Making the charts in 2012

You may or may not be pleased to know that my article for The Commentator on the economics of Hayek and Keynes was one of that sites 10 most read articles in 2012. Which was nice.

The blog itself was viewed in 104 countries around the world in 2012…

annual-report-

Happy new year, thanks for reading in 2012, and see you in 2013. Which is tomorrow.

The costs of gun control

One side

On October 17th in Bryan County, Oklahoma, a 12 year old girl named Kendra St. Clair was at home alone when a 32 year old man named Stacey Jones rang the doorbell. As her parents had taught her, Kendra didn’t answer, but Jones went to the back of the house and kicked the door in. Kendra called her mother who told her to get the family gun, hide in a cupboard, and call 911. Kendra did and was on the phone when Jones opened the door of the closet she was in.

Kendra shot and wounded Jones who ran off. He was found by Police and charged with 1st degree burglary. He had previously been arrested for kidnapping a mentally disabled 18 year old girl.

In the wake of horrific incidents like those of last Friday in Newtown, Connecticut, the clamour rises in a crescendo for ‘gun control’. It is sometimes said that if we can save even one life by banning the private ownership of guns it would be worth it. It is often presented as a costless transaction, all upside and none down.

But, as the case of Kendra St. Clair shows, it isn’t. The benefits of greater gun control (fewer Newtowns) must be weighed against the costs (whatever fate Stacey Jones had in mind for Kendra St. Clair). Indeed, the gun control debate in the US all too frequently forgets the costs of gun control.

The case of Kendra St. Clair got very little press. So, too, did the case of 92 year old World War Two veteran Earl Jones who opened fire on the three men who broke into his home in September, killing one. Likewise, the case of Teresa Barron, who was being stabbed repeatedly in the neck in August until a passerby with a concealed weapon intervened, received little coverage.

Incidents like these are not uncommon. The National Institute of Justice surveyed prison inmates and found that 34 percent owned up to being “scared off, shot at, wounded, or captured by an armed victim” while 70 percent knew a “colleague” whom this had happened to. Indeed, it has been estimated that there are between 800,000 and 2.5 million defensive uses of a gun in the United States each year.

What do these uses of guns prevent? According to a study carried out by the National Crime Survey, “when a robbery victim does not defend himself, the robber succeeds 88% of time, and the victim is injured 25% of the time. When a victim resists with a gun, the robbery success rate falls to 30%, and the victim injury rate falls to 17%. No other response to a robbery – from drawing a knife to shouting for help to fleeing – produces such low rates of victim injury and robbery success.”

But these might not be the full benefits of gun ownership. Few would enter a house like Kendra St. Clair’s if they knew they would end up like Stacey Jones did. When the National Institute of Justice asked prisoners whether “one reason burglars avoid houses when people are home is that they fear being shot during the crime” 74 percent agreed. 39 percent of felons said they had abandoned one crime because they feared the intended victim was armed; eight percent said they had done so “many” times.

Indeed, in the United Kingdom the number of burglaries which are ‘hot’, where the homeowner is at home, is about 45 percent of the total. In the US it is just 13 percent. If the figure in the US rose to British levels that would mean an extra 450,000 American homeowners attacked each year.

Sources: Open Society Foundations and US Census Bureau

This chart shows states rates of violent crimes per 100,000 compared to rankings for the tightness of their gun laws (1 = tightest, 50 = loosest). It excludes the District of Columbia with its outlying rate of 1,508 violent crimes per 100,000 whilst having some of the tightest gun laws in the country.

John R Lott argues that the lower violent crime rates are caused by the easier access to guns. Writing about the concealed carry laws which some states have Lott writes, “if all states had adopted nondiscretionary concealed-handgun laws in 1992, about 1,600 fewer murders and 4,800 fewer rapes would have been committed.” That’s 266 murders and 800 rapes prevented every single year.

Correlation does not demonstrate causation. Perhaps there is another variable responsible for the correlation observed above and elaborated by Lott, and access to weapons does not lower violent crime.

But we must remember people like people like Kendra St. Clair even in the wake of shocking tragedies like Newtown. There must be a discussion, but it must proceed with an awareness of the costs as well as the benefits of gun control.

This article originally appeared at The Commentator

Two thousand words – or two pictures

Everyone likes pictures so here’s a couple

spending

This shows British government spending (in constant £s). Can you see any ‘austerity’? No, me neither.

Here, taken from Guido Fawkes and dervived from HMRC data, we see average income tax rates across the pay scale from the last year of the Labour government  (2009-10) and under the coalition this year (2012-13). The coalition is taxing the rich more and the poor less than Labour did. Not that you’d know it from the Guardian or BBC.

Silly Lily

This picture has become popular among the anti cuts crowd

There’s just one problem; it’s bobbins. Let’s see how…

1 – Are Cornish pasties a ‘working class food’?

2 – There is a tax on Polo mallets, VAT at 20%.

3 – No on was voted in, that’s why we ended up with a coalition.

4 – He ‘Seriously’ wants to see David Cameron and George Osborne beheaded. Seriously? Get a grip.

5 – Sadly most of what the bankers did was perfectly legal and was encouraged by the Labour government who showered the tax receipts of the property boom the bankers created on its clients in the welfare state and public sector.

6 – The working classes are not portrayed as rioters. The working classes were too busy working to go out rioting. It was elements of the permanently unemployed (and probably unemployable) underclass that went ram-raiding for new shoes.

Paul O’Grady is a funny bloke. A political sage he is not.

In defence of economics

The truth is dismal

Economics has always had a dodgy reputation. 160 years ago Thomas Carlyle famously branded it “the dismal science” when he surveyed the gloomy predictions offered by the classical economists. More recently it has been said that economists are heartless calculators who ‘know the price of everything and the value of nothing’. And with economic turmoil raging economics and economists are in the cross hairs again.

In a new book called Economists and the Powerful, Norbert Häring and Niall Douglas argue that modern ‘neo-liberal’ economics has gained its perceived primacy not from any great validity as a theory but because, as a doctrine which justifies the increasing wealth of the rich, its propagation has been well funded by those same rich folks. To borrow from EH Carr, study the economist before you begin to study the facts.

Like so much else surrounding economics this is really just an old debate in new clothes. The classical school of Smith, Malthus, Ricardo, and Mill built on the foundation of the labour theory of value and economics of contending classes, diminishing returns, and stagnation. Karl Marx simply took all this and worked it through to its logical conclusion. Paul Samuelson was correct in saying that “From the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post-Ricardian.”

But the classical economists were wrong on this and so was the theory Marx derived from them. Separately and almost simultaneously in 1871 William Stanley Jevons and Carl Menger developed the marginal theory of value, a subjective theory which devastated Marxist economics almost in its crib. The Marginal revolution and the neo-classical economics it spawned opened up the vista of a growing economic prosperity which would enrich all, a prediction which has largely been borne out. Marxist economists, from 1871 to the present day, have responded by branding neo-classical economics a pseudo-science designed by lackeys of the rich to justify their increasing wealth.

What lies behind the current outbreak of economics bashing is the continuing brutal fallout of the credit crunch. For years governments across the west have been making extravagant spending commitments without devoting much thought to how they would pay for them. They could get away with it as long as the tax revenues from unsustainable bubbles flowed in. But now they have dried up and we are finally being forced to face up to the fact that our governments will be showering us with far fewer goodies than we had come to expect.

This is a painful prospect but it is what it is. America’s government debt doubling in four years and Britain’s increasing by 60 percent in five years are problems, massive problems. We are not worried about them because mercenary economists in the pay of the Rand Corporation are telling us to be worried about them; we are worried about them because we ought to be. And we are nowhere near as worried as we should be.

What books like Häring and Douglas’s – and a notably dimwitted entry, Don’t Buy It, by a strategic communications consultant called Anat Shenker-Osorio who thinks that debts and deficits will vanish if we stop talking about them – are trying to argue is that there is no such thing as economic reality, that our situation can be simply what we choose it to be. The juvenile dumbness of this wishful non-thinking is hard to overstate.

This article first appeared on The Commentator

Why do smart people still choose Keynes over Hayek?

The ridiculous and the sublime

On October 17th a group of concerned economists wrote to the Times. The current economic woes, they wrote, were down to insufficient spending/increased saving. “[W]hen a man economizes in consumption”, they argued, “and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources do not find a new home waiting for them.” Crucially, “In present conditions their entry into investment is blocked by lack of confidence.” The government should step in and spend to make up the shortfall they said.

On October 19th another group of economists replied with their own letter to the Times. They believed that the cause of the economic problems was monetary mismanagement which had created “a deficiency of investment-a depression of the industries making for capital extension, &c., rather than of the industries making directly for consumption.” They argued for the necessity of increased saving to readjust this and explicitly rejected any role for government spending, writing that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities.”

But this was October 1932 and the letters were written by John Maynard Keynes and Friedrich von Hayek. It says much about the essentially static nature of economic knowledge that an 80 year old debate remains so compelling today that it continues to inspire radio shows, debates, books, and even rap-offs.

Keynes’s economics, in a nutshell, argues that of the two components of ‘effective demand’, consumption and investment, investment is prone to volatile swings. As Keynes put it, investment spending was reduced when their expected payoff, the Marginal Productivity of Capital, dipped below the cost of financing them, the interest rate.

Why might this happen? “Animal spirits” was Keynes’ answer; “Don’t ask me guv” in other words. Whatever it was that tipped investors from optimism into effective demand-sapping pessimism is exogenous to the model; it cannot be accounted for by it.

Either way, the policy prescriptions of the Keynesian model are obvious. Financing costs must be held down with low interest rates and the Marginal Productivity of Capital must be underwritten by a government guarantee to purchase, with deficit spending if need be, whatever output industry might produce. Low interest rates and deficit spending. That is the Keynesian prescription for prosperity.

Hayek’s theory is very different. For Hayek, when low interest rates cause an expansion of credit, this credit flows into some parts of the economy before others. This blows up bubbles in the affected part of the economy, be it in housing, internet stocks, or tulips.

At some point, Hayek argues, the inflationary effect of this credit expansion overwhelms any wealth effect and interest rates begin to rise. With no further credit available to purchase the bubble assets the prices of these assets and their attendant industries collapse. This is the bust.

A major difference between Hayek’s theory and Keynes’s is that for Hayek the bust as well as the boom is endogenous to the model, it is explained by it. The bust isn’t caused by “animal spirits” switching inexplicably out of the clear blue sky, but by the predictable outcome of actions undertaken in the boom.

As Hayek’s model is radically different from Keynes’s, radically different prescriptions follow from it. Viewing the cycle as a whole Hayek believed that preventing a future bust was as important as fighting the current one and he proposed measures to limit the ability of banks to swell credit, his favoured solution being competing currency issue by banks.

More immediately, Hayek argued that as the bubble assets and attendant industries had been pumped up by unsustainable injections of inflationary credit, they could only be liquidated; any attempt to preserve their value would only prolong the bust or, as bad, set another cycle in motion. Sound money and non-intervention was the prescription of Hayek and his fellow Austrian Schoolers.

Looking back over the last few years you have to ask how intelligent people, examining the evidence, can still choose Keynes over Hayek. In both Britain and America we had monetary policy makers working to keep financing costs down with low interest rates. We had governments running budget deficits and applying fiscal stimulus to economies which were already growing. We followed the Keynesian prescription for prosperity and we still ended up with a bust – a bust which Hayekians, with their superior model, saw coming.

The answer lies in the prescriptions. Keynes, with his cheap credit and shower of borrowed money, is a pleasant prospect. Indeed, Paul Krugman, one of the most uncompromising modern Keynesians, believes that “Ending the depression should be incredibly easy”, all we need is cheaper credit and more borrowing. Just, in fact, what we had going into the crisis.

Hayek, on the other hand, offers a more painful prospect. As his mentor Ludwig von Mises put it:

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”

Which of these vistas would you prefer to gaze upon?

But these theories should be judged not on how warm and fuzzy they make us feel but on how accurate they are. On that score Hayek wins hands down yet some still cling doggedly to Keynes. It’s for the same reason the aunt who gives you chocolates is preferred to the aunt who makes you do your homework.

This article first appeared at The Commentator

No, he can’t

Not a great slogan when there’s a pile of crap up ahead

November 6, 2012 gave generations of American history students yet unborn a new standard exam question: how did one of the most ineffectual presidents in US history get re-elected?

Across the OECD countries since the financial crisis hit in 2008 incumbents have had a tough time. Britain, Spain, France, Italy Greece and Ireland have ditched leaders. How did Barack Obama buck this trend?

The pattern has been that economic realities have forced big-spending, heavily-indebted Western governments of whatever stripe to adopt some measure of spending restraint. Even when, as in Spain and France, parties have been elected in opposition to so-called austerity they have been forced into it once in office by the remorseless reality of economics.

Electorates haven’t liked this. They still appear to believe, as the current travails of Britain’s coalition and plummeting popularity of President Hollande show, that there is a magic money tree somewhere, that plenty can return and cruel financial reality be banished simply by ticking a different box on a ballot paper.

Whereas other elections since 2008 have pitched an “austerity incumbent” against a “fantasyland challenger”, in America the roles were reversed. Obama, the incumbent, peddled fantasy; his challenger, Mitt Romney, offered some semblance of reality. Looked at this way the post-2008 pattern was maintained: the fantasy candidate won.

But it won’t make any difference. The people who celebrated Obama’s victory, thinking they had saved entitlement programmes like Medicare, Medicaid and Social Security from Republican cuts, are deluding themselves. America’s unfunded liabilities, including these programmes, rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans, as some Obama supporters appear to suggest, the $1.7 trillion you would get wouldn’t make a dent.

Those programmes will not be saved by Obama’s waffle. They will die because there is no money to pay for them and there won’t be, no matter which box you tick. That is the lesson of the last few years and it is one the US is going to learn. The laws of economics have a habit of being enforced with the doggedness of Inspector Javert and the merciless brutality of Dirty Harry.

This article originally appeared in Standpoint