IEA Blog

My expectations of politicians, those “insidious and crafty animals”, are low. (Like Hayek, I find that over the course of a long life they have steadily gone down.) But in this general election campaign the performance of all three main parties has still managed to disappoint. They have refused to spell out in any detail how they propose to eliminate the huge government deficit, which is unprecedented in peacetime.

The British government’s deficit this year is expected to be about 12 per cent of GDP, nearly as high as Greece’s. Assuming that about half has been caused by the recession, we need to find another 6 per cent of GDP (around £90 billion a year). I accept George Osborne’s line that about 80 per cent should come from cutting government spending and 20 per cent from tax increases. 

Where could the government raise an extra £18 billion in tax? Raising Value Added Tax by 2½ per cent to 20 per cent would raise about £12 billion. And adding 1 penny to the basic rate of income tax, I think, would raise about £6 billion. 

That would leave a need to cut about £72 billion from government spending, around 10 per cent. In my view, there can be no sacred cows: I wouldn’t “ring-fence” anything.

The government has been grossly irresponsible in failing to undertake the three-year Comprehensive Spending review when it was due, last year. The Chancellor pretended there was too much uncertainty, but that is a pathetic excuse. 

I’m sceptical about “cutting out waste”, though I dare say there’s plenty of it. The trouble is it’s not always easy to identify “waste”, to cut it out, or to stop it creeping back in again. So most of the reduction would have to come from the government stopping doing some things it is doing now. What Keynes called the “non-agenda” of government. 

As I haven’t got the details, I can’t say precisely what government spending I would to cut. But it’s scandalous that none of our leading politicians, seeking election, has spelt out the details either. Their attempt to deceive the British people fools nobody, but it is a disgrace. No wonder so many people choose to vote, in effect, for “none of the above”.

While Greece’s financial issues, both domestic and international, are making any bailout package more difficult in deed than word, the social issues at stake are no less troubling.

Domestically, the situation has bred a population unwilling to recognise the problem for what it is – a clear case of a culture of entitlement created by the kindness of strangers. As Anita Acavalos has explained, in Greek culture using the wealth of others is not considered fundamentally immoral. Furthermore, seeking recourse against the productive elements of the country is popular as “the rich … are commonly perceived to be everything that is wrong with Greek society.”

A recent poll suggests that a majority of Greek citizens are against their government’s decision to accept a bailout from eurozone partners and the IMF. While the domestic government resists political unrest by only gently suggesting that spending restraint and wage reductions should occur, the foreigners who will foot the eventual bill are chastised for suggesting that the behaviour that got the nation into this mess should be curtailed.

Were Greek opposition to the bailout package based on a desire for independence and prudence, we could rest easy. Instead, international calls for austerity measures aimed at combating a bloated public sector rife with unfunded government obligations, drive fear into the eyes of many Greek public employees. These same employees have already been bailed out for years by other European nations, allowing an unsustainable situation to persist and, indeed, worsen.

One particularly troubling incident occurred recently when striking dock workers prohibited tourists from boarding their ship. For an economy dependent on tourism for a good part of its GDP and employment, discomforting tourists willing to bring their foreign money into the nation risks reducing future revenues. Without these revenues Greece will be even more reliant on foreign bailouts – with all the restrictions and concessions demanded.

Biting the hand that feeds you is never in one’s best interest. A failure to recognise the means available to bring prosperity to the Hellenic nation will prolong the spending imbalances central to today’s crisis.

Language was created spontaneously and needed no act of creation or sanction by the state – it is owned by each and every one of us. Money was also created this way, but today we have government ownership of the supply of money. This has been devastating for its purchasing power.

There are many stories in history of wicked monarchs who, to fund their various despotic regimes or lifestyles, would call in the coinage of the realm, extract a small percentage of gold – a “clip” – and then add an impurity before giving the coins back to the public; this is debasing of the monetary unit. This embezzlement was unlawful for the minter in the private sector and many people over the ages have been executed for stealing from money owners. Yet it is not unlawful for the state to do it.

Before World War I, money was gold. This was the commodity over time that freely consenting adults had chosen. This was the most marketable commodity that allowed us to move from barter to indirect exchange.

One ounce of gold today is £766. So if a pound sterling pre-WWI was just a name in the UK for 1/4 of an ounce of gold, it would imply that the pre-WWI purchasing price was 1/4 of £766 or £191.50. Compared with gold, the pound sterling has therefore lost 99.5% of its purchasing power in 100 years. One pound should buy something like a good week’s food shop for a family of four and not just one daily newspaper like it does now.

The government will raise an estimated £498bn and spend £666bn this year. In the last 20 years, the economy has grown at about 2% on average. Even with the 3% Treasury growth forecast, we will have a £1.5 trillion debt at best by 2014. On the whole, quantitative easing – i.e. creating money out of nothing or debasement of our purchasing power – has “paid for this”. With no political will to cut public spending, there is a serious danger we will be faced with further debasement and eventual currency collapse. This is the elephant in the room during this election campaign.

For more on these issues see Ludwig von Mises – A Primer.

I was on Sky news recently arguing that the positions of the various parties were so close (and so inadequate) that if we had a hung parliament rather than a clear result it might not make much difference. What we need is a tax-cutting, spending-cutting government and such a government is not on offer.

Back at home, I then listened to the Lib Dems’ party political broadcast. It was a depressing experience though, since they were not outlining a position that was radically different from that of the other parties. Their position looks different on paper but their platform really just involves a redistribution of a very high tax burden. It is rather difficult to redistribute that burden because marginal rates are so high right across the board it is difficult to see that they can be increased for any group.

Some of the Lib Dems’ tax proposals look rather crazy. Increasing capital gains tax, for example, which in most circumstances (such as when it is levied on equity investments) is a double tax, would essentially be an additional tax on life insurance and saving’s policies. Like other aspects of our tax system it would encourage debt finance rather than equity finance which seems to contradict the thrust of much of what Vince Cable has been saying about the problems of debt.

But what really struck me was the repetition of the word “fairness”. I should imagine that it was used 30 times or more in five minutes. Of course, the great liberal thinkers would regard the outcome of a free economy as “fair” (though they would have preferred to use the word “just”). They would not believe it was necessary for the state to then spend 52% of national income to make such an outcome “fair”. Interestingly, Nick Clegg did not say what he meant by “fair” – I assume from the context that he was equating “fair” with “equal”. Fairness is rather a subjective concept and perhaps it is rather odd for a political party to stand on the basis of “fairness”. All the electorate could argue that they are voting for “fairness” but could have a different perception of what fairness involves.

But what really struck me was that the Liberal Democrat broadcast did not mention the word “freedom” once. Is that because the Liberal Democrats do not think that freedom is attractive to people or because they do not believe in freedom? Both explanations would be rather depressing. In fact, the Lib Dems have some policies that can be justified more from the point of freedom than from the point of view of fairness (assuming they do not think that both are the same!) such as a relatively liberal policy to give more autonomy to parents in choosing non-state schools (though bizarrely they want to abolish faith schools), reducing taxes for the lower paid, as well as various policies in the areas of government bureaucracy and personal data management. Moreover, the party logo is a “bird of liberty”. But, the puzzle remains. The Lib Dems are riding high. Are they no longer a party that is proud to trumpet the importance of a free society? Or are they just another party that is putting before the electorate a platform that does not have underlying principles to it but is just based on the party’s own subjective view of what is fair?

The IEA is delighted that Gary Becker will be giving the Hayek Lecture on June 17th this year. Gary Becker attended Hayek’s evening seminars at the University of Chicago, thus making a nice link to F.A. Hayek, who was the inspiration behind the founding of the IEA.

Becker is, of course, renowned for applying economic ideas to unconventional areas and won the Nobel Prize in 1992. His research programme has examined sociology, demography, human capital, criminology, the economics of the family and so on. At the lecture in June he will be specifically discussing migration.

Gary Becker’s research programme is founded on the idea that the behaviour of an individual adheres to the same fundamental principles in different areas. The same explanatory model should thus, according to Becker, be applicable in analysing different aspects of human behaviour.

Becker’s approach has been criticised for reducing human behaviour to unrealistic axioms and base economic motives. However, this is a mistake. In many, ways it is Becker’s critics who are reductionist and, certainly, they have a very incomplete view of many policy issues if they neglect Becker’s arguments. Becker never argues that self interest is the only motivating factor for a particular action: he argues that individuals make rational choices, motivated by a range of preferences which will include self interest.

Let us take crime as an example. Many people will never commit a serious crime – however great the benefit to them from doing so. But, for those who are willing to commit a crime because they are not restrained by their moral views, their behaviour will surely be affected by economic incentives. What is the pay off? What is the probability of getting caught? What is the sentence?…And so on. This does not just apply to murderers and robbers but to a much larger number of people who might be willing to commit (say) a speeding offence to catch a ferry for which they are late. And this reasoning can obviously be applied to a large number of other fields – the welfare state, whether footballers commit fouls etc.

In other words, whatever our moral views, we ignore the economic motivation, which is often important in particular circumstances, at our peril. Gary Becker is well worth listening to…

Click here for full details of the event.

According to the Sunday Times, the Labour Party is facing a mass revolt from its own parliamentary candidates, as 200 have already signed the petition organised by the National Union of Students (NUS) opposing any increase in the current £3,220 tuition fee limit. However, the ongoing debate on university tuition fees is nothing short of perverse.

Whatever the historical reasons for the £14.3 billion annual subsidy to students and universities, it is impossible to escape the fact that when public subsidies are spent on higher education, some of the taxes being paid by the general taxpayer (including those on low incomes) are now being used to support students who a) would have been prepared to invest in their own university education themselves b) come from families who would have been prepared to cover the full cost and c) will expect to earn much more after graduating than many of those who are now being forced to subsidise them. 

The inequitable nature of the way in which higher education is funded has previously been criticised by Professor Nicholas Barr (LSE), who has suggested that those campaigning against tuition fees would do well to recognise the simple fact that “free” simply means that someone else pays. He concludes that “the evidence is unambiguous: ‘free’ higher education redistributes from poor to rich.” 

Professor Andrew Oswald (University of Warwick) has also described the British system as unethical, because of the barely discussed subsidy from the badly off to the rich. He concludes that “[e]very year, poor families contribute hundreds of pounds through their taxes to each undergraduate in Great Britain. That is immoral.” Professor Oswald also refers to the muddled logic of many left wing commentators who continue to believe that taxing the poor to subsidise the rich is somehow egalitarian. This is also not a phenomenon which is unique to the UK - Milton and Rose Friedman in the US have previously admitted that “those of us who are in the middle and upper‑income classes have conned the poor into subsidizing us on a grand scale ‑ yet we not only have no decent shame, we boast to the treetops of our selflessness and public spiritedness.”

A similar sense of selflessness and public spiritedness is reflected in the NUS promise to name and shame every candidate who refuses to sign a pledge to oppose a rise in university fees. However, if a candidate signs this pledge then this implies that they not only support the current policy of taxing the poor to subsidise the rich, but that they also want this burden of taxation to be increased even further. It will also imply that the candidate believes that even though many students and their families can afford to fund their own university education themselves (often via loans), it is still much better if they continue to live at the expense of everybody else, including those on low incomes. 

Clearly there is no shame in refusing to sign this petition and candidates should be happy to explain that it is not the role of government to take money from low-income families in order to subsidise students who are perfectly capable of funding themselves. Finally, if the NUS is so intent on securing a free ride for its members, then they are still free to appeal to the public directly. And if union leaders believe that they occupy the moral high ground on this issue, then they can look forward to a warm and sympathetic response on the doorstep.

Talks over what should happen about the Greek debt situation were recently delayed by the impromptu eruption of the Icelandic volcano Eyjafjallajökull. In the meantime, analysts and commentators continued missing the essential problem engulfing the country. Its problem lies in the past, not the future. The seeds have been sown, and there is no way now to escape all the hardships that must be endured. While short-term relief may come, this will quickly be exhausted and leave an imbalanced situation.

Greece’s accession into the Eurozone caused an immediate reduction in the implicit risk on its government issued debt. Secured by a robust European community committed to supporting weaker members befalling hard-times, interest rates on Greek bonds were commensurately reduced.

Interest rate reductions are generally promoted endogenously through high saving rates. The exogenous support of friendly European neighbours created an atmosphere of proliferate credit expansion in the face of reliably low interest charges – charges which were not complemented by any form of spending restraint. This problem has come to the fore now as a burgeoning public sector is unable to be supported at higher interest rates, and any increase in taxes to sustain the situation will place undue pressure on an already strained (and shrinking) private sector.

The situation may well prove fatal to Greece’s economic prospects.

International hesitation at providing a bailout has created further uncertainty as to what the future holds for the country. Lacking both private and public savings to address its financial woes, any short-term relief must come from an international consortium – fellow European Union members, or the IMF.

Yet it is important to remember, as Philipp Bagus has outlined, that Greece has already been bailed out by the EU for many years. The European Central Bank (ECB) has accepted as collateral most government bonds – including Greece’s. Consequently, European banks have been purchasing Greek government bonds to pledge as collateral against loaned ECB funds at historically low interest rates. This already highly profitable deal has been magnified as the crisis continues as Greek bond yields have crept higher, making the spread relatively more profitable. This increased demand for Greek government bonds has already provided the Greeks with a bailout through artificially low interest rates.

The ECB monetizes Greek debt by printing new Euros against the collateral of the pledged Greek government bonds. This allows the government to spend beyond its means, comforted in knowing that spending shortfalls can be papered over by issuing more bonds for the ECB to monetize. Inflationary pressures originate in Greece as the new liquidity is spent, but quickly spread to other European nations. As the domestic purchasing power for Euro-using citizens decreases, there is a latent transfer of wealth to the Greek government.

The moral hazard signalled to other EU member states by a further Greek bailout would have massive ramifications. While details are still being ironed out, the Eurozone will tentatively fund the Greek government with a €30bn loan, with the IMF contributing an additional €15bn. While this package has provided some immediate calm to the markets, the long-term effects look much less positive. The reasoning can be seen in the support given to the bailout.

While Spanish and acting-EU president José Luis Rodríguez Zapatero welcomed the bailout, Germans remained much more sceptical. Spain will fund about 10 per cent of the EU’s bailout – a noble contribution. However, the precedent set will almost certainly be repaid to the Spanish government in the future. By pushing for a bailout, Spain has almost assured that European support will be forthcoming for itself when the time arises. As the 2nd largest economy of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), and with an unemployment rate hovering around 20 per cent, Spain is sufficiently large, interconnected and troubled to raise the expectation that it could be the next Greece. By supporting its troubled ally today, Spain increases the odds that it will be aided in the future.

Any bailout to Greece now will do little to remove its previous excesses, and may well exacerbate the problem elsewhere in the EU.

One analyst jokingly tweeted: “It was the dying wish of Iceland’s economy to have its ashes spread across Europe.” Luckily, Greece’s own Mount Olympus is not volcanic. If continued assurances of a bailout continue, the adjustments necessary to save the Hellenic nation – less spending, lower wages and more saving – will fail to materialize. Europe may well have to contend with the financial fallout anyway.

There is a video doing the rounds at the moment under the name, the “Keynes-Hayek Rap”, although more formally titled, “Fear the Boom and Bust”. It has had a million hits and if nothing else it has brought economics into households that would never normally pay the slightest attention to issues in the history of economic thought.

Keynes is, of course, the author of the twentieth century’s most influential book on economics – although it might be noted that the economist who has been most influential on the economies of the twentieth century is more likely to have been Karl Marx. But Marx wrote in the century before. In the twentieth century, the laurel goes to Keynes.

Hayek was the counterfoil to Keynes in the economics world of the 1930s (although he lived on into the 1990s while Keynes died in 1946). During the 1930s Hayek spent a good deal of his time demonstrating that Keynes’ ideas were unsound, but strangely, and much to his own regret, he never properly dealt with the General Theory when it first appeared in 1936. The economics of Hayek is described as “Austrian”, a school of thought that originated in the 1870s. The Austrian School is the single largest segment of pre-Keynesian economic thought that remains alive today.

On a related matter, I have now returned from presenting the Ludwig von Mises lecture at the Mises Institute in Auburn, Alabama. The Keynes-Hayek Rap provides a contrast of the theories and associated policies of Keynes and Hayek and in its own way delves into the history of economics. My presentation also dealt with the history of economics, but for me the relevant history was how Keynes ended up falsely accusing his classical predecessors of having no explanation for involuntary unemployment. Keynes then used this accusation as a vehicle to undermine the classical theory of the cycle with a theory of his own, a theory which pre-Keynesian economists were virtually unanimous in recognising as fallacious.

If you are interested in this little known story in the history of ideas, which also discusses the pre-Keynesian theory of the cycle, this is my presentation:

The grip of Keynesian theory on governments, which gives them the authority to spend our money copiously, stupidly and in any way they please, is going to be hard to break. But the two presentations, as different as they may be in style and content, are attempts to explain why this most urgently needs to be done.

The election campaign should be bringing on another Great Depression in the minds of all taxpayers. This morning Gordon Brown continued his daily rant at the Tories for promising to reverse his increase in the National Insurance tax because “this is no time to be taking money out of the economy.”

Surely anybody with a modicum of common sense would realise that no money would be taken “out of the economy”. Rather (to use Brown’s ridiculous terminology) it would be taken back from the government’s “economy” and put back into the private sector “economy” from whence it came. 

In fact it is far worse than this. Brown has it precisely backwards; all taxes “take money out of the economy” because they weaken the division of labour and therefore reduce output and living standards. My estimate is that Brown’s £6 billion hike in National Insurance knocks £4 billion of productivity into a black hole. Just as tariffs (i.e. taxes) on international trade reduce international trade (that’s the idea!) so do internal taxes reduce internal trade and therefore reduce living standards. This is true of any kind of taxes, since all are effectively based on trade and exchange.

James Tooley’s recent book The Beautiful Tree is the best single book on public policy to be published since Charles Murray’s Losing Ground twenty-five years ago. It richly deserves to win the 2010 Sir Antony Fisher Memorial Award from the Atlas Economic Research Foundation for the best policy book of the past two years. The prize of $10,000 goes to the think tank that published the book - namely Washington DC’s Cato Institute - but I heard from that think tank’s great leader Ed Crane that Cato will split the prize money with Professor Tooley.

The book is all about how many poor people in less developed countries are educating their children privately. Huh? Yes that is no typo. It is about rickshaw drivers and washerwomen and peasant farmers who scrape together enough to get inexpensive private education for their kids in many of the world’s worst slums. Private education does not have to be expensive is one of many lessons Tooley teaches us.

It is counterintuitive but it is there, it exists and large numbers of children are getting a far better education than they would at the hands of the state. It is (as one reviewer put it) as if Indiana Jones did education policy as Tooley bravely goes into really quite disgusting and very dangerous neighbourhoods tracking down his private schools.

But this book is not just about education. It is a big,big book with a breathtaking scope and an ability to change the way you view the world, particulary the less developed bits. If every priest in the world were asked to read Tooley then we would hear a lot less twaddle on Sundays.

But hats off too to the IEA because The Beautiful Tree is a direct descendant of Tooley’s earlier monograph The Global Education Industry, which I was very pleased to publish back then. And hats off also to Penguin for publishing the Indian edition of The Beautiful Tree which at Christmas was the number one non-fiction ranked book by The Hindi Times.

I worked closely with the Founder of Atlas namely Sir Antony Fisher and in 1987, a year before he died, he entrusted Atlas to me. He passed on the following summer and his widow Dorian and I created the  Fisher Prize to keep his memory alive. Of all the books that have won that prize over the past two decades The Beautiful Tree has to be way up near (or even at) the top of the best of the very best, such is the power of its message, the depth of its research and the elegance of the writing.

Click here to listen to Professor Tooley’s 2009 IEA Hayek Memorial Lecture and here to read Education Without the State.