Liberal Vision

Niall Ferguson on fiscal stimulus

In yesterday’s Financial Times, the historian Niall Ferguson writes:

[W]hat we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war.

But the differences are immense. First, the US financed its huge wartime deficits from domestic savings, via the sale of war bonds. Second, wartime economies were essentially closed, so there was no leakage of fiscal stimulus. Third, war economies worked at maximum capacity; all kinds of controls had to be imposed on the private sector to prevent inflation.

Today’s war-like deficits are being run at a time when the US is heavily reliant on foreign lenders, not least its rising strategic rival China (which holds 11 per cent of US Treasuries in public hands); at a time when economies are open, so American stimulus can end up benefiting Chinese exporters; and at a time when there is much under-utilised capacity, so that deflation is a bigger threat than inflation.

Are there precedents for such a combination? Certainly. Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations…

Also in the article, he notes (almost in passing) that:

In an influential paper published earlier this year, Carmen Reinhart and Kenneth Rogoff warned that debt burdens of more than 90 per cent of GDP tend to result in lower growth and higher inflation.

If memory serves, the Labour budget earlier this year referred to a then-current national debt of c.£800 billion, rising to £1,400 billion by 2014. That is likely to be roughly equal to GDP even if we recover and grow quite well over the next few years.

Vince

Continuing the theme of serial delusion, the big debate on university finance within the Liberal Democrats now appears to be between those who want to bleed everyone and those who just want to bleed success. This against the status quo of making people who use a service, and can afford it, pay for it.

I wrote last month criticising the uncapped graduate tax proposal in detail. It’s a daft scheme. Who in their right mind would volunteer to pay a potentially unlimited liability for a degree? The long-term consequences would be to incentivise mediocrity.

Like the mansion tax the sage of Twickenham has proposed another complex tax evasion plan, and one, like the mansion tax that we hope stands no chance of becoming policy.

The Redistribution Delusion

One of the most important books for left liberals in recent years has been the “The Spirit Level: Why More Equal Societies Almost Always Do Better“. It’s important for number of reasons, however the main one is that it appears to provide an empirical basis to justify policies that redistribute income for no purpose other than redistribution.

In some Liberal Democrat and Labour circles it has been treated with a sense of uncritical reverence usually reserved for religious tracts.

This is not entirely without reason, it is a good read, and the weight of statistical evidence, both comparisons between countries and between US states, across multiple social trends do seem to point to unarguable case that more equal societies are, on the whole, nicer places to live.

Those then claiming to seek “evidence-based politics” should be pleased by the detailed rebuttal issued by Policy Exchange today - Beware of False Prophets.

The 125 page white paper is also a cracking read and debunks the Spirit Level correlation arguments almost entirely, bar in the one instance of infant mortality, often using their own evidence. A table at the end summarises the problems

The rest of the paper goes through each of the claims in detail and provides comparative analysis, showing what happens when extreme cases are removed (for example the US heavily distorts murder rate correlations, Japan life expectancy).

Clusters of nations that do not explain inequality relationships elsewhere, but might reflect the result of cultural history (Remove Scandinavia and most inequality relationships collapse between the rest).

Highlighting selective use of evidence, such as country choice, and which social statistics they regard as important (they ignore all trends where more equal societies have it worse for example suicide rates, HIV, boozing and divorce).

That socialism encourages suicide does not surprise me, who aspires to be an arbitrary average? But I remain respectful of people’s right to choose the miserable philosophy for themselves. The Spirit Level also ignores rapid improvements in life expectancy in countries where inequality has also been rising.

The Spirit Level does not look a correlations that better explain social trends than income inequality. In their US data for example the uncomfortable conclusion of the counter-analysis is that “the proportion of African-Americans in a state is often a much stronger predictor of social outcomes than the level of income inequality”. True or not, it is a stark warning against using isolated social trend correlations to drive prescriptive policies.

On a smaller note within the same theme, when I had the opportunity to put a question to the author of the Spirit Level at a meeting last year, I asked him whether if his or similarly modelled data showed ‘rich’ countries with less freedom had better social outcomes than those with more freedom, he would advocate policies that reduce freedom. His prickly non-response did not suggest the kind of critical open mind that separates genuinely curious researchers from political activists.

An approach evident in his Equality Trust response to the Policy Exchange paper today, which does little more than reiterate previous points, rather than answer the challenges raised.

Prior to this publication I had thought the main problem with the Spirit Level was that it confuses correlation with causation, and suffers the delusion that very different states can simply be planned into better shape by state action if only we knew the right lever to pull. But this powerful rebuttal also makes clear that the correlations used are highly suspect, selective, and in many cases simply wrong.

As the report notes “Despite the enthusiastic reception this book has received from social commentators, its claims are unsupported. The ethical debate over inequality remains unresolved.”

This is not an argument that inequality doesn’t matter, or conversely that it’s a good thing. It is an argument against the distributionalist position that it is the only thing that matters or automatically more important than other social goods.

It is against the notion that by throwing money at redistribution all other things improve. General social trends it would seem are bad at improving your health for you, you may need to make some effort yourself.

To believe the Spirit Level has ended the left/right distribution/aspiration debate in politics, let alone within liberalism, is a delusion.

The twisting of evidence: the graph the left ignore

The above graph from the Appendix A of the Budget shows the actual material impact of all measures on each income decile by 2012/13. It has not appeared on the left-wing blogs currently claiming the Budget is highly regressive.

Instead they use this one from the Institute for Fiscal Studies.

Even in that graph though does not support their arguments. What we can clearly see is that from decile 2 to 9 the effect of changes are broadly progressive or proportional. From 9 to 10 highly progressive, and only from 1 to 2 slightly regressive. This one difference is from where all this week’s attacks on coalition ‘progressive’ claims have stemmed.

However as we can see from the first graph, the actual cash impact of the changes is about £25-50 a year between those on £14,000 and those on less. 

Does anyone, even in the Social Liberal forum, sincerely believe that this £25-50 a year represents a great injustice that condemns the entire Budget?

At the other end those on £50,000 or more will be paying an average of £1,000 a year more than those around £38,000, or £1,650 a year in total. This disproportionate assault on a minority apparently is ’fair’ to the left, yet has gone largely unnoticed by Liberal Democrat malcontents. 

One response to that analysis has been that the Budget graph goes up to 2012/13 not 2014/15 where the IFS indicate more welfare reductions kick in. However actually looking at that analysis, the difference between 2012 and 2014 looks like a reduction of about 0.4% of income (-2.2% to -2.6%), or another £10-£20 for the bottom decile, with similar reductions across the board up to decile 9.

For the top decile the increase is a near doubling of their loss from -3.9% to -7.5% or around £3,000 on average, for many then considerably more.  That this goes unnoticed speaks to Tuesday’s point that the distributionalists are group who will never be satisfied.

The other point of attack is that to be progressive the Budget depends on previously introduced measures not yet implemented, for example the 50% tax rate. There is something in that, however it is the case that the Coalition could have reversed those measures. It is the Coalition, not Labour implementing the changes.

Broadly then the ‘regressive Budget’ narrative is not supported by the evidence bar in one small part of the distribution where there has been gross partisan exaggeration of a tiny difference. One more than made up at the other end of the income scale if that is your notion of fairness.

From bottom to top the facts show the impact of changes this Government will introduce are progressive, just not uniformly for every group. Liberal Democrats of any stripe should not find it difficult to rebutt this dishonest attack.

Or better still ignore it, most normal people don’t base their happiness or political decisions on the percentile differences between their loss and someoneelse. It’s the actual loss that matters and in that regard a lot more people on high incomes will have a reason to resent this government by 2015 than those on benefits.

The Independent City State of *ankers

Yesterday, I attended a talk on the theme of our natural resource legacy by economist Paul Collier. He questioned the ethics of depleting resources in order to produce other goods- “our children’s children are unlikely to be impressed when we offer them computer games instead of fish stocks” he mused. He even managed to work in a good natured dig at Goldman, which made me think about another of our legacies: the UK’s economic environment. Now, we all know everyone hates bankers at the moment. Allister Heath reminds us that Osborne will use tonight’s Mansion House address to indulge in a little more “banker-bashing”.Traffic wardens, divorce lawyers and tabloid journalists have never slept so well.    Everything that can’t be blamed upon the financial services must be the fault of the credit rating agencies and anything else is BP’s fault. In fact it’s becoming increasingly difficult to find someone who makes money who isn’t despised by the general public. But is all this hatred really such a good idea? Will our children’s children really thank us, and our politicians, for making life so difficult for big business in the UK? Is hammering people with new regulatory hurdles, higher capital gains tax (CGT) and the constant threat of new rules and scrutiny really such a good idea? I rather suspect not and here’s why.

Another esteemed economist, Paul Romer, is promoting a new approach to development: Charter Cities. The idea is for underdeveloped countries to set up new cities with business friendly regulatory environments and low taxation to attract investment and labour. Modeled on the development success stories of Hong Kong and Singapore, the concept is radical, inspirational and might just work. So, considering our resentment for all things financial why don’t we set up a Charter City- City of Bankers - in Canary Wharf? All the fat cats who spend their time smoking Cuban cigars (hand rolled by 5 year olds), buying porches, and generally ruining “our” economy could move there in voluntary exile to enjoy the business friendly environment and the absence of bureaucrats. We, on the other hand, would get to inhabit a London free of corrupt and greedy businessmen and get on with enjoying the finer things in life: eating organic produce and drinking carbon-neutral water.

Of course, the answer is fairly obvious. Really we want, in fact we need, the financial sector and big business to stay. Not only do we appreciate the services, jobs and tax revenues, but we also enjoy the talent, capital and ideas they attract from across the globe that afford us the cosmopolitan quality of life most of us relish. London and the UK became prosperous and successful by embracing business and industry, not by obstructing it.

The typical response to these concerns is that big businesses wont just up and leave- London is London, its where everyone wants to be! Maybe. But maybe not forever. London is the financial capital of the world by design, not default, and we’re not talking about today’s businesses, but tomorrow’s. Established companies may linger, but the new ones will locate wherever they believe they will make the most money. While London remains the place to be, all is well and good, but for those politicians (unfortunately there are many within the Lib Dem ranks) who remain intent upon scoring cheap points at businesses’ expense- be careful what you wish for! One day our children may talk of setting up a Charter City, not in jest, but in an attempt to entice those we currently love to bash to come back.

Clegg Prepares the Ground for Cuts

The last general election was between three parties in different states of denial about the state of the public finances. All agreed there would be cuts, none wished to say on what, and all agreed front-line services would be protected.

Were they all telling the truth the deficit could not be cut and the United Kingdom will eventually be having difficult conversations with the IMF. I think it unlikely the coalition will let that happen. But beyond the substance of what is to be done, they now have the communications challenge of adjusting expectations.

Nick Clegg has started this process with the language of “painful but necessary” cuts, whilst the Conservatives are strongly implying that many departments have been left with difficult legacies by their wasteful Labour predecessors. A process helped by Liam Byrne’s odd sense of humour.

It appears Vince Cable will need to make some of the toughest early decisionsby cutting the budget of BERR, the department of business. This should not prove politically difficult, BERR’s core business constituency are not vulnerable or compelling victims, and many will agree with the decisions.

It should also not prove as painful for Vince as has been reported. Abolishing BERR’s predecessor, the DTI, has been party policy for nearly a decade.

“Our proposal to abolish the DTI is not just about saving money but because we understand the frustration business has with a meddling, centralising, over regulating government. Its abolition is the largest act of deregulation.”

Labour’s narrative during this process will be about threats to “front-line services” and “jobs”. These are fair points. Cutting fake jobs for which there is ”no more money”, is still cutting a job. Delivering services nobody needs badly is still front-line delivery. The coalition are going to have to be prepared to be a lot tougher in their analysis of where the public sector does and doesn’t create value, to counter this.

They need to point out that many jobs will transfer from public to third sector or private provision where they are valuable and necessary, and many new jobs will be created in the private sector from the money not been wasted by Whitehall. Do Labour think only public spending creates jobs?

They need to draw distinctions between essential services, those that are nice to have if we could afford them, and those that are political projects of dubious worth that don’t deliver. The latter should go, the second should be cut, the former protected. Do Labour disagree with this?

They need to challenge the crude Keynesianism of Labour’s suggestion that cuts will ‘jeopardise the recovery’ or that they ‘withdraw money from the economy’. They could challenge Labour to reinvent their own golden rule and come up with a less arbitrary definition of the difference between investment for the future and current spending.

As things stand both parties have allowed Labour to get away with painting almost all public spending as a good thing, because it is public spending.

The coalition have referred vaguely to ‘waste’ and talking about reducing the centre, but they have not yet developed a clear ‘public service test’ that might help indicate what the limits of government activity might be and by implication what needs to be cut.

Iain Duncan-Smith, after his leadership, started talking about the difference between public service and the public sector, but this analysis has been narrowly applied, not extended to politically difficult sectors like health. It also doesn’t differentiate between public services that are valuable today, those that are valuable for the future, and those that reflect political priorities from the past which are no longer justified such as the BBC licence fee.

When the coalition come to deliver change then they will then need to deal with unravelling Labour’s justifications for the debt, and their own half-agreements with it, made prior to the election. It will take longer and the cultural barriers will be higher. But the process has started.

Liberal MPs should be applauded

So the full coalition deal has passed the scrutiny of MPs and Federal executive. Comments from those leaving was that MPs gave 100% backing - that is what is needed and congratulations to each and every one of them. All for one. One for all. What ever the future holds, backing the leader and putting the countries interests first is right.

From the sideways comments from those leaving the meeting, there seems to have been some dissent from the Federal Executive…. but not enought. I have had no news on that yet though….

Onward and upward.

Governments are like a box of chocolates…

You really do not know what you’re going to get…

Like what has come to be known as the Cadbury Law. Unveiled in Labour’s election manifesto the law “would put curbs on hostile takeovers of businesses deemed to be of national interest” and has been proposed as a reaction to the public outrage over Kraft’s takeover of Cadbury’s. Not a moment too soon after it was unveiled the law is already being slammed by business leaders.

The plans include changing British takeover regulations to insist that two-thirds of shareholders must approve big transactions, as opposed to the simple majority required at the moment. It is also expected to contain rules designed to limit the influence of short-term investors such as hedge funds, by excluding them from buying shares during bids and from voting on the transaction.

The law is shockingly anti-competition “…the threat of takeovers makes management efficient. If they underperform, someone else will take advantage and have a go.”

But aside from all the legitimate concerns from the City, what I find most interesting is the fact that Cadbury’s chocolate is not going to begin to taste like chalk just because Kraft owns it. There may be no difference to the product at all. So the ‘national interest’, which in this case is chocolate, is not necessarily at stake. Labour’s policies are becoming more excruciatingly tenuous by the minute.

Cider Budget Rules

As you all may be aware, in the budget, Chancellor Darling increased taxes on alcohol. And in particular cider:

Cider drinkers were left with a flat taste in the mouth yesterday after the Chancellor picked them out for a punitive tax rise. From midnight on Sunday duty on cider will increase by 10 per cent above inflation. The price of a bottle of cider will rise by 9p while a litre of cider will cost an extra 5p.

Naturally this has upset cider manufacturers, some what.

And what part of England produces the most cider? That’s right, the West Country…

Bad Economics Fortnight

It’s “Fairtrade Fortnight” - apparently… Don’t get me wrong. The people behind the “Fairtrade” brand (which is a brand just like Coca Cola. It is a brand. Full stop.) have good intentions. But what they believe in is bad economics. They are ultimately out-of-touch and misinformed and rely on woolly rhetoric and guilt-inducing marketing.
I think this facebook group says it best:

Fairtrade is a cartel that favours farmers in relatively wealthy countries (eg Mexico), who can afford to sign on to the Fairtrade brand, at the expense of those in the poorest countries, who cannot. Fairtrade incentivises the growing of cash crops, like coffee, which encourages the overproduction of these crops and locks poor farmers into a dependence on Fairtrade for their income. According to Oxford University economist Paul Collier, Fairtrade ensures that poor farmers “get charity as long as they stay producing the crops that have locked them into poverty”, perpetuating the poverty trap that Fairtrade claims to work against. We also object to the bullying tactics used by the Fairtrade cartel to get exclusive access to universities, etc, by having their rivals banned. This is a coercive measure that limits freedom to choose between different products.The only way to help lift the poorest farmers out of poverty is by boycotting Fairtrade and buying goods from the poorest, non-Fairtrade countries. Our alternative: Buy products from poor countries and spend the amount you save on real charity that helps the neediest, not a privileged elite of Fairtrade-sponsored farmers.

A good video:

Quote: “we don’t have a view on mechanisation…”

Oh dear…

Some more articles here:

Not So Fair Trade

The Poverty Of Fairtrade Coffee

Unfair Trade