Brown’s “sleight of hand” budget hurts the poor as well as the rich

It came as no surprise that Gordon Brown delivered a few headline-grabbing surprises in his last budget as Chancellor of the Exchequer. By far and away the most eye-catching (though not unpredicted) measure was the grand finale, the cut in the basic rate of income tax from 22p to 20p in the pound. It seems like the tax cut that Middle England has been waiting for, but in truth it is what Menzies Campbell called a “sleight of hand”, giving with one hand while taking away with the other.

Tax measures are never equal, however – there are always winners and losers – and this one appears to squeeze those on low incomes the hardest.

Without having the leisure to browse the Red Book, a brief analysis of the measures looks like this:

• The 10p lowest rate of income tax is abolished, applying the basic rate from the very beginning
• The basic rate is cut to 20p
• The upper rate allowance is set at £43,000 from 2008
• National Insurance is aligned with income tax
• Tax credits are increased

The effect of the first two measures is to take more income tax from the roughly £2,000 one earns after one’s personal allowance is used up, but less from the next £30,000 (or £35,000 from 2008). So an extra 10% of £2,000 but a saving of 2% on £35,000, which means that if you are earning around £40,000 you will pay slightly less income tax, but if you are earning just £10,000 you will pay a lot more.

Ed Balls, the Chancellor’s closes ally, admitted that it was “not a very big tax cut”. It was worse than that, however. The poor are squeezed to pay for an income tax cut for the rich. But the National Insurance changes undermine what benefit higher earners see. By applying the 11p rate of National Insurance on earnings up to £43,000, instead of £35,000, an extra 10% of that last £8,000 is taxed, undermining much of the gain from the income tax cut outlined above.

Thus those earning very little will end up paying more tax, as will those earning a goodly sum. Only those in the very middle appear to gain (though it is interesting to note that other commentators seem to have interpreted this differently, so I would welcome an explanation as to why others seem to think that it is those earning in the twenty thousands who will suffer most).

The budget raises taxes on low-income earners and so presumably raises the barriers to people leaving benefits and returning to work. Brown’s solution is to fall back on his tried-and-tested-and-frankly-failed Tax Credits. He promises to increase the amount of tax credits, but the tax credit system is already costing £16bn and requiring 8,000 civil servants to administer. Yet last year half of the awards were wrong. Furthermore, too many of the poorest do not even claim the benefits, so complicated and obscure are they.

In other budget news, Brown has raised taxes on small businesses while alleviating them on bigger firms. The latter a welcome measure if we are to compete with low-tax emerging economies, but to increase taxes on struggling small enterprises if frankly perverse and pernicious.

Public spending will remain at record highs of 42% – not far off a level where the state takes every other pound we generate to distribute in on our behalf – yet there has been precious little to show for it.

The environmental taxation remains both parlous and interventionist: while the overall level remains lower than under the Conservatives, the measures introduced are meddling (levied specifically at Tory-voting car owners, for example) rather than economically (which is not to say fiscally) neutral (taxing all carbon and so allowing people to decide how to cut back – the policy I have advocated).

Despite the bluster of the Chancellor and the raucous support of his party, this budget is a disappointment. The tax code remains more complex than anywhere but in India as Brown intervenes and meddles in ways that distort the economy and make work for civil servants. It may serve his personal goal of looking good as he moves next door to No. 10, Downing Street, but it does little to address the real problems in Britain: excessive and ineffective public spending, taxes (not just headline rates but overall burdens) that are too high, an over-regulated economy and an underclass of poor people increasingly struggling to provide for themselves and their loved ones.

As an exercise in Public Choice Theory it is exemplary: the politician serves his own interests rather than those of the nation. As an economic plan for Britain’s future it is a sham.

The Trap: Whatever happened to our dreams of freedom? (part 2)

Last night BBC 2 showed the second episode of Adam Curtis’s new series, The Trap: Whatever happened to our dreams of freedom?

As I explained when I reviewed part 1, the general premise of the programmes is that over the past thirty years, trends in psychology and economics that viewed the people as a rational, selfish individuals interested only in personal gain have come to dominate public policy. Policy-makers have lost faith in the concept of public service and have instead applied market forces to public services in an attempt to give power to citizens (as consumers) and free them from the shackles of bureaucracy. However, Curtis argues that this has in fact backfired, leading to worsening inequality and a collapse in public services and political efficacy.

Part 2, subtitled The Lonely Robot, expanded on these themes with particular focus on the 1990s, and in so doing highlighted both the mistakes of what we call the Thatcherite Revolution and Mr. Curtis’s own erroneous analysis. I will explain these errors below, but first I will provide a synopsis of the programme. Those familiar with it may wish to skip the next six paragraphs and move on to my comments.

The programme began by returning to Buchanan’s Public Choice Theory, which argues that politicians and civil servants actually pursue their own rational interests rather than the public good. Curtis juxtaposed John Major’s efforts to create an internal market in public services that would use the rational interests of public servants to achieve public ends, with Bill Clinton’s interventionist presidential campaign, in which he publicly berated President Bush for his laissez faire approach, saying that if Bush would not use the powers of the presidency to improve America, he should stand aside for somebody who would. Clinton was elected, but before he took office was visited by Alan Greenspan and Gene Sperling, who explained to him that if he tried to intervene in the economy he would just worsen the economic crisis of the early 1990s. They convinced him that the power of governments to effect positive economic outcomes was a chimera; only the market could provide the prosperity America craved. Clinton accepted this advice and presided over one of the greatest economic booms in American history.

However, Curtis criticised the underlying basis of this belief. He argued that the consumer society did not in fact reflect the economics of Adam Smith. Rather, its assumption of the rational individual pursuing self-interest ignored the sympathy and moral sentiment which Smith argued were essential to man’s role in society. Instead, the selfishness of the species stemmed from scientific theory. Curtis dwelt upon and later critiqued anthropological studies of the Yanomamö people of Central Brazil, and also noted the view (promoted by Richard Dawkins, among others) that animals – including man – were merely vehicles and tools for the promotion of their selfish genes. Meanwhile, the revolution in psychological diagnosis described in last week’s programme had led to around half the population reporting themselves as suffering psychological disorder. New drugs such as Prozac appeared to offer a cure. The result was that millions of people took drugs to “normalise” their behaviour and emotions – a practice that some interviewees believed threatened to create a static, stagnant society.

Back in the world of public policy, 1997 saw New Labour elected to govern Britain. Labour took the distrust of policy-making to a new level, as demonstrated by the granting of independent powers to the Bank of England. Labour’s means of “incentivising” public servants was to set centralised targets and reward or penalise them accordingly. Curtis cited some of the more ridiculous examples of targets set by the Labour government, including:

• A community vibrancy index
• The quantification of bird-song in the countryside
• A target to reduce world conflict by 6 per cent
• A target to reduce malnutrition in Africa by 48 per cent

The result was not driven and measurable success, but what a member of The Audit Commission called a systemic “gaming of the system”. The NHS would employ people who’s job it was to greet people on admission so that they met their targets of seeing patients within a certain time, though no treatment was given; wheels were removed from trolleys and corridors were renamed wards so that patients could be counted as being in a bed in a ward; the police reclassified crimes as “incidents” so that crime fell; schools taught easy subjects and concentrated on mediocre children so as to raise the number of children gaining GCSE grades A-C. The result was a decline is social mobility to the point where a child born in Hackney was twice as likely to die in its first year than one born in Bexley.

Curtis also critiqued the supposed boom in the US. The apparent rise in the financial markets was based increasingly on dodgy accounting practices rather than reality. Meanwhile the economic progress was increasingly one-sided: one interviewer highlighted three interesting comparative statistics:

• The real term after-tax income of a family in the lowest quintile fell between the 1970 and the 2000s
• The real term after-tax income of a family in the middle quintile rose only slight between the 1970 and the 2000s
• The real term after-tax income of a family in the top 1 per cent rose by an enormous amount between the 1970 and the 2000s

Thus Americans were not only becoming less equal; the poorest were getting poorer.

The result of the revolution of the last thirty years, concluded Curtis, was that politicians were weakened by a mistaken belief that they could not affect change or improve welfare. Politicians were emasculated and corrupted and felt powerless. Meanwhile, the masses were not fulfilled by either consumerism or politics, but were instead doping themselves up on psychiatric medicines. At the same time, scientific evidence was emerging that undermined the selfish-gene and anthropological evidence of the 1970s, John Nash – the father of game theory – had begun to repudiate much of his work, and the free market was under attack by economists who argued for greater intervention and critiqued the rational individual thesis.

So ended the second episode. The third promises to discuss the War on Terror and – I suspect – “spin”.

Sadly, the second programme lived up to all my expectations. Curtis is an excellent documentary maker, but while he highlights genuine and important crises within society and provides a plausible historic context, he tends to misinterpret the causes and thus advocate policies that would exacerbate rather than alleviate those problems.

For a start, Curtis is prone to simple mistakes. For example, his critique of the American economic experience in the 1990s made a schoolboy error, confusing the state of the financial markets with that of the economy. In fact, the eventual collapse in share prices as the Dot Com and dodgy-accounting bubbles both burst had almost no effect on the US economy – the 2001 recession was the shortest and least painful in American history. Similarly, the statistics about relative welfare did not explain how far this was a result of taxes undermining the incomes of the poor (the statistics being post-tax incomes which suffer from heavy taxation), or of the effects of immigrant labourers who generally take low-paid work at the bottom of the economic pile, thus lowering averages without adversely affecting anybody, while they are happy to make a new life for themselves and their families. Similarly, in comparing infant morality rates in two London boroughs, Curtis failed to clarify whether the widening gap was due to a decline in Hackney or an improvement in Bexley.

Other errors, however, are more substantial, and demonstrate that he has fundamentally misunderstood both the classical liberal case and the causes of Thatcherism’s failures. The fundamental example in The Trap is Curtis’s belief that market mechanisms have been injected into public services and have as a result created perverse incentives for deliverers to “game the system” by aiming at achieving targets rather than positive outcomes for citizens; that governments have acted upon the belief that bureaucracies serve their own interests first. This is a profound error. In fact, the supposedly-liberalising agenda of the three (soon to be four) Thatcherite Prime Ministers has been completely undermined by the distrust that both the Conservatives and Labour have for freedom and the market.

Instead of creating a true market, with individuals holding the power as consumers and using their power over the money to reward success and punish failure, the past thirty years has seen the greatest centralisation of power in Britain since the Stewarts attempted to introduce an absolute monarchy. Distrustful of what a true market might produce, successive governments have endeavoured to micromanage the public services from Whitehall. Thus, instead of eliminating the power of self-interested bureaucrats, they have made local authorities and public services answerable to central government, made delivery departments answerable to the Treasury, and made the Treasury answerable to a small coterie around the Prime Minister and the Chancellor. This has led not to liberty and a genuine market, but to an over-regulated, over-centralised, overly-bureaucratic system. This is not what either classical- or neo-liberal economists would have suggested.

A real market that genuinely empowered people and lifted the dead hand of bureaucracy from our shoulders would put citizens in control. Rather than being answerable to civil servants in Whitehall, deliverers would be answerable to citizens through the latter’s ability to allocate funding. As Friedman demonstrated in theory and Sweden demonstrated in practice, voucher schemes not only drive up standards but they are particularly beneficial to the poorest in society. Sweden – that paragon on Social Democracy – has similarly had a very positive experience with creating a healthcare market.

Sadly, this kind of freedom is not to Curtis’s taste. For him the volatility and unpredictability of the market is disturbing, and the freedom of the individual is a myth. He prefers the certainties of Statism and the comfort of the community. But with the lack of hindsight that only a shift of generation can provide, he ignores the bleakness of the last period of interventionist government and the abject failure of Statist solutions. One need not look to pre-1990 Eastern Europe for evidence of the failure of state planning; dirigiste France’s youth unemployment of 25 per cent and Germany’s stagnant economy are lessons enough for us. Governments are incapable of managing so complex and delicate a system as the economy, which rely on incalculable pieces of information. Economies are, in essence, merely a mirror of society as a whole, and efforts to manage economies are therefore efforts to manage society. Whether it is through dictating how many hours an employee may work or through confiscating a portion of their earnings for central distribution, such efforts are inherently illiberal and should be kept to a bare minimum.

The desire of recent governments to end the old bureaucratic tyranny is laudable, but their efforts have been risible and their methods misguided and ultimately counter-productive. Only by genuinely empowering citizens through giving them the power to allocate their resources – be they those they earn or those transferred to them by a welfare state – and allowing the consequences of those decisions to have their effect, will we improve the quality of public services and benefit society more generally. Into the bargain we will re-invigorate the population who, being now in control of their own destiny and no longer supplicants at the mercy of the state, will rediscover the moral sentiments that Smith and Mill thought vital elements of a fully rounded person.

I have separately reviewed part1 and part 3. Curtis's conclusion and my analysis of it are discussed in a final post.

The Trap: Whatever happened to our dreams of freedom? (part 1)

Last night BBC2 showed the first part of The Trap: Whatever happened to our dreams of freedom?, a three part series by Adam Curtis that argues that post-war initiatives that aimed to set mankind free have in fact created new means of entrapment. Curtis was the producer of The Power of Nightmares, an excellent three-part documentary that showed how the neo-conservatives and Al Qaeda both exploited fear of enemies abroad and moral decline at home to dominate the political agenda and promote their own conservative beliefs.

In the first part, subtitled F*** you, buddy!, Curtis discussed how various different branches of scientific thought converged around the paranoia born of the Cold War. My main criticism of the first episode was that it failed to do more than set the scene. It may be that this will lead to fascinating insights in the next two programmes (he has already promised to show how it all led to the culture of “spin”) but the fact remains that the programme did not stand alone, and left too much of the analysis for later episodes.

It began with F. A. Hayek’s warning (available in full or in summary) that governmental efforts to manage the economy would lead not to the tempering of the excesses of capitalism but down a road that led ultimately to enslavement by the state. In fact this was barely touched upon before Curtis had moved on, but before he did so he presented a vary negative view of Hayek’s position, suggesting that his belief in a self-correcting system, in which individuals pursuing self-interest would promote a common good, relied upon the assumption that mankind was essentially selfish and callous.

I will dwell upon that for a moment both because I feel it misrepresented Hayek’s views on liberty, and because it calls into question Curtis’s assessment of other strands of thinking during the programme, about which I have less knowledge and so cannot exercise judgement.. Hayek was quoted as saying that there was no room for altruism in his theory. However, as those who have read Hayek should recognise, his theory does not in fact deny the altruism within people, nor does is suggest that altruism is not a good and worthy thing. Hayek’s concern was that government, with its unique power to coerce individuals, should not attempt to correct the self-regulating mechanism – even for altruistic ends – because ultimately those ends were the ends of fallible (and sometimes selfish) individuals. Instead it should create a sound and predictable legal framework that protected the liberty of individuals, who would then be free to pursue their own interests (even altruistic ones) that would as a by-product benefit mankind. This belief goes back at least as far as Adam Smith’s “invisible hand”.

The programme’s quickly moved on the main point, which was that there were those who thought that mankind could be liberated by rationalising him as an isolated, self-interested and ultimately callous creature (a rather sinister version of the individual at the heart of the Enlightenment). I will attempt to summarise this, though as I only have a limited knowledge of the subject matter I may make some errors – which may be due to my misunderstanding the programme or to its misrepresentation of the facts.

The story begins with the Game Theory logic of the Rand Corporation – promoted by the not-so-beautiful mind of John Nash – which suggested that individuals could never trust one another and so would always prosper if they adopted the most cynical assumptions about one another. Meanwhile, psychiatrist R. D. Laing had proved that much psychiatry was based not on science but a socially-constructed concept of the “normal”, and the role of psychiatry was to force those that were different back into the societal mould. Laing became the father of the anti-psychiatry movement and inspired the Rosenhan Experiment, which suggested that psychiatrists had no idea who was sane and who was not. The result was that psychiatrists were forced to admit that they had no idea what was wrong with the mind, and so the field shifted its attention from focussing on causes (schizophrenia, manic-depression) to symptoms defined by observable phenomena (ADHD, Obsessive-Compulsive Disorder).

Meanwhile, back in economics, Public Choice Theory (outlined in, for example, The Vote Motive) had fatally undermined concepts such as the “public interest” and “public service”, demonstrating that politicians, civil servants and those working for the state were just as self-interested as those in any other walk of life. As Northcote Parkinson and Yes, Minister captured so humorously, everyone in public service was primarily trying to protect and promote their own interests; the “public interest” was just a cover for what was at best individuals’ concept of what was right and wrong, and at worst selfish rent-seeking.

The result of these three revolutions was a belief that the mess that many nations found themselves in by the 1960s and 1970s was caused by the naïve belief that the public good could be promoted by wise men in ivory towers rationalising the process with the disinterested altruism of platonic guardians. Not surprisingly, there were those who wanted to sweep aside this belief, and the entrenched interest groups that it protected. These included a number of right-wing think tanks. Their proposed solution was to exploit the self-interest of public servants to promote more effective outcomes: for example, by giving incentives to them to achieve results.

Sadly, this proved rather less successful in practice that in theory. Robert McNamara’s attempts to run the Vietnam War as a mathematical exercise, calculating exactly how much explosive tonnage needed to be dropped to achieve the cowed submission of the Communists, resulted in failure and resignation; in attempting to achieve body counts that met their targets, self-interested soldiers would kill anything that looked like a Viet Cong fighter, which in a guerrilla war meant just about anyone. Margaret Thatcher’s NHS reforms began the process – so beloved of Gordon Brown – of setting central targets for local hospitals and financially rewarding or penalising them accordingly. It has been an ill-starred venture.

And that is where the programme left off. There was no broad analysis or discussion; no sense of conclusion; and no clear vision of where the rest of the series would take us. We were left dangling in the wind, waiting for Mr. Curtis to explain it all on BBC2 next Sunday at 9pm and the Sunday following.

I have my reservations. Firstly, as I outlined regarding the approach to Hayek, Mr. Curtis’s analysis is not always correct – he is stronger on his psychiatric home-ground than on other topics. Secondly, I fear that his intention is to question much of what has happened in the past thirty years. While there have undoubtedly been colossal failures and terrible errors, there have also been successes and benefits: it is a sign of how much time has elapsed that some are now able to look fondly upon the 1960s and 1970s as though they were some sort of golden age, rather than a wasteland of inflation and unemployment, bubbling revolution and counter-revolution, and abject poverty. If it is Mr. Curtis’s intention to suggest that the positive elements of the revolution of the past thirty years – the deregulation and liberalisation that has led to wealth and freedom beyond the imagination of those living through the Winter of Discontent – have been accompanied by a creeping centralisation and rising state power, then he is correct (and in good journalistic company). But if, as I suspect, he intends to suggest that we would all be better off returning to the age of collectivism and public duty, of trusting citizens and paternalistic administrators, then he is simply swapping a flawed concept of freedom for no freedom at all.


I have separately reviewed part 2 and part 3. Curtis's conclusion and my analysis of it are discussed in a final post.

The road-user pricing to serfdom

Gridlock is coming, is both a literal and a figurative sense, and only Douglas Alexander can save us. If that doesn't send a shiver down the spine (or perhaps send you off into peels of laughter), the alternative should cause you to break into a cold sweat.

The petition to “Scrap the planned vehicle tracking and road pricing policy” has now received over 1.4m signatures. It says something of the pace and popularity of this petition that the editorial in today’s Times referred to just 1.3m signatories. Like the proverbial snowball, this is gathering ever more size and momentum as it cascades downhill.

I have explained before that the thinking behind this petition is confused and wrong. At the time I also warned, in passing, that no government could ignore a petition that garnered more than 30m signatures: the majority would have spoken, and to deny it its head would be all but impossible. The question, however, is whether a government can even ignore one with 3m signatures, or (the imminent test) half that. The pressure is clearly great: how often have opponents of the war in Iraq – Liberal Democrats among them – argued that the government should have changed its policy when a million people marched through London on 15 February 2003. But where would such a policy lead us?

If just 3.5 per cent of the voting public – just 2.5 per cent of the population – can divert a democratically elected government from its course, is this a sign of direct democracy in action, or is the government caving into a well motivated and vocal minority. It strikes me as no surprise that millions of people object to this, or indeed any other, government scheme – especially one that involves taxation. Every change has winners and losers, and both winners and losers will be numbered in millions. The question should not be whether the losers bleat most loudly, but whether the overall social benefit is greater than the cost, and (for those of us of a liberal bent) whether the proposal represents an abuse of the minority by the majority. Where road-user pricing is concerned, it is clearly a case that the social benefit outweighs the cost without the minority being unduly coerced. The government (in the form Mr. Alexander) should continue to make the case for road-user pricing and face down the protest.

This move towards “Direct Democracy” is in fact a dangerous trend. There is a good reason why we practice an alternative, “Representative Democracy”. We cannot all be experts in every field; decision-making is a full time business, and few of us have read the parliamentary committee reports, research institute papers and academic studies that underlie much of the decision making of government. Government also needs to be strategic, whereas the will of the majority (an amorphous body, constantly in flux, the make-up of which is constantly changing as it coalesces around new ideas and opinions) is momentary and fickle, precisely because the majority has no permanence.

More sinisterly, it can be anti-democratic. As both public choice theory and the petition about road-user pricing tell us, it is easier for minorities to mobilise than for majorities. Because minorities are smaller, they are easier to pull together, while the benefits of successful lobbying are shared less widely, so for any individual the spread between cost and benefit is closer than for a majority, where the benefits are spread broadly and the costs of mobilising high. This is why single-issues of dubious popularity often capture the media’s attention and bend governments to their will.

But if Direct Democracy lends itself to minorities, it lends itself to populist demagoguery even more. Caesar dominated Rome through plebiscites, a practice that was aped my Mussolini. To this day the German constitution bans federal referenda because they were the tools of Nazism.

And here I can see the real nightmare emerging. If the government backs down in the face of opposition form just a tiny fraction of the polity, it will set a trend that will lead to more than just motoring gridlock. Almost all important government policy is controversial, and all controversial policy will be paralysed by petitions and polls. A situation akin to that in Switzerland, where votes for women were blocked until 1973, or the United States, where differently-constituted majorities simultaneously try to cut taxes and increase public spending, would be the least of our fears. A government unable to legislate has a certain appeal to the libertarians among us, but it would undoubtedly be only the beginning.

As important and popular social and economic reform was stymied, and the government was rendered increasingly unable to respond to real problems, a new popular opinion would rise: that a strong government, a strong leader, was needed to push through change; to break the gridlock. We have seen it before. Popular frustration leads to the election of a strongman who offers to over-rule petty objections and push through progress. At first it is welcome, and the benefits are tangible: Hitler built the autobahns and Mussolini made the trains run on time; no need for road-user pricing when you have slave labour and threaten to shoot the train drivers! The benefits of today are paid for tomorrow, as freedom is lost and democracy forgotten. It is the road to serfdom.