A lunchtime reminder of the golden rule of liberty
During lunchtime last week, I was queuing for a popular street-stall which sells kebabs to the hungry workers of Westminster. I thought the queue had managed to double back on itself enough to avoid blocking too much of the busy street. Apparently, I was wrong. A middle-aged woman (let’s call her “Mary”), who seemed to be otherwise uninterested in the kebab-stall, decided the queue needed to change shape so that it was more compact. We, in the queue, grumbled but obeyed her directions and shuffled around into the new formation. Whether this had any effect on the flow of pedestrians was unclear, but Mary seemed happy and wandered off, leaving us to discuss her sanity and lust for power.
This got me thinking: to what extent are we private citizens justified in ordering each other about? Mary had no authority over us: she wasn’t a government official, company boss or even an employee of the kebab-stall. We were equals in every respect. For deciding how to act, I was glad to see everyone more or less obey the golden rule of liberty: no interference is justified except to prevent harm.
How does that apply to this situation? Mary’s belief that the queue was blocking the street (and thus causing “harm”) provided justification for her intervention. Furthermore, I believe everyone has the right to freedom of speech, so whatever the circumstances, Mary would have had the right to open her mouth. But what if we, the people in the queue, had ignored her directions? Could Mary have been justified in gently tugging sleeves to form a less disruptive queue? While this would hardly be assault, it would go beyond the right to free speech. It could be argued that people who spend their time trying to help society run more smoothly, as Mary did, should be hailed as heroes of “the Big Society”. I certainly think that, in general, people are too passive about minor intrusions in their lives (for example, those selfish individuals who feel it necessary to share their music tastes with the rest of the bus).
But this is what happens in the ideal society: the citizens sorting themselves out, willing to listen to the advice of a stranger without feeling their autonomy is being violated. More important, in my opinion, are the laws that we need for society to operate to a basic level of satisfaction. In this case, Mary’s right to exercise free speech, but not go beyond that into physical involvement. After all, the actions taken to correct an error should be in proportion to the error itself. Physical coercion seems fine when used against criminals, but over-the-top for rearranging a kebab queue. (This isn’t totally accurate: the police may have the authority to physically control crowds at public events, for example.)
Still, the main point is that Mary had the right to suggest that we re-form the queue, but nothing more. If we had ignored her (and assuming that the queue shape was indeed causing a problem) that would have left a small imperfection affecting the flow of the street. This can be applied in a wider sense to government in general. A control-freak large state might iron out inefficiencies in some areas, like Mary reducing the blockage of the street by physically rearranging the kebab queue. But it is not worth giving up individual rights (and the long-term benefits of a limited state) for these small savings.
Welcome Mark Carney, now here's what you need to do
Today Mark Carney becomes the new governor of the Bank of England, gaining oversight not only of UK monetary policy, but also financial regulation, as part of the Bank's newly-expanded responsibilites. When George Osborne revealed he had managed to persuade Carney to take on the role there was great fanfare and excitement. This was firstly because the Canadian economy has performed relatively well through the recession and secondly because Carney has shown himself open to innovations in central banking, though he has not implemented any in his time at the helm of the Bank of Canada.
Carney talked up the benefits of targeting the level of demand in the economy—though only for exceptional times—in a recent speech. And one would expect that the chancellor, for the £870,000 he has agreed to pay Carney, is open to significant change, notwithstanding the insignificance of the minuscule changes he himself made to the BoE's remit in the budget. Put together, these facts give cause for some optimism for someone like me, who supports targeting the level of demand.
So instead of speculating on what the superstar economist actually will do, I will outline the basics of what Mark Carney should—and could do:
I. Target levels instead of rates—this means bygones are not expected to be treated as bygones, and market actors do not worry about worse-than-expected outcomes because the central bank has committed to sorting them out
II. Target NGDP (demand) instead of inflation—this means supply moves don’t lead to the wrong sorts of tightening or loosening of monetary policy, also means demand is stabilised directly, instead of an arbitrary part of the outcome of demand; stable demand means no recessions caused by nominal factors and no unsustainable booms
III. Target the forecast instead of the outcome—this is what matters for expectations, which are basically all that matters for employment contracts, loan/debt contracts, investment etc. etc. Expectations are the key, so it’s insane to ignore them
IV. Target market, not internal forecasts—set up an NGDP-linked bond, like the RPI-linked bond, and target the spread between the vanilla bond and the linked bond to get an objective idea of where to aim. Guesses where people have skin in the game are systematically better than the relatively costless estimates produced by private consultancies and the Bank’s internal team. But even if they’re wrong it doesn’t matter because expectations are all that count, and the spread between the bonds IS the market expectation. Driving that to a particular point is success, regardless of what happens.
In general the road ahead must be one of rules and discipline, not the translucent discretion of nine unelected barons.They must keep demand steady so we can focus on improving the supply capacity of the economy, and so there is no excuse for fiscal stimulus, with all its flaws. If you still need convincing, read Scott Sumner's 2011 Adam Smith Institute monograph "The Case for NGDP Targeting".
Professor Kenneth Minogue
Sadly Prof Kenneth Monogue has died. Born in New Zealand and educated in Australia, he taught at the LSE since 1959, eventually being appointed Emeritus Professor of Political Theory. He fought tirelessly and bravely for freedom at a time when it mattered most, and has a huge range of scholarly works to his credit, including "The Liberal Mind," "Nationalism," and "Alien Powers - The Pure Theory of Ideology." He made an important contribution to the understanding of ideologies, and took apart some once-popular ones with forensic skill.
He was a good friend and supporter of the Adam Smith Institute, along with other right-thinking think tanks. We knew him personally for over 35 years and enjoyed his wit and charm as well as his insight. He often attended ASI functions and was widely liked and admired by our members.
He was 82 when he died, having just attended and delivered a paper at a successful conference of the Mont Pelerin Society in the Galapagos Islands, which both Eamonn and I attended. He was a former President of the Society. He remained lively and alert to the end of his life and died quickly and among friends. His shrewd observations and mischievous sense of humour will be much missed.
Mongolia chooses right in plans for the future
Last Sunday saw Mongolia’s 6th Presidential election. I was glad to see the incumbent President, Tsakhia Elbegdorj, win with just over 50% of the vote. Mr Elbegdori, the candidate for the centre-right Democratic party, was heavily involved in the movement to end 70 years of Communist rule, which was finally successful in 1990. He has a good track record of loosening the grip of government on the country’s businesses, and he is passionately anti-corruption. Another of his achievements (in my opinion) is his work to abolish the death penalty.
It’s great to see an emerging democracy choosing to shrink the state. It may be unsurprising that the people want to get away from the Communist ideology of the past, but the false promises of socialism are always tempting. Mongolia has great mineral wealth, and everyone will want a slice of the pie, but the best way to get rich is through laissez-faire economics. The focus of the presidential race was on Oyu Tolgoi, a huge copper and gold mine: both of Mr Elbegdorj’s rivals advocated a renegotiation of the government’s contract with Australian mining giant Rio Tinto. But Rio Tinto has put a lot of investment into Oyu Tolgoi, and too much government involvement may cause problems. Mr Elbegdorj is more friendly to foreign investors, which bodes well for Monglia’s future.
The country has been doing well recently: this year it is the world’s fourth fastest-growing economy. Poverty has been decreasing, from 39.2% in 2010 to 29.8% in 2011. Of course, there are still obstacles to be overcome, but at the moment it looks as though Mongolia is in capable hands.
Anatomy of a panic over corporation tax
The current furore over who is and who isn't paying corporation tax is taking on the attributes of a moral panic. Not just that people arre panicking over the morals of it all, but that they're entirely ignoring the evidence as they do so. As examples I offer you two stories from the Mail on the subject. First up is Starbucks and the dastardly manner in which they pay no tax because they make no profit:
Starbucks’ UK sales during the year rose 4 per cent to £413.4million – the biggest increase since 2008. But the company made a loss of £30.4million – after paying £26.5million to overseas subsidiaries in ‘royalty payments’. It also paid £1.8million to other Starbucks companies as interest payments on loans made between divisions.
That the Starbucks brand has a value is easy enough to show: the company has franchisees around the world and they pay a royalty for the use of the brand. We can also consider the differencee in trade you'd get if you opened a caff called "Fred's" as opposed to one using the Starbucks brand. We all understand that traffice and trade are going to be different. That value of the brand should righteously be paid for. However, let's ignore that and also the intercompany loans. Add them back in: Starbucks UK is still making a £2.3 million loss.
Why Starbucks isn't paying the corporation tax due on its profits is thus explained: it's not making any profits that it has to pay corporation tax upon. But such is the moral panic that people are still shouting at them.
As to where the money is going that is simple enough. Try reading Ricardo on rent....or if that's too much for you, read Tim Harford's first chapter in "Undercover Economist". Which uses London coffee shops to explain Ricardo on rent. The competition for the land and or sites which get a lot of passing thirsty traffic is such that rents soar and the landlords get all the money. Which they are indeed taxed upon as rents are one of those things that you really cannot shift about in and out of a tax jurisdiction. Starbucks isn't paying tax this is true: but the economic activity of coffee shops is, it's just through the landlords.
The second is about the water companies:
Britain's privatised water firms have ‘abused’ loopholes in the law to dodge more than £1billion in tax since the election. A dossier of shame reveals nine water companies, seven of which are foreign owned, have racked up operating profits totalling £10billion since 2010 but paid just £541million in tax. This equates to a tax rate of just 5.3 per cent. Corporation tax on operating profit is normally 23 per cent.
The heinous crime they're accused of is to subtract interest on borrowings before calculating their tax bill. Which, given that interest is a specifically allowed expense isn't all that heinous a crime. They then apply the various rules that Parliament has passed to deal with the costs of investment (capital allowances and the like) and so they make no profit. Given that Parliament has specifically put these rules into law it's a little odd to claim that they are therefore shirking their tax duties. Most especially as everyone has been shouting to the skies that they must invest more in their businesses in order to upgrade the quality of the water itself, treat the sewage more carefully, fix the century old leaky pipes and even, because of climate change, start building some more reservoirs. All of which is capital investment that they need to borrow money to do thus attracting the necessity of paying interest and having capital allowances.
They're doing exactly what everyone and the law tells them to do and yet people are still shouting at them.
Richard Murphy, of Tax Research UK, said lax UK rules meant avoiding tax was ‘as easy as taking candy from a baby’ for multinationals. ‘There are several serious problems with the system which leads it wide open to abuse,’ he said.
Well, yes, obviously we were going to get a quote from that fabricator of this current moral panic. But look again at what the Mail seems to believe the tax system does:
Corporation tax on operating profit is normally 23 per cent.
There is no world in which it is feasible to have a profits tax levied upon operating profits. It must be upon net profits, after the deductions of the cost of doing business. But here we have one of the leading newspapers of the country spouting nonsense to the population. This is indeed a moral panic, one in which all evidence is simply ignored. We'll be back to burning witches soon enoiugh, you mark my words.
The pain in Spain
Yes, yes, I know that this Keynesian explanation for everything is all the rage at present. If only we artificially pumped up demand then everything would be just tootsie and fruit loops once again. However, hard as it may be for some to understand there really are structural problems in economies as well. For example, Scott Sumner tells us about Spain:
Note that during the depression of the early 1990s (when Spain still had its own currency) their unemployment rate rose from 16% to 24%. I don’t recall if they devalued during that cycle, but they certainly had the ability to devalue. And of course what’s striking about that period is not so much that Spain’s unemployment rate rose by 8 percentage points, but rather that it only fell to 16% at the peak of the previous boom! To say Spain has structural problems with its labor market would be an understatement.
We can see the evidence right there: even in boom times the Spanish unemployment rate was uncomfortably high.
And it isn't just Spain either: most of Southern Europe (which, in this formulation, includes France) is suffering from the same problem and we see a little bit of it here in hte UK. Simply the ever increasing regulation and thus rigidity of the economy means that the "natural" rate of unemployment keeps rising. Ratchet by ratchet with each turn of the business cycle wheel.
This isn't a problem that can be solved by Keynesian means: this is one that calls for reform of the supply side of the economy. All of which is really just a prelude to one of my favourite points about said economy and its structure. Yes, there are most certainly cycles in it and it could well be that certain actions will help smooth out the swings in such cycles. But that isn't the end of the job at all: it's also necessary to look hard at the underlying structure and to see whether there are, perhaps as a result of our smoothing exercises, structural problems that also need resolution.
The poverty we can relieve
The Joseph Rowntree Foundation (JRF) has a new report out today that takes a look at living costs for the poor and the cost of achieving a 'socially acceptable standard of living' in modern Britain. The report continues their excellent approach to poverty measurement, which looks at the cost of a basket of goods that most people would consider necessary to have a decent standard of living.
This approach is very reasonable, and does a good job of contextualising domestic poverty without being led to the sort of absurdities of straightforward relative poverty measures, which, for example, "improve" every time someone wealthy goes bankrupt or leaves the country. The JRF’s method is quite a neat combination of the best elements of relative and absolute measures of poverty.
It's important to remember that poor people in the UK are still very rich by global standards. But that's not to say that their problems aren't still important and worth trying to solve by allowing more wealth to be created. There are some things we can do to help people in poor countries, such as removing barriers to trade and migration, which would also be good for poor people in the UK, but that shouldn’t stop us caring about relatively less poor people in the UK.
The JRF is right to highlight the fact that rises to the cost of living hit the poorest the hardest. I think it's probably a mistake, however, for anyone to assume that benefits cuts are the main causes of the living standards squeeze for the poor. They might be a factor in declining or stagnating incomes (not as much as the overall economic climate, though), but they don't explain why the cost of living is rising so rapidly.
Paradoxically, things like 'affordable housing' requirements can actually end up hurting people in need of affordable housing. They disincentivise higher-end developments and cause the demand for those homes to be pent-up in the existing housing stock – so, in other words, instead of building new houses for the rich, existing affordable homes are converted to accommodate them, reducing available units for people who need cheaper homes. Liberalizing the planning system so that supply can meet demand would do a lot to reduce the cost of living for the poor.
I also think it's crazy and inhumane that we tax minimum wage workers so much. A full time worker on NMW earning just under £13,000 a year will have to pay more than £1,300 of that in tax. That's a scandal.
And of course a lot of the problems facing people on low incomes are due to the overall economic climate. If Mark Carney really does implement a nominal GDP target, the resulting economic recovery and job creation will mitigate some of the worst problems facing people at the bottom of British society.
Osborne plans to scrap benefits for wealthy pensioners—he should be scrapping the pensioners themselves
Don’t jump to conclusions: I’m not advocating a purge of the elderly. Rather, what I’m saying is that the government should get rid of its concept of a pensioner, and all the benefits which go with that. There should be no division of law-abiding adults into "working-age" and "pensioners": they should have exactly the same rights.
Of course, "pensioner" just means someone who is receiving a pension. The state definition of a pensioner as a person over a certain age completely ignores the huge variation amongst individuals. ‘Pensioner’ conjures up an image of a frail old person in need of help. While it’s clear that some pensioners are dependent on others, many are not, and it’s illogical to treat them all the same based on an arbitrary definition. One area of difference is employment: some 70-year-olds, say, are much more able and willing to work than others. If a 70-year-old is able to work, why should she be treated differently to a 30-year-old working man? And if a 30-year-old is unable to work why should she be treated differently to a disabled 70-year-old? One’s age does not itself indicate one’s need for state assistance.
A response to this would be to say that the elderly are more likely to be dismissed from their job, due to age discrimination. But I believe such dismissal or ‘compulsory retirement’ should be completely up to the employer: it is their right to employ whoever they want. Also, calling it compulsory retirement is misleading – the dismissed employee is free to take up another job. I think employers should be much freer to fire employees of any age. This would make companies more willing to take a risk in hiring people, as they could be fired if they were not suitable.
The state also ignores the varieties in wealth amongst pensioners. Only now are ministers moving to scrap benefits such as free TV licences and winter fuel allowances for wealthy pensioners. To me it seems crazy to have been handing out these benefits at all: the whole point of redistribution is to take from the wealthy and give to the poor. Taxing the wealthy and then subsidising their TV licences and bus travel is simply a waste of money. At least Osborne and co. are finally moving in the right direction.
The main justification for the benefits of state pension age (at least for poorer pensioners) is that pensioners’ lower income means they cannot afford to pay for as many goods and services as a working person can. But this lack of money is partially caused by the whole scheme. Subsidising bus fares and TV licences costs money, paid for by taxes. If people were taxed less, they would have more money, and would be able to save to pay for these things themselves, if they so desired. Also, over time, a smaller state would lead to easier business, more wealth, and cheaper goods, further easing people’s dependence on the state.
The other injustice the government causes through its ‘pensioner’ classification is the state pension, paid for by National Insurance. This is another example of the state being unwilling to leave the individual to make their own choices. If I want a pension I should be left to sort it out for myself directly through a provider or my employer. If a company requires that its employees pay into a pension pot, that is fine—if I don’t want to contribute to the pension, I can choose not to take the job. But to force me to put my own hard-earned money into a pension, with the promise of greater reward in the future, is simple coercion.
Finally, the name ‘National Insurance’ is deceptive. It is income tax by another name (around 8.5% for the average wage). It is used to pay for more than the state pension: for example, it also funds Maternity Allowance. It is yet another example of how the government takes our money dishonestly: ministers can raise National Insurance contributions and say that income tax has stayed the same.
The government’s pension age should be scrapped, and all the pensioner-benefits with it. Currently, people are taxed heavily only to be given benefits back later in life, when it would be more efficient to leave people to provide for themselves. The state pension scheme is coercive, and National Insurance is a deceptive tax which should be abolished.
Think Piece: Good and bad arguments against positive discrimination
The US Supreme Court has just left one Texan affirmative action scheme in place, but it has recently busted schemes elsewhere. I discuss what libertarians should think about positive discrimination and affirmative action.
Many of the arguments libertarians make against affirmative action/positive discrimination do not hold. For example, it neither needs to interfere with equality before the law, nor does it need to imposed by state coercion. And in its favour, affirmative action may be one way to overcome some of unjust forms on inequality in our society. On the other hand, it is clearly not even close to the best way of dealing with unjust inequality. And some evidence suggests that these schemes actually hurt those they are designed to help. But without sufficient evidence perhaps the best short-term approach is to allow universities to experiment with their admissions process, so they can among them discover the best approach.
Good and bad objections to positive discrimination
The US Supreme Court has just left one Texan affirmative action scheme in place, but it has recently busted schemes elsewhere. I discuss what libertarians should think about positive discrimination and affirmative action.
Many of the arguments libertarians make against affirmative action/positive discrimination do not hold. For example, it neither needs to interfere with equality before the law, nor does it need to imposed by state coercion. And in its favour, affirmative action may be one way to overcome some of unjust forms on inequality in our society. On the other hand, it is clearly not even close to the best way of dealing with unjust inequality. And some evidence suggests that these schemes actually hurt those they are designed to help. But without sufficient evidence perhaps the best short-term approach is to allow universities to experiment with their admissions process, so they can among them discover the best approach.
The supreme court on 24th June effectively decided to leave a Texan affirmative action programme in place. The programme had two main provisions: (1) guaranteeing any pupil finishing in the top 10% of their year group a place at a publicly-funded university in the Lone Star state; and (2) allowing university administrators to consider race and diversity as part of their admissions criteria.
Both elements work as positive discrimination tools. Guaranteeing places to relatively—as opposed to absolutely—high-achieving pupils should mean that at least some of the effects of school quality are subtracted out. And allowing authorities to take into account race means that deprivation or oppression experienced mainly or exclusively by non-whites may also be factored out. How do we judge whether this is bad or good?
Many libertarians would object that a system of affirmative action either because it violates equality before the law or because it interfered with people's free interactions, and could only come from state involvement. But neither of these claims necessarily hold.
Though it may not necessarily be true in the specifics of this US case, in general we'd generally expect and require that equal application of law took circumstances into account. For example, years of domestic abuse would rightly be considered an extenuating circumstance in a case where a parter accidentally went too far in self defence. Similarly equality before the law in schooling may require taking into account the statistically likely backgrounds of applicants.
The alternative seems less equal, since getting top A-levels at a tough inner-city comprehensive is surely more difficult than at a highly selective school, even given similar parental support. And in still-discriminatory societies people of colour usually have more difficult lives, even past their general social deprivation, and thus we might expect lower grades, even for an equally talented or conscientious student.
The other libertarian objection may have slightly more force. It would be rational for universities that either sought to maximise wealth (through boosting bequests) or academic prestige (through the best students or best research) to neuter out factors that affected school-level performance but would not affect university or later career performance. The factors listed seem like obvious examples of these. But affirmative action may have to go further, not simply aiming for top potential, but also for those who due to their unfairly poor circumstances have lower potential. It would seem to have to go this far if it wanted to attain the goal of fully accounting for circumstances, as some circumstances may reduce potential as well as reducing results in lower tiers of education. In effect, with affirmative action we want to act as if people had never been hampered with worse starts, even if at the university level we want to "leave in" differences in natural talents.
Thus it might be that state pressure would be necessary to get universities to consider more than just student potential. But this is far from certain; the University of Michigan's scheme, which gave 20 automatic points (out of an 100 needed for guaranteed admission) to underrepresented ethnic minorities. It was ruled unconstitutional but while it was in place it was chosen freely by the university. If chosen upon freely then surely libertarians should laud the schemes as admirable voluntary attempts at distributive equality through free association.
But there's a more telling objection to affirmative action: it causes more harm than it does good. In his barnstorming dissent to the judgement, (black) conservative justice Clarence Thomas points out many of the bad effects of the scheme. In his 2007 memoir he said "As much as it stung to be told that I'd done well in the seminary DESPITE my race, it was far worse to feel that I was now at Yale BECAUSE of it." And in his very readable judgement, along with pointing out the similarity—despite their apparently inverse goals—between segregationist and pro-slavery arguments and pro-affirmative action cases, he listed the negative impacts positive discrimination can have on those it's supposed to help.
Thomas cites a 2003 book which claims that "it is a fact that in virtually all selective schools…where racial preferences in admission is practiced, the majority of [black] students end up in the lower quarter of their class." And, according to Thomas, this upward shifting does not result in higher proportions of black or Hispanic students in higher education on average. Instead, minority students go to more selective schools than they would have otherwise attended, which he believes explains their relatively poor performances. This, in turn, pushes them into less challenging schools within those universities, he says, citing figures showing disproportionately high numbers of blacks and Hispanics study social work or education.
Worst of all for Thomas is that—in our flawed society (which won't be changed by this policy alone)—positive discrimination "stamps blacks and Hispanics with a badge of inferiority". One feature of race is that it's often outwardly identifiable, meaning any black or Hispanic student could be seen by others as owing their place to affirmative action, even though most of them in the particular case in question did not gain their place due to the system. He quotes a black student: "I was never able to be as proud of getting into Stanford as my classmates could be…how much of an achievement can I truly say it was to have been a good enough black person to be admitted, while my colleagues had been considered good enough people to be admitted?" This ties into the ideas Elizabeth Anderson explores in her classic essay "What is the Point of Equality?". She imagines a government grant to the less attractive—would they be grateful for the money or would they be deeply hurt by the elevation of subjective preferences to official dictum?
Such concerns, especially packaged with the litany of practical issues and inconsistencies highlighted by Thomas and Prof. Mark J Perry make the issue more difficult, and give us reason to question whether the system is the best means of achieving our genuine concerns about equality. If we can achieve more desirable policies to improve distributive justice like a universal basic income and a negative income tax, then we should definitely not try and engineer equality at the level of the university. In a system with overall distributive justice, differences in education are down to different choices and shouldn't trouble us.
In sum, we can conclude that though neither of the main libertarian arguments against affirmative action hold, it may nevertheless be an undesirable scheme because it actually hurts those it intends to help. But a diverse system is surely preferable to a one-size-fits-all set of admissions policy, and that suggests we'd want to leave universities to decide whether or not they implement positive discrimination for themselves.