Economics

While I was away, I received a copy of this letter from Bob Durward (chairman of the classical liberal New Party) to David Milliband. Bob has allowed me to reproduce it here. I hope it tickles you as much as it tickles me.

To: Rt Hon David Milliband MP
Secretary of State, DEFRA
17 Smith Square
London SW1P 3JR

Dear Secretary of State,

My friend, who is in farming at the moment, received a cheque for £3,000 from the Rural Payments Agency for not rearing pigs. I now want to join the "not rearing pigs" business.

In your opinion, what is the best kind of farm not to rear pigs on, and which is the best breed of pigs not to rear? I want to be sure I approach this endeavour in keeping with all government policies, as dictated by the EU under the Common Agriculture Policy.

I would prefer not to rear bacon pigs, but if this is not the type you want not rearing, I will just as gladly not rear porkers. Are there any advantages in not rearing rare breeds such as Saddlebacks or Gloucester Old Spots, or are there too many people already not rearing these?

As I see it, the hardest part of this programme will be keeping an accurate record of how many pigs I haven't reared. Are there any Government or Local Authority courses on this?

My friend is very satisfied with this business. He has been rearing pigs for forty years or so, and the best he ever made on them was £1,422 in 1968. That is - until this year, when he received a cheque for not rearing any.

If I get £3,000 for not rearing 50 pigs, will I get £6,000 for not rearing 100?

I plan to operate on a small scale at first, holding myself down to about 4,000 pigs not raised, which will mean about £240,000 for the first year. Then I can afford to buy an aeroplane.

Another point: These pigs that I plan not to rear will not eat 2,000 tonnes of cereals. I understand that you also pay farmers for not growing crops. Will I qualify for payments for not growing cereals to not feed the pigs I didn't rear?

I am also considering the "not milking cows" business, so please send any information you have on that too. Please could you also include the Government information on set aside fields? Can this be done on an e-commerce basis with virtual fields?

In view of the above you will realise that I will be totally unemployed, and will qualify for unemployment benefits.

I shall of course vote for you at the next general election.

Yours faithfully,

Forget about what the BBC, the Government or the Tories say about the impact of the changes to personal taxation and benefits announced by Gordon Brown today. Here is what it really means for people of working age (comparing the current system with the system as it will be in 2009, according to Gordon's announcements, taking 2009 because many of the announcements are delayed or staged).

• Those earning between around £5,000 and £18,000 p.a. get to keep less of their wages than before.
• Those earning over £18,000 keep more of their wages, with the greatest benefit (proportionately) going to those being paid in the £40,000s.
• Couples with one principal wage-earner continue to pay more tax than two-income couples on the same combined household income, thanks to his rejection of any form of joint or transferrable allowance.
• The negative impact on low-earners is to be compensated mostly through increases in the threshold for withdrawal of Working Tax Credits (WTC) and, for those with children, increasing the level of Child Benefit for the first child and of the child element of the Child Tax Credit. Those with one or two children will be best-insulated by these measures from the effects of the changes to income tax. Those on low incomes with many or no children will be the worst hit.
• To avoid these increases dragging too many more people into the means-tested benefits bureaucracy, the withdrawal rate for WTC has been increased to 39%. Because losing benefits has the same impact as paying more tax on a household's net income, this has further increased the effective marginal rates of taxation on poorer households. In some cases, marginal rates of taxation are now approaching 100% - in other words, you barely keep a few pennies of every extra pound that you earn. Marginal rates of taxation determine the incentive for people to work harder, longer or smarter to earn more money, so increases in marginal rates act as a disincentive to work. Gordon announced this change as "further strengthening the incentives to work for families with children and low-income working households". The precise opposite is the case. The disingenuity of this claim marks Gordon as either a knave or a fool.

The BBC's reporting of the Budget debate on Radio Five Live has been fantastically lop-sided. On the most basic measure - air time - they broadcast the whole of Gordon Brown's speech but cut off both David Cameron and Ming Campbell mid-flow.

Instead of hearing their words, we were given John Pienaar's conclusions to save us the bother of making up our own minds. DC had been "outmaneouvred", he was "like a man who had had his legs cut off from under him", he was "floundering" and "drowning", unable to respond to the "magic" of Brown's cut in the basic rate of income tax to 20%.

To be fair, Cameron had missed the main point - that the cut to 20% had been largely paid for by the replacement of the starting rate (10%) with the basic rate, which Brown disingenuously announced as the abolition of the starting rate - sounding as though tax on income within the 10% band would now be zero, rather than the 20% that is actually intended. This is dangerously close to deceiving the house, but it did seem to have done the job in deceiving DC.

Ming Campbell (whose Treasury team, headed by Vince Cable, have a real understanding of economics, unlike the Tories) was not taken in, and, in his earnestly dull but intelligent way, nailed the point - that the changes to income-tax rates benefited middle-income earners but penalised low-income earners. We were not allowed to hear much more of his speech (in many ways a blessing, but hardly balanced) before the BBC cut back in and Pienaar told us that Campbell must have "mis-read" the announcement, that the effect was not to penalise the poor. This is what we need from the BBC - insightful analysis of the impacts of the budget. So why has Campbell got that wrong, then, John? Because Gordon "would not do that", apparently. What insight!

No wonder the big beast of the political jungle has survived so long, when the elephant guns of the media have been aimed largely at his predators. How strong is the beast really, if he needs that sort of protection?

Only a couple more hours and Gordon will giving his final Budget to Parliament. There will be much patting on the back by his loyal followers, though probably mostly by himself. He will claim the longest period of economic growth in the history of mankind and beyond and take all the credit for it (ignoring the rise of China and the stable global economy and the fact that inflation is rising at a concerning rate in the UK).

With the budget coming up next week, it is that time of year where Gordon Brown lays it on thick that this country has never had it so good and that we have seen ten consecutive years of growth and he has been the longest serving chancellor in history and then he says something else, but I'm always asleep by this point. You would have thought that all this meant that we have more money in our pockets than ever before. Of course, things are not always what they seem.

The Centre for Policy Studies think tank has reported that we are virtually no better off than we were six years ago. In fact, in real terms, households have an extra £9 disposable income in our pockets. This is a growth rate of just 0.35 per cent a year - I bet Gordon doesn't bore us with that statistic next Wednesday. Tax lawyer Charlie Elphicke, who led the study, uses the example of Ronald Reagan when he asked the question in the 1980 US Presidential debates - "are you better off now than you were four years ago?" As Elphicke points out "For the average voter, the answer to Ronald Reagan's question is likely to be a resounding no." The report also concludes that the lowest income households in Britain are paying a higher share of tax - and receiving a lower share of benefits - than they were in 1996/7. The Treasury have countered the report with claims that disposable income has increased since 1997. For a government that came to power promising that income tax will not rise only for it raise just about every other tax possible and create a few more on top of that, it is hard to believe a word they say.

The Tax Payers' Alliance has exposed one of the reasons why our council taxes are rising well above inflation every year - to pay big bosses. The number of local authority staff earning more than £100,000 jumped from 429 in 2005 to 578 last year, an increase of 35 per cent. Peter Gilroy, the chief executive of Kent, had the highest salary at £229,999.

The attacks on Gordon Brown's high taxation, high spending polices are becoming more and more frequent on this website. It it not the intention of picking losers to target individuals nor is it partisan. However, it is of course more likely that attacks will be made towards the Government as they are the ones in power actually making and implementing policy. It is also not without good reason that this high level of scrutiny and criticism is directed at the Treasury at the moment. The International Monetary Fund share the view that Brown's policies are unsustainable and have issued a warning - one that Mr Brown will do well to heed.

You have to hand it to him, Gordon Brown is a highly successful opportunist. If it can be taxed, it will be taxed and the less people realise what he is doing the better. The Dour Scot is famed for stealth taxes but it's the way he makes the most of changing circumstances (and gets away with it, it seems) that is most impressive.

As we all know, house prices have been rising at an impressive rate over the past few years. However, the rate at which buyers pay stamp duty has barely moved. So a house that was free from stamp duty a few years ago, is now ripe for the Iron Chancellor's very large hands and deep pockets. A survey by the Halifax has revealed the extent of the problem. Nearly 300,000 purchases fell into the three per cent bracket last year as the number of properties sold above its £250,000 threshold soared. Their figures show that over the past five years there has been a 281 per cent rise in the number of home sales in England and Wales above the £250,000 threshold. Kaching!

The Economist has been talking up prize-giving as a good way to get the maximum bang for your charitable buck. In response to a flippant remark, suggesting prizes to solve the riddle of the missing NHS billions, from the excellent Dr Steele of Unforeseen Contingencies, I have added a discussion on the merits of offering prizes and other ways of encouraging outcomes that are perceived to be for the benefit of society, to the thread in which the comment was made.

In short, prizes, grants and arbitrary, government-defined, incentivised targets are all as bad as each other, even if they are dressed up in market clothing. They are all forms of "picking winners" (i.e. losers). They dominate policy in the UK at least, and I suspect most of the rest of the world. We need to replace the massive infrastructure of state preference with institutional protection of property rights (including the extension of that protection to cover real "externalities", where the external impact of one person's activities has a material and uncontracted impact on another's person or property) and free access to markets.

The average council tax bill is set to rise another 3.8% this year - an incredible 90% increase since Labour came to power! And surprise, surprise - the lowest rises are in the 238 districts that face elections in May, weeks before Gordon Brown is expected to take over as Prime Minister. The government is doing its usual trick of going easier on the key voters in the run up to an important election; however it will probably deal them the sucker punch next year to make up for the short fall. It stinks.

The hardest hit are the pensioners, who will face massive increases which will come straight out of their pensions - Gordon's other favourite trick: to give with one hand and then take it all back with the other. And what are we getting for this 90% increase? Considering we will probably be charged extra to have our rubbish removed in the coming months (another example of raising money with the old environment debate as a smoke screen) not a lot. We do have to pay £9bn for that £3bn Olympics we "won", I suppose. Expect to see many pensioners stand up to this in the coming months and be criminalised by the government - there are 90 in Devon alone, apparently, who are willing to go to prison over this. I guess that will mean our council taxes will have to rise further to pay the police and courts then... not that there are any spaces left in our prisons to put them.

Anyone (other than the specialists who get paid to produce them, or pressure groups and politicians who use them to justify intervention in favour of their special interests) who has looked with a critical eye at the Cost-Benefit Analyses, Regulatory Impact Assessments, Environmental Impact Assessments, etc. that accompany voluminously any piece of consultation, legislation or regulation nowadays will know that they are incomprehensible, pseudo-scientific claptrap claiming to predict the unpredictable and usually in practice justifying the unjustifiable.

But surely, the counter-argument goes, it would be irresponsible of the government to proceed without trying its best to assess what might be the results of the policy it is considering. However inaccurate such assessments might be, they are better than no assessment.

I am currently reading The Foundations of Morality by Henry Hazlitt, author of the seminal Economics in One Lesson and, though not widely acknowledged by academia, one of the great thinkers of the twentieth century. I, like Hazlitt and his great mentor Ludwig von Mises, subscribe to the rule-utilitarian approach to moral philosophy. Whilst reading Hazlitt's book, it is becoming more apparent to me what a close connection exists between the alternative moral philosophies and the alternative methods (such as the above bureaucratic approach) by which legislation can be shaped and justified. In Jeremy Bentham's words (that strongly influenced Hazlitt's book), "Legislation is a circle with the same center as moral philosophy, but its circumference is smaller."

For those who believe in a god or gods, the question of morality is an easy one - right and wrong is simply what is specified in the texts. But with the weakening of the moral authority of the church that accompanied the Enlightenment, there was a need for an alternative basis for morality - a method for determining what is right and wrong without dependence on the word of a higher being. The solution developed by a series of great philosophers (most famously David Hume, Jeremy Bentham, and John Stuart Mill) became known by Mill's term: Utilitarianism. In the words of Bentham (with whom the concept is most closely associated): "Morality is the art of maximizing happiness: it gives the code of laws by which that conduct is suggested whose result will, the whole of human existence being taken into account, leave the greatest quantity of felicity."

The above quote, from the posthumous compilation Deontology, expresses a view that is characterised nowadays as rule-utilitarianism. In his earlier works, Bentham had appeared to promote an alternative form, known as act-utilitarianism: "that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question....I say of every action whatsoever; and therefore not only of every action of a private individual, but of every measure of government" (from his An Introduction to the Principles of Morals and Legislation). The difference is that act-utilitarianism attempts to judge the impact on total happiness of every action, whereas rule-utilitarianism specifies that the morality of actions should be judged by their conformance with general rules, whose merits have been calculated to promote the maximum happiness if followed by everyone.

Our politicians and civil servants certainly seem, in recent years, to have taken seriously Bentham's instructions to consider, for "every measure of government" the utility of the measures under consideration to "the party whose interest is in question", i.e. "if that party be the community in general, then the happiness of the community". And very worthy it sounds too. But there are problems with this approach, sufficiently intractable that few people would now promote pure act-utilitarianism as a sensible basis for action.

1. What is the measure of the happiness of the community? Happiness is experienced only by individuals, so the happiness of the community must be the sum of happiness of the members of the community. To calculate that sum requires an effective method of hedonistic (or felicific) calculus, which has escaped Bentham and his successors. If an action makes me happier and you less happy, how are we to decide whether the total change in happiness is positive or negative? We cannot even say that the change is positive if it increases the happiness of more people than it decreases. Murray Rothbard (emphatically not a utilitarian) gives the example of 99% of the population deciding to enslave the other 1%. This is the illusion underlying the King of Bhutan's Gross National Happiness index, and David Cameron's replacement of GDP with GWB (General Well-Being) as the guide to public policy. It tends towards governance in the interests of the majority, which can be a very dangerous thing.

2. Even if it were possible to calculate the impact of each action on the combined happiness of all those affected, one cannot live life this way. I should not decide whether to stop at a red light by trying to weigh the time-saving benefit of proceeding against the possible impacts of doing so. We have neither the time nor the ability to weigh all the impacts on all the people who may be affected by all the decisions we take. In most cases, we have to act according to general rules that, if followed, should lead to a good outcome in most instances. In other words, we are all rule-utilitarians, if only by force of necessity.

We know the importance of general rules for our own actions. But modern government, full of the arrogance of power, believes itself not to be subject to these limitations. No longer do we draw up legislation according to the good judgment of intelligent people, following general rules that can be shown to maximise the welfare of society.

Modern government forgets about general principles and instead tries to weigh the consequences of every piece of legislation and regulation for every party affected by the measure under consideration. That is what CBAs, RIAs and EIAs (not to mention focus groups and polls) are for. It is an impossible task. But while they continue to try, our legislation becomes ever more complex, contradictory, unprincipled and counterproductive.

The first step in improving the quality of our legislation (not to mention saving money on the legions of consultants who prepare these useless pieces of paper) must be to scrap the CBAs and go back to governing and legislating according to principle. This will not only improve the legislation, but also restore the battle of ideas to the centre of political discussion. The debates can return to the question of which principles are best to maximise the welfare of society, not who can best micro-manage the economy. That cannot but help alleviate the public disengagement with the political process.

Gordon Brown has bailed out Mr Money-waster himself, David Miliband. More than £300m worth of taxpayers’ money has been used to compensate for another Government IT cock up – this time a computer system that failed to pay thousands of farmers subsidies that had been paid to the government by the European Community. The Government sat on this money for six months before finally paying it out, but in classically incompetent style missed the deadline for claiming the money back from the EU.

But don’t worry; the Treasury has said that “the money allocated was an estimate of the cash the ministry might have to pay if it is "fined" by the EU for not making the payments on time”. So what? It’s still £300m worth of taxpayers’ money that wouldn’t have been spent if you had your house in order. Richard Bacon MP sums it up rather well - "The sheer incompetence and ineptitude of this government in handling [the matter] has now been compounded by them screwing the taxpayer as well."

To coincide with Gordon Brown’s birthday last month, the prudent, iron chancellor made a surplus of £21.4bn thanks in part to a surge in income tax from record City bonuses.  I can only imagine what he is planning to spend it on, but I’m sure he knows full well.  With the incredible amount of money we are paying in taxes each month at the moment along with the seemingly endless list of stealth taxes we have to put up with, coupled with the waste this government is synonymous with how can he have a surplus of £21.4bn in one month.  Surely he does not need to be collecting so many taxes? 

Further to my earlier story on MPs’ travel expenses, Scottish MPs have just had their expenses claims revealed. There must have been one or two MPs feeling very embarrassed whilst they knocked back their cornflakes this morning and had a good read of the Scotsman. Yes, I’m talking about you Mr.