Book Review: Zitelmann's How to Escape Poverty
Well, how do nations escape poverty? Those of us familiar with the prominent US economic historian Deirdre McClosky know the answer to that. Liberal values (what she calls ‘bourgeois values’). Things like respect for individuals and their freedom of action, toleration, limited government, the rule of law, minimising the use of force, property and honouring contracts. All those things provide the compost in which the seeds of prosperity can grow.
But it’s a long and difficult process. And unfortunately, says the prolific German author and economist Rainer Zitelmann in his new book, we don’t often help poor countries to do what it takes to acquire these values. On the contrary, we try to help them with foreign aid, which messes up what markets there are and is too often badly managed or even abused. And when the funding runs out, projects become unaffordable and are terminated, so whatever good was created by them is lost, as William Easterly and Dambisa Moyo point out. So what can poor countries do, and do better, to pull themselves out of poverty?
Zitelmann takes two very different countries, Vietnam and Poland, who took very different paths to reform. Vietnam, of course, was not helped by years of destructive war, then communism sweeping down from the north. Like everywhere else, it found that collective agriculture systems, borne of communist ideology, simply didn’t work. So, like China and so many others, they were eventually forced to modify it, still claiming it was collectivised, of course, but actually transferring responsibility to individual families, who had an incentive to produce more rather than work less. The limited markets for agricultural products gradually expanded, then individuals were allowed to employ up to ten other people. Internal customs barriers were eroded, and international trade opened up. Then price controls and subsidies faded, banking was reformed. The trappings of socialism remained, but it declined in economic significance.
By contrast to this slow and piecemeal approach, says Zitelmann, Poland change rapidly and radically after the fall of communism. Its new finance minister, Leszek Balcerowicz realised that only ‘shock therapy’ would reverse decades of soviet mentality. A new law allowed people to engage in any economic activity they liked, and to employ as many others as they chose. Inflation was reined in by sound money policies. Debt was cut. Banks and other businesses were privatised. Industries were deregulated. Taxes were simpliefied, along the lines of a flat tas. That all led to a big rise in entrepreneurship. And the opening up of trade with the West brought people more and better products, and a rise in prosperity.
The lesson, really, is that there is no ‘right’ way to make a country rich — ‘to carry a state to the highest degree of opulence from the lowest barbarism,’ as Adam Smith put it. But ‘peace, easy taxes and a tolerable administration of justice’ seem to be the essentials that you cannot do without.
If you get your economics wrong then so too will be your solution
Willy Hague is telling us about the decline of local newspapers. Important for local democracy and all that, doncha know. So, there’s a solution:
Such abuse of global dominance warrants some international solidarity — the UK could join with other countries to require links to local news, and payment for them, and levy serious fines for non-compliance. Here at home, the new Digital Markets Bill must be used to require the social media firms to negotiate with local papers.
Sigh. As we’ve pointed out before, this is not the correct solution for it’s also not the correct diagnosis of the problem.
We should, perhaps, just take a moment to marvel at the claim being made there. The search engines and social media sites must send traffic to the local papers because that benefits the local papers. And also, the same sources of that traffic must pay the local papers for sending them the traffic which benefits the the local papers. That betrays a certain confusion, no?
But that initial mistake. It’s not the social media companies which have sucked the revenues out of local papers. Newspaper economics did not work that way. The grand profit centre was always the classifieds ads section. Those classifieds have moved to Autotrader, Rightmove, Monster and Gumtree. That initial analysis has misdiagnosed which part of the internet cut the local papers off at the knees.
And therefore - and of course - the proposed solution is wrong.
So, err, let’s not do that then.
Subsidising your own taxes doesn't sound like a good idea at all
We do, here, seem to have a proof that renewables are not cheaper. Which is a bit of a blow to so much of the current rhetoric on the subject:
British battery plants given cheap power to break dependence on China
Cheap power, eh?
The costs of the scheme will be borne by consumers, with the measure expected to add between £3 and £5 to household bills per year.
Ah, no, not cheap power then. Just power paid for by someone else.
So, how cheap paid for by someone else?
Paul Atherley, chairman of Tees Valley Lithium and Pensana, which are building plants in Teesside and Humberside respectively, said the changes will cut the price his companies pay for energy from a quarterly average of 19 pence per kilowatt hour (kWh) to “single digits” in September.
So, call that halving the cost to the user. Well, how is this to be done?
The BIS is comprised of 3 measures which will together address the areas of the domestic energy system which currently contribute to higher electricity costs for EIIs than comparable countries. The 3 measures are as follows:
an increase in the subsidy under the existing EII Renewable Levy Exemption scheme from 85% to 100% aid intensity
a new full exemption from the indirect costs associated with the GB Capacity Market
a proposed compensation scheme for the charges paid for using the GB electricity grid through the EII Network Charging Compensation (NCC) Scheme
At which point we can all observe the deliciousness of the policy. Electricity prices have been pushed so high by government intervention that we have to give industry a subsidy from those high costs. Should’a gone fracking instead, obviously.
There is also the logical problem here. Emissions are emissions, the CO2 does the same damage whether it’s one tonne of many millions from a factory or one tonne of three or four from a household. But the value of being able the make the emissions is clearly much, much, higher for those domestic ones than some factory producing a few hundred jobs (the Tyne lithium plant claims it will produce 500 jobs). Therefore any system of emissions reduction should be concentrating upon those from the millions from industry, not the handful from households.
We might also note that there’s absolutely no reason at all why Britain should refine or separate its own rare earths or lithium. There’s this thing called trade that can deal with that for us.
But the real lesson here? Renewables cost twice as much as not having to carry the costs of renewables. Because, as this announcement explains, if electricity users do not have to pay the costs of renewables - which is what the subsidy is, that they do not have to carry those costs - then electricity is half the price of having to pay those renewables costs.
Renewables aren’t cheap. So perhaps everyone could stop saying they are?
That folk can gain a subsidy of half price electricity if only they’ve not got to pay the renewables costs is all the proof we need of that contention.
We're beginning to understand this UPF idea now
As we’ve been musing for some time now the whole idea of Ultraprocessed Foods, UPFs, seems very odd. However, we think we now grasp what’s going on:
But UPFs are a different beast – they are the products of industrial processing methods that we cannot replicate in a domestic situation. They include pretty much all carbonated drinks, ice-cream, biscuits, margarines, pastries, cakes, breakfast cereals, stock cubes, infant formulas and mass-produced packaged breads.
That’s Rousseau. There was some past moment of rural idyll when human life was perfect. We have erred by having that Big Bad Capitalism and factories and mass production and abandoning our Polanyi-sque web of mutual interdependence and gone for the impersonality of Smithian market exchange.
Tsk, should have remained under that tree awaiting the acorns to bounce on the bounce.
That’s all it is and as that’s all it is we can pay it no mind. Except, of course, to insist that those infected with the delusion have no power over us.
We might also suggest a little solution too. If Big Bad Capitalism were to produce, in those factories and for that impersonal market exchange, a little kit that could, if used, perform those industrial processes in the home then UPF would vanish back into the aether from which it should never have emerged. It doesn’t have to perform such processes well, or efficiently, or economically. Just the fact that they can be done in the home kitchen kills the UPF idea stone dead.
If, that is, simply telling the wowsers to go boil their heads doesn’t work.
The Road to Serfdom is a Slippery Downward Slope
Eighty years ago (on 10 March 1944) a short but hugely influential book was published: The Road to Serfdom. Written by the prominent economist, social theorist, and later Nobel laureate Friedrich Hayek. It sought to explain how a civilized country could fast descend into a warmongering, totalitarian dictatorship, as Germany had done.
The book certainly caught the imagination of a world still at war. A US edition came out six months after the British publication, then in April 1945, Reader’s Digest published a condensed version that brought it to a mass audience.
But The Road to Serfdom is much more than an explanation of what had gone wrong in the country of Goethe and Beethoven those eighty years ago. It is also a stark warning to future ages of how easy it is to stumble down a road to serfdom of their own — and a warning to us today that we may already have taken fateful steps in that direction.
Probably nobody in a liberal society intends to turn their country into a tyranny like Hitler’s Germany, or for that matter, Stalin’s Soviet Union. But Hayek’s shocking thesis is that public policies that are introduced for the most noble of reasons can, and often do, create the conditions that make this fate more likely. Then, by the time people have come to understand what is happening, it is already too late.
Even more shocking is his firm belief that it is the pursuit of social democracy that is responsible for this result. Social democrats, and centrists of many varieties, promote policies that they hope will reduce inequality and boost social welfare. Such policies usually demand greater government control over the economic system, the use of taxation to redistribute wealth and income and compensate for other inequalities, and the establishment of a comprehensive welfare state to provide essentials such as housing, education, healthcare, and social benefits.
But these initiatives all require the creation of new levers of political power, and at least some curbs on people’s economic and social freedom. Once those two things are in place, they can potentially be exploited by politicians — not just those trying to make the policies work, but less scrupulous ones who dream of power. Moreover, these policies also give rise to perverse incentives and inefficiencies that stifle individual initiative and undermine the dynamism of markets. The resulting economic stagnation generates calls for yet more, and tougher, central planning and government intervention to correct things — which makes the rise of those unscrupulous politicians more likely.
Historians may argue that this is not exactly what happened in Germany. Hitler’s National Socialist German Workers’ Party came to be seen as an antidote to the economic chaos of the late 1920s and early 1930s. But it did not have all the instruments of power presented to it on a tray. It had to seize power. But the fact that so many people thought that more government was the answer made it easier for it to do so.
Nor did the United Kingdom, its government now furnished with all the power required to win a war, find itself too far down the road to serfdom to turn back. Rather, it found itself on a long road to economic stagnation, inflation, unemployment and decline that made British people yearn for the kind of post-war economic miracle enjoyed by the country they had so recently pummelled into defeat. Their journey down the road to road to privation was halted only in the 1980s, with Margaret Thatcher’s reforms.
Yet still, much of the apparatus of government intervention, planning and control remained in place, slowing any advance in a better direction. That — and its baleful result — is nowhere more obvious than in Britain’s hugely government-heavy planning system for land and property, a post-war creation which the Adam Smith Institute reckons to cost the economy £66bn a year, or 3% of GDP. And much of the other apparatus of government control — in education, healthcare, housing, pensions, transport and insurance — is still there and still holding back innovation and enterprise.
Today, that continuing dominance of government in so many parts of life is seriously eroding individual freedom. The government may not own utilities, transport or manufacturing operations anymore, but through law and regulation it still controls them. And as Hayek pointed out in The Road to Serfdom, if a government controls the economy, it controls freedom itself. How can critical ideas be advanced when the government controls the dominant media outlets? Or when it controls what people can and cannot say in public? How can critical ideas even arise when it sets the school curriculum and when college teachers — along with a fifth of the working population more generally — owe their living to the state? How can people find suitable accommodation when national and local government own a sixth of the land and control every aspect of how the remainder is used? Such a country is free only in name.
Hayek believed that the apparatus of a state was needed to maintain freedom and deliver defence and justice, and essential public goods and services. And these are no small tasks. But he also realised the danger that government could so easily grow into the destroyer of individual freedom. That policies that start with noble intentions — sparing people from hostile views, for example — can turn into something repressive —such as the shutting down of free debate. The road to serfdom is a slippery downward slope. And we appear to be a long way down it.
But why would we subsidise a booming business sector?
We disagree with, but grasp the idea of, subsidising a business sector that’s not doing very well. But we’re gawpmouthed with incomprehension at the idea that a business sector that is grossly outperforming therefore requires subsidy and support. But this is the claim:
Opportunities to revive the UK’s flagging economy by boosting green industry were missed in one of the least green budgets of recent years, experts have said.
Several said this failure to recognise one of the fastest-expanding areas of business – the net zero economy grew by 9% in key areas last year, while the rest of the economy was stagnant, according to CBI estimates – would drag down the UK in the short and long term.
Alasdair Johnstone, of the Energy and Climate Intelligence Unit, said: “At a time when the US and EU are competing over investment in clean industries, there was little here to attract investment.”
Clearly, little to attract investment is wrong if the sector is growing by 9% as against no growth for the rest of the economy.
Now the idea that something needs to be done to support the green economy is not alien to us. We are aware of what externalities are - those things not included in market prices - and sometimes those externalities are important enough that something must be done. Could be subsidy, could be support, could be taxation or quotas, or licences or permits and all the rest to get those externalities into market prices. But that’s not the correct question here - that, the correct one, is whether more needs to be done or are we, umm, done here?
We have a large outperformance from that green economy. Therefore we do seem to be done in the interventions we need to be making to grow the green economy.
We suspect that the insistence is simply that the green economy would enjoy ever more of other peoples’ money and therefore the green economy should gain ever more of other peoples’ money. Which is something we find easy enough to reject.
No, the Spring Budget wasn't a Raw Deal for Pensioners
Believe it or not, there are people in the British press who are genuinely arguing that this week’s Spring Budget “stuck two fingers up” to pensioners because the Chancellor decided to focus his efforts on tax cuts for working-age people, instead of throwing yet another bone to retirees.
From the Mirror to the Telegraph the headlines were the same - pensioners are the big losers of this budget, pummelled by stealth tax rises and neglected by the Chancellor. Let’s not mince words - this couldn’t be further from the truth. However, it’s useful to examine exactly how this false narrative came to be, why it isn’t true, and what it can tell us about the broader direction of travel in Britain today.
As I wrote in CityAM on Wednesday, this Budget represents a cautious step in the right direction against a challenging economic backdrop. In particular, we should celebrate the 2% cut to National Insurance which, combined with the 2% cut announced in the Autumn, will mean that NI has fallen to a third, from 12% to 8%. We should also welcome reforms to how Child Benefit eligibility is calculated, investments in public sector productivity, and the removal of stamp duty on shares.
Of course, it wasn’t all perfect. Our very own Maxwell Marlow has highlighted elsewhere the damaging effects of frozen income tax thresholds, and the Chancellor’s failure to deliver any substantive fiscal measures on housing. All in all though, this was a Budget characterised by modest measures designed to get more people into work, while improving the efficiency of the public sector and rewarding working-age people for their graft.
So who’s to blame for spreading the idea that the Chancellor has suddenly turned against the ever-reliable grey vote? This harmful misconception is, in no small part, the result of research from the Resolution Foundation and the Institute for Fiscal Studies. Both have pushed the idea that pensioners are the big losers of this budget, with the Resolution Foundation suggesting that households headed by someone aged 66+ “will see losses of £770 on average”, mostly due to the fiscal drag caused by frozen income tax thresholds.
However, they can’t seem to see the wood for the trees. This Budget maintained and extended a host of costly benefits for older people, which more than make up for any apparent losses.
As the Chancellor himself has rightly pointed out, those over State Pension age already benefit from not having to pay National Insurance at all. By default, their tax burden will already be 8% lower (12% lower prior to cuts over the past two fiscal events) than their working-age counterparts.
There’s also spending on public services like the NHS, disproportionately used by older people. Alongside £2.5 billion in additional NHS funding, the Chancellor has invested £3.4 billion in the process of NHS digitalisation, which will enable up to 200,000 extra operations a year. It is pensioners who will see the greatest benefit from this investment.
Then, of course, there is the public sector hydra known as the Pension Triple Lock. Since the Triple Lock was introduced in 2011/12, the cost of the state pension is estimated to have grown by a staggering £78 billion - that’s about the same amount as the UK’s entire corporation tax revenue in 2022/23. Across this Parliament alone, the state pension has risen by 31%.
In April, the state pension will again increase by 8.5% (more than double the current rate of inflation), representing a £900 income boost for pensioners. It’s worth reminding ourselves that the state pension is not means-tested, despite the fact that one in four British pensioners lives in a household with a combined wealth of more than a million pounds. Let me repeat that - depending on your definition, one in four British pensioners is a millionaire. They will all receive an additional £900 per annum from April.
From taxation to pensions to public services, this was a budget which works squarely in the interests of pensioners. To suggest that a 2% tax cut for working-age people means neglecting retirees is risible; with the cohort of people aged 22-29 now earning less than it did in 2002, it’s right that support is targeted to those earlier in their careers.
So why, despite all of this, are so many commentators eager to tell us that pensioners have been stiffed by the Treasury?
As is so often the case in politics, the fault lies with the politicians. Over successive Parliaments, politicians of all parties have propagated the view that the benefits enjoyed in later life are directly related to taxes paid throughout one’s career. We’ve all heard that slippery little phrase before - “I paid into the system all my life, and now I expect to get back out”.
Of course, in most cases, this simply isn’t true. The money that we pay in tax during our working lives does not sit in a hypothecated pot, to be drawn on in times of crisis. In fact, the money that many pensioners receive far outstrips their tax contributions - the average person born in 1956 will receive about £291,000 more in state benefits than they paid in across their lifetime.
Not only did favourable economic conditions in the 1980s and 1990s allow older people to build up assets which younger people can now scarcely dream of, but the state now gives them additional support on the questionable basis that they “paid in” to the system throughout their working lives.
Alas, common sense ceases to matter when the ballot box looms. Older people vote in far greater numbers than their younger counterparts, with 81% of older people expected to vote at the next election, compared to just half of those in their twenties. Governments must now contend with this ‘grey vote’. There is a resultant expectation that all major fiscal events must involve a confession of faith in the Baby Boomer orthodoxy, and a vindication of that faith through ever-greater public spending.
It would be far more sensible to recognise this expenditure for what it is - state assistance for old people. What else can we call money provided by the state with no expectation of returns, drawn from general taxation on working-age people?
If pensioners want to hold onto their state benefits - and yes, these are benefits -, they should celebrate the tentative steps taken in this Budget to incentivise work, reinjecting a modicum of dynamism into our sluggish economy. Covering the cost of these benefits will only be possible with a growing economy, particularly as the fiscal burden grows larger every year due to our ageing population.
More people working more productively means more revenue for the Treasury, and a greater likelihood that older people will continue to enjoy these favourable conditions. If our economy continues to languish in its current sorry state, beset by low growth and high taxes, it won’t be long before the bill simply becomes too large to bear.
Whitehall Waste
Every Chancellor, like every Cabinet Office minister, dreams of cutting waste and reducing bureaucracy. It is surprising how few of them succeed at it. That is because you need to know how to do it, and few ministers do.
Michael Heseltine MP did a reasonable job in the Thatcher and Major administration. Pretty soon the number of officials rose again. Francis Maude MP had a go for Cameron, but in that decade, officialdom grew by a quarter (conveniently put down to the problems of Covid and Brexit). Sir Jacob Rees-Mogg MP, Boris Johnson’s efficiency minister, thought axing 90,000 civil service jobs — about a fifth of the total — was quite reasonable, but time, Boris and he all moved on before anything happened.
The result is that we still have over half a million civil servants in government departments, and even more public servants running museums, infrastructure and all the rest. It’s a nice earner, too: the proportion of civil servants in the ‘Senior’ grade has doubled in ten years. Whitehall has become a dense jungle of ministerial and non-ministerial departments, executive agencies, regulators, quangos, you name it, many of them with duplicated or overlapping functions. Ministers do not even know exactly how many civil servants there are. No wonder people complain about red tape.
The only significant reform since the civil service was created in 1854 came under the Thatcher era. Her adviser, Sir Robin Ibbs, proposed to reduce Whitehall to just a few hundred elite civil servants who would make policy. But senior civil servants are rarely good managers, so those policies, ran the plan, would then be delivered by separate ‘executive agencies’ — or even outsourced to the private sector. A bit of that happened, though Whitehall remained very far from the ‘few hundred’ target. And as soon as Thatcher had gone, the mandarins started to rebuild their empires once again.
Thatcher also culled a number of quangos, having learnt from an Adam Smith Institute report, Quango, Quango, Quango, that there were no fewer than 3,068 of them. But they again soon sprang back, until David Cameron cut a fifth of them. A waste-cutting minister might ask why we have quangos at all. (I’ve always advocated sending them home on full pay, waiting six months and seeing if we are actually missing any.) The quangos that execute policy should be turned into agencies. The advisory ones should be abolished: ministers can get advice whenever they like without maintaining permanent talking shops at public expense.
We need to return to the Ibbs strategy, and at the same time cut all the duplication that goes on. A streamlined civil service would mean the Cabinet Office, which is supposed to run the whole show, could lose 90% of its staffing, according to management consultant Tim Ambler in his 2023 Adam Smith Institute book Shrinking Whitehall. The rag-bag Department for Digital, Culture, Media and Sport could also lose 90% by turning its functions into charities or industry bodies, and cutting all the overlaps. Big reductions would come from similar rationalisations at Education, the Treasury, Transport and others.
So if you are looking to cut waste in government, start at the top.
Sigh. Can we at least try to get the basics right?
As The Guardian reports:
The chancellor announced in his budget on Wednesday that businesses would no longer have to pay VAT if they had a turnover of less than £90,000, an increase from the previous threshold of £85,000.
That is, of course, 100% wrong, 180 degrees from the correct direction. A business of whatever size has to pay VAT on items that carry VAT. The VAT limit is upon businesses which do not need to charge, or collect, VAT.
This is, we would submit, a fairly important distinction.
In more detail. Some items in the economy have VAT charged upon their purchase. A business - of whatever size - which purchases these items then pays the VAT on the purchase of those items. Fully chocolate covered biscuits - those essentials for a meeting of the important HR people - have VAT charged upon them. The small business - under the £85k or £90k limit - and the large will pay that VAT on the chocco biccies. The not chocolate covered biscuits - that meagre type more suited to meetings of less important than HR people like main board directors - do not carry VAT. Therefore the small and large business does not pay VAT on the less than fully chocco biscuits.
The distinction on the payment of VAT on chocco or non-chocco biscuits is not the size of the business doing the paying, it’s the chocco or non-chocco.
However, if the business selling the biscuits has a turnover of less than this new £90k then it does not - cannot - charge VAT on the sales price of the chocco biccies, however important the HR people are. And obviously doesn’t upon the non-chocco either.
The VAT limit is about who gets to, has to, charge VAT, not who has to pay it.
It’s possible that it’s the Chancellor who has got this wrong, it’s obviously true that a major national newspaper has. Neither of which fills us with much confidence about the level of economic understanding in this country.
But it does aid in explaining why so many seem to have so little grasp of the subject. If The Guardian, the major newspaper on the left, gets something so basic wrong then is it any great surprise that its readership is all at sea on the subject?
An excellent argument against Pigou Taxes
We are prepared to agree that good economics is often not consistent with good politics. We would insist that, in such cases of a clash, it’s the politics that is wrong but there we are. The prime example is that the only economically rational approach to trade is unilateral free trade - we’ll buy what we want, whenever, you can do what the heck you like - but politics just so rarely does work out that way. Perhaps the UK 1846 to the late 1860s and Hong Kong all the time it was getting rich.
But we’ve now a new example. The vape tax. This is an idea of crushing stupidity. Taxing that substitute which leads to less smoking. That smoking that we’ve been trying to wipe out by ever higher taxes upon smoking. But, you know, politics.
But this gives us the why Pigou Taxes might not be all that great. As shown here.
OK, great, so smoking is Bad, M’Kay? So we’ll impose that Pigou Tax which will price people out of doing it. Great economics! But the problem then becomes that politics becomes hooked itself on those revenues from that Pigou Tax. We’ve changed who is addicted to what but not the addiction problem. So, as smoking does actually decline - the reason we imposed the Pigou Tax - politics is looking for its now mainline fix of the cash to micturate up against the wall.
At which point we get the tax on the substitute - recall, the tax was imposed in order to get people to substitute - imposed. Because there’s nothing as crazed and angry as a politician deprived of a revenue stream to micturate up that wall. Cold turkey simply is not to be thought of, no way.
As Dizzy points out this might not be quite logically sound, this tax upon vaping. But there we are. And just think, there are people who disagree with our idea that perhaps politics isn’t the best way to run a place or economy. Not all of whom are politicians mainlining on other peoples’ cash.