Economic Lessons in the News

50p tax rate 'failing to boost revenues’

The U.K. government is learning about the economic lesson that "if you tax something, you get less of it."  Following an increase in the top marginal income tax rate to 50%, tax revenues from high-income taxpayers are falling, and are not going up, as the Treasury somehow expected by ignoring the economic lesson that "people respond to incentives." A U.K. Treasury official explained the disappointing drop in tax revenues by saying it "was partly due to highly-paid individuals arranging their affairs to avoid paying the 50% rate."

By Robert Winnett, and James Kirkup

The amount of income tax paid fell sharply last month in the first formal indication that the new 50p higher rate is not raising the expected amount of revenue.

Liberty, Economy and Ecology

Government must be the moderator, not the manager

By John A. Baden and Robert Ethie

Prosperity and Ecology

For years environmentalists ignored or discounted the strong correlation between economic prosperity and environmental concern. But when prosperity is at risk, people willingly trade environmental quality for economic gain. This occurs even in wealthy nations. In our political campaigns environmental themes are crowded out by economic issues. As Michael R. Deland, former chairman of the President’s Council on Environmental Quality, observed: "in a recession there is an increased sensitivity to the job side of the equation."

This is because wealth fosters both environmental concern and the capacity to exercise that concern in a concrete way, e.g., with sewage treatment plants. The 1992 World Bank World Development Report shows that less than two percent of sewage in Latin America is treated. Worldwide more than one billion people have no safe water. In China, two-thirds of rivers near large cities are too polluted for fish. These are problems that require capital, not promises and Green pretenses.

How to implode a supernova star

When Risk Is Disconnected From Consequence, the System Itself Is at Risk   

If we understand risk cannot be eliminated, it can only be transferred, then we will understand why the current financial trickery in Europe and elsewhere is doomed to fail.

by Charles Hugh Smith

The entire global economy's fundamental financial instability can be traced back to one simple rule of Nature: risk cannot be eliminated, it can only be transferred to others or masked. And when it is transferred to others or masked, then the causal feedback between risk and consequence is severed.

Once risk has been disconnected from consequence, then it is impossible to discover the price of capital and risk. Once capital and risk have been mispriced, then the inevitable result is misallocation of capital and a positive feedback loop of self-referential, self-reinforcing risk.

Once the causal negative feedback of the real world--consequence--is no longer available to those taking on risk, then only positive feedback remains. Positive feedback inevitably leads to runaway reactions that self-destruct.

Moral Cover and Business Opportunities

Green Bootleggers and Baptists
By Bjørn Lomborg

In May, the United Nations’ International Panel on Climate Change made media waves with a new report on renewable energy. As in the past, the IPCC first issued a short summary; only later would it reveal all of the data. So it was left up to the IPCC’s spin-doctors to present the take-home message for journalists.

The first line of the IPCC’s press release declared, “Close to 80% of the world‘s energy supply could be met by renewables by mid-century if backed by the right enabling public policies.” That story was repeated by media organizations worldwide.

Last month, the IPCC released the full report, together with the data behind this startlingly optimistic claim. Only then did it emerge that it was based solely on the most optimistic of 164 modeling scenarios that researchers investigated. And this single scenario stemmed from a single study that was traced back to a report by the environmental organization Greenpeace. The author of that report – a Greenpeace staff member – was one of the IPCC’s lead authors.

Fast-talking political scam artists

The Ongoing Recovery from the Folly of Intellectuals

By Patrick Cox   

I’ve often referred to a theory of business cycles that was first described by the Austrian Joseph Schumpeter, but amplified by contemporary American Thomas Sowell. Both are brilliant economists who have described in mathematical detail how free markets produce the most wealth and well-being for society, including for those at the lower end of the financial spectrum.

It is their explanation for why things go wrong, however, that I find most illuminating. Both Schumpeter and Sowell write about “intellectuals” who have academic credentials of some sort but are lacking in knowledge that would make them particularly valuable to the market. Incapable of commanding significant wealth and status through voluntary market mechanisms, these intellectuals resent the wealth of more-successful people. As a result, they envy and resent the entire market system that has failed to reward them as they believe they deserve to be rewarded.

Others have also explored this theme. Another Austrian, Helmut Schoeck, wrote the book that is widely considered a masterpiece of sociology, Envy: A Theory of Social Behavior (Der Neid: Eine Theorie der Gesellschaft). You can go back even further, if you like, to the Tenth Commandment’s proscription on “coveting.”

The Strength of Human Materials

The New Generation

The posthumous tale of a Russian professor’s nightmarish encounter with a former student

By Aleksandr Solzhenitsyn

They were writing the Strength of Materials exam.

Anatoly Pavlovich Vozdvizhensky, an engineer and associate professor in the Faculty of Civil Engineering, could see that his student Konoplyov’s face was very flushed.  He had broken into a sweat and had missed his turn to come up to the examiner’s desk. Then, with a heavy gait, he approached and quietly asked for a different set of questions. Anatoly Pavlovich gazed at the sweaty face beneath a low forehead and met the desperate, imploring look in his bright eyes—and he gave him some new questions.

From First Principles

What is the correct size and proper function of the state?

by DETLEV SCHLICHTER

For a long time I considered myself a classical liberal – as did Ludwig von Mises who inspired much of my work. I do no longer think that this position is logically consistent. The classical liberal position, although advocating a much smaller state than today’s political consensus, still assigns too many powers to the state. Nevertheless, it offers a good starting point for the discussion. So let us start here.

Utilitarian arguments for the strictly limited state

The classical liberal position on the role of the state can approximately be described as follows: The state should stay completely out of the economy. There is no role for the state in industry, banking or money. Money is gold, or any other commodity chosen by the trading public. The supply of money is thus outside of political control, and banking and finance are entirely free market businesses with no state support, no guarantee nor any explicit or implicit backstops. 

How to get fired in under 5 mins

Judge Napolitanos last tv appearance

Flags, Penns and Tiny Minds

The Penn is mightier than the sword

Argentina's use of Sean Penn to goad Britain over the Falklands confirms the terrifying power of celebrity today.

by Brendan O’Neill 

Easily the most extraordinary thing about Sean Penn’s recent comments on the Falkland Islands is the impact that they made. The tidal wave of furious commentary has tended to focus on Penn’s undoubted combination of daftness and arrogance, with enraged British hacks asking ‘where does Mr Madonna get off holding a press conference to pontificate about the serious affairs of the South Atlantic?’. That is indeed a good question. But a better and more pressing one is this: how on earth did the musings of one muppet make such a massive impact, intensifying the stand-off between Argentina and Britain, generating acres of newsprint, and even provoking a huge protest in the Falkland Islands themselves under the banner ‘Falk You, Sean’?

Nothing is inevitable

Europe’s ‘proud empire’ is entering a cul de sac of history

By Andrew Roberts

Nothing is inevitable. It was the first truth I was taught as a Cambridge undergraduate in the 1980s, and it has been italicised and underlined for me by everything I have learnt since. (I even use spellcheck to excise the word “inevitable” from my books, lest it’s crept in at a lazy moment.) The whole of human history is testament to the fact that vast sections of mankind can seem to be progressing towards what looks like an established goal, only to get sidetracked into cul-de-sacs, sometimes for decades, occasionally for centuries. So why do we still assume that an eventual return to any significant economic growth in the European Union is inevitable?

The news that Greece’s economy shrank by 7 per cent last quarter, and that for all his valiant efforts even George Osborne, the UK chancellor has been slapped with a downgrading threat by Moody’s, ought to focus us upon the thoughts of Jeremy Bentham, John Stuart Mill, Karl Marx and Antonio Gramsci. For it was the leading thinkers of the Whig and Marxist historical determinist school who infected mankind with the concept that we were “progressing” somewhere, moving towards a fixed, positive future point. In economics, that idea is encapsulated in the assumption of economic growth as a kind of manifest destiny, almost the birthright of the species. All too often we see growth as something to be taken for granted as a natural part of the human condition; the rule rather than the exception. If Thomas Macaulay, Friedrich Engels and the other historical determinists had been right, and mankind was on a train track towards either the inevitability of universal liberty or a workers’ paradise, would we have wound up with a 20th century as scourged as it was?

The past two-thirds of a century have been atypical for the globe, and peculiarly conducive for growth. Never before had there been so prolonged a period when no two great powers went to war, if one counts Korea as a UN operation and discounts the Indochinese border incidents of the 1960s and 1970s. America was a powerhouse of innovation and leadership, in competition with a resurgent, confident Japan. Exchange rates went largely unmassaged. China was quiescent and unable to price European economies out of raw materials. Food and energy were cheap by historical standards. Trade and markets were generally freer (in the west) than ever before. Populations were rising, but controllably so. Interest rates encouraged lending, and competition between and within European countries was producing what Adam Smith had promised it would.

Strictly confidential

Greek debt nightmare laid bare
By Peter Spiegel

A “strictly confidential” report on Greece’s debt projections prepared for eurozone finance ministers reveals Athens’ rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue – set to be agreed on Monday night – runs out.

The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out.

It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

“Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said.

The Perennial Myth

Overpopulation

By David Osterfeld

“What most frequently meets our view (and occasions complaint) is our teeming population. Our numbers are burdensome to the world, which can hardly support us . . . . In very deed, pestilence, and famine, and wars, and earthquakes have to be regarded as a remedy for nations, as the means of pruning the luxuriance of the human race.”

This was not written by professional doomsayer Paul Ehrlich (The Population Bomb, 1968). It is not found in the catastrophist works of Donella and Dennis Meadows (The Limits to Growth, 1972; Beyond the Limits, 1992). Nor did it come from the Council on Environmental Quality and the Department of State’s pessimistic assessment of the world situation, The Global 2000 Report to the President (1980).

It did not even come from Thomas Malthus, whose Essay on Population (1798) in the late eighteenth century is the seminal work to which much of the modern concern about overpopulation can be traced. And it did not come from Botero, a sixteenth-century Italian whose work anticipated many of the arguments advanced by Malthus two centuries later.

The Cancer of Debt and Deficits

Thoughts from the Front-line

By John Mauldin

We are coming to the point in the United States when even the US government will no longer be able to borrow at very low long-term rates. That point is a few years off, and we have time to change paths; but as I have shown in previous letters, the longer we wait to get the deficit under control, the fewer choices we have and the more painful they are. NO country can run deficits the size we are currently running, along with unfunded deficits over four times the size of the economy and a growing overall debt burden, without consequences. At some point, investors in bonds will start wondering exactly what the process is by which they will be repaid. And what will the value of those future payments be?

Germany’s Sunshine Daydream

What went wrong?

By Bjørn Lomborg

One of the world’s biggest green-energy public-policy experiments is coming to a bitter end in Germany, with important lessons for policymakers elsewhere.

Germany once prided itself on being the “photovoltaic world champion”, doling out generous subsidies – totaling more than $130 billion, according to research from Germany’s Ruhr University – to citizens to invest in solar energy. But now the German government is vowing to cut the subsidies sooner than planned, and to phase out support over the next five years. What went wrong?

The ECB has Opened Pandora’s Box

Where law ends, tyranny begins

“I believe that banking institutions are more dangerous to our liberties than standing armies. “                                 -Thomas Jefferson

By Mark Grant

I am not going to speculate about anything this morning. No guesses about what the Finance Ministers might do on Monday, no simple addition or subtraction that the data used to forecast Greece’s return to a 120% debt to GDP ratio is a falsification of the numbers, no mention that only nineteen cents of any bailout for Greece would actually go to the country; I am not going to discuss anything except what the European Central Bank has actually done and what we now know with a one hundred percent (100%) certainty and the horrifying implications of their actions.

“There are no necessary evils in government. Its evils exist only in its abuses.”                                 -Andrew Jackson

The Minotaur is Dead

The Way Greeks Live Now

Petros Vafiadis, with his wife, Ekaterina, and their son Traianos, is an unemployed construction supervisor who says “things will only get worse.” The couple put their sons through college and now have no savings.

By RUSSELL SHORTO

In a little brick-walled taverna in Athens, over a lunch of Cretan salad and stuffed grape leaves, a Greek journalist named Aris Hadjigeorgiou was holding forth one day in late November about the calamitous state of his city and country as only a veteran metropolitan reporter could. He explicated the insidious ways in which the upper echelons of Greek media were intertwined with the political structure, which prevented reporting of financial mismanagement and also clouded any hope for resolving the crisis. And he noted little things, like the leaflets on car windshields advertising moving companies: literal signs of the way the economic crisis was affecting Athens, as people angled for escape routes, either abroad or to the countryside. And how the mayor’s office was at that moment considering a quaint but cockeyed approach for the season’s Christmas lighting scheme: stringing lights around the city’s hundreds of shuttered storefronts.

Creeping Fascism, Part One

Return of the Company Town

By John Rubino

The US government's obliteration of the Bill of Rights via the Patriot Act, the recent defense bill that allows the military to detain citizens indefinitely without trial, the health care law that forces citizens to buy insurance, and the attempted takeover of the Internet through SOPA and PIPA has gotten a lot of attention lately, and in a few rare cases has generated some effective push-back.

But according to an article in this month's Harper's Magazine (Killing the competition: How the new monopolies are destroying open markets, by Barry C. Lynn), US corporations are evolving into forms that are more threatening to their victims than anything emanating from Washington. As the author characterizes it, a new generation of monopolists are imposing their own private governments on their industries -- and not always the industries one would expect. This long, detailed article should be read by anyone with a desire to understand how the US is evolving. Here I'll highlight a few excerpts to summarize the major plot points:

Silicon Valley

Just a few years ago a software engineer's talents were almost completely portable, allowing a programmer to move effortlessly between tech companies. In other words, there was a functioning market for talent in which the individual had power and choice vis-à-vis local employers. Then a handful of companies began to accumulate near-monopoly control over their product lines -- and their workers. From the article:

Τhe shores of Tripoli.

Remember Libya?

If you thought the war ended last year, you're dead wrong.

By ADAM GARFINKLE

Last week, the New York Times carried a front-page story on Libya entitled “Libya Struggles to Curb Militias as Chaos Grows.” If the headline were not enough to clarify the main point, the subheads in the print edition were: “Government Paralyzed” and “Officials Confronted by Rivalries, Grievances and Old Habits.”

To my knowledge, this is the first front page New York Times story on Libya in many, many weeks. The occasion for the story seems to be crack New York Times Arab-world reporter Anthony Shadid’s visit to Tripoli. If that is so, then the story is a prime example of nomad journalism. That interpretation of the occasion for the story is strengthened by the fact that the story itself appears to contain no brand new hard news. It is rather a short feature, as opposed to a straight news article, that reviews events of the past several weeks and months, speckled strategically with pithy quotations Shadid managed to elicit (and presumably translate into English) from several locals.

The end has come, but is not yet in sight

America 2.0

By WALTER RUSSELL MEAD

Writing about the onset of the Great Depression, John Kenneth Galbraith famously said that the end had come but was not yet in sight. The past was crumbling under their feet, but people could not imagine how the future would play out. Their social imagination had hit a wall.

The same thing is happening today: The core institutions, ideas and expectations that shaped American life for the sixty years after the New Deal don’t work anymore. The gaps between the social system we inhabit and the one we now need are becoming so wide that we can no longer paper over them. But even as the failures of the old system become more inescapable and more damaging, our national discourse remains stuck in a bygone age. The end is here, but we can’t quite take it in.

Mussolini’s Last Words

Mussolini, Mugabe, Ceausescu, Blunt—none of them ever got it up again after losing their knighthood

by Taki Theodoracopulos

At ten minutes past four on the afternoon of April 28, 1945, a plumber named Moretti shot and killed a prematurely aged man and a youngish woman who was not wearing any underwear in front of the Villa Belmonte near Lake Como. Next to Moretti—who was later tried for theft and other misdeeds—was one Colonel Valerio, whose submachine gun had jammed while he was trying to shoot the defenseless couple.

The skeleton that rattles loudest in the left's closet

Eugenics

William Beveridge, who argued that those with 'general defects' should be denied not only the vote, but 'civil freedom and fatherhood'

Socialism's one-time interest in eugenics is dismissed as an accident of history. But the truth is far more unpalatable

By Jonathan Freedland

Does the past matter? When confronted by facts that are uncomfortable, but which relate to people long dead, should we put them aside and, to use a phrase very much of our time, move on? And there's a separate, but related, question: how should we treat the otherwise admirable thought or writings of people when we discover that those same people also held views we find repugnant?

Chinese Labor, Cheap No More

The after-’80s generation 

By MICHELLE DAMMON LOYALKA

WHEN China’s vice president, Xi Jinping, visited the White House on Tuesday, President Obama renewed calls for China to play more fairly in the world economy. Vice President Joseph R. Biden Jr. echoed those sentiments, telling Mr. Xi that the two countries could cooperate “only if the game is fair.”

But while China’s industrial subsidies, trade policies, undervalued currency and lack of enforcement for intellectual property rights all remain sticking points for the United States, there is at least one area in which the playing field seems to be slowly leveling: the cheap labor that has made China’s factories nearly unbeatable is not so cheap anymore.

China has experienced sporadic labor shortages, which in turn have driven up its once rock-bottom labor costs. This trend is particularly evident in the weeks following China’s Spring Festival, or New Year, when more than 100 million rural migrants return to the countryside to spend the year’s biggest holiday with family. Coaxing those same migrants back into the urban work force has proven increasingly difficult.

Germany drawing up plans for Greece to leave the euro

Schäuble's realistic pessimism

Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiraling out of control - with or without a second bailout.

By Bruno Waterfield

The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.

Eurozone finance ministers meet on Monday to approve the next tranche of loans from the EU and the International Monetary Fund, designed to stave off national bankruptcy while the new Greek government puts the country's finances in order.

But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them.

His pessimism has been tipped into despair with a secret European Commission, Central and IMF report that even if Greece made good on its promises, it would not be enough to reach the target of bringing total debt to 120 per cent of GDP by 2020.

Handing out condoms on the Titanic

Brokest Nation In History Fusses Instead About Sex

By MARK STEYN

Have you seen the official White House version of what the New York Times headline writers call "A Responsible Budget"?  My favorite bit is Chart 5-1 on Page 58 of their 500-page appendix on "Analytical Perspectives." This is entitled "Publicly Held Debt Under 2013 Budget Policy Projections."

To infinity and beyond!

This is the debt chart Obama and Geithner should be ashamed of

By James Pethokoukis

Testifying before the House Budget Committee today, U.S. Treasury Secretary Tim Geithner told Chairman Paul Ryan the following: 

“We’re not coming before you to say we have a definitive solution to that long-term problem. What we do know is we don’t like yours.”

Actually, President Obama sort of did have a definitive solution. He created a debt commission, which devised a long-term debt reduction plan. Which the president rejected. And instead, we get this new budget proposal, which makes no effort to deal with Medicare, Medicaid, and Social Security—the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House (!) chart shows. (Yes, the chart comes from the White House’s Office of Management and Budget.) It just goes up and up and up—until the heat death of the universe or the economy is struck by a Greek-style debt crisis.

It's in overtime already

A New “New Halftime” Commercial

By Jeff Harding 

Those of you who remember the hilarious cartoon that described quantitative easing, will know the mind of Omid Melikan. He has done a series of these cartoons which we will be featuring here soon.  Here Omid does his take on what Clint’s “Halftime in America” ad should have been. I think you will enjoy it. And thank to Omid.

A Race to Hunger

Rent seeking in bio-fuels still going strong

By Bjørn Lomborg

Spectators at February’s Daytona 500 in Florida were handed green flags to wave in celebration of the news that the race’s stock cars now use gasoline with 15% corn-based ethanol. It was the start of a season-long television marketing campaign to sell the merits of biofuel to Americans.

On the surface, the self-proclaimed “greening of NASCAR” (National Association for Stock Car Auto Racing) is merely a transparent (and, one suspects, ill-fated) exercise in an environmental form of whitewashing for the sport – call it “greenwashing.” But the partnership between a beloved American pastime and the biofuel lobby also marks the latest attempt to sway public opinion in favor of a truly irresponsible policy.

The United States spends about $6 billion a year on federal support for ethanol production through tax credits, tariffs, and other programs. Thanks to this financial assistance, one-sixth of the world’s corn supply is burned in American cars. That is enough corn to feed 350 million people for an entire year.

Government support of rapid growth in biofuel production has contributed to disarray in food production. Indeed, as a result of official policy in the US and Europe, including aggressive production targets, biofuel consumed more than 6.5% of global grain output and 8% of the world’s vegetable oil in 2010, up from 2% of grain supplies and virtually no vegetable oil in 2004.