Economics

The latest publication from the IEA landed through the letterbox yesterday (I can't say plonked or thudded, because the IEA publications are always of eminently digestible proportions). It is on one of the most important subjects of modern policy and economy - happiness.

There is an increasing tendency amongst academics and politicians to decry policies that deliver simple economic freedom, and to talk up policies that try to deliver social benefit, usually at the expense of economic freedom. The pretext is a growing body of work that argues that prosperity and happiness are not linked, and suggests alternative approaches to maximising happiness (most commonly, though with little empirical or logical justification, the reduction of income inequality). In these demotic times, what modern politician can resist the call to maximise the public's happiness? Certainly not most of our bunch of intellectual lightweights.

The IEA booklet, Happiness, Economics and Public Policy, by Helen Johns and Paul Ormerod, tackles this body of work head-on, in its own terms. It examines critically the statistical merits of the happiness data, and the claims that standards of living are unimportant to happiness, and that other factors such as economic inequality are more important. It finds most of the happiness literature wanting.

This is a necessary counterweight to the burblings of politicians like David Cameron and "economists" like Lord Layard on the need for policies to try to maximise General Wellbeing (GWB) or Gross National Happiness (GNH), rather than Gross Domestic Product (GDP). It is to be hoped (but not expected in the race to the wishy-washy centre-ground) that politicians will read this booklet and stop sniffing Layard's glue.

With a few exceptions contemporary commentators on economic problems are advocating economic intervention. This unanimity does not necessarily mean that they approve of interventionistic measures by government or other coercive powers. Authors of economics books, essays, articles, and political platforms demand interventionistic measures before they are taken, but once they have been imposed no one likes them. Then everyone - usually even the authorities responsible for them - call them insufficient and unsatisfactory. Generally the demand then arises for the replacement of unsatisfactory interventions by other, more suitable measures. And once the new demands have been met, the same scenario begins all over again. The universal desire for the interventionist system is matched by the rejection of all concrete measures of the interventionist policy.

So wrote Ludwig von Mises in his 1929 book, A Critique of Interventionism. He could have been writing of the state of our political and academic debate today.

The Sunday Telegraph reports that "Gordon Brown is drawing up plans to vary the minimum wage region by region across Britain". The original intervention - a standard minimum wage for the whole country - has been judged by academic economists to be too blunt an instrument. Although the call is for more flexibility, the proposals are not simply to remove or reduce the minimum wage. Instead, they propose that we should tell each region the level of pay below which jobs should not be offered. That's an interesting definition of increased flexibility.

What the academics intend is that the minimum wage should be reduced in those parts of the country where a national-average minimum wage exceeds the level at which people might be willing to work and able to sustain a reasonable quality of life (though this is made literally and figuratively academic by the punitive nature of the means-tested withdrawal of nationally-harmonised benefits on the effective marginal rate of taxation). The objective is to allow some jobs to be created or legitimised, which currently cannot be afforded in compliance with the law.

Gordon, however, cannot reduce the minimum wage in those parts of the country, because the unions will not wear it. So it is suggested that, instead, he will raise the minimum wage in London and possibly the South-East. Because, from a socialist perspective, this is not about allowing people to find jobs, this is about micro-managing the economy to ensure that no one is getting more or less than they deserve.

The result, if implemented, will not be an increase in flexibility and the creation of jobs in areas of the country where costs-of-living are lower, but a reduction of flexibility and the destruction of jobs in areas of the country where costs-of-living are higher. Genius.

The Tories and LibDems, of course, now support the minimum wage too. I wonder what new interventions they will be drawing up to offer their refinements on this "improvement", and what all three of them will propose when these changes also fail to deliver the artificial boost to the incomes of poorer members of society that they all hoped they could compel by legislation, in contravention of the most basic laws of economics. It's so much better fiddling with this sort of superficial, bureaucratic, managerialist, economically-illiterate tinkering than actually doing something about the structural problems, most of which the politicians themselves have created, isn't it?

A couple of months ago, I suggested that the claims for the benefit of the Tory trip to Rwanda might be inflated. In the current mood of dissatisfaction with David Cameron, much of the media and many private commentators are making cynical observations about this trip. Much of this cynicism is simply gut-reaction to an apparently shallow publicity-seeker travelling on another foreign jolly in the immediate aftermath of the exposure of the hollowness of his claims to have transformed the electoral prospects of his party by abandoning principles and moving to the centre-ground. These are not unreasonable grounds for cynicism, but it is nevertheless possible that this trip has genuine merit, despite the troubles at home. It would be useful to be able to judge the trip according to the tests and claims that Team Cameron have set themselves.

You may remember from the earlier post that the key to this trip was that it is "a genuine two-way learning process, with each side leveraging the skills and knowledge of the other", with "targeted professional help in support of the development of Rwanda". The "importance of the projects' legacy" is emphasised. To ensure that the participants actually bring something useful to the trip, "there has been a rigorous interview process of prospective participants to ensure a correct fit between skills and assignments".

I questioned exactly what skills, useful to African development projects, most Tory MPs would bring. Helpfully, Adrian Yalland, the boss of the company organising the trip, responded to my challenge on Iain Dale's site, though he was unable to name names, to enable us to test the claims. We had to wait for the trip, and rely on the Conservatives to tell us who was doing what.

Well, the trip has started, and so far the Conservatives have not given us a list of participants and the particular skills that they are bringing to the projects. But it is possible gradually to extract the names of participants from reports on the trip. So, for instance, we know that Andrew Mitchell is leading the trip, which, as Shadow Minister for International Development, is entirely reasonable. Earlier suggestions that David Mundell and Hugo Swire would be involved have not been confirmed (Hugo may be less keen, now he has been dropped from the Shadow Cabinet). But we learn instead that "Tobias Ellwood, the shadow culture spokesman and former officer in the Royal Green Jackets, shared some of his considerable carpenting expertise with Brooks Newmark, a new whip". So that's another military man, like Swire, of which there is not a shortage in Rwanda. But at least Ellwood has carpenting skills (to accompany his military and City experience), which the Guardian seems to be hinting that Brooks Newmark, a former venture capitalist, lacks.

Having had a meeting today with civil servants at the "new" Department for Business Enterprise and Regulatory Reform (i.e. the DTI with a bit chopped off and a bit stuck on), it is clear that their position on all issues is now that they (or their consultants) can predict the outcome of future developments with such precision that no uncertainty or dispute need be entertained (nor, logically, need free markets be utilised). It seems to me that a good test of this position (and an original objective of this blog) would be to see how accurate their past assumptions had been. I therefore went to the DBERR website (the DTI site no longer being accessible) to have a look at their old reports and consultations.

It seems that they are less than keen for people to review their past performance. Their archive holds only a motley collection of seven consultations - four from 2003, and one each from 2005, 2006 and 2007. This is a tiny fraction of the DTI's output. I wonder why these particular consultations merited preservation for public access? Are they the ones they got right (to within a tolerable level of error)?

For the other consultations by the DTI (and other departments, presumably), we are advised to find hard copy at the British Library (not enormously accessible to the majority of the population). Their website is to be your guide, but the search-term "DTI reports" yields very little, and nothing relevant online. Following a few link trails didn't do any better. Let me know if you have any more joy.

The slate has been wiped clean, records expunged, the history books tippexed. It's almost as though Uncle Gordo didn't want people to look back at how New Labour had performed over the past ten years. A bit like Uncle Joe and the NKVD.

Two excellent Camoronisms spotted yesterday:

Tim Worstall picked up Dave's ignorant currying of favour with the music industry. Hoping for some "Cool Britannia" credit at the next election? Or just dumb?

Is Gordon having problems with his new Business Council already? Curiously, if you go to the No 10 website and look at the index of press releases, there is no mention of the one announcing his plan for the cosy group of corporates advising him (already comments on by bgprior here)

Even more curiously, you can still find the release on the No 10 site if you know where to look. So here it is, if you are struggling.

The BBC ran a half-hour promotion on Thursday night for government-funded investment in businesses or technologies that government judged to be promising. In other words, a promotion for picking losers (the policy, not the site, sadly). I'm sure the institutionally-biased BBC didn't think that was what they were doing, but that's what it was.

That advert was masquerading as one of their business programmes - Radio 4's In Business - which ought to be the last place that one would find such a concept promoted. But this isn't real business, this is the BBC's idea of business. Perhaps it is unreasonable to expect a commercial perspective from a state-funded organization, and from a business reporter (Peter Day) whose background is an English degree, four years with a Glasgow newspaper, and then a lifetime of service with the BBC. This guy has barely been close to a commercial organization or a set of accounts, let alone tried to run a business in a world of government-funded competition.

You can download an MP3 of the programme here (careful, it's a 12MB file). Those of a rational disposition may want to ensure that they have a punchbag (a BBC employee would be ideal) to hand before starting playback, to avoid stress-related injury due to excessive internalization of anger.

There was nothing wrong with looking at the issue of picking losers. But even the most Trotskyite of BBC producers [Tautology - Ed] might have to admit that there are two sides to this story. There was an almost complete failure to examine the arguments against, and plenty of commentary that said to the listener, in effect, "of course government should be picking losers". Let's look in detail at how the programme went about this issue.

Some people claim that Nicolas Sarkozy is France's Margaret Thatcher. Yeah, right.

To quote from the BBC report:

"A reference to 'free and undistorted competition' was pulled from the draft [Treaty that isn't the Constitutional Treaty] after French pressure late on Thursday. Instead, the treaty refers to 'social cohesion' and 'full employment'."

Sarkozy did not hide his contempt for free trade during the election. This is consistent with his position. But those who thought they were getting an economic liberal, simply because they heard someone who talked tough on immigration and liked to swing a handbag, were fools.

Anyway, two good things stem from this.

Firstly, it is clear that this is not just a tidying-up exercise, and that this goes to the heart of what Europe is about. The Government has absolutely no excuse to deny the British public a referendum, given their promises that one would be held for any significant changes.

Secondly, Jose Manual Barroso, Angela Merkel and the rest of the con-merchants can no longer argue that certain aspects, such as voting rights, ought not to be opened up again, as they have already been settled. If something as fundamental as this is still subject to change, then nothing should be off-limits. We should support the Poles in demanding that the German stitch-up on voting rights be re-examined. They were right anyway, but now there is no excuse for trying to railroad them.

I have long been a supporter of self determination. That is to say, if a country wants its independence then it should be granted, or in cases like Gibraltar (for example) if they want to remain part of the UK or return to being part of Spain then it is the citizens there who should decide. No-one else. Ever since 1998 when devolution was granted to Scotland from Westminster, the West Lothian question was a raging debate just waiting to explode.

What exactly is the point in the tax credit system?  It seems to me just a way of confusing the tax system as much as possible so that people are so baffled they mess up their claims for what is rightfully, under the system, theirs.  The system is also so complex that it makes it much more viable to fraud and also costs an unnecessary amount of money to administrate.  There is little doubt that the scheme is haemorrhaging money due to fraud and admin - the Lib Dems claim that it has cost more than an incredible £9bn in its first three years - 50% more than previous estimates.  Revenue &

One of the things that America does better than us Europeans is its inclination to give (at least in business) another chance to those who at first don't succeed. Whilst bankruptcy is seen in Europe as evidence that someone is not to be trusted with money, in America it is far less of an obstacle to raising money for another venture.

But not all failures are noble. A good test of whether someone who has failed deserves another shot is their attitude to the failure. An acknowledgement of mistakes made, and an understanding of the lessons learned and how to avoid repeating them, should be viewed as a mark of strength. Conversely, blaming others for the previous failure should be viewed as a warning of intellectual and moral weakness and the likelihood of repeat offending.

This came to mind when reading an interview in the Financial Times with Professor Robert Merton, Nobel-prize-winning economist at Harvard University. Prof. Merton was a partner in the Long Term Capital Management (LTCM) hedge fund, which imploded in 1998. I am sure that Prof. Merton is a clever and honourable man, but his explanation for that failure, as reported in the FT, suggests that one should be very wary of utilising the services of the consultancies (IFL and Trinsum) in which he is now engaged (notice that he is no longer risking people's money directly, but charging to advise other people how to risk their money). Many see the collapse of LTCM as symbolising "the perils of excessive speculation", but:

"The causes of the hedge fund's collapse, though, are widely misunderstood, says Robert Merton. While some observers blamed events on the faith that the fund placed in financial models - founded on a belief in rational markets - Prof Merton says the real problem was the way that LTCM's counterparties behaved. When the fund started to suffer losses, the counterparties did not behave as proponents of finance science - or rational markets - predicted. Instead, they sold assets in a seemingly indiscriminate panic, triggering market swings more violent than anything Prof Merton expected."

This displays not only a staggering ignorance of economic history - has the bursting of a bubble ever been accompanied by anything other than "indiscriminate panic"? - but an equally staggering level of hubris. It is not the models that were at fault for failing to reflect actual behaviour, it was the people who were at fault for failing to behave as the models said they should have done. This is a man who sets altogether too much faith in models. That is a warning not to set too much faith in him.

As any psychologist can tell you, denial can manifest itself outwardly in destructive ways. I recently attended a workshop where a member of the British Government's Renewables Advisory Board (RAB) introduced himself as a serial founder of renewable-energy businesses. His explanation for why he had had to start again after his previous adventure in biomass-fired power-generation: the Government had failed to take account of the fact that his technology was more expensive than some, when it had created a competitive market in renewable electricity. Well, isn't that always the problem when businesses struggle - that the Government has failed to compensate for their lack of competitiveness?

The government can not do IT projects.  Not a revelation to regular readers of Picking Losers, but even civil servants are now accepting the hard facts.  Joe Harley, chief information officer and the official in charge of IT at the Department for Work and Pensions has said that only 30% of Government IT projects are successful.  Given this incredibly low success rate, it is worrying to know that public sector IT costs £14bn a year, equivalent to 75 hospitals.  That is to say, we are wasting £10bn a year on public IT systems that do not meet the criteria to even be considered successful - re

What makes Gordon Brown think that he can effectively steal? He is set to launch an initiative to raid dormant accounts to raise £300m. OK, the money will be put to what the Lottery commission believe are "good causes", but I still don't think that justifies him assuming he has a right to do this. Has it got anything to do with the ever rising Olympic costs and him needing to find new and "innovative" ways to get money of us? Let's face it, he has just about pulled every other trick in the book and made up a few more himself.

The Willetts speech on education is causing waves in Tory circles, as they vie with each other for who has the best idea for the standard (or perhaps two-model) offering that should be provided to other people's children. It's yet another example of how Camoronism is about out-Labouring Labour.

Clemency Burton-Hill (a multi-talented individual and real fox to boot, so I'm sorry to have to take the piss, but this is too good to ignore) reports in this week's Spectator that the Tories are "fighting back" against Gordon Brown's lead on international development issues "with a plan to send MPs into poverty-stricken Africa." I bet the poor Africans can barely contain their excitement.

After reports yesterday about the Government issuing warnings to keep quiet about the their plans for fees on rubbish collections (on top of council tax), there are more reports today of "behind the scenes" policy making that would not go down well a week before major local and Scottish elections if they were big news. It appears that valuation officers are compiling an electronic database logging details of every home in the country - despite the government saying that this would not happen until after a general election. Internal government handbooks for the Valuation Office Agency, an arm of the Inland Revenue, showed that inspectors were empowered to enter homes and log features. The council tax manual states that although the revaluation exercise is delayed, "it is imperative that every opportunity is taken to maintain and further improve the extensive electronic database".

The time is drawing nearer and nearer where Tony will have to finally announce he is stepping down and the long, long awaiting "leadership contest" can finally begin. Since the Labour conference last year where Blair had them screaming in the aisles, this government has been completely paralysed and achieved next to nothing. As I have argued before, this is probably better than what they normally do, but it does beg the question what have we been paying for all these months?

The government is being urged to get VAT removed from school clothing - and quite right. It is the government that back schools having a uniform promoting the benefits of equality, i.e. no fancy Dans coming in with all the latest street wear, while the spotty kid with an interest in robots and computers gets bullied for wearing his older brother's hand me downs (it's not cool to be clever these days, in fact it's positively frowned upon; another feather in the cap of the famous line "Education, education, education").

The problem with this is kids come in all different sizes so even though VAT is waived for the under 14s, the fact that we have a nation of fat kids means that adults can fit in to much the same clothes as the kids - therefore it is done by size not age. I don't know whether to laugh or cry when I read that some shops were selling boys' blazers with a 52in chest and trousers with a 42in waist. Who breeds these monsters?! Of course, if the VAT was waived just for school uniforms by age, then it would be easy to enforce as you would assume (hope) that only a school kid who had to wear the uniform would buy it... All this does beg the question, should clothes be viable to VAT in the first place - I wouldn't call them a luxury, they are most definitely a necessity. The government is once again cashing in on things that we have no choice but to pay up for. As way of a point to prove it is a necessity, the last thing I want to see is a 14 year school boy with a 52in chest and 42 inch waist walking around in his birthday suit - a powerful argument to scrap VAT on clothes altogether, I'm sure you'll agree.