Is France inadvertently voting for the euro’s break up?

Au revoir

The almost total emptiness of the term ‘right wing’ is never better illustrated than by comparing what passes for ‘right wing’ on either side of the English Channel. During his seemingly doomed bid for reelection French president, Nicolas Sarkozy has stood on platforms where the flag of the European Union stands next to France’s tricolour, something which no British Conservative leader would dare contemplate. In the best Gaullist tradition Sarkozy is a dynamo of constant economic intervention; there is little trace of the small state philosophy which occasionally finds voice from Britain’s Conservatives.

It wasn’t always like this. When he took office in 2007 Sarkozy was fancied as a French answer to Margaret Thatcher, there to shake France’s moribund economy back to life and promising a “rupture” with the past.

Sarkozy ended up falling victim to heightened expectations. He was neither as radical as his detractors on the left made out nor as timid as mostly foreign ‘right wingers’ scorned him for. Raising the retirement age from 60 to 62 for example hardly sounds Thatcheresque but the fact that such a minor and unavoidable reform repeatedly brought millions of trade union members out onto the streets shows the scale of Sarkozy’s task.

The truth is that the French would not support a reform agenda anything near as comprehensive as the Thatcherite rhetoric suggested. As soon as Sarkozy tried to implement the promises that the French had voted him in on they turned against him. In France it seems that reform, like so much else, exists only in the abstract.

When the financial crisis and its notably acute manifestation in the Eurozone broke out in the wake of the credit crunch of 2007 Sarkozy had a new opportunity to dust his reform agenda off and package it as the economic necessity it is. In the end he fell between two stools, on the one hand pledging to do whatever it would take to defend France’s AAA rating (which was lost anyway), on the other castigating the ‘Anglo-Saxon’ economic model which he mysteriously blames for the euro’s woes.

On Sunday Sarkozy became the first sitting French president to lose the first round of an election. A comeback looks unlikely.

His victorious opponent, the Socialist Francois Hollande, makes no concessions to economic sanity. He promises to hire 60,000 new teachers and lower the retirement age back to 60 on his way to balancing the budget by 2017. He intends to square this circle by introducing a tax of 75 percent on the ‘super rich’.

If the French are intent on slitting their own economic throats by choosing such a risible set of policies then they are, of course, quite entitled to. But in the context of the ongoing financial crisis in the Eurozone, Hollande’s economic illiteracy will have wider ramifications.

Most obviously he intends to renegotiate the euro stability pact which was signed at the end of last year. True, the pact is a waste of paper, but Hollande’s opposition to it is wrongheaded. He objects to the pacts’ limiting of euro member government borrowing apparently in the odd belief that Europe doesn’t have enough debt and actually needs more to get its economy going again.

He also wants the European Central Bank to adopt ‘growth friendly’ policies which is simply a euphemism for printing more money. In fairness Hollande isn’t the only person who thinks that we will get richer if only we have more banknotes. Mervyn King and Ben Bernanke are fervent believers, and the ECB’s various operations in support of Italian and Spanish bonds suggest that he might be pushing on an open door.

Either way it looks like tensions along the Rhine are set to rise. Germany’s entire approach to the euro crisis has been based on the idea that the solution is fiscal and that monetary policy can play no role. To this end they have pushed for spending cuts in member nations and (supposedly) tight money in Frankfurt. Sarkozy probably privately opposed both notions but wouldn’t go against Angela Merkel. Francois Hollande might be less wary of conflict with the Germans.

Even so Hollande’s almost certain election looks likely to put new stresses on the beleaguered euro. His hopeless economic policies look certain to add to France’s debt issues and these will put further upward pressure on French borrowing costs.

The euro can possibly survive debt crises in small peripheral countries: Greece or Portugal. The existential threats to the single currency come from the big members. Italy and Spain are already pushing the euro to the limit. With France voting to join them, the odds on the euro’s break up just shortened.

This article originally appeared at The Commentator

If you are looking for useful insights into the behaviour of homo economicus, don’t look to the left

UK Uncut – Where RAG Week never ends

Few subjects currently arouse the political passions quite like that of tax avoidance. Such is the subjects’ flammability that the antics of glorified Rag Week pranksters like UK Uncut have, none too indirectly, prompted government action. And, predictably, action with such pitiful inspiration has blown up in the government’s face.

It might be wondered why tax avoidance generates such emotion. It’s a perfectly legal activity after all, even though some people seem incapable of (or unwilling to) understand the difference between tax avoidance and criminal tax evasion.

Indeed, most of us are tax avoiders. If you have ever modified your behaviour because of taxation, say by taking the train to Edinburgh rather than the plane, quitting smoking, or buying a little less of something because VAT has gone up, you are a tax avoider.

To illustrate the scale of this common or garden tax avoidance, here, literally, are some back of a fag packet calculations. There are 10 million ex smokers in the UK. The average smoker smokes 13.5 cigarettes a day (13 for women, 14 for men) so that is 135 million cigarettes these people are not smoking everyday. Now, with the each tab generating 26p in tax that is a whopping loss to the Exchequer of over £35 million per day because these people stopped smoking. Can we expect to see the guilt ridden middle class poseurs of UK Uncut chasing ex smokers down the street, throwing fags at them and demanding that they continue to puff for the public sector?

In fact, whole areas of public policy rely on us being tax avoiders. Government raises taxes on smoking and drinking (ostensibly) to get us to smoke and drink less. They put all manner of green taxes on carbon consumption because they want us to consume less carbon. To assume these measures will have any effect you have to assume first that most people are responsive to tax changes; that they are tax avoiders, in other words.

Recognising perhaps that government would have very few policy tools left if there were no such thing as tax elasticity, George Osborne has lately been trying to distinguish between this widespread fact-of-human-nature tax avoidance and what he calls “aggressive tax avoidance” which he finds “morally repugnant”. As you might have expected, policy based on such a non-existent distinction has come a cropper.

You will know the details by now: rich people are giving money to charities and offsetting this against tax liabilities. This has the effect of reducing the newly popular but entirely bogus‘effective’ tax rate paid by the rich. To prevent this, the government announced plans to cap the tax relief on charitable donations.

All hell broke loose. Apparently it came as a shock to Osborne and David Cameron to find that if you effectively tax charitable donations, charitable donations might actually decline. That they should have been so stunned is quite bizarre. As we’ve seen, swathes of public policy depend on us being tax avoiders. And, in the very same budget, Osborne announced the reduction of the top rate of tax from 50p to 45p citing exactly those incentive effects that he dismissed when applied to charities.  The eminently avoidable fiasco looks likely to end in a clumsily executed U turn.

You could have known all of this, in fact, before it happened. That is because, to repeat, people are generally tax avoiders. Individuals generally think that they have the most right and are the best qualified to spend the money they earn on satisfying their wants and needs.

This is not to say that the tax avoidance bandwagon does not have some support. But when you ask people which taxes they think should be increased or whose avoidance should be clamped down upon the answer is always the same: “Somebody else’s”.

This natural self interest is something the left has always struggled with, as demonstrated by their renaming it ‘selfishness’. It is a key tenet of left wing belief that state spending is good (not entirely coincidentally very many on the left receive large amounts of their income from state spending). This is why you heard people supporting the retention of a 50p tax rate which actually saw the rich pay less in tax. This arose because, if you hold to the idea that state spending is good, then if your taxes increase you will simply keep on working or giving to charity as before and taxes will rise proportionally. And, by extension, if the goodness of state spending is so self-evident, then everyone will think like this.

But they don’t, as common sense and a wealth of history attest. Instead people have some idea of what they should fairly be paying in tax and any attempt to raise the tax take much beyond this is doomed. Obviously, with a raft of lawyers and accountants on the payroll, the opportunities for the rich to skip out of any increase are greater than for others.

If you are looking for useful insights into the behaviour of homo economicus don’t look to the left. The effective raising of tax on charitable giving was always going to lead to less charitable giving because the levying and raising of tax on anything generally leads to less of whatever is being taxed. The government has waded into this avoidable mess because it has been led in the search for the limit of what people will hand over to the state by people who don’t believe such a limit exists.

This article originally appeared at The Commentator

As easy as ABCT

Wise guys

In economics as with medicine any cure must begin with a sound diagnosis. But if economists were doctors the patient would have died on the table. Despite its pretensions to scientific exactitude, the discipline has offered a bewildering array of diagnoses; the doctors still arguing.

Some diagnoses can be ruled out. The Marxist theory of economic cycles with its declining rate of profit is clearly useless; businesses were making record profits on the eve of the bust. There was no shock to Total Factor Productivity which a Real Business Cycle explanation would require. Keynesian ‘animal spirits’ are also unsatisfactory. The flight from mortgage backed assets was a totally rational response to the Federal Reserve raising interest rates between 2004 and 2007.

But there is another diagnosis which fits the symptoms quite well; Austrian Business Cycle Theory (ABCT), so called because it grows out of the Austrian School of economics founded in Vienna by Carl Menger in the nineteenth century. It describes the causes and course of the current crisis better than any other theory and offers some insights in to what lies ahead.

ABCT starts with the idea that the interest rate is a price like any other matching the supply of something to the demand for it. Funds for investment are supplied (via saving); savings are demanded (for investment). If people cut back on current consumption and save more to increase future consumption then the interest rate falls and firms are able to borrow more to invest in the means to supply that future consumption. And when people begin drawing down their savings to fund current consumption the interest rate rises and firms cut back on investing for future consumption.

The key insight is that the interest rate is a real phenomenon. As the Austrian School economist Eugen von Böhm-Bawerk put it, it reflects the ‘time preference’ of economic agents, the value they place on consumption of something now compared to the value they place on consumption of the same thing at some given point in the future. The interest rate reflects the compensation/incentive for abstinence on the part of the saver.

But in the real world we have central banks. In response to something like the bursting of the dot com bubble the Federal Reserve can lower interest rates, as it did in that instance, from 6.25% to 1.75% over the course of 2001.

However, the interest rate is not falling because of increased saving (or decreasing time preference), rather it is being forced down artificially by the expansion of credit; the creation of phony capital in other words.

As interest rates fall firms see ever more marginal investment opportunities becoming profitable. They borrow and undertake them. A boom is underway.

But eventually the inflation caused by this credit expansion starts to show even in the central bank’s cooked figures as when inflation went above 4% in the US in 2006. Interest rates are raised; the Fed Funds rate went above 5% the same year. Those marginal investments that looked viable at 1% are now scuppered.

This is the bust. All the enterprises undertaken in the expectation of catering for the demand for future consumption indicated by low interest rates discover that there is, in fact, no such demand. There never was. They are revealed as ‘malinvestments’, with no hope of ever producing a return above their borrowing costs unless interest rates are kept artificially low and cheap credit is kept flowing.

The recession is not some mysterious collapse in aggregate demand which can be stopped with a dose of government spending. It is the liquidation of these unviable credit positions and it will not be over until this process is complete.

The Austrian School economist Ludwig von Mises wrote

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved

This is the Austrian choice; recognize the liquidation and allow zombie banks to collapse and stop soaking up scarce capital so we can get the recovery going or keep putting it off with more monetary and fiscal stimulus. And, as another Austrian Schooler, Friedrich von Hayek, warned,

The magnitude of unemployment caused by a cessation of inflation will increase with the length of the period during which such policies are pursued

True, this is a grim prospect, but that matters less than whether it’s correct. Anyone who says there is a third option, a painless way out which can be found simply by ticking a different box on a ballot paper, truly is peddling snake oil.

This article originally appeared at The Cobden Centre

Taxpayer funding for political parties? Why not pensions for life for armed robbers too?


Not the only bubble that’s burst

Whether it’s General Motors or RBS, no failing enterprise has ever truly breathed its last before gasping the plea for taxpayer funding. ‘Dinnergate’ provided the opportunity for Britain’s failing political parties to utter the immortal words.

In the general election of 1951 Labour and the Conservatives got over 95 percent of the vote between them. Labour got 13.9 million votes, the victorious Conservatives, by a quirk of the electoral system, 12.6 million. In the general election of 2005 labour and the Conservatives got just over 67 percent of the vote between them. The victorious Labour party got 9.5 million votes, the Conservatives 8.7 million. Losing that sort of market share is catastrophic.

Though obscured by First Past the Post the trend in British politics in the post war period is clear; a decreasing number of British voters are interested in either main party.

This increasing lack of interest in either the Conservatives or Labour has also been reflected in falling membership numbers. Perhaps counter intuitively for the self proclaimed party of the working man, Labour party membership has always lagged Conservative party membership. But, even so, in 1953 Labour had more than 1 million members and the Conservatives had 2.8 million.

With occasional reverses Labour party membership fell steadily until 1979 by which time it had fallen by a third to 666,000 members. Then came the Winter of Discontent and, as well as losing power to Margaret Thatcher, Labour lost a staggering 318,000 members in one year.

By the late 1960s the Conservatives had fallen to 1.1 million members but held steady until the early 1990s. From 1 million members just prior to Thatcher’s ousting in 1990 membership had halved to 500,000 in 1992.

But even these figures now look like some halcyon age of mass participation. By 2010 Conservative party membership had slumped to 177,000 while Labour was enjoying a “surge” in membership to 60,000 – a disappointing crowd at Old Trafford. No wonder that Britain’s political parties now find themselves in the position of a busted bank or bankrupt car company.

In the absence of membership fees the effect has been a reliance on ever fewer donors giving ever more money. Lord Ashcroft kept the Conservatives going almost single handed in the wilderness years after 1997. Labour, out of power and drifting to the left, holds little appeal for those with bulging wallets; Labour received just 13 private donations in the year from September 2010. Labour is now reliant on the trade unions (who themselves represent just a fraction of the workforce they used to) for over 80 percent of its funding.

The politicians’ ever greater flattery of their ever fewer donors is a nauseating sight and when it doesn’t cross the line into the criminal it certainly radiates a sleazy impression, as with Cameron’s latest kerfuffle.

The proposal for taxpayer funding of political parties is usually floated in the wake of such scandals. Perhaps because the threat of bankruptcy is very real for the Labour party (a rare example of politicians practising in private what they do in office) the demand for taxpayer funding has come loudest from the left. In the wake of Dinnergate, a Conservative scandal remember, the New Statesman carried articles by Labour MP Denis McShane and Mehdi Hasan arguing for taxpayer funding of political parties. As McShane put it, there is a need “for democracy to pay for democracy”

There is nothing of the sort. There is, instead, simply the desperate desire for members of failing enterprises like Britain’s major political parties to be bailed out. If you won’t give them your money voluntarily they will take it straight out of your paycheque.

Hasan quoted the Independent’s Mary Ann Sieghart saying that “our government was being corrupted by shady donors” so we must introduce taxpayer funding. This idea, that because we cannot trust politicians to raise money honestly we must give it to them in taxes, is absurd. By that way of thinking we would ‘punish’ armed robbery by giving the robbers pensions for life.

The question few seem to ask is why this is happening. Why are our major political parties becoming so noxious that Labour, with a 10 point lead in the polls, can lose a safe seat to a sectarian bigot? Why do 72 percent of voters see the Conservative party as “out of touch”? Answer that and you have a solution to party funding which doesn’t involve taxing people more.

There are long term secular trends. In terms of voting the decline can be attributed to some mixture of weakening class identification and growing disillusionment with both main parties’ inability to deliver on their grand promises. In terms of membership people join thing things less than they used to whether it’s political parties or the Dennis the Menace Fan Club.

But there’s another factor. Why should people give money to people who don’t like them? When Gordon Brown was overheard calling a lifelong Labour voter a “bigoted woman” just for asking some valid questions about immigration he revealed more than he knew. He revealed that the Labour party is run by a metropolitan elite which views its core voters in places like Rochdale as a bunch of unreformed hicks.

The same goes for the Conservatives. The strategy behind Team Cameron was that if they alienated enough of their core vote they would attract enough Guardian readers to more than make up for it. It failed. In the Telegraph Iain Martin wrote that “A fundamental miscalculation was the decision by this group to ape Mr Blair and define themselves in opposition to their party and their core supporters.” You can understand why Conservative party members might balk at giving money, or votes, to people who view them like this.

The truth is that both Labour and the Conservatives are run by people who don’t like Labour or Conservative voters very much. Those voters are entitled to keep their hands in their pockets and not have them picked by taxpayer funding.

This article originally appeared at The Commentator