A message from the 1970s on state spending - Telegraph.

The 1970s were when my political views were formed. In that decade, I was suspended from my bog-standard comprehensive for my revolutionary activities. I was a member of a Maoist school students union, which organised the only pupils strike in the history of British education. I sold "Quotations from Chairman Mao" and "The Little Red Schoolbook" to my fellow pupils. I refused to be a prefect or to apply to Oxbridge (alas) because I was anti-elitist.

I had a Damascene political conversion as a result of seeing men on a building site where I worked in my school holidays subjected to violent intimidation by the Shrewsbury Pickets. I had already read my Marx but that led me to my Hayek and Popper. I went on to lead my university's Conservatives to take control of its Student Union from the Left for the first time and was one of the first people to call myself a "Thatcherite". I met and discussed politics with Sir Keith Joseph and discovered I was a good judge of character when I also met the pompous, wet and unreliable Sir Geoffrey Howe. I didn't like him the instant I set eyes on him and was not surprised when he later played Brutus to Margaret's Caesar.

But the truly formative event was the national humiliation wrought on Britain by Labour bankrupting the British state and calling in the IMF. I don't think anyone who was there and understood what what happening could ever forget it. It has informed my every political and economic thought since. It's why I am so scared by the nonsense flickering across the synapses of commenter and erstwhile guest blogger Mark (and virtually everyone else in Britain, alas).

Every new Labour leader should stand before his first party conference and recite Jim Callaghan's words, because they nail the greatest lie in modern politics and economics; that the state can drive growth. It cannot. At the most it can facilitate it, by providing the rule of law and consistent, predictable regulation that businesses can plan for, but otherwise getting the hell out of our way. This is what he said.

We used to think you could spend your way out of recession and increase employment by boosting government spending. I tell you in all candour that that option no longer exists. And in so far as it ever did exist, it only worked on each occasion ... by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

I agree with Liam Halligan, author of the linked article in The Telegraph, that these are among the most important (and I would add almost certainly the most honest) words uttered by any British Prime Minister. That they have been forgotten so quickly horrifies me. If all my efforts in writing this blog achieve nothing else, I hope I can bring people to Mr Callaghan's honest, if no doubt disappointing for a lifelong Socialist, realisation.

Inflation rises unexpectedly | Reuters.

In what possible universe was inflation not "expected" to increase? Are we naieve enough to think that the economic gods would not notice the printing of money unbacked by value? Or that they are so stupid as to be fooled by the euphemism "Quantitative Easing?"

Admittedly the rating agencies seem to have been fooled so far, but the invisible hand tends to put its finger on the truth rather sooner than them.

Or perhaps we simply assert, with Merkel-like arrogance, the primacy of politics over economics?

Government savings infographic in perspective | Burning Our Money | The TaxPayers' Alliance.

This (click to enlarge) is the tool we need in our everyday conversations with the Thoughtless. The method to show them, in terms they can understand, that there are no cuts. No austerity. Just a fractional slowing in the rate at which the government spends the money it takes by force from the productive - or their posterity.


Surely they must understand it now? Mustn't they?

Let Unsound Money Wither Away - Joseph T. Salerno - Mises Daily.

We are so dependent on our drug of choice - debt - that the shock of allowing the market to eliminate (as it almost certainly would) fractional reserve banking is too great for most of us to contemplate. Decades down the road, people might - luxuriating in a stable society where money held its value long-term - wonder why we didn't do it sooner. But right now, the debtors who would be forced to admit that their lifestyle is many times beyond their means constitute if not a majority, a politically-decisive minority. And as for the politicians who would have to admit their complicity in the dangerous scam of fractional reserve banking, the idea is just beyond contemplation.

Factual Free-Market Fairness | Bleeding Heart Libertarians.

I am on the road today, visiting the old haunts of the original and best Tom Paine. I am unlikely to post anything substantial, so I merely recommend you to the linked article described by Cafe Hayek as "The greatest blog post ever written". Almost as much as the post itself, I enjoyed the debate in the comments and particularly this observation by one Terry Mcintyre;

It is not enough to point to "market failure" - the proposed solution must actually be an improvement; it is not logically permissible to wave a wand and say "a miracle happens, and a politician emits the Perfect Solution which Fixes Everything."

Does that remind you of anyone?

After the 2011 tsunami, Fukushima nuclear power plant exploded and was unable to produce electricity, necessitating rolling blackouts and widespread efforts to save electricity in the Tokyo region/ East of Japan. The disruption that this caused was completely inevitable given the circumstances. At the same time, in the West of Japan there was also a widespread campaign to reduce electricity consumption. Lights in supermarkets were turned off, air conditioners not used despite soaring temperatures, workers all crammed into one office, people generally encouraged to turn things off regardless of inconvenience - to help the people in Tokyo.

All this, despite the fact that there was absolutely no way to transfer electricity to the areas with a shortage. The Eastern and Western halves of Japan operate on completely different electricity systems and are unconnected. Consumption in the West is entirely unrelated to availability in the East, yet people still believed that their sacrifice would somehow help their countrymen.

You might find this behaviour strange, or perhaps noble, but to me this represents more than just another oriental peculiarity or example of Japanese communalism. This is the way that most people around the world think, most of the time. It's based on the principle that resources are universally exchangeable and unfortunately, it is a damaging mistake. The reason why we make this mistake, is money. We are so familiar with equating the things we consume and do with money, we forget that different types of work and different resources are often entirely unrelated.

For example - if I manage to refrain from eating a chocolate bar, the number of motor cars does not increase. There is some real physical limit to the number of chocolate bars which can reasonably be produced in the present. There is also an unrelated limit to the number of cars which can be produced. A chocolatier cannot design a motor car and a chocolate factory cannot make one.

We are told, often and loudly, that the rich must pay their fair share in order to contribute to the poor. I suggest that this is not possible. The rich absolutely cannot pay for the poor, because the resources that they use are entirely unrelated to those which the poor need. The rich spend most of their money on positional goods. If we lower spending on diamond rings, will more food become available? Will lowering spending on Ferraris increase the number of houses? No.

"But," you cry, "if we spend money on the poor, we must get it from somewhere!"

Yes - we make it. If the supply of money is the only factor which is limiting production, then presumably producing more money will increase production ( for free since money costs nothing to make). I assume that price rises are driven by supply and (nominal) demand, so if production increases, presumably price inflation will be limited. In this case nobody has paid anything to feed the poor, though some people have chosen to work.

If there is some real limit to production, then producing more money will lead to inflation. But even in this case, it won't be the rich who pay.

Price increases for everyday goods, will effect the rich only a little and in order for the price of the positional goods which they want, to increase, the rich would have to be getting more money (or who else would pay for them). In real terms, they have lost nothing. In reality, the price increases would affect ordinary people - so they would be the ones paying for the poor.

If printing money is inflationary, then taxing it must be deflationary. Why not give the money to the poor, but reduce the inflation impact on ordinary citizens by taxing the rich? Again, this won't work. Given that the rich spend so little of their income on everyday goods, the only way we can have an effect on the demand for these goods is if they stop paying so much money to their workers, ordinary people.

If we want to pay for the poor and there is a limit to real resources, it will be the ordinary people who pay - through consumption tax or food price inflation - in real terms, through less everyday goods.

There are, of course, other reasons why we might want to tax the rich - perhaps their wealth causes great unhappiness to the rest of us, or they earn their wealth through exploitation rather than contributing to the common good. Perhaps by taxing the rich we will encourage people to work harder in real jobs. Perhaps the rich will work harder to make up the money they have lost. Who knows. Taxing the rich could equally cause them to work less hard and make us all poorer. The case isn't clear which is why people generally try and justify taxing the rich on the grounds of them "paying their way", even when their true motivations are quite different.

As far as I'm concerned the effects of taxation on this group are so unclear, we probably shouldn't worry about it over-much. Ideally, we would have a society in which wealth wasn't produced by antisocial activities, but destroying the entire mechanism of money as motivator isn't likely to achieve that.

In the same way, by not consuming a chocolate bar, perhaps I might, in the long term, lead to an increase in investment in car factories. Only if I use my money to buy more cars.

We are also told that increasing government debt means the impoverishment of our children as they work to pay it off. This is the temporal version of the Japanese Electricity Fallacy. As Bertrand Russell once wrote, "a man cannot eat a loaf of bread that does not yet exist". By taking a piano lesson today, I am not reducing the number of piano lessons available to my children. Government spending, resulting in debt can only reduce the welfare of future generations to the extent which it reduces investment in the economy. But the reason for increased government expenditure and deficits at the moment is the desire of the private sector to save.

That is what government debt is - the savings of individuals and businesses. And that is why interest rates are low - businesses fear that demand is weak and therefore don't wish to invest - they are saving their money. This saving does not result in productive investment. The government can help, by either giving money to people in the private sector who want to spend but have no money, thereby boosting demand and encouraging investment or by investing in public goods themselves.

"Ah!" you exclaim, "eventually, interest rates will rise and then we will be bankrupt!"

If interest rates rise, it will mean that the price of bonds have fallen. What would prevent the government from buying these bonds back at less than they issued them for in the first place, exchanging interest bearing bonds for zero interest cash? They would turn a tidy little profit on it at the same time (though the idea that the government (representing the country as a whole) should be trying to make a profit(at the expense of the country as a whole) is utterly ridiculous).

It is absolutely true that if savings are sufficiently high and growth in productive capacity sufficiently low, that the people making savings have absolutely no hope of getting their money back. They will lose out to either inflation or tax (this is what will happen to the Japanese eventually). But, what do you suggest we do about this? Surely the only thing we can do is attempt to boost demand and investment through government spending. The "do nothing" charter will absolutely doom savers to losing their money, and mean the rest of us have fewer sunglasses at the same time.

Having said this, there is a definite limit to what government spending can achieve. All unemployed people are not the same and giving them money will not neccesarily increase real production. It will however increase demand which will encourage those capable of production to get on with it.

In my humble opinion, we shouldn't worry about debt, deficits or unemployment - an excessive concern for any is likely to be counter productive. We should instead be pragmatic and attempt to buld the best possible society while ignoring the twin evils of egalitarianism and market fundamentalism.

[Even more than his previous posts, this - Mark's final contribution here - only represents his own opinion and is not endorsed by The Last Ditch in any way, shape or form. Tom]

I heard Jim O'Neill speak yesterday. He's the Chairman of Asset Management at Goldman Sachs and the macro-economist who coined the expression "the BRICs". He pointed out that while the European press is full of the Greek debt crisis, on a global scale it simply doesn't matter. The Chinese economy is growing so fast that it is increasing its GDP by the equivalent of the Greek economy every 11.5 weeks. If Greece stopped producing anything at all as of today, China would make up the loss to global GDP in less than one quarter! He also pointed out that Russia's GDP is expected to grow by 2020 by more than the GDP of the whole Eurozone.

His point is that the economic 'crisis' is not 'global', as billed. It's an economic crisis of the West. It seems to me that the question is, are we also witnessing the collapse of the corrupt political model of buying votes with current 'benefits' by borrowing against the work of tomorrow's voters? Is Greece mainly important as a warning to all Western governments of what lies ahead if they continue to refuse to balance their budgets? I hope so - and I hope they heed the warning.

My apologies for the awkward angle of the image. If you click on it to enlarge, I hope it's legible. It does put a lot of current discussions in context. The West simply doesn't matter as much as it used to and is going to matter less. My own response, economically, is 'so what?' Do Luxembourg and Switzerland (whose citizens are wealthier than Americans) care that they don't matter on a global scale?

The expansion of the global economy represented by hundreds of millions of growth economy citizens being lifted out of poverty is good news for us as well as for them. Forget the Chinese billionaires and remember the 300 million Chinese who - thanks to capitalism - are no longer poor. The ex-poor in China and elsewhere already drive the growth of the US and German motor industries, for example. China matters far more to BMW or for that matter Siemens than does Germany. If we can all adjust our thinking to provide the goods and services these people want (and stop worrying so much about how they are led) the economic future can be bright for us too. If we continue to regard them as less important than us, that will be another story.

O'Neill doesn't address the politics of all this, but I think we also need to recognise the significance of the fact that the successful new growth economies have balanced state budgets. Unlike every country of the Eurozone except Finland and Slovakia (and very unlike Britain and the United States) - most would meet the original Maastricht criteria for European Monetary Union. I don't advocate that we adopt the political models of China or Russia, but we do need to understand and moderate the tendency of our democratic politicians to mortgage our children's future to buy our economically-illiterate support.

Nobody Important: Democrasy. Is it working?.

Our regular commenter Moggsy is a blogger herself, posting at our mutual friend JMB's site, Nobody Important. Today she considers the problems of democracy. She proposes, controversially, that the votes of different categories of voters should carry different weights. Even more controversially, she suggests that voters be licensed like motorists.

One man, one vote is such an established principle that to challenge it is almost unthinkable. Yet this model of democracy seems to tend to economic collapse. Majorities or decisive minorities of financially illiterate or irresponsible voters demand ever more from the state. Governments (or more precisely politicians who want to remain in government) are forced to tax or borrow from the prudent in order to deliver. Holding down interest rates while inflating the currency with Quantitative Easing is merely one current example of the state impoverishing the prudent to bail out the feckless. If interest rates returned to their historical average (so that the prudent earned from their capital) millions of over-borrowed voters would be bankrupt and house prices would collapse to sensible levels.

So democracy requires that economic justice be denied.

Harvard Professor of Economics, Martin Feldstein, recently wrote in the FT that a mere 3% cut in Italy's public spending would solve its financial problems. I am sure he's right but will Italy's state 'payroll vote' permit it? After all our public sector workers are out on the streets in 'righteous' indignation when our feeble government is not (contrary to their claims) making any cuts at all. Government expenditure in Britain continues to rise. The hated 'cuts' are merely a reduction in the rate of increase. It's as if the massively-indebted British nation was on its way to buy a Bugatti, but 'prudently' decided to buy a mere Ferrari instead. The National Debt continues to rise apace (see the debt clock now in my sidebar). Yet such is their sense of entitlement that our cocky 'servants' demand even more.

It has been said that;

A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing.

Could a reform of our democracy prevent that collapse? My own preference would be rather to scale down the state and prevent its re-expansion by an entrenched constitution permanently limiting its scope. We could then safely continue with 'one man, one vote' as, while it's a terrible way to choose a master, it's a perfectly adequate way to choose a servant. But whether you favour my approach, Moggsy's suggested electoral handicapping or some pipe dream of your own, how can any reform ever be achieved when the state payroll vote is now decisive?

Unless a truly charismatic leader emerges to explain patiently, relentlessly and - most of all - convincingly that we can't keep spending more than we earn, our model seems doomed to collapse. Every state's credit has a limit and its cheques will eventually bounce so that its dependents starve. Yes, a small state might then be built on the impoverished ruins of the old, but at what terrible human cost?

"Downing Street said yesterday that a referendum is unnecessary. It is, at the very least, an odd negotiating strategy for Mr Cameron to throw away the strongest card in his hand before the game has even started." - Telegraph leader

via conservativehome.blogs.com

The press are calling on Cameron not to treat us as "congenital idiots", but what if - politically and economically - we are? Let's not get into the whole 'in or out' issue of the EU. It inflames too many passions. Let's just look at one of the mooted solutions to the problems of the Euro.

The proposed EU Tobin Tax is a threat to Britain's economic future. The burden will fall, not merely disproportionately, but mainly on the City of London as the only global financial centre in the bloc. This has been reported in the quality press, as has the threat from City folk to move their businesses elsewhere, but there's no sign that the British people care.

David Cameron's political future depends, not on getting things right, but on pleasing that clueless majority. If he had the charisma of a Margaret Thatcher or a Tony Blair he might shape their opinions but he hasn't. He can't even influence the views of his coalition partners. Nor does it help that he short-sightedly joined in the scapegoating of bankers to cover for the failures of the political class at EU and national level.

Marcus Brigstocke's idiotic recent comment on Have I Got News for You to the effect that the bankers are always threatening to leave and winning political concessions, so "...maybe the public sector workers should all threaten to leave too..." probably better represents the general population's view than anything I can say. What, after all, is the City of London to a Warrington benefits claimant who is now more 'the man on the Clapham omnibus' of British politics than you or me? Well a great deal, actually, but if he doesn't understand that, a hapless, charisma-free, David Cameron can't help but listen to his ignorant views with attention.

For those of us who believe Britain would be 'Better off Out' the Tobin Tax proposal is further proof that our European 'partners' do not have our interests at heart. Yet it does not prove that the EU is rigged against us. It isn't. It's rigged, by its original French designers, against the German people. It was designed to exploit an historical guilt that no living German should now feel.

Unlike their federal government, which is as feckless as any group of politicians spending other peoples' money to buy votes, the hard-working German citizenry is largely debt-free. They produce fine goods, deliver fine services and more than pay their own way in the world. They are peaceful global citizens and no longer go in for armed evangelism. Would that we could say as much. Yet, true to the French design of the European Project, they have seen their pensions and public services cut, while they contribute more and more to bail out their feckless, massively-indebted neighbours. They are the EU's greatest victims.

Properly viewed, the EU is just a cynical game played to rules written by Frenchmen. It is a game played brilliantly by France and the other consistent net beneficiary nations. Only Britain and Germany ever naievely treat it as a serious political project. From this point of view, David Cameron is simply a bad coach of the British national team. Whether we believe Britain should play this game or not, for as long as we are in the league, we are entitled to have him try to lead the national team to victory.

The 'congenital idiocy' of British voters is something of an obstacle, perhaps. If Cameron believes in the EU and wants to see EU-scepticism decline however, then he needs to man up and do his job. Or make way for a new manager who will.

The Best Bet Is Freedom | The Freeman | Ideas On Liberty.

There is no such thing as a magical public fund from which political gifts spontaneously generate. No matter how noble the intention or the cause, the benevolent politician is not Santa Claus. All goods distributed by government must first be created or produced by somebody. Whatever is given must first be taken. This is true for corporate subsidies and bank bailouts, just as it is true for transfer payments made to the very poorest members of society.

People by and large accept such a system because they believe they will be able to draw more in political advantage than they lose by way of political plunder. This mentality keeps the population playing the game, and like the casino, if enough people play the game, it is the political class and the politically connected that always win.

In fact the odds of winning in the casino are actually better than the odds of coming out ahead in the political game. In Vegas the house has an advantage of about 3-10 percent on most table games. Currently, U.S. government takes a 32.6 percent rake to serve as the proverbial dealer, cashier, and pit boss. The government spends more, regulates more, and interferes more in our lives each year – and the economy barely grows. Even with the odds stacked against the average person, people still seem eager to place their bets on the system by looking for political solutions. In Vegas they would call this a “sucker bet.”