Adam Smith Institute

It is richly ironic that Goldman Sachs is now reported to be reviewing whether to relocate some of its spectacularly successful money making operation out of the UK to more conducive climes. The current Government’s tax and regulatory policies are identified as the trigger for this potential move. The prospect of handing over piles of cash to the UK Treasury to meet spiralling tax demands is clearly sticking in the collective Goldman gullet.

Yet Goldman Sachs has been one of the staunchest supporters of New Labour. The bank’s Mancunian chief economist, Jim O’Neill, responsible for coining the term BRICs, is a close friend and informal adviser to Gordon Brown, while the bank’s former chief UK economist, Gavyn Davis, amassed most of his considerable fortune when working for Goldman. Davis’s wife Sue Nye, was Gordon Brown’s diary secretary and continues as a special adviser and Director of Government Relations. The bank’s chairman, Peter Sutherland, is one of the most prominent advocates for the euro.

Last year Goldman Sachs paid £1.1 bn in UK corporation tax. It topped the league as the highest City contributor to the Exchequer. The bank’s 5,500 UK employees pay millions in income tax. Indeed, some of them pay well over a million each. The prospect of making an even higher contribution has caused some of them to form a queue asking the bank to relocate them to friendlier jurisdictions.

As 2010 unfolds one of the key themes we are likely to witness is the flight of well-heeled City folk to countries where the taxman does not grab the major slice of their income. Peter Sutherland’s previous appointment as a member of the Hong Kong Chief Executive’s Council of international Advisers may prove highly relevant as his employees line up to leave to more hospitable financial centres.

It is election year and the battle has begun in earnest. Against the Tory message of Austerity, Mr Brown has drawn a clear dividing line; his party of ‘opportunity’ will usher in an Age of Aspiration after ‘only’ 12 years in office. If by aspirational, he refers to the aspirations of socialists to centralise, control, distort, burden, and hinder, then perhaps he has credibility.

Austerity and opportunity are not mutually exclusive. The principles of strict economy are sound, which although forgotten or unknown in Number 10, drive growth and create opportunity. Saving is fundamental to economic growth. The process of investment in capital requires prior saving. By relinquishing immediate consumption below its potential level one may engage in capital formation.

Brown’s disregard for strict economy is made evident by the horrendous state of the public finances due to terribly excessive spending in times of growth. There is nothing complicated about living within ones means, about balancing the budget. However, when Labour entered in 1997 the budget was in balance, but by the Treasury’s own forecast by 2011 we will be over £1 trillion in debt, and this doesn’t include our obligations off the balance sheet.

With business stifled, interest rates rising, our credit rating at risk, and huge amounts of debt that you and future generations will have to pay, Brown’s record for burdening the future is perhaps without comparison. Our growth statistics show that you cannot spend your way out of recession, and we cannot borrow our way out of debt. Brown’s economic illiteracy is simply depressing - No sustained recovery can be achieved without focusing on debt reduction.

The aspirational people who achieve overall success and generate the most wealth will be penalised with at least half of their income taken by the government in taxes. Regulation costs under conservative (small c) estimates work out to over £100 billion. For those still in education, who aspire to success, rather than having an education based on their own choices and needs, it is centralised and focused on government targets.

As Smith put it, “there is a lot of ruin in a nation”. We need a competent and genuine strategy in Number 10 which tackles debt and returns power to the people.

6. Inflation is not a cost-push phenomenon.

Many economic commentators used to believe (and some still do) that inflation could result from rises in the input costs of production. An increase in the price of raw materials or in the wages paid to workers would have to be passed on, it was supposed, leading to a rise in the price of the finished product. If enough goods were thus affected, this would bring about the general rise in price levels which is popularly called inflation.

If the money supply is unchanged, then price rises for some products will be matched by lower prices elsewhere. If people have to pay more for their essentials, for example, following increased prices brought about by higher input costs, then they will have less money to spend on non-essentials, the demand for which will go down.

The reverse is true, in that if people pay less for essentials because falling input costs allow lower prices, they will have money left to spend elsewhere, with the increased demand leading to higher prices in other sectors. The significance of this is that for over a decade cheap imports from China meant lower prices in developed countries for many household goods. The result was downward pressure on the consumer price index, leading central banks to keep interest rates low, with easy credit and cheap money.

The fall in prices was mostly in goods which show in the various price indices. It left people with money to spare elsewhere, some of which found its way into asset bubbles, including housing. Some of the goods which saw increased demand and higher prices did not feature in price indices, and therefore did not undermine the visible fall in prices. The choice of some items and not others to feature in price indices means that some price rises are effectively hidden from consideration.

With a stable money supply, price increases in some economic sectors will be matched by reductions elsewhere, and vice versa. If the money supply is increased when prices are stable or falling, the result might well be asset bubbles as people seek places to gain good returns on it, given falling prices and narrower profits elsewhere. Inflation is not caused by the push of higher input costs, but by extra money in the economy, or by its faster circulation.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

Britain is the most watched nation in the world with around 4 million CCTV cameras installed across Britain. The London Borough of Wandsworth has a higher number of them than Dublin, San Francisco, Johannesburg and Boston combined. Cameras can be easily installed by local councils, and are a way to visibly display that an issue is being ‘tackled’. However, the exponential rise in cameras simply serves to suggest that as a nation we cannot be trusted, and that if we are not being watched over we are somehow unsafe.

The ‘success’ of CCTV cameras in securing convictions has often been used as an excuse to support even more invasive forms of state monitoring. However, statistics show that CCTV cameras simply do not work. The crimes actually caught on camera fell by 70% between 2003/4 and 2008/09, while in London only one in seven crimes solved involved the use of CCTV. Many cameras are ill-positioned, lack film or are of such poor quality that they can’t be used as evidence in court.

Spending on CCTV guzzles three-quarters of the crime prevention budget, and so provides very little bang for our buck. £500 million was spent on new cameras in London between 1996 and 2006. This is £500 million that could have been spent on a number of better measures, such as employing or training police, and tailoring crime-fighting strategies to suit local areas. Coating the country in all-seeing-eyes has proved to be an expensive and inefficient use of resources, and dramatically reducing the number of cameras in the UK would be a good way to rein in profligate spending and create a freer society.

The ASI is looking for a new Communications Manager. All the details can be found on our website here.

The above is taken from the BBC’s website. Both parties are fighting over how the government can control food production, distribution and retail. One can only conclude that Hilary Benn and Nick Herbert have gone stark raving mad.

Today the Chartered Institute of Personnel Development launches a package of proposals that they say will improve the jobs market, and indeed the whole UK economy. Controversially, perhaps, they involve freezing the National Minimum Wage for younger workers in order to tackle youth unemployment. They also want the government – or the next government – to abandon the National Insurance Contribution hike planned for 2011, and to delay measures to reduce the deficit.

Well, two out of three ain't bad. Yes, we should freeze the minimum wage for younger workers. Younger, and unskilled, workers are always the worse sufferers in a recession. That is why there are nearly a million 16-24 year-olds who are not in education, employment, or training (NEETS). Because they have few skills and experience, they just aren't worth as much to employers. When unemployment is rising, and employers have their pick of experienced and qualified staff all queuing up for interview, why should they taken on youngsters who they would have to spend time and money training up? When the economy's booming, employers can afford that. When it's not, like know, they can't.

As for NICs, it's a no-brainer. National Insurance was originally planned as a social insurance premium to cover pensions, health, and the rest. Now it is a straight tax – and a tax on jobs. Most people do not notice it, because the employee's contribution is tiny – just 1% of earnings for some people, 1.6% for most others (who said tax was 'not taxing'?) But the employer's contribution, conveniently hidden out of the sight of most electors, is 12.8%, and rising. A few weeks ago our Tax Fellow Richard Teather showed here just what the effect of that is – basically, making it very expensive to hire people. And the more the tax rises, the more expensive it is. Again, in a recession, who is going to take the risk of taking on new workers?

As for deficit reduction, well, as Jeremy Warner said in yesterday's Daily Telegraph, the economy has been running on the steroids of cheap money and government spending for far too long. Time to get down to reality. You cannot spend and borrow your way out of debt. And we are in a lot of debt right now. Nor is government spending somehow more magically efficient at creating jobs. In fact it is less so, because so much of it is wasted. No, CIPD, we do need to get the government deficit under control, and fast. If we do not look serious about it, investors will get nervous, The UK's credit rating will fall, and we will be cap in hand to the IMF again, just like the last time. And what do you think that is going to do for our job prospects.

See Dr Butler's new Alternative Manifesto here.

5. For every multiplier there is a de-multiplier.

Governments sometimes justify moves to stimulate the economy by pointing to the multiplier effect. There are, indeed, multipliers. In a simplified example the government might inject a million pounds into the economy. If the recipient buys a boat and two cars and redecorates their house, this provides jobs for boat-builders, car manufacturers and dealers, painters, plasterers and handymen. And when these people in turn spend what they receive, yet more economic activity is generated.

There is a catch, of course. It is that government gets that money from the private sector. It takes it in taxes, leaving people with less spending power; or it borrows it, thereby increasing the interest rates the private sector has to pay, discouraging private investment. Or the government can print the money, ultimately taking out spending power by reducing the value of everyone else's money.

The money the government takes out of the private sector to finance its stimulus is money that would have been involved in other economic activity. Unless it were buried somewhere, it would have been working its own multiplier as it passed from hand to hand. It might have been used to buy the boat, cars and home redecoration that the government stimulus financed, or it might have created a stimulus in other sectors. The removal of this money in effect constitutes a de-multiplier, inhibiting the second, third and subsequent waves of economic activity it might have triggered.

There is a problem in that the private economic activity now squeezed out was a real response to demand, whereas the government stimulus does not necessarily go where it is needed for resources to be allocated efficiently. Furthermore, because the private sector is generally more efficient in its use of resources than the state sector, the chances are that the de-multiplier is larger than the multiplier the government claims credit for. The problem is that on the political landscape everyone can see and identify the government stimulus, whereas few people can spot the private sector activity which it has thwarted. Political leaders claim credit for the one without attracting blame for the other.

Governments sometimes argue that their activities shorten the time it might take for resources to be reallocated, and thereby minimize the hardship engendered by an economic downturn. This misses the point that it reallocates them to areas where production cannot be sustained without that government demand, and builds in imbalances that will cause later hardship when they readjust to real economic conditions. Instead of trying to create public multipliers at the expense of private ones, governments should boost the private ones by cutting the taxes it imposes on them.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

For the last few weeks my wife has been working her way through the BBC's online Italian Steps language course, so that she can make herself understood next time she visits the Italian relatives in Garfagnana. She reckons it's actually just as good as the Italian evening course she signed up to at the local college. I had a look at it, and yes, using interactive web technology, it looks quite effective. And of course there are other courses for other languages.

So do I think that the Beeb has done us all a great service, enabling people around the world to pick up at least a smattering of other languages before they go abroad? Certainly, but the trouble is, it has done this on my nickel. Or my £142.50, to be more accurate, the value of the licence fee. And in the process, it has queered the pitch for other language course publishers and online providers (such as Berlitz, Rosetta Stone, Linguaphone et al.). Why pay for something you can get free from Auntie?

I'm sure that most people who worked through an online language course like this would not mind paying a pound or two, just as they pay a dollar or to to download tracks from iTunes. I am certain that they would not mind a few ads in the sidebar. Maybe not even a bit of product placement ('Scusi, un cappuccino Lavazza per favore'.) So why should the BBC provide it to users for nothing, and charge licence payers – the vast majority of whom will never hear of its existence, let alone actually use it?

This, like so much on the BBC website, should be privatized. Spin it off into a private company and let the licence payers pocket the sale price. Going right through the website, this could bring in quite a bit of cash, just when we all need it.

In case you missed it, the ASI was voted Think Tank of the year by the discerning readers of Ian Dale's popular blog.

David Cameron will pledge today to divert billions of pounds to healthcare in the most deprived parts of the country if he forms the next government.

This decision on health funding, I am told, is the first in a series of policy statements by the Conservatives aimed at countering claims that the party is intent on slashing core public services, and countering 'class war' claims that they are a party of the rich. So I can see why 'Dave' (as his spin-doctors prefer him to be called) wants to do this. I just think it will be an ineffective policy, and therefore a waste of our money – money that is pretty short right now, and could be used to better effect.

If health outcomes reflected the amount of money we spent in different areas, then the fittest, sprightliest, longest-living folk would be in the Calton area of Glasgow, and the sickest ones with the rottenest teeth would be in Wokingham. The fact is, of course that although residents of leafy Wokingham can expect to live comfortably longer than the national average (75 for men and 80 for women), a male in Calton cannot expect to see his 54th birthday. (That is 13 years shorter than Iraq, even after a decade of sanctions, and 16 years less than North Korea, likewise.)

In the Calton, a quarter of the population say their health is not good and over half smoke. Two-fifths are on incapacity benefit. Calton residents suffer from their drink, drugs, and poor diet. Alcohol abuse is far above the national average. Heart disease, diabetes, and hospital admissions with drug overdoses are high.

Would more money from the NHS change that? Not a chance. Of course, Dave's health supremo, Andrew Landsley, says that he is going to turn the NHS from a sickness service to a health service, concentrating more on prevention rather than cure. He would still have his work cut out to make an impact on statistics like these. No, Calton residents are already the victms of too much government spending – poor-quality public-sector housing, a social benefit system that encourages family break-up and makes it almost impossible for people to get back into work, and a state school system that leaves inner-city kids underqualified and devoid of any hope of improving themselves. Yet more of the same will not help. We need to think much more radically if we are to change ill-health – and the causes of ill-health.

Dr Butler's new book The Alternative Manifesto is published soon. Click here to find out more.

It's always amusing to see those statements, the "discredited Laffer Curve" " the irrelevant Laffer" and so on. For of course the Laffer Curve itself, that zero tax rates raise no money nor do 100% ones, but ones inbetween do with some point being the maximum revenue raising level, is simply a mathematical truism. But what is more than amusing, actually fun, is to look at the proposals of those who make these dismissals of this idea that higher tax rates can lead to lower total revenues: and see that while they don't espouse the idea they most certainly believe it.

As Paul Samuelson didn't quite say about revealed preferences: don't look at what people say they believe, look at what their plans suggest they believe.

The proof is here in a TUC pamphlet. Written by one Richard Murphy. Recommendations 4 and 5 for reducing tax avoidance are that it should be made more difficult for people to leave the country and not pay UK taxes and that it should be more difficult for companies to leave the country and not pay UK taxes. Your views on the justice of such measures may vary but think about what the implication is.

Tax rates are sufficiently high that even the TUC is worried about people upping sticks and simply not paying them. Thus we must change the law to make it more difficult for people to leave. You see? People do change their behaviour in the face of higher tax rates. Thus there is some tax rate at which revenues will decrease as too many people will have left the country.

Why, we might even think that this new found concern for the way in which people and companies can just vamoose is an admission that the TUC's own proposals for yet higher tax rates will take us over the peak of the Laffer Curve into revenue losing tax rates. Unless, of course, we change the law so that they cannot vamoose.

So there we have it. While huge numbers of people keep saying that they don't believe the central concept of the Laffer Curve, that there is some tax rate which will reduce taxable economic activity and thus tax collected, those making that statement of disbelief do seem to act as if they believe it to be true.

4. Price is transient.

Price is not something permanent attached to an object to denote its value. It is what is paid in a transaction, and its level it set at the point at which the transaction takes place. Price varies from place to place, even for identical objects. The cup of tea at the top of Ben Nevis will generally command a higher price than a similar cup of tea at the base of the mountain, and both will probably be higher than that of a cup of tea at a city corner-shop café. Price changes over time, too, and the same object might command a lower price at some times of the year as opposed to others.

In some circumstances price may vary according to the person involved, with some being charged more than others. In large parts of the world the transaction price is struck at the end of a spell of bargaining, with its level depending in some degree on the skill of the bargainer. In some tourist economies visitors are charged higher prices than local residents.

Economies are constantly in motion as transactions are completed and new ones begin. Price is part of that motion. While there might be some price stability over the medium term, it does fluctuate according to the relative supply and demand for particular commodities. Supply matches demand only fleetingly, because for most items both supply and demand are constantly changing variables as people alter their behaviour in response to changing conditions.

There is no such thing as a 'fair' price for a commodity. Some people will value an object more than other people, and be prepared to devote more of their resources to it. Although customers might object to high prices charged in times of scarcity, those high prices might well encourage others to increase the available supply. Although we speak loosely of the 'market price' for something, we do so knowing that this is something which varies with place and time.

Since the time of Hammurabi in ancient Babylon there have been attempts by government to fix prices, including wages, the price of labour. These attempts only suppress the information which changing prices convey, and distort the ability of supply and demand to respond to each other. Shortages and rationing are the usual result of such measures.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

3. Every economic activity uses energy and resources that might have sustained other economic activity.

Almost everything we do involves time and possibly effort that could have been spent doing something else. The activities we choose displace the ones we could have done in their place. When we buy something, it is at the expense of other things we might have bought with the money. Economic production uses the investment and materials which might otherwise have gone to produce something else.

When government engages in an economic activity, it uses the resources that might otherwise have sustained other activities. Government does not add economic activity; it diverts it from some outputs into others. The money government uses for its activities, whether acquired from taxes, borrowing or inflation, takes resources that could have been used elsewhere, and inhibits the economic output they might have generated.

Governments sometimes claim that their 'stimulus' puts into production resources that would otherwise have gone unused, and therefore boosts the overall performance of the economy. In fact, though, there are rarely "idle resources" which governments can bring to play their part in production. When people choose to save instead of spend, for example, unless savings are kept in tin boxes under the bed, they are normally used for investment by the institutions people choose to save with. Instead of being economically idle, savings are normally used to buy different (producer) goods rather than the consumer goods they might have bought if the money had been spent. What the government 'stimulus' does is to generate production in areas where there was insufficient demand in the real economy to achieve this. The result is to send false signals that lead to misallocation of resources and distortion of the economy.

There are corollaries of the idea that one economic activity takes place at the expense of another. We speak of "opportunity cost" to indicate what the money to finance an activity might otherwise have bought, such as the interest it could have earned. We speak of "crowding out" to highlight how government spending reduces the private consumption or investment which could have taken place otherwise. A government construction project uses thousands of inputs such as labourers, concrete, metals, transport, etc., most of which would otherwise have been used in other projects, quite apart from the money it diverted from the private sector.

The observation means that no economic activity stands alone. It meshes into the rest of an economy in motion, and must be seen in the light of the activities which might have happened instead.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.