Politics against economics

Adam Smith’s wisdom still works – but not in every situation

Even though the scientist Lewis Wolpert sometimes writes silly books explaining why there’s no God, he’s amply qualified to pronounce on his own field.

One of his pronouncements struck a chord with me. Modern science, wrote Prof. Wolpert, always goes beyond common sense.

If so, economics isn’t a science for it doesn’t, or at least shouldn’t, transcend common sense. Any good housewife equipped with a charge card and a pocket calculator can teach economics better than most professors equipped with pie charts and computer models.

Adam Smith emphasised the commonsensical essence of macroeconomics by writing: “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”

A scan of modern history will show that the success of an economy depends on the rigour with which it follows Smith’s dictum. And a slightly deeper scan will confirm the truth of other commonsensical axioms as well.

It’ll show that no economy has ever taxed and spent its way to success. Quite the opposite, it’s tax cuts that invigorate an economy, especially if accompanied by reduced public spending.

Also proved will be another maxim: imposing protectionist tariffs leads to a trade war, with both sides losing. David Ricardo even argued that a country shouldn’t retaliate against another country’s protectionism, for doing so will hurt its own consumers too.

All of this is common sense, pure and simple. Alas, modern economies are neither pure nor simple. Politics gets in the way, sometimes rightly, usually destructively.

And politics is hardly ever, and never merely, commonsensical or indeed rational. It’s kicked from pillar to post by such irrational things as ideology, emotions, resentments. That’s why politics is usually at odds with economics.

Just look at two Anglophone countries: Britain and the US. I’ll start with Britain’s problem first. Or rather two problems: PM Theresa May and Chancellor Phillip Hammond.

In a recent interview, Mrs May nonchalantly mentioned that the NHS is in dire need of an extra £20 billion. To raise that amount she’ll have to raise taxes.

Now Britain’s tax revenues are already close to 35 per cent of national income, which is the highest they’ve been since Harold Wilson’s tenure.

Since only about half of British adults pay taxes, a painstaking number-crunching shows that those unfortunate individuals pay, well, a hell of a lot. How much more will they have to shell out?

I suspect their tax burden will be less in keeping with Arthur Laffer than with Harold Wilson, who cheerfully introduced a top marginal tax rate of 83 per cent on earned income – and 98 per cent on the ‘unearned’ variety.

(A term I detest: a man who works all his life and prudently saves or invests his surplus income has earned this privilege. It’s the fiscal version of double jeopardy: if we can’t be charged twice for the same crime, how come we can be taxed multiple times on the same income?)

The only excuse for this type of state extortion is that Corbyn would be even worse. For, other than the detrimental long-term effect of punishing industry and thrift, the immediate result will be lower, rather than higher, tax revenues.

Former Chancellor George Osborne found it out the hard way, by increasing stamp duty on house purchases, undermining the property market and then watching the Treasury lose hundreds of millions in revenues.

So don’t our politicians know the most elementary economics? I wish it were quite so simple.

They know all that. Some of them even know considerably more. For example, they must be aware that full nationalisation is the costliest and least effective way of providing medical services.

The NHS, whose standards of care are rapidly moving towards the third world, is a bottomless pit into which the nation’s wealth is sliding at an ever-increasing rate.

But that knowledge is purely academic for our politicians. They’re driven by the need to stay in power at any cost, which in Britain still involves winning elections.

This goal is incompatible with uttering a single word against the NHS, which massive propaganda over three generations has turned into a God surrogate, a national totem.

One is allowed to bemoan some inefficiencies of the NHS, but one can’t question the principle behind it on pain of political oblivion.

Saying publicly that the NHS is failing not because it’s run by corrupt people, but because it’s based on a corrupt principle is tantamount to announcing one’s retirement from politics.

And suggesting a switch to a semi-private system, similar to those operating in most Western European countries, would be like advocating cannibalism as a way of providing dietary protein.

Hence neither Mrs May nor any other politician will ever be able to say that increasing the NHS budget is throwing good money after bad. So fine, let’s accept that the extra £20 billion must be found somehow.

But surely squeezing even more money out of working people isn’t the only way? While I wouldn’t dare suggest the truly radical solution of disbanding the NHS, I can easily propose all sorts of extra sources of revenue.

The most obvious one is not paying the £39 billion ransom to the EU. That would serve the additional purpose of Britain recovering some of her erstwhile dignity.

As it is, Mrs May and her emissaries are acting as lowly supplicants, begging their EU masters for concessions and ‘deals’, whereas all the EU wants is to torpedo Brexit by any means possible.

The best deal is no deal, and the £39 billion is its immediate payoff.

Throw £20 billion into the bottomless pit of the NHS, and we can still spend £19 billion on defence and policing, if only to remind people what the state is for.

Add to that the £14 billion we spend annually on foreign aid, some of it to the world’s second largest economy, and we’ll be in clover – rather than the substance we’re in now.

All this is clear-cut: there’s not a grain of economic rationality about the planned hike in taxation. But Trump’s trade war on China is more complicated.

Modern wars, shooting, cold, or economic, are seldom waged for fiscal gain. It’s generally understood that, in purely financial terms, even a victory may well spell defeat.

Yet some wars are just, and they must be fought – man doesn’t live by bread alone, and neither do countries.

There’s no doubt that, by slapping protectionist tariffs on half a trillion’s worth of Chinese imports, President Trump has declared trade war. Neither is it a secret that US consumers will be the poorer for it, in the short term at least.

But then Britain emerged not just poorer but destitute out of the Second World War. Does this mean Hitler should have been given a free rein?

China is run by an evil regime, acting in character. True, it hasn’t yet attacked the US in the old-fashioned military way. But that only means that it has chosen different, economic, offensive weapons.

It was China that fired the first shots in the trade war, by making American goods hard and expensive to sell inside China.

Employing throngs for coolie wages, the regime can undercut any economy employing people unprepared to live on a handful of rice a day. Chinese economic troops are deployed in an aggressive formation, and they’re armed with intellectual properties stolen from the West, especially the US, en masse.

The loot thence realised is laundered through Western financial institutions on a scale only bettered by the Russians. Much of it is used to bolster China’s rapidly expanding armed forces.

The outcome of the present situation is hard to predict in the absence of reliable insight into the minds of Chinese chieftains. It’s possible, though far from guaranteed, that Trump’s measures will force them into a modicum of civilised behaviour.

This isn’t to say I’m advocating the trade war declared by Donald Trump: I simply don’t have enough information for any such advocacy. Nor, for that matter, can I oppose it on any other than general economic presuppositions.

I’m merely suggesting that it’s often unavoidable and sometimes desirable to let politics interfere with economics. Regrettably, general economic principles of good housekeeping can’t be applied indiscriminately – the world is too imperfect for that.

But there’s a major proviso: such latitude should only be given to good, sound politics – not to those springing from politicians’ urge to win elections by pandering to the false idols of modernity.

7 thoughts on “Politics against economics”

  1. China should not have been allowed to enter the world market. One country using government controlled slave labor to produce goods obviously has a huge price advantage over the rest of the world. Imagine: it is cheaper for U.S. companies to ship raw material to China, pay for labor there, then ship the finished goods back to the U.S. than it is to do the labor in the U.S.! President Nixon’s visits were a mistake. But, hey, at least we now have pandas in our zoos; and a trade deficit that will never be overcome (and a labor force that expect something – or everything – for nothing).

    1. I couldn’t agree more – even though I’m not sure how China could have been kept out. As to trade deficits, Milton Friedman actually argued in favour of them (it’s a sign of health that our money buys more of their goods than theirs can buy ours). I was never quite convinced, but it’s not easy to dismiss that argument, at least not out of hand. If you’re at all interested, I touched upon this in my book The Crisis Behind Our Crisis. My counterargument was more social than economic.

  2. Bizarre as it may sound. I feel as if a majority vote for Corbyn’s Labour party would be a good thing for Britain. Shake the masses from their apathy, what?

  3. A magnificent polemic, enough compressed into one blog but sufficient to fill a book. That we have survived many episodes of bizarre economics can probably be put down to human ingenuity ensuring that things reach a natural level in terms of what accountants call ‘the bottom line’. For instance, in the case of supertax where you were allowed to keep (say) 5% of income, your company (especially if you owned it) would pay you 20 times what you might have got if there had no tax at all. Obviously. that was only for top employees in successful companies. Today, such employees still get their millions and pay tax at a rate similar to that paid by the rest of us. Back in the day, Harold was a hero to the downtrodden masses but supertax was often paid at no great loss to the end payers or was avoided by tax exile.
    I haven’t heard the term ‘unearned income’ for many years. Perhaps it was a hangover from the time when people such as the ones satirized by Evelyn Waugh existed in abundance.

    1. Thank you for your kind words — and your suggestion that this kind of polemic could fill a book. Alas, I already wrote it a few years ago: The Crisis Behind Our Crisis. And I congratulate you for not having heard the term ‘unearned income’ for many years. That means you shun verbal jousts with Marxists, a wisdom I can’t boast.

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