Comments by Alexander Hamilton234

While it is true that austerity alone, in weakening economic climate, may only work to exacerbate the current crisis there are some easy ways to boost growth that do not require fiscal expansion:

1) Fully liberalise services across the EU (including the recognition of professional qualifications)- thereby also mitigating the timid or non deregulation of such professions in the PIIGS
2) Rationalise and eliminate regulations at the EU and national level- thereby reducing business costs
3) Simplify the tax code at the national level- fewer distortions and costs of compliance
4) Open governance- force Eurozone states to have independent statistical agencies and require the publication of comparative data on revenues and expenditures
5) Successfully negotiate a global round of trade talks. Or, at least a US-EU Trade Area or Common market agreement

The only way to trim the deficit is to pursue a two pronged process of net-expenditure cutting and wealth creation. This should include:

(1) Indexing social security benefits to a cohorts life expectancy
(2) At least some general ‘across the board’ cuts to all parts of the budget (including the military)
(3) Real cost saving reforms of healthcare (from tort-reform to fewer incentives for the health professional industry to overspend at taxpayers’ expense)
(4) A Swiss style (NOT the German version) budget balance amendment which eliminates deficits in the good times but allows deficit spending in the bad times.
These measures needs to be coupled with a pro-growth agenda which should include:
(1) A reduction in regulatory costs (stimulating business growth- especially SMALL business growth)
(2) A simplified tax code (preferably no deductions with a single flat rate for everyone and a tax free allowance for the first $20,000 dollars earned- ensuring lower income groups don't pay taxes)

As any good political economist can tell you no voting system can eliminate the possibility of strategic voting (at least some voters will have an incentive to alter their stated preferences). The good thing about FPTP is that, because it diminishes but does not eliminate the likelihood of coalition politics, voters ordinarily know exactly whom to hold responsible at the election (no complex coalition bargaining to consider) and can decide more clearly whether they want the government of the opposition to win. Moving away from the most accountability enhancing voting system won't increase 'representation' but will diminish accountability (just what most of the political elite wants).

The difficulty in implementing a comprehensive deficit reduction plan is that, unfortunately, the US political system allows rent-seeking interest groups to unpick the bits of the plan that they do not like....so I am not optimistic BUT here is my deficit reduction wish list:

(1) The retirement age rises to 70 and is pegged to life expectancy increases.
(2) A simplified tax system (deductions=distortion) in which wealth creation is rewarded (lower business tax) and consumption is taxed more heavily to compensate (national VAT tax).
(3) Please stop subsidising the farmers.
(4) The defence budget also needs to be cut.
(5) It may be symbolic but please ban pork-barrel (its just so unsightly) .

ALSO another way to stimulate growth without adverse fiscal consequences (if you buy into that concept) is a de-regulation bonanza...getting rid of red tape is a good way to reduce business costs without hurting the balance sheet (and please none of this de-regulation caused the crash...actually government regulation requiring banks caused the sub-prime crisis).

The way in which the Spirit Level uses data to draw inferences is wholly inadequate. If you tried to claim that x causes y based on a bivariate correlation and tried to publish such findings in any serious social science journal you would be rejected. One has to wonder if some of the correlations hold once you control for things like geographical location, per capita income, religious heritage etc...

Who guards the guardians?
Proponents of state intervention, who argue that transaction costs (information asymmetries, externalities) cause 'market failure' forget that the political marketplace is just as prone to such pathologies.
Politicians will have a tendency to: (1) implement policies which deliver short term political gain regardless of any long-term economic pain (think unsustainable welfare states) and will have: (2) a tendency to undersupply policies that may promote the welfare of citizens in the long run if such polices also generate too many short term political costs (if its going to explode in voters face tomorrow, when you are not in office, why bother fixing it today?).
Bureaucrats and interest groups will use information asymmetries to allocate taxpayers money to further their own private interests and provide themselves with exciting jobs.
More pertinently, all policy-makers- because they are just human beings after all- cannot predict the future (see KARL POPPER- THE POVERTY OF HISTORICISM). Just because someone is clever and has the best intentions does not mean they can make the best choice...so using other people's money to back winners is difficult to justify on utilitarian/scientific grounds even if we assume the existence of a benevolent Leviathan.

I find the Keynesian argument, that government needs to intervene in the economy to alleviate what is essentially 'irrational behaviour' rather inconsistent. On the one hand we are to believe that the actors in the free market are prone to coordinate on sub-optimal equilibria following a shock (recession). In order to prevent/alleviate this outcome an omniscient and benevolent government has to 'intervene' to ensure a marginally more optimal outcome. Even if we were to assume away government failure, a rather heroic assumption, it is possible to argue that if human behaviour is 'irrational' free agents may become 'irrationally' intolerant of government intervention (over-estimating the impact of unfunded fiscal intervention)- resulting in the generation of even worse sub-optimal equilibria. Therefore, when applied consistently, the 'irrational actor' assumption behind Keynesianism cannot, a priori, be used to predict the net effect of government intervention because, in practice, it applies to the political marketplace as much as to any other market.

The interesting thing about European critics of the market is their logical inconsistency. If such critics applied the reasoning behind market failure to the political market place they would discover that the coercive hand of the state is not infallible. Justifying intervention to correct market failures on welfare grounds is only reasonable if the expected a public sector failures subsequently generated (rent-seeking bureaucrats, office seeking politicians- good governance is public good subject to undersupply after all) are less than the market failures they remedy....Rather than just employ lazy half-baked arguments a dose of critical reasoning and reflection might do these critics some good.

Marie Claude

You are correct to point out that most of the 'social solidarity' programmes have been a waste of money. But this should serve as a warning- there is actually no evidence that conscription is any more effective. So we should be weary of social engineering.
COnversely, there is some evidence that conscription promotes increased drug taking and discriminates against the disabled. As for social solidarity...conscription is perhaps the prototypical example of Milton Friedman's critique of welfare states in general- namely that it is nothing more than a subsidy for the middle class.
Vietnam (a rather long war- so much for the 'conscript armies reduce the propensity for war-making' argument )was fought predominantly by socio-economically disadvantaged groups- the sons of pivotal voters are the last to be sent to the front line- political logic would not have it any other way. Furthermore, having lived in Greece for a few years, I can tell you that, anecdotally, there is a very strict hierarchy in terms of the jobs conscripts get assigned- 1) the super rich avoid the draft completely; (b) the middle class children man the photocopier on some nice island and (c) the rest - who need to earn an income more than most- are left with the most arduous and unpleasant assignments.

A few notes/responses to some of the comments about my first post:

To Marie Claude: There are more efficient ways to incentives social solidarity. Given that we live in a world of scarcity spending extra resources on such things as social mobility, diversity programs etc would be a more efficient way of fostering solidarity than doing so by forcing people to live together. Have you also considered that some people (disabled, people with certain personality types) may become alienated from their society if they are forced into wasting their time in an environment that is detrimental to their health and sense of well-being? Also there is evidence that, like prison, the barracks can result in increased drug-taking and more anti-social behaviour.

To Kurt Lessing: You need to compare like with like. Firstly would a conscript army today have fared better in Afghanistan and/or Iraq than the professional forces? I think not. Secondly, historically the professional armies that fought against Napoleon had large numbers of foreign mercenaries who have always been known to be more unreliable. I don' think the desertion rates of professional armies approach anything like the desertion rates of foreign mercenaries prior to the second half of the 20th century.

From a purely logical point of view conscription is analogous to serfdom. Serfs (citizens) toil for their Lord (the State). To add insult to injury in modern times this form of slavery is not even profitable as it is a costly burden that robs the taxpayer of her money for negative returns (if taxpayers value real defence then they would spend the money on professional soldiers who might actually be able to provide credible security services). So practically, conscription has turned into a absolute waste of resources- feudalism that impoverishes the serf and the lord simultaneously...oh the joy

If elements of the Greek trade union movement are so incest about the 'unequal' cost of austerity why don't they enthusiastically embrace labour and product market reforms? After all removing business red tape would effectively act as a stimulus for private enterprise while allowing consumers to benefit from the deregulation of product markets would result in more competitive consumer prices (everything from pharmaceuticals to foodstuffs to cigarette prices would fall)- in effective this would act as a pay increase without forcing up government expenditure. Then again supporting such reforms would go against the narrow interests of their rent-seeking members so I guess it makes sense to keep blaming "capitalism" for their collective greed.

It is important to note that, contrary to many of the arguments of neo-Keynesians, there is evidence that cutting the deficit before debt levels rise too far is growth enhancing (making it hard to argue that excess spending on wasteful government activities should not be scaled back too quickly to prevent a double dip recession).
Just as the human brain may be wired up to become overoptimistic in times of seemingly endless growth there is evidence that, in a context of deteriorating public fiances, firms and households are likely to become ever more risk averse as they anticipate, or even overestimate, the un-sustainability of public finances. As a recent paper on the historical relationship between GDP growth and public debt shows cutting down the state can be very growth enhancing:

http://www.economics.harvard.edu/faculty/rogoff/files/Growth_in_Time_Deb...

Cutting the deficit requires spending cuts and also the stimulation of a more private sector friendly, pro-growth environment:

Spending Cuts:
(1) Link the future pension age to life-expectancy (no more unsustainable pension systems)
(2) Raise VAT (tax consumption not investment)
(3) Set universities free to set their own fees (there is no evidence people are not willing to pay for the returns of education)
(4) End the absurdity of unsustainable public sector pensions
(5) Civil service hiring freeze

And some supply -side reforms:

(1) Simplify the tax system
(2) Have a regulatory bonfire (noting like reducing the costs of doing business)

One of the potential benefits of university tuition fees, which people often forget to mention, is that, by directly linking a student's financial contribution to the service they receive this may actually create incentives for university staff to actually teach as poor performance, and the long-term reputation ramification this creates, will have more substantive implications (students as consumers are more demanding than students as taxpayer-subsidised agents). This is something Adam Smith noted in the Wealth of Nations in which he compared the superior teaching experience of the University of Glasgow (where teaching incentives existed) with the rather different experience he received at Oxford where college endowed professors had quite different incentives:
"In the University of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching."
(As anyone who is at Oxford knows, our relatively imperious professors have not changed their way much since Smiths days).

I wonder how attractive people now find the prospect of proportional representation? It is sold as a system that 'empowers voters' yet in reality it diminishes accountability by making it more difficult to predict who will be in power post-election (no more throwing the rascals out) and if you think about it, because the voters of pivotal 'kingmaker' parties will be able to influence post-election outcomes more even each vote does not count equally...talk about a real 'bargain'

While it is difficult to determine the long-term consequences of public policy enacted by any government, some of the (unintended/intended but obfuscated consequences of labour's policies need to be noted).

(1) Getting rid of the hereditary pears, while a sound move from a democratic perspective, also resulted in increased executive dominance of the second chamber (the PM essentially appoints a greater percentage of peers than ever before).
(2) The limited/non-existant fiscal powers of the devolved institutions has resulted in increased 'complexity' of holding politicians accountable. Essentially the Scottish executive blames Westminster for having too limited powers and Westminster blames the Scottish government for producing fiscal irresponsible policies.
(3) The introduction of 'closed list' proportional representation for the European Elections and elements of both the Scottish and Welsh devolved institutions has reduced the ability of voters to hold individual office holders to account. Thus increasing parties power over tat of the electorate.
(4) The ratio of public spending/public reform has been appalling. Instead of introducing new governance mechanisms (such as school vouchers) and freeing professions (especially teaching) from the regulation imposed by rent-seeking unions (that work against the interests of the public/taxpayers) the government has handed these problems onto their (cash strapped) successors who will not be able to use the carrot of greater fiance to induce incentive reform.
(5) When introduced the minimum wage was relatively low and the job market relatively robust. Yet the political economy of minimum wage change is unlikely to be sensitive to changes in the labour market and the economic environment for political reasons.
(6) Public debt and the budget deficit...don't even go there.

While one must never be too naive regarding the incentives politicians will have to implement their pledges after the election the Tory's education and local initiative proposals are potentially quite radical. While the quantification of the impact of institutions is difficult the most rigours econometric evidence suggests that: (1) school choice does improve overall standards and; (2) local referenda/initiatives tend to cut government waste and increase citizen participation. Conversely, the tory plan to subsidise people's lifestyles is both morally indefensible and empirically unsound. The argument that the statistics show that married couples stick together and all the other poorly understood statistics used to defend, what is nothing more than a rent to a special interest group, is very unsound. This is because there is little evidence that when you control for the type of people who get married (the selection effect) there marriage increases the longevity of a relationship (people who get married are more likely to stay together anyway as marriage is an experiential good rather than an instrumental institution). Then again who said politics produced coherent plans anyway?

It is so ironic that the first-past-the-post electoral system is often regarded as unfair because it under-represents small parties, yet as this (potentially) anomalous election result may illustrates a proportional electoral system will only ensure the over-representation of small parties and, at least relative to a first-papst-the-post modus operandi, marginally increase the propensity for more 'back-room' coalition dealing. If this is the choice we have surely it is better to stick with a voting system that ordinarily gives voters the power to 'throw the rascals out' rather than switch to an electoral system in which smaller parties get to yield disproportionate influence and voters are less likely to know who to blame for public policy outcomes.

It is so ironic that the so called 'social legislation' (aka politically guaranteed rents to the trade unions and their chums) aimed at protecting workers in fact has the effect of generating so much misery. Not only does the two tier labour market deprive many aspirant individuals of work but it disproportionately affects young people and the socially marginalised. Yet, surprise surprise, I am not hearing the 'progressives,' so supposedly incest by 'market generated' income inequality clamouring for the deregulation of the labour market, to remedy this disparity...funny old political economy