Category Archives: Economics

In defence of the Republicans. Well, up to a point.

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I know where they’re coming from. Small government is good; big government is bad. I’m totally signed-up to that, and compared with most of the free world, America has one of the smallest governments in terms of how much of the nation’s wealth they tax and spend. At around 27% it compares very well with ours at around 41% in the UK and especially well with an eye-watering 55% in Sweden. At American levels, we in the UK would not have to pay any income tax, and no fuel duty, and no tax on beer, wine and spirits. Joy!

But this isn’t the complete picture. The problem is masked by the size of the American workforce and how productive they are. Here are some figures assembled from different sources, CIA World Fact Book [cols 1,2 & 4 below], Wikipedia Tax Freedom Day data [col 3 below], Adam Smith Institute [tax levels, above].

America has a workforce of almost 155 million people, generating a national income of $15 trillion. The US government spends 27% of it, which works out to be a little under $13,000 per man woman and child of 313 million in the country. I’ve counted the whole population because expenditure covers their needs such as health and education etc whereas the income is generated only by the workforce.

For reference, here’s what the table looks like:

workforce

>

GDP

x

gov’t share

/

population

=

government expenditure per person
USA

154.9m

T$14.66

27%

313.2m

$12,590 pp
UK

31.4m

T$2.17

41%

62.7m

$14,175 pp
Sweden

4.9m

T$0.35

55%

9.1m

$21,155 pp

The comparable story for the UK would be that our workforce, which is about one fifth of America’s in size, generates only about 70% as much national income per worker as their American counterparts. Our government spends a much higher proportion of this smaller amount and this works out to be a little over $14,000 per head of population.

The difference between how much the American government spends and how much the UK government spends is almost $1,600 per head of population. This doesn’t seem to square with the dramatic difference between government expenditure as a proportion of national income and the respective dates for Tax Freedom Day. The reason is as I have already stated, that the American worker is far more productive. His or her productivity makes the American government look practically parsimonious, whereas in reality it’s very nearly as profligate as ours.

So I believe the Republicans have a point when they complain about the level of US government expenditure. It is unacceptably high. High productivity shouldn’t be an excuse for the government to spend more. It is money they haven’t earned.

Where I disagree with the Republican leadership is their approach to dealing with the problem. They want more of the burden to fall on low-income families; they want to protect some tax concessions for the super-rich; and they want to maintain taxes on jobs. And they are using the debt-ceiling crisis as a lever to further their agenda, at whatever cost to the country. Maybe it’s all a big bluff, we will know in a few days time. In the meantime, President Obama has offered some huge concessions on his side that have alarmed and dismayed many of his own supporters, going further in cuts to Medicare and Medicaid than even some Republicans feel comfortable with.

The fact there is a debt ceiling at all and the fact America is in this crisis is a self inflicted injury. But it seems that having shot America in the foot, the Republican leadership want to finish the job and kill the patient.

Their conduct is indefensible.

Do the Greeks know something about democracy we don’t know?

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They gave us democracy, it says so in the history books, but look what we’ve done with it since. We’ve created bloated governments that tax the life out of us, wrap us up in red tape and all too often run rough shod over our civil liberties. Part of the “problem” in Greece is that everyone hates the government; people don’t pay taxes and they ignore pesky laws and regulations when it suits them – which is almost always. That extends to those in government too, it seems.

Maybe they’re reminding us how democracy works?

Maybe if we believe in small government and low taxes we should live the dream too?

Maybe the “problem” is really the “solution”?

However I don’t believe that rioting in the streets is the way to go. It’s self-defeating. You can get yourself beaten over the head with police batons and choke on tear gas ’til the cows come home, but will those who run the EU be in the slightest bit inconvenienced? Not a bit of it. The EU is institutionally immune to criticism. It has a president nobody votes for and a cabinet full of wastrels splashing tax-payers’ money around with abandon. There is no accounting either literally or morally, and certainly not electorally. The EU is a travesty of a democracy and Manuel Barroso has as much democratic legitimacy as Vlad the Impaler.

The reality is, there is no democratic redress available to us.

We are all Greeks in this Tragedy.

A Lesson for Teacher

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When you walk into your classroom, pause for a moment and look around.

Those eager young faces are your pension fund.

You see, a pension fund is not some bottomless pot of money created by government magic, it is actual cash that has to come from somewhere, and that somewhere is your pupils when they are old enough to get a job. In the meantime, they depend on you for an education.

Except you’re going on strike.

You are disadvantaging the very people who will pay your pension when you retire.

That’s not clever.

I suggest instead of striking you work harder to give them a better education so they can get better jobs and create more wealth for the economy, because it’s how wealthy the economy is that determines how much pension you get.

Right now the economy has tanked and everyone is struggling.

So if you’ve been in education a long time you haven’t done a very good job, have you?

Otherwise we would have a bright, well educated workforce and we wouldn’t be in the mess we’re in.

But you think going on strike will improve matters.

See me after school.

The man who predicted how the Soviet Union would collapse

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Igor Yakovlevich Birman has died. I’ve never heard of him before, but I wish I had. He was a Russian economist who from first-hand knowledge saw through the lies and propaganda of Soviet might. He emigrated to America in 1974 where his predictions that the Soviet economy would eventually implode were disbelieved and ridiculed by western ‘experts’. As a director of planning in Soviet factories “he had a profound distrust of official Soviet statistics and believed its economy was smaller and could support far less non-military consumption than most foreign analysts believed,” as his obituary in the Telegraph explains it.

The problem was the American military establishment had as much a vested interest in talking-up Soviet capability as the apparatchiks in Moscow had. The appearance of a new Soviet bomber or missile system at the annual May Day Parade threw the Pentagon into a frenzy of lobbying on Capitol Hill for yet more money for yet more military programmes. The arms race was conducted round a tight circular race track; each new Western bomber spurred the Soviets to produce another. The Pentagon could not allow the idea to gain credence that this race was unsustainable for the Soviets, it would undermine their own programmes. Birman knew the truth and he had to be rubbished.

Paradoxically, Birman believed that the best strategy for the West was to ramp up the arms race and bankrupt the Soviet Union. Instead of giving him the cold shoulder, the Pentagon should have championed him.

The first cracks in Soviet confidence came with the Falkland’s War. Soviet spy trawlers were shadowing our fleet as it sailed south and we feared they were passing intelligence to the Argentines. It turns out they were not, but the Russians watched the whole conflict closely, with mounting alarm. And with good reason. Operating at extended range, against an enemy with modern weapons with the advantage of being dug-in and prepared, and operating close to their homeland with short supply lines, we trounced them. All of our weapon systems worked as advertised, the Harrier jump-jet in particular was an outstanding success shooting down 23 enemy aircraft without loss.

The second blow to Soviet confidence was the First Gulf War when NATO forces demonstrated military capabilities that were simply beyond the Soviet’s dreams. From the stealth bombers that opened up the campaign, to the ‘smart bombs’ that had devastating accuracy, and especially to the Tomahawk cruise missiles. Who can ever forget those television images of cruise missiles flying up the street past the Al Rasheed hotel in Baghdad, using SatNav to home in on their targets. Watch it here

This came just two years after the Russians had to retreat from their disastrous campaign in Afghanistan, beaten and demoralised. It was probably the final nail in the coffin. The Soviets realised that no amount of money would bring their military up to sufficient capability as to challenge ours. They had hit the limit; they could spend no more because the Soviet economy could not take it.

So, back to Birman who predicted as much. Why do I wish I had known more of him? Because everything he said about the nature of the Soviet economy applies to us today. How far can we believe and trust those who run the economy? Those who ran the Soviet factories, and the apparatchiks in Moscow, are hardly different to those who run our financial centres on Wall Street and the City of London, and the regulators who oversee them. There is a vested interest in talking up their importance to the economy and how good a job they are doing. But I don’t believe any of it.

What we really need is a return to fundamental capitalism. Pure free trade. We need to get away from the culture of unearned bonuses. If you do a good job you get to keep your job, that should be the reward. We need to return to an economy where wealth creation is the objective. If we don’t create sufficient wealth, then just like the Soviet Union all else fails. We need to make it profitable to employ people in this country, not export jobs. We need to reduce taxation so a higher proportion of what we earn is ours to keep and spend. Above all, like Birman, we should trust what we see first hand, so-called ‘anecdotal economics’ (or as Professor Patrick Minford puts it, ‘rational expectation’) and act on it. Otherwise if we are deluding ourselves as the Soviets did, our economy is at risk of imploding as well.

Igor Birman’s obituary in the Telegraph

One of Our Aircraft is Over-Budget, or, the Modern Ministry of Defence

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Joseph Heller’s Catch-22 is a work of genius. His description of the absurdities of petty military bureaucracy are devastatingly accurate and despite the humour, frightening, because anyone who’s been in the forces knows it’s all too real. When you combine it with the Peter Principle that tells us everyone rises to their level of incompetence, we begin to get a picture of what life must be like at the highest levels of the Ministry of Defence.

For most of its time in office, the Labour government appointed ministers of breathtaking incompetence to run the department. They in turn favoured admirals, generals, and air marshals who spoke the same language, that is, when they spoke at all. How else do we explain the shambles that we have today, with front-line troops fighting a hot war while badly equipped and about to bear the brunt of the economic cutbacks? Our military capability is tiny and becoming miniscule.

I would like to imagine how a conversation might have gone between Wing Commander Guy Gibson and whoever his boss was following the successful Dam Buster mission. I say “whoever his boss was” because I’m certain ‘Bomber’ Harris would never have survived in the kind of climate we have in the modern Ministry of Defence.

I think it would have gone something like this:

HQ: Gibson, HQ here, do you hear me, Old Boy? Over.

Gibson: Loud and clear, HQ, over.

HQ: Good show on the dams. Pass on our congratulations to your crew.

Gibson: Thank you Sir, they will appreciate that.

HQ: Now, here’s the thing, Gibson. Now that there are no dams to attack, we’re rather over-manned in the dam-busting role.

Gibson: I see Sir.

HQ: So what we need you to do is find the nearest airfield, and land your plane there.

Gibson: But they’re all enemy-held airfields over here Sir.

HQ: Well that’ll be more mouths for them to feed, eh? Ha ha.

Gibson: But don’t you want us to come back Sir?

HQ: No. Do not come back Gibson, we don’t need you any more.

Gibson: But we could re-train Sir?

HQ: Not on Old Boy, we got rid of training in the last round of cutbacks.

Gibson: There must be something we could do Sir, they might rebuild the dams or something?

HQ: No, we’ve thought about that, they won’t and there’s no point maintaining capabilities we don’t need. There is a war on, you know.

Gibson: But what do I tell my crew?

HQ: Tell them these are difficult times for the economy and we must all share the pain.

Gibson: Can’t we make some economies at HQ instead Sir? Cut back on some of the back office staff?

HQ: Really, Gibson, I’m surprised at you. We at HQ are going to have to work much harder to manage the same number of operations with fewer front-line staff. I myself am having to accept a pay rise to reflect the added responsibility. I don’t want it, but we don’t all get what we want in these situations, Gibson, and don’t you forget it.

Gibson: I’m sorry Sir, I don’t know what came over me.

HQ: So just go ahead and land your plane, and hand yourselves over to the enemy, there’s a good chap.

Gibson: As you wish, Sir.

HQ: And with any luck, you’ll have that plane paid-off by the time the war’s over.

Gibson: Excuse me, Sir?

HQ: Well, we’ll deduct the least amount we can from your wages, but you’ll have to pay for the plane you’re not bringing back.

Gibson: But it’s not my choice not to bring it back, you’ve ordered me not to!

HQ: We can’t make an exception for you, Gibson, or there would be no incentive for the other crews to bring their planes back.

Gibson: They don’t need an incentive to bring their planes back, Sir, they will do anything they can to defend their country.

HQ: Now Gibson, that’s just silly talk. Do you think we at HQ would put in the hours that we do, working until almost gone 5 o’clock, the endless committee meetings – with no biscuits I might add, all those important papers to read, if we weren’t incentivised? Reports don’t just write themselves, you know. Everyone needs incentives.

Gibson: But the Nazis don’t.

HQ: Exactly, do you want us to all end up like them? That’s what this war is all about and that’s why we need incentives.

Gibson: Very well Sir, I’ll crash-land the plane forthwith.

HQ: Good show, Gibson.

Gibson: Thank you, Sir.

HQ: By the way, Gibson.

Gibson: Yes, Sir?

HQ: We’re going to award you a Victoria Cross.

Gibson: That’s very kind of you, Sir.

HQ: It’s the least we can do. I’ll deduct the cost from your salary of course, but would you like it presented by the King?

Gibson: How much extra would that be, Sir?

HQ: Now you’re getting the idea, Gibson.

Sack no Soldiers; Sack no Coppers; Sack no Nurses

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I wish I had their confidence. The government is so convinced there could be no Mumbai-style attack in Britain they are cutting back on every resource we might need to deal with it. And as Liam Fox, Defence Secretary, told a Chatham House conference yesterday, there is more to come. He is right to say, “Tackling the crisis in the public finances is not just an issue of economics but an issue of national security too,” but as I asked in a post last year, “Should economic reality trump military necessity?” After all, we either spend the money and defend ourselves adequately, or we have no need for budgets for anything. This is a matter of survival, plain and simple.

Al-Qaeda could continue to target London, or they might do what the IRA did and seek out softer targets where they can stage what they also now call a “spectacular” with a higher percentage of success. In other words, an attack could happen anywhere in the country and we need the resources to cope with it throughout the country. But what are we doing instead?

Defence:
Reducing front-line capabilities, but not tackling top-heavy administration.

Police:
Reducing front-line capabilities, but not tackling top-heavy administration.

NHS:
Reducing front-line capabilities, but not tackling top-heavy administration.

As Rolf Harris used to say, “Can you see anything yet?” Is there a pattern emerging? Yes there is. Soldiers, policemen and nurses are bearing the brunt of the cut-backs, but not the generals, police chiefs and hospital administrators. Yet in a Mumbai-style attack, the police will be the first on the scene, large numbers of casualties will need to be taken to hospitals, and ultimately the army will need to be called in to assist as even a small number of armed terrorists rampaging through a city would be beyond the resources of any local police force. The police and medical services would still be stretched even if the attack was a series of coordinated bombings across a city. I ought to acknowledge that the fire service also has a vital role to play in these scenarios.

The government needs to focus attention on making the cuts where they are most warranted – at the highest levels, and not where they are most damaging – at the front line.

The cumulative effects of trivial cheating

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There are two stories in the New York Times today which illustrate the scope and scale of the problem we have with corruption. This isn’t about America where these stories happen to come from, we have the same problem in the UK. It’s about our collective inability to “do the right thing” and our willingness to cheat even at the most banal level. Take the first story:

Texas Passes Bill to Make Some Fish Tales a Crime

That is rather a misleading headline, which is ironic given what I’m writing about. The story is not about people in pubs who idly brag about the size of some fish they caught, it is specifically about cheating in fishing tournaments:

Senator Glenn Hegar, a Republican who sponsored the bill, said it was intended to address cheating in high-level bass fishing tournaments, some of which offer tens of thousands of dollars in prizes. In one notorious case in 2009, an angler who entered the Bud Light Trail Big Bass Tournament on Lake Ray Hubbard, east of Dallas, put a one-pound lead weight inside the stomach of the 10.49-pound bass he had entered to win the grand prize, a $55,000 fishing boat.

“Some people are literally taking scissors and cutting off the tail of a fish to make it fit into a certain category,” Mr. Hegar said. “Unfortunately, they’re not playing by the rules.”

Trimming a fish tail with scissors? That’s cheating at a pretty trivial level, but when you scale it up and involve a large number of people all willing to cheat on what they may each regard as a trivial level, then we have this problem:

Raj Rajaratnam, the billionaire investor who once ran one of the world’s largest hedge funds, was found guilty on Wednesday of fraud and conspiracy by a federal jury in Manhattan

As the article explains:

What made Mr. Rajaratnam stand out was not his proprietary computer models nor his skills in security analysis. Instead, colleagues marveled at the deep set of contacts he had cultivated inside Silicon Valley executive suites and on Wall Street trading floors.

All of these people he cultivated were willing to blur the edges or even cross over the line completely. They knew right from wrong. Yet had Rajaratnam had only one or two contacts willing to cheat he could not possibly have had the success he had, but he had hundreds of them all willing to cheat. How absurd would it be if every contestant in a fishing tournament cheated on the same level as well? It becomes a farce.

There is a growing problem in society with people willing to cheat, to get an edge if they think they’ll get away with it, and it’s becoming farcical.

It’s long past time to put some moral standards back into our lives.

A fatal addiction for Ireland; a warning for the rest of us

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There’s this free and independent country, with it’s own government running it’s own affairs, which gives it all up in a moment of madness. It’s a story every addict knows well. Befriended by a pusher who gives them a few free samples, they experience the thrill of drug-fuelled highs. Life has never seemed more exciting and they’re hooked. Now the pusher makes demands on them and they must pay the price of continued supply. Ireland is owned.

The Irish try to break free. They have a referendum on implementing a new treaty giving more power to the EU, and they vote it down. The EU is furious at this act of defiance, they order Ireland to vote again – and keep voting until they get it right. Then as the global economic crisis begins to bite, the EU offers Ireland a loan it doesn’t want on terms it can’t afford. But the EU are loan sharks as well and the Irish will not be allowed to refuse the offer.

Broken in spirit, the dream long dead, Ireland tries to patch up a ruined country. They adopt painful and unpopular economic measures, but it’s not enough, the EU wants more pain. The government is close to collapse and wants fresh elections for a new mandate to tackle the crisis. But their EU masters won’t permit it, they make it very clear that elections at this time would be “very irresponsible”. Ireland learns the price of disobedience.

No longer a free and independent country, no longer with a government of it own in any meaningful sense, unable to run it’s own affairs, Ireland is what every drug addict becomes. The exodus of Ireland’s young talent to seek new opportunities abroad compounds the impression of a drained and depleted body, aged before its time, its life ebbing away. Ireland’s only use now is as an awful poster child to warn others of the perils of further EU integration.

Should economic reality trump military necessity?

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These have to be the happiest of days for pacifists. With a growing sense of disillusionment with our wars and our ability to fight wars, the Strategic Defence and Security Review just heaps joy upon joy for them. Now the Royal Navy is to be saddled with two massive aircraft carriers, useless without aircraft and which the Navy must scrap much of its surface fleet to pay for. The Army and the Royal Air Force, both apparently clinging to the need to defend Northern Europe from a Soviet Pact invasion, a threat that vanished decades ago, have sacrificed everything else to keep that dream alive. All of which leaves brave men and women fighting in the front line to pay the ultimate price for years of neglect.

Who should the finger of blame point towards? The last government appointed some of the most breathtakingly incompetent ministers in our history, but if they are given no leadership from above, and they are never held to account in Parliament, is it their fault for being useless or ours for letting them get away with it? And if the Ministry of Defence is run by clowns, have our top generals and admirals been moulded by their environment or are they equally culpable for the mismanagement of the department over many years? It’s hard to imagine how any senior officer who puts the case for military need above that of political expediency can further his career.

And that is a large part of the problem. We have far too many senior officers scrambling up the greasy pole to collect more stars before retiring to a comfortable job in the defence industry which is  milking and bilking the defence budget. We already have more admirals than ships even before the planned round of cutbacks. But the bloated empire that is Whitehall will not be scaled back accordingly. It will be the soldier, the sailor, and the airman who will again bear the brunt of economic cutbacks. There will be fewer of them, with poorer equipment, and less of it. All of which ignores the fact that we are in a hot, shooting war with al Qaeda.

We need to confront terrorism everywhere. We need to tackle its radicalising influence here in the UK, and we need to be capable of responding to terrorist incidents or preferably of detecting and preventing them beforehand. We need to be tracking them down to their training camps and flushing them out of their safe havens, worldwide. That’s why we were in Afghanistan originally, that’s why we should be in the North West Provinces if the Pakistan government won’t assist. Hot spots of radial Islam in Yemen, Somalia, Indonesia and elsewhere also need to be brought into the equation and we need to deal with those politically if at all possible but militarily if not.

To do this we need more military resources, not fewer. We need more armed police or territorial army manpower ready to deal with a Mumbai-style attack wherever it might occur. That means more soldiers and army camps across Britain. We need sufficient emergency resources to cope with casualties after a bomb attack, again wherever it might occur which means more ambulances, hospitals and medics across the country. And we need intelligence gathering to tell us what the terrorists are planning. We also need to engage with moderate Moslems, to counter the extremist views being put across by radical clerics, and to reassure them that this isn’t a war against Islam.

But we also need to be able to deploy an independent army to any location in the world. Fully equipped, fully trained, and fully supported on land, sea and in the air. We should not require support from any other country to do this, but we should be ready and willing to support others should we be called upon to do so. Finally, and most important, we need the political will. Defence expenditure is not something to be weighed against other peace-time budgetary considerations. It’s not a choice between a new warship or a cross-rail link. We either spend the money and defend ourselves adequately, or we have no need for budgets for anything. This is a matter of survival, plain and simple. We are at war.

These may not be happy days for pacifists after all.  White Poppy, anyone?

Car Park Tax – A Jobsworth’s Dream

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Just when it seemed likely that a few out of countless thousands of civil servants might lose their jobs so councils can balance their budgets, along comes a hare-brained scheme straight out of New Labour’s play book. The complications involving a work-place parking tax are quite possibly too many to enumerate, meaning that legions of civil servants would be required to manage it. Or it would be contracted out at great expense leaving nothing for the public purse. And for what? Yet another burden on the hapless taxpayer.

For starters, this is a tax on jobs. This is a pet topic of mine, the extent to which we put barriers in the way of anyone who wants to employ people in this country. We tax them through Employers NIC, a direct tax on jobs, and we burden them with endless red tape, an indirect tax on jobs. No wonder it is easier to export jobs and cut costs. This has to be the killer argument against a workplace parking tax, it’s yet another burden at a time when we desperately want to see more jobs being created.

Then we can start to think of all the practical implications, the million little complications that somebody has to deal with.

Does a company pass the cost on to its employees? Or does it just swallow the charge? Indeed, does a council have to pay the charge to itself or does it charge its own employees? Does a charity have to pay? Does the owner of an empty office block have to pay? Can a company eliminate all of its parking spaces to save the charge, perhaps by grassing them over and turning them into lawns and flower beds? Can a company install parking meters so they are no longer providing free parking? Would that be valid even if they charged only a penny per day? Or a pound per day? Would the council have to employ inspectors to go round and ensure companies were enforcing parking charges? If you are self-employed and you normally work from home, do you have to pay a charge for parking on your own driveway? Or would you have to put up a parking meter as well? Do visitor parking spaces count? Do hospitals and fire stations have to pay for parking places for emergency vehicles? If not, what counts as an emergency vehicle?

If a company does pass the charge on to its employees, do they have to pay if they are on holiday? Or sick? What if they start at the company part-way through the year? Or leave part-way through? What if they belong to a car pool, do they pay a proportion or does each employee pay the full charge? What if an employee is paying the charge but there frequently isn’t anywhere for them to park? Or they only occasionally bring the car to work? What counts as occasional use? What if there’s a transport strike and more employees have to use their cars temporarily, will they have to pay? But if they don’t, will regular car users still have to pay? What if the transport strike only affects one group of employees, for example those who normally travel to work by train?

It’s not just a local council issue either as central government must surely become involved. Will the charge, if levied on the employee, be tax deductible? If it is not tax deductible and it is not passed on to the employee, is it a taxable benefit in kind? Is National Insurance payable on it as well? Is the charge liable to VAT?

Seriously, this is another ill-thought out gimmick like the Robin Hood Tax.