for and pay for at the lowest political level possible. In the UK this is the council ward which is some 5,000 to 30,000 people, depending upon urban, rural and so on. This maps well over the 10,000 and up number in the communes of the country we're going to nick our tax system from.
The local tax rate is set and raised locally (although of course you can have a national organisation collecting it if you wish) and much more importantly, it is spent locally. Each such ward will indeed need some police cover, fire cover and so on and there's no problem with banding together as larger units to pay for these. Similarly with health care, some such is decidedly local but not every ward needs a transplant ward, so money can be sent upwards to pay for a share of one of those if desired. But the massively important point is that money is only sent upwards, local things are locally funded, regionally can be regionally but only with the direct consent of that lowest level.
Such a system will also be subject to what I've called Bjorn's Beer Effect here before. If Bjorn is the bloke who sets your tax rate and Bjorn is the guy who decides where the money is spent, then in a community of 6,000 to 30,000 people you're going to know, or at least be able to find out, where Bjorn has his Friday night snifter. Which is going to put the fear of God into Bjorn as he spends your money: but also means that there's one human individual to explain to you, forcefully if need be, why you can't have what you're not willing to pay the taxes for.
The country we're taking this from is of course Denmark. Which means we can all join in a rousing chorus of, along with Polly Toynbee and all points left, "We must all be more like the Nordics!"
The case for recalculation
Skeptics of the Austrian narrative of the Great Recession – that inflation caused malinvestment bubbles, particularly in the housing sector, which eventually burst – often point to the lack of empirical evidence for this thesis. David Andolfatto seems to offer some of this vital empirical evidence (hat tip to Arnold Kling):
The collapse of the construction sector accounts for 46.4% of the decline in U.S. GDP and 51.9% of the decline in total employment (roughly 3.4 million jobs).
That's important, because – if it's true – it really would suggest, empirically, that the Austrian story about the crisis is the right one. You probably know the narrative by now – easy money distorted relative prices, making construction appear to be more in demand than it really was, causing a lot of people to invest too much money and time building things that nobody ended up wanting. Once prices started to stabilize and reflect real demand, a lot of the people who'd made bad investments need to cut their losses and get rid of them. The same goes for people who've trained in skills that aren't really needed – they've got to retrain now that reality has bitten.
Andolfatto's analysis is interesting, because it attempts to model the shockwaves that a change in a large single sector can have on the rest of the economy. If you've set up a business selling coffee to workers at a now-defunct construction site, you're out of business. If some of your customers were construction workers, whatever your business, you'll be making less money now, and so will the people who you bought money from. And so on. The interconnectedness of the economy is sometimes difficult to grasp, but it's really important to understanding why one sector going *pop* can affect so many other sectors so badly.
The policy implications of this perspective are quite signficant. Forget trying to "stimulate" your way out of a recession through spending or printing money – all you'll be doing is creating another type of false, unsustainable demand. You'll do the most damage if the stimulus is aimed at the unemployed, the people who need to retrain to cope with the real economy the most: reskilling takes time, and will be put off if there's some public works project nearby that will hire you instead. Even taking up unemployed people's time has an opportunity cost; justification for "stimulus" programmes ignore this.
Stimulus and government spending aren't just bad because they cost money; they're bad because the people they employ could be doing something else with their time that people actually want. That's the crucial thing that many economists ignore – time. A recession takes time for people to resolve their difficulties. Impatient governments can't do anything to speed that along, except get out of the way.
Property rights and the 'Occupy' protest
The 'Occupy' protest around St Paul's Cathedral in London raises interesting questions about the nature of property rights. When a few anti-capitalist activists started pitching their tents on the forecourt of the Cathedral, the first thought of the police was to step in and tell them to move on. But then the Dean of St Pauls, the Rev Dr Giles Fraser, told the police that it was the Cathedral's private property, that the Dean and Chapter approved of the right of people to protest, and that the police should clear off. Which they did.
Since then, however, with 180-odd tents pitched round it and more arriving by the day, the Cathedral has had to close some of its facilities and restrict access to visitors. A bit unfortunate if you happen to be on a once-in-a-lifetime trip to London and you cannot actually experience the magnificent interior of Wren's Masterpiece. And unfortunate if you live or, more probably, work around St Paul's and are inconvenienced with noise and congestion as a result of the protest.
There's also a public health consideration. There is no water or sanitation in the encampment, of course, and St Paul's is not known for its lavish shower and toilet facilities. Plus the fact that, like the years-long encampment on Parliament Square outside the House of Commons, the protest is, well, a bit of an eyesore.
It's a point noted by Milton Friedman nearly 50 years ago in his Capitalism and Freedom that, for all we liberals or libertarians believe in property rights, the ownership of property does not necessarily allow people to do anything they like with it. He asks, for example:
Does my having title to land, for example, and my freedom to use my property as I wish, permit me to deny to someone else the right to fly over my land in his airplane? Or does his right to use his airplane take precedence? Or does this depend on how high he flies? Or how much noise he makes? Does voluntary exchange require that he pay me for the privilege of flying over my land? Or that I must pay him to refrain from flying over it? Does my having title to land, for example, and my freedom to use my property as I wish, permit me to deny to someone else the right to fly over it?
Friedman's point is that property rights are not indisputable, but are a matter of convention, settled over long periods by public debate, court decisions, and laws. Dr Fraser and the protesters should no more expect to be able to do anything they like on the Cathedral's land than travellers can expect to be permitted to form a settlement at Dale Farm without the same planning permission that everyone else must apply for. The forecourt of St Paul's Cathedral is, in an important sense, as much public property as it is private.
I'm all in favour of people being allowed to protest – the last government's blanket ban on demonstrations within a kilometre of the House of Commons was an absolute outrage – but I'm not in favour of allowing people permanently to occupy public space, or even private space if it has adverse effects on the public. If we were looking for a new convention, the easiest might be a 24-hour rule: demonstrations on public land, or on private land that might impact the public, are OK as long as they pack up the next day. Then at least we, the public, might be able to reclaim what is supposed to be ours, instead of having to endure permanent eyesores around our main tourist attractions.
Paying for Localism
Charles Moore makes a good point in The Spectator:
The government is very proud of its commitment to localism, and has fought hard to get its controversial Localism Bill despite numerous objections in the House of Lords. Yet at the same time, it orders another annual freeze of council tax and everyone applauds. If localism is not locally paid for, it is only a game. It reminds one of people who love the ‘self-sufficiency’ of living in tents and foraging for food, but retreat to their comfortable homes whenever it rains.
I agree – the general principle ought to be that each level of government should itself raise the money it spends. When local authorities are just spending bodies, reliant for the most part of the largesse of the central government, they lack accountability. They also face skewed incentives – why should they economize when money is being handed to them by Whitehall? If anything, they’ll want to be as profligate as possible in attempt to justify a bigger grant the following year.
Financial autonomy, or at least something closer to it, would encourage greater fiscal responsibility and more rational policymaking. It ought to be a central part of any localism agenda worth the name. How exactly you do it is open to debate. Some favour greater reliance of property taxes, while others advocate a local sales tax. Personally, I think the best approach would be to cut every national income tax rate by six or seven percent, and then let councils set their own flat rate income tax.
The beauty of that approach is that it would introduce domestic tax competition where it is needed most. Councils who set lower taxes rates might attract more residents and see revenues rise, which would encourage other councils to follow their example or else risk losing out. At last, then, there might then be some countervailing pressure on income tax rates – which would be a very good thing indeed.
The myth of government cuts
At an Adam Smith Institute dinner with Lib Dem MP (and former Chief Secretary to the Treasury) David Laws earlier in the week, the conversation turned – as it does so often at such events – to the speed of the 'cuts' in government spending. Without resorting to Google there was no way to resolve the argument, but next morning a City economist friend of mine gave me the actual figures.
It turns out there haven't been any 'cuts'.
Here is what the most up-to-date figures show. Total government spending (or as economists put it, general government expenditure on goods and services) in the April-June quarter of 2011 was 3.8% higher than in the same quarter of 2010. That's in straight cash terms (current prices). If we adjust for the effects of inflation (constant prices), the rise over the year was 1.3%.
Looking at Whitehall, and taking just the most recent month for which we have figures, central government spending (ANLP in the jargon) for August 2011 was a remarkable 7.2% higher than a year earlier.
In other words, despite all the howls about austerity, government spending is still growing, and growing fast, in both cash terms and real terms. True, some capital projects are being cut: but not enough to bring down the total amount that government spends.
With tax receipts stuttering because business is so flat, the government will struggle to get its borrowing down and hit is deficit-reduction targets. The problem with that is that foreign investors may come to the conclusion that for all the UK's fine talk, it cannot actually get its books to balance. If investors get the jitters, or the rating agencies downgrade the UK's creditworthiness even a fraction, the government could find itself having to pay significantly higher rates of interest on its massive borrowings. And that would make it even harder to balance the books.
Sometime soon, we really need to grit our teeth – end the bluster, and make real cuts in public spending.
[Update: As some commenters have pointed out, the initial current and constant prices figures for government spending were muddled. This is now fixed, thanks to all who pointed this out – ed.]