The world is getting richer or freer - probably both
An interesting little snippet in the FT:
The findings show that demand for cash continues to rise globally, despite t increase in electronic payment options, including mobile in recent years. Cash in circulation relative to GDP has increased to 9.6 per cent across all continents, up from 8.1 per cent in 2011.
The more general rise in the demand for money is evidence of the world getting richer. As with a restaurant which moves from serving 50 covers to 150, a restaurant which is going to need more plates. A larger economy needs more money to lubricate it - thus Milton Friedman's strictures on why the money supply must grow but moderately and in pace with GDP.
But cash relative to GDP is something different. That's an expansion in freedom.
As we've pointed out before cash is untraceable and anonymous - that means that we can do things the prodnoses would prefer we didn't with it. Escaping the prods of the nosey is indeed a rise in freedom. Yes, there's also the possible loss of tax revenue in a grey economy to consider but then which do we think more important? Liberty or paying for diversity advisers?
Your answer might differ from the logically correct one there if you are a diversity adviser but it's pretty clear to the rest of us.
Happy Birthday David Ricardo!
Today marks a significant birthday, that of the English economist, stockbroker and politician, David Ricardo (1722-1823).
His career began as a successful broker and speculator. It was said that he made £1m by misleading market players into thinking that the French had won the Battle of Waterloo, and then buying stocks and bonds cheaply.
But Ricardo is much better remembered today as an economist. His career in this field started when he read Adam Smith’s Wealth Of Nations (1776). Applying rigorous logic to Smith’s ideas, he made important developments in the theory of rents, wages, profits, taxation and value. In 1809 he argued that the high inflation in England was the result of the over-issuance of banknotes—making him an early monetarist. Like Smith, he opposed protectionism, arguing that the Corn Laws (which restricted wheat imports) made domestic production inefficient and drove up rents.
Ricardo’s greatest contribution to liberal thinking was perhaps his theory of comparative costs (now known as comparative advantage). Countries, he said, could make themselves better off by specializing in what they can produce relatively cheaper (in terms of what else they might have produced) than other countries. Even if a country can produce everything more cheaply (in absolute terms) than another, they are still better to specialize and trade in the goods where they have a comparative advantage.
This principle became and remains one of the key foundations of the argument for free trade. So let’s raise a cheer for David Ricardo, 296 but still going strong—or at least, his ideas are.
Communal Forgetting
Throughout my school years we didn’t spend much time talking about the Russian Revolution and its atrocities and I’d bet that most of my peers wouldn’t know of any genocides except for perhaps the Holocaust. Though I grew up in Denmark, this is not strictly a Danish problem. According to a report by The New Culture Forum similar tendencies are seen in the UK. In a survey they found that less than ⅓ of 16-24 year-olds have studied the Russian Revolution at any point in school. Furthermore, they found that of secondary school children aged 11-18 81% weren’t able to mention a genocide other than the Holocaust.
What’s more, in their report they presented a list of 22 historical figures to respondents and asked them to indicate whether they associated that name with crimes against humanity or not. It turns out that a significant proportion associated George W. Bush (39%) and Tony Blair (34%) with crimes against humanity, far more than did Communist mass murders like Pol Pot (19%).
In a different survey the respondents were presented with a different list of another 15 historical figures and were asked to indicate whether they would consider them to be a dictator or not. Surprisingly, more people thought of Ronald Reagan (9%) as a dictator than Nicolae Ceaușescu (8%).
The list of surprising findings goes on. In a third survey designed to test respondents attitudes to various ideologies, socialism is viewed as the most positive ideology while only receiving the second worst negative score. Unfortunately, it seems the brand socialism has not been contaminated by the crimes and atrocities of Communism - rather the opposite.
By now, we’ve established that lack of education is the problem. Therefore, getting out on the platforms where young people spend their time to educate them on Communism and its consequences might help turn the tide. Good friends of the Adam Smith Institute have created a project, Museum of Communist Terror, with the aim of keeping the knowledge and understanding of the deaths, terror and economic failure of Communist regimes alive. They plan on doing this through social media and talks for schools and universities among other things that ultimately will lead up to a museum in London.
Part of their strategy is also to educate people through small videos with experts and victims of Communism. I highly recommend that you spend 2 minutes watching their most recent video on the Holodomor and perhaps share it with your friends.
Time to thaw out support for free enterprise in Iceland
I’m just back from Iceland, which is (as always) an interesting place. It had more difficulties than most after the 2008 financial crash, largely as a result of Gordon Brown’s outrageous use of anti-terrorist legislation to freeze the assets of Icelandic banks—no way to treat a country that was our best friend in Europe, and something that still rankles. As it turns out, Icelanders grudgingly admit, Brown did them a favour. Iceland’s banks had grown beyond financial reason, thanks to policies of cheap credit and easy money—much like the UK’s (the Royal Bank of Scotland, for instance) but even more so. Brown’s shock therapy forced the sector to restructure, and today it is much healthier. Iceland has paid off its debts, and is now doing many of the right things. A pity, really, that Brown did not dose out the same medicine at home: instead of a quick and painful restructuring, the UK has had a lingering and painful non-restructuring and is still living beyond its means.
Iceland was never bankrupt, thanks to its fishing and free geothermal energy, not to mention the resilience, stamina and enterprise of its people. But the shock of the crash and the Brown collapse led to years of political turmoil. Confidence in politics and business was shaken (despite the fact that it was bad policy, rather than bad businesses, that caused the crash—the usual inflation-fuelled fake boom that ended in the usual destructive real bust). So Iceland’s business lobby has been on the back foot, while the current prime minister is a Socialist Green who spouts the familiar nonsense about inequality and Gini coefficients (a proxy critique of capitalism and an attempt to legitimise larger statist control).
And despite having restructured the finance sector, paid its debts, and got inflation under some control (it’s currently about 2.5%), other things are going wrong too. Iceland’s taxes are among the highest in the OECD: the average Icelander works 170 days a year for the state, from the 1st January to the 19th June. And as we know from the Rahn Curve, high taxes mean low growth. That’s because high taxes kill enterprise (why take risks when the government takes half your profit) and make your goods more expensive. So it’s time for a really serious zero-based review of all government activities. Does Iceland’s government do things it doesn’t need to? Yes. Could other people deliver some services better? Yes. Can the essential government functions be done better? Yes.
But in small countries, the cronyism between business and politics is hard to break. Too often, Iceland’s businesses see big government as an easy source of cash, when they should be proclaiming free markets. But given Iceland’s crazy post-crash politics, even those who believe in free markets have been reluctant to be seen advocating them.
It has indeed been a difficult decade, but with things now going reasonably on the economic front, it is time for Icelanders to put that decade behind them and look to the future. To liberate enterprise with open institutions—low taxes, sound money, free markets—that motivate people to go out and create wealth for everyone. Not a bad lesson for any country, really.
The Office for National Statistics proves Hayek Right. Again
There are those who insist that we can plan something as complex and chaotic as an economy. If only all the bright people were stuck into offices they'd be able to make all do as they insist and the world would be a better place.
It doesn't seem to matter how often reality comes around to give them a smack in the mouth, the belief persists. One such slap coming from the Office for National Statistics:
Britain’s trade deficit is almost £10bn smaller than previously thought as financial trading is a bigger boost to the economy than experts had realised.
A new system for counting goods traded in and out of the UK also meant the deficit came in smaller, improving the economic outlook.
The 2016 deficit in trade in goods and services was one-quarter smaller than had been understood, at £30.9bn, not the £40.7bn estimated earlier. Around £5bn of the improvement comes from financial trading.
The economy was also £5.6bn larger than previously estimated, the Office for National Statistics said, due to financial trading profits.
It's entirely true that in a floating currency system trade deficits don't matter at all. But then those who would plan economies tend also to think they should be determining exchange rates - where deficits do matter in a fixed exchange rate system. And now we find that this specific number is 25% out?
As said, that feeds through into the size of GDP. Which in turn feeds through into productivity numbers - UK productivity is 0.3% higher as a result of this change. The financial system is significantly more important to the economy than we thought, perhaps as much as 7 or 8% larger in fact.
And people want to try to plan an economy when we've this little knowledge about what is happening, let alone what will happen when all those clever people act on such sketchy information?
Hayek was right, wasn't he? We've not actually the information to be able to do such planning. As he pointed out, and as has been confirmed is even true with all these computers around, we cannot have such knowledge either.
Sadly, this little slap will make as little difference to the dreamers as that haymaker of the 1989 revelations did. The insistence upon national planning is a religious, not rational, belief thus reality - however hard it punches - just ain't gonna make a difference.
Yes we CANZUK
We started this week with a piece from Matt Kilcoyne in City AM calling for governments in Canada, Australia, New Zealand and the United Kingdom to seriously consider the prospect of CANZUK at the beginning of the Commonwealth Heads of Government Meeting.
Today Dr Pirie uses his latest Madsen Moment to call for CANZUK to get greater attention. It's popular. CANZUK International found in polls of 13,600 across the four states this year that 68% were in favour in the UK (up 4% on last year), 76% in Canada, 73% in Australia and 82% in New Zealand. And it's especially popular among the young – somewhat of an open door for politicians to push at.
Plucking the Taxpayer
Hypothecating taxes makes good politics but poor economics. The public liked the idea of paying national insurance, when it actually did fund pensions, road fund tax, when it did fund roads, and heritage projects via the Lottery. The BBC licence fee is a form of hypothecated tax. The Times on April 12th reported that most of the public support paying more tax provided it goes to the NHS. Hypothecation for popular causes is a fine example of plucking the goose to maximise the feathers while minimising the hissing.
Hypothecation prevents government from allocating funds to where the country most needs them. Priorities will change even though that disrupts planning for the recipients. But then hypothecated tax flows will vary just as income tax, VAT and any other form of tax does.
The history of hypothecated taxes teaches us that the Treasury cheats. The road fund tax, for example, was only used to fund roads until the government decided the hypothecated tax was too much or too little. Then it was swept into the general pot and the Ministry of Transport had to compete with every other ministry.
The only way to keep the Treasury’s hands off hypothecated taxes is to make the NHS independent of government, i.e. a public corporation like the BBC or the Bank of England. Jan Zeber and I have made a case, published by the Taxpayers Alliance, for that. Today’s NHS is unmanageable thanks to its size and constant meddling by its parent Department and the DHSC’s 19 quangos. If the logic of hypothecation was carried through to independence, the DHSC could be immediately scrapped – a considerable saving in itself. Would we miss it? Almost certainly not. The DHSC was responsible for adult social care, and yet did nothing about it, for five years from 2012. The funding came from the Department responsible for Local Authorities. Then Downing Street noticed and added the SC to the DH. It is hard to discern any difference since.
So hypothecation and independence for the NHS should go hand in hand. That would not entirely prevent politicians trying to make capital out of whatever problems emerge but at least it would minimise their ability to worsen the situation. We would still require a separate regulator to maintain quality standards (i.e. the Care Quality Commission) in the same way that the BBC enjoys the attention of OFCOM.
The NHS needs a distant planning horizon, perhaps 10 years, to train nurses (five years) and doctors (10-12 years) and build facilities. At the same time, 10 years is too long a financial commitment for any government. The obvious compromise would be for the NHS to have a 10 year planning horizon with hypothecated taxes set for that period but a quinquennial strategic and financial review in case the situation goes awry in either direction.
The more difficult question is how a hypothecated tax should be collected. People have long looked for ways to integrate income tax and national insurance contributions to avoid having to make two separate and complex calculations. Business would not welcome a third unless it was something really simple like a per capita tax. After all, we all pay the same prices for what we buy and are equally entitled to NHS benefits, so why not pay equally for health insurance?
The people reported by the Times as being keen to pay more to rescue the NHS might not like the bill. Dividing the NHS England cost per capita would be £2,200 each for this year, rising steeply if NHS England’s demands are met. Remember the Poll Tax.
UK National Insurance Contributions for 2016/7 totalled £124.93bn. It is expected to rise to £136.5bn in 2018/9. Since the income is treated in the same way as personal income tax, it should be scrapped in England and replaced by the “National Health and Care Contribution” (NHCC) since it would need also to cover the integration of adult social services as is now widely seen to be essential. The UK NIC total take would need to be reduced by about 16% to give a figure for England alone but that would be offset by removing the exemption for those above the state pension age. If the elderly will continue to get medicines free at the till, at least they should contribute towards them through the tax system.
According to the Health and Social Care Information Centre, “in real terms [English] councils spent £15.9 billion on social service support for adults ten years ago [i.e. 2003-04]. This peaked at £18.2 billion in 2009-10 before falling to £17.2 billion in 2013-14.” Although some tweeking would be needed, the NIC and NHCC figures would not be wildly apart:
In other words, the two could be swapped over without much cost to the taxpayer or HM Treasury. Income tax would then cover what NICs now do and the NHCC would cover health and adult care.
As noted above, the NHS needs a 10 year planning horizon but any government would need a five year accountability framework. For comparison the much smaller and more stable BBC secured fixed annual (licence fee) funding for 7 years in 2010 and in 2016 it was agreed that it should rise in line with inflation for five years from 1 April 2017.
The trade, in essence, for NHS and care independence and its own hypothecated tax should be a five yearly forensic audit by the National Audit Office to establish the extent to which the new English Health and Care Corporation (EHCC) could improve the value for money it gives to patients, the cared for and taxpayers.
Merging NICs into general taxation implies removing the National Insurance Fund (NIF) and all the bureaucracy that goes with it. A quinquennial NAO forensic audit of the EHCC would take the place of the five yearly actuarial review of the NIF which seems something of a farce. In the last (October 2017), accurate forecasts were required through to the 2080s but it does not really matter what the numbers say as the Treasury tops them up to the required level anyway. It is a matter of indifference to the taxpayer from which pocket the Chancellor pays benefits.
If, per contra, NHS England is not given independence, then hypothecation would make no long-term sense. It might alleviate immediate political difficulties but it would not be long before some future Chancellor is mixing and matching the tax streams.
The strange worry over China devaluing the Yuan
People do, often enough, worry about some strange things. For example, that China might react to Trump's tariffs by reducing the value of the yuan:
Beijing's threat to fight fire with fire in its escalating trade spat with Washington had one crucial problem.
After Donald Trump warned that the White House was lining up a further $100bn of tariffs on Chinese products, Beijing ran out of US imports to ramp up taxes on.
Some $550bn of products emblazoned with the Made in China stamp flooded into the States last year.
A mere $130bn made the journey across the Pacific to the Asian powerhouse. Beijing would have to go back to the drawing board.
A currency war — the use of monetary policy to devalue a currency to gain an advantage in international trade by making exports cheaper, also known as competitive devaluation — is one method for Beijing to even the odds in a trade skirmish between the world’s two largest economies.
Analysts believe that Beijing is mulling a devaluation of the Chinese yuan as a hidden weapon in its trade war arsenal.
It's not a very hidden weapon given that the price of the yuan is posted in millions of places and updated by the minute or second. But the complaint is also rather to miss what happens.
A devaluation of the yuan is something which undoes some of the damage being caused by those tariffs. That's what's being complained about in a sense of course. But then undoing that damage does, well, it undoes that damage. China's products would be more expensive in the US, US domestic production will be more expensive, as a result of the tariffs. A fall in the value of the yuan makes both cheaper again to the benefit of the American consumer.
We, we few, who are rational about trade like this.
But the misunderstanding here is deeper than that. To the extent that the tariffs alter China's external trade those same tariffs will lower the value of the yuan. That's just the way it all works. Just as it did with the £ and Brexit of course. That British exports might have to vault the EU tariff barriers led to a fall in sterling. That fall neatly, and not at all by coincidence, compensating for the price differences that would be caused by those tariffs. That's just how these things work.
Thus, if we assume that Trump's tariffs will have an effect upon China's trade then one of those effects is going to be that the yuan falls against the dollar. Yet it's a fall of the yuan against the dollar which is being complained about here.
Yes, the complaint is about what will happen because of the tariffs. Go figure, eh?
Changing the debate on gang violence and drugs
Daniel Pryor, Head of Programmes at the Adam Smith Institute, took to the airwaves with TalkRadio on Saturday to explain that if we want to tackle gang violence, the best way is to legalize and regulate the drugs market.
Listen below 👇
Sadly, this won't work in economics, no
A reasonable enough idea here but it's not, we're sorry to say, one that will actually work in economics. The point being that the weathermen - the people economists were put on this Earth to make look accurate - have improved their forecasts by being less specific about them. So, would this work in economics?
The opposite has happened. The ensemble approach has helped improve accuracy: Scientists can now predict weather as well over 4 days as they used to over one day. This has increased public confidence in forecasts, which now inherently include a range of possible outcomes rather than pushing false belief in a single outcome. Oddly, better knowledge has come about by emphasizing doubt and uncertainty at every step.
This can work in economics as well. The Bank of England, for example, has adopted the ensemble approach in its forecasts, always laying out a range of possibilities rather than just one prediction.
This would work in one sense in that sure, the economy is chaotic, complex, and it's near impossible to produce a point answer to any question about it. So, produce a range and we'll do better .GDP next year will be within 10% of GDP this year, that's near certainly true for example.
In another and much more important sense this won't work. For it obliterates the possibility of using economics to do what so many people wish - manage society. It shouldn't come as a shock or a surprise that there are plenty of people out there who insist that if just their policy were enacted then this would be nirvana. Perhaps the latest being the Modern Monetary Theory people, who state that government should just print as much money as it likes, spend it then control inflation through taxes.
If we now insist that actually, we cannot provide point answers to any questions about the economy, only a range, that rather destroys the ability to fine tune taxation to beat inflation, doesn't it? We're asking for operations at a level of detail we've just admitted we cannot even predict, let alone manage.
Which is why there will be so many against this rather sensible idea. For those insistent upon economic management are never going to want to admit that we don't actually know, and cannot, the outcomes of their management. Which is a bit of a barrier to implementing such management plans, isn't it?