Working Papers

2010 06

Ferraris for All

Sean Collins reviews Daniel Ben-Ami’s Ferraris for All:

Ben-Ami maintains that, rather than challenging growth scepticism, the 2008 recession gave it greater impetus. The growth-sceptic outlook that prevailed prior to the downturn encouraged us to explain it by reference to unbridled greed, instead of structural economic factors. And this greed and excess were said to characterise all of us, not just a few bankers. Ben-Ami cites Neal Lawson of the UK Labour Party-linked think-tank Compass, whose book All Consuming criticises mass consumption. The subtitle of Lawson’s book – ‘How shopping got us into this mess and how we can find our way out’ – makes it clear we are all to blame…

The limits to growth that critics cite are not insurmountable, says Ben-Ami. For example, he argues that the answer to climate change is more and better technology, rather than reduced energy use and cutting back on economic growth. But technology is expensive, which is why growth is so important. Cynicism about growth is negative because it denies us the resources to deal with problems.

Ben-Ami’s blog can be found here.

posted on 30 June 2010 by skirchner in Economics

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All His Own Work

Former federal Labor Minister Graham Richardson, on why caucus liquidated Kevin Rudd with only marginally more dignity than afforded to Nicolae Ceauşescu:

Faction leaders didn’t make caucus members hate Rudd; no, that was all Kevin’s own work.

Hate, by the way, was the right description. From lowly backbenchers to cabinet ministers, I have never come across such loathing towards a leader before, let alone a leader who achieved the biggest swing to Labor since World War II at the 2007 election.

Not bad for a former diplomat.

posted on 29 June 2010 by skirchner in Politics

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Rudd Down, Hayek Up, Pundits Red-Faced

The exclusion of Kevin Rudd from the first Gillard cabinet completes the wholesale political collapse of the Rudd bubble. It may be coincidental, but still highly poetic, that Rudd’s demise coincides with F A Hayek’s Road to Serfdom going to number one on Amazon. Rudd was the author of a ham-fisted critique of Hayek, presented to CIS in 2006, which effectively foreshadowed his intellectual, personal and policy failings in government.

When I worked in federal politics, I was struck by how much media punditry reflected personal relationships between pundits and politicians at the expense of journalistic objectivity. Andrew Bolt rounds up some of the casualties on this occasion.  The Australian’s Cut and Paste also does its usual compare and contrast, courtesy of Mark Latham, who should know a thing or two about the bursting of media-driven leadership bubbles:

Peter Hartcher in The Sydney Morning Herald on Wednesday:

WHEN Kevin Rudd talked confidently on Monday about the strength of Labor support for his leadership it was not based solely on bravado, he has been discreetly checking that his party is still behind him. The Herald has learnt from a number of MPs that the Prime Minister’s chief of staff Alister Jordan has been talking privately to almost half the caucus. While some caucus members are edgy about their electoral prospects, Mr Jordan’s exercise evidently discovered no defectors from the Rudd camp.

Mark Latham in The Australian Financial Review yesterday:

A DEFINING feature of Rudd’s prime ministership was his constant briefing of Hartcher on the behind-the-scenes processes behind big decisions, invariably to glorify his own contribution. As one caucus wag told me earlier this year, “Kevin doesn’t change his underpants these days without telling Hartcher about it.” It would have been obvious to his colleagues (Gillard in particular) that the Herald’s story came from the PM’s office, a stunning valedictory to Rudd’s misreading of his colleagues and his ineptitude as a caucus tactician.

Alex Robson and Sinclair Davidson provided perhaps the most prescient assessment of Rudd’s likely performance in government in a Wall Street Journal editorial published before the last federal election:

If Ruddonomics wins the day, Australia could find itself back in a 1970s mindset, with bigger government and a less competitive economy.

posted on 28 June 2010 by skirchner in Politics

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Kevin Rudd’s Lesson for US Politicians

A US perspective on the repudiation of Kevin Rudd:

Six months ago, Kevin Rudd was one of Australia’s most popular prime ministers in history. The brainy and intense Labourite had beaten four-time Prime Minister John Howard in a smashing victory and his Australian Labour Party was comfortably ahead in the polls. Today he’s gone, resigning midterm rather than be dumped by his own party. What happened?


Rudd had made the pursuit of cap-and-trade a hallmark of his tenure, calling it “the greatest moral, economic, and social challenge of our time.” But once the opposition coalition picked a new leader, Tony Abbott, in December, prospects of an agreement that could send cap-and-trade through the Australian Senate faded. Abbott labeled the plan ”a great, new big tax” and the coalition started to climb in the polls. When Rudd announced in late April that he would not push his plan until 2013, well after the next scheduled elections, his support collapsed. Recent polls show the coalition in the lead, a stunning turnaround that if repeated in the elections due within a year would constitute the largest swing between elections in modern Australian history. Meanwhile, support for the Green Party has surged to record heights as disappointed climate activists have abandoned Labour in droves.

There’s a moral here for American politicians. Voters understand that cap-and-trade is not a free lunch; pointing out the real costs will resonate with voters.

posted on 25 June 2010 by skirchner in Politics

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‘I Disrespected Hayek and Look What Happened to Me’


posted on 25 June 2010 by skirchner in Politics

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The Repudiation of Kevin Rudd

Congratulations to the ALP caucus for acting decisively to remove Kevin Rudd as Labor leader and Prime Minister. To be repudiated by his own party on the eve of an election is a well-deserved humiliation for Australia’s worst Prime Minister since Gough Whitlam. The fact that Rudd was still burbling inanely about the G20 at the press conference announcing the leadership spill must surely have convinced many members of the ALP caucus of Rudd’s disconnectedness from reality, born of his spectacular hubris and vanity.

It is noteworthy that their handling of the ETS was decisive in the demise of both Kevin Rudd and Malcolm Turnbull. The cynicism and opportunism of the Rudd-Turnbull ETS was one of the most shameful episodes in the history of Australian federal politics. It is testimony to the remarkable efficiency of the Australian political system that it is capable of so swiftly liquidating its own errors.

UPDATE:Australian dollar-denominated asset markets outperform on change of leadership.

posted on 24 June 2010 by skirchner in Politics

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Profit from Kevin Rudd’s Defeat

Go long Julia Gillard here.

posted on 24 June 2010 by skirchner in Financial Markets, Politics

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The Economic Consensus We Could Do Without

Treasury Secretary Ken Henry’s call for economists to shut-up and ‘serve the national interest’ finds little favour with Warwick McKibbin:

Warwick McKibbin, the director of the Australian National University’s research school of economics, said he was stunned by a call from Mr Henry on Monday for academics to ‘‘put down their weapons’’ rather than nit-pick over government proposals such at the emissions trading scheme. ‘‘I don’t know whether Ken was fingering me but there weren’t too many other people out there arguing against an ETS,’’ he said.

‘‘I have enormous respect for Ken Henry but he can’t believe that you should have consensus because it is better to have bad policy that everyone agrees with than eventually get good policy that will work.

‘‘The ETS was a flawed scheme. Had the government got it through it would be dead by now because of the financial crisis.

‘‘I also disagreed with the scale of the stimulus package … It wasn’t evidence-based policy; they panicked. The government rammed those decisions through the economy even though they were fraught with risk. No one was consulted about an alternative view and if you did say anything you were attacked by the Treasurer and the Prime Minister in public.’‘…

‘‘If the government won’t engage you behind closed doors then an academic has no other choice than to express their opinion in the public interest, in public, for the public to assess.

‘‘The stimulus created a problem. The government overspent but they had enough in reserve. Then they decided that because of politics they had to get their spending back so they could claim they had fiscal surplus - for which there is no economic basis, by the way - so they come up with a really badly designed resource tax to try and get the position to look good three years from now, and in the middle of a sovereign risk crisis exposed the economy to a reassessment of sovereign risk.

‘‘The review of the tax system should have been independent of the Treasury and then critiqued by it and other economic agencies.

‘‘Treasury, as far as I can tell, has become an arm of political policy. Historically they have always been the ones who have said, ‘Wait a minute, this policy of subsidising green cars to try and save the constituents of a particular electorate is not a very sensible way to spend $8 billion.’ You just don’t see that now.’‘


posted on 23 June 2010 by skirchner in Economics

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Never Let the Facts Get in the Way of a Dumb Story

Chris Joye points to a piece by Michael Pascoe, reporting on a speech by RBA Deputy Governor Ric Battellino:

Reserve Bank deputy-governor Ric Battellino quietly destroyed a bunch of major myths this week – turns out we’re actually good savers, our household debt isn’t a problem, the housing affordability crisis has been exaggerated and our foreign debt is sustainable. In short, most of the usual scary headlines about the domestic economy are rubbish.

You’d think that would be worth a few headlines, but the RBA made a couple of mistakes in the timing of what is really a very good news story.

Pascoe thinks the speech got buried by the RBA minutes, released the same day. But Pascoe is mistaken if he thinks Battellino’s comments were newsworthy in the usual sense. Battellino and other RBA officials have been arguing along these lines for years. The comments are only news to those who haven’t been listening. If Battellino’s comments were under-reported, it is perhaps because his remarks are embarrassing to the lazy prejudices peddled by so many media commentators over the years.

As noted in the previous post in relation to the Henry review, the media are more than capable of ignoring arguments that are inconvenient to established narratives. Commentators like George Megalogenis and Mike Steketee could hardly ignore the most comprehensive review of the Australian tax system ever undertaken, but they still managed to write it up in way that pretended it was something other than a wholesale repudiation of most of what they have previously written on the subject.

posted on 20 June 2010 by skirchner in Economics, Media

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Journalistic Cheek on Housing and Tax

George Megalogenis wrote in the Weekend Australian (12-13 June 2010) that ‘the Henry review was being cheeky in playing down what previous decisions did to housing affordability.’ He goes on to describe the 1999 Ralph reforms to capital gains tax ‘as the worst revenue decision of the Howard government.’ Megalogenis and many other media commentators may well find the Henry review cheeky, because it effectively repudiates much of their commentary on the subject of capital gains tax, negative gearing, and housing affordability over the last decade. The real cheek is that these commentators have not changed their tired old tune in light of the review.

The Henry review was commendable for rejecting from the outset the comprehensive income view of taxation that has informed most media commentary on these issues. Henry noted that there was no reason why labour and capital income should be taxed at the same rate, favouring an expenditure tax benchmark that seeks to exempt the returns to saving from tax. The final report’s recommendation that saving via owner-occupied housing remain tax-exempt was explicitly based on this benchmark and not, as some have suggested, resignation to political reality. The final report also recommends that the returns to other forms of saving, including capital gains and net residential income and losses, should enjoy a 40% tax discount. Like the Ralph review, the Henry review embraced the principle that capital gains should be concessionally-taxed, along with the returns to other forms of saving such as bank interest.

Contrary to media myth, the Ralph capital gains tax concessions have resulted in more revenue being collected, not less. The capital gains tax share of federal tax revenue has increased since 1998-99, from 3.3% to 4.1%.  Growth in capital gains tax realisations and revenue has been strongest on the part of individual taxpayers who received the largest concessions, a classic supply-side response. The Treasury’s Tax Expenditures Statements are often misinterpreted by journalists as evidence that the Ralph concessions have come at a cost to the revenue. As the Treasury makes clear, its approach measures the benefit to taxpayers, not the cost to the budget, based on the assumption of no behavioural change. It makes no allowance for the positive supply-side response to the Ralph CGT or other concessions.

Henry’s suggested move to a 40% savings income discount is designed, among other things, to remove ‘the current bias towards negatively geared investment in rental property and shares.’ However, this recommendation was made subject to the major proviso that supply-side constraints in the housing market need to be tackled first and that phase-in arrangements should apply to minimise disruption to the housing market. The final report notes that ‘changing the taxation of investment properties could have an adverse impact in the short to medium term on the housing market…reducing net rental losses and capital gains tax concessions may in the short-term reduce residential property investment. In a market facing supply constraints, these reforms could place further pressure on the availability of affordable rental accommodation.’ Many media commentators have argued that the current concessional tax treatment of housing adds to demand, but Henry makes clear that it is also a positive for supply (which is not to say that Henry’s suggested approach to taxing saving is flawed). The demand-supply imbalance in Australian housing that might have occurred in the absence of the current concessional tax treatment makes for a terrifying counter-factual that most journalists and commentators have completely ignored.

Henry correctly concludes that ‘the tax system is not the appropriate tool for addressing the impact of other policies on housing affordability.’  Australia’s housing affordability problem is not due to the principal residence exemption, negative gearing and capital gains tax concessions. The Henry review’s recommendations should be embarrassing to those journalists who have suggested that it is. The failure of many journalists to re-evaluate their previous views on the subject in light of the review is more than just a little cheeky.

posted on 18 June 2010 by skirchner in Economics

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Gangster Government

Matthew Stevens on government by intimidation:

YESTERDAY we observed, like many others, that the PM has a jaw of crystal when it comes to criticism, after he dubbed unspecified Australian miners as “ugly”. Our words were prescient, because in the wee hours before The Australian hit the streets the PM had again stunned his fellow Australians gathered at the Canberra Press Gallery’s Midwinter Ball with an acerbic aside that carried with it a bleak threat to the mining industry.

“The mining industry are here tonight,” Rudd said in a prime ministerial speech that, in more normal times, would have been protected by Chatham House rules but was circulating widely yesterday.

“I extend my greeting to each and every one of them. I notice there’s a small fire which has been erected down the back. I understand that myself and Wayne Swan and Martin Ferguson will soon be erected above that fire. Can I say, guys, we’ve got a very long memory.”

This is not the first time representatives of the mining industry have been warned of retribution by this government.

I’ve been told, for example, that one very senior member of Rudd’s team made even more pointed threats to a table of mining industry folk dining in the hours after the recent federal budget. They were warned that the government intended to secure a mandate for the super-profits tax at the election and then, with victory in hand and tax in place, it would come after all those who had been dense enough to challenge Rudd’s reform.

UPDATE. Alexander Downer on the bursting of the Rudd bubble:

It has taken an incredible three years for the Australian public to realise who their national leader really is. I sat with a Labor luminary having a late-night drink in June 2008. He turned to me and said: ‘Mate, one day the Australian public will grow to hate Kevin Rudd as much as I do.’ That day has arrived.



posted on 18 June 2010 by skirchner in Economics, Politics, Rule of Law

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Paul Romer and Charter Cities

The Atlantic profiles Paul Romer and his charter cities movement. You can hear Romer being interviewed on the concept at Econtalk. Romer’s charter cities blog is here.

posted on 17 June 2010 by skirchner in Economics

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Ricardian Equivalence in Australia

Shane Brittle has completed a PhD thesis that is the most comprehensive examination of the issue of Ricardian equivalence and related questions in an Australian setting. Brittle estimates a long-run private saving offset to changes in public saving of around one-half. One interesting conclusion from the thesis is that around 80% of the Howard government’s tax cuts were saved, an empirical refutation of the ‘tax cuts lead to higher interest rates’ nonsense of a few years ago.

posted on 16 June 2010 by skirchner in Economics, Fiscal Policy

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Andrew Charlton as Political Liability

Peter Van Onselen, on Andrew Charlton’s role in the wholesale political collapse of Kevin Rudd:

As the polling tightens and the Prime Minister’s security as leader starts to be questioned, he is recoiling more and more into a closed forum with his personal staff—chief of staff Alister Jordan, press secretary Lachlan Harris and his senior economics adviser, Andrew Charlton. All three are early 30s political apparatchiks who Rudd listens to more than anybody else, with the possible exception of his immediate family.

Some Labor MPs worry that they are too narrow a set of opinions to give Rudd the perspective he needs to regain the trust of ordinary voters. As one senior Labor source noted: “The advisers around him work on the idea that we are smart; the punters are dumb; they won’t recognise that we are running a scam.”

Andrew can’t take credit for Rudd’s political successes and then shirk responsibility for Rudd’s failure.

posted on 13 June 2010 by skirchner in Politics

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The Australian Origin of Hedge Funds

Sebastian Mallaby profiles Arthur Winslow Jones, the Australian-born pioneer of hedge funds:

he studied at the Marxist Workers School in Berlin, ran secret missions for a clandestine anti-Nazi group called the Leninist Organization and reported on the civil war in Spain, where he hitch-hiked to the front lines in the company of Dorothy Parker…

Mr. Jones’s second distinguishing feature was a conscious avoidance of regulation. In his previous life as an anti-Nazi agent, Mr. Jones had kept a low profile. As a hedge-fund manager, likewise, Mr. Jones escaped the attention of regulators by never advertizing his fund; he raised capital by word of mouth, which sometimes meant a word between mouthfuls at his dinner table. Unhindered by the government, Mr. Jones expected no help from it either. The Jones men knew that if they mismanaged their risks, their fund would blow up—and nobody would save them.

posted on 13 June 2010 by skirchner in Economics, Financial Markets

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iPredict Australian Federal Election Market and Election Timing

iPredict has launched a market on the outcome of this year’s Australian federal election, with a Labor Prime Minister (not necessarily Kevin) priced at 51% and a Liberal Prime Minister (again, doesn’t have to be Tony) priced at 45%.

Anthony Green provides a handy primer on likely federal election timing:

As the Constitution prevents writs for a half-Senate election being issued before 1 July this year, the first possible date on which a House and half-Senate election can be held is 7 August.

Constitutionally the last possible date for the election is 16 April 2011.

However, the fixed term election dates for Victoria on 27 November 2010 and NSW on 26 March 2011 mean that the Federal election will have to be over by the end of October to avoid overlap with state polls.

With football finals in September, and Commonwealth Games in October, that means the date for the Federal election date is likely to be either in August, early September, or between the 16th and 30th of October.


posted on 11 June 2010 by skirchner in Economics, Financial Markets, Politics

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France Welcomes Foreign Property Buyers

The French government is selling off state-owned property assets. French openness to foreign buyers makes for an interesting contrast with the xenophobic reactions to foreign investment in Australian property markets:

All buyers, French or foreign, are welcome to bid for the properties but there will be checks to ensure that they acquired their money legally…

Heritage bodies welcomed the sale plan as a way of ensuring the improvement of neglected properties.

Francis Cahuzac, the head of the Commission for the Protection of Historic and Rural Heritage, said: “What matters is that the properties are protected, never mind if the owner is a foreigner or the Government. In most cases, foreigners are very good at restoring old buildings.”

posted on 11 June 2010 by skirchner in Economics, Foreign Investment

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US Equities to Outperform?

Bob Doll makes the case for the continued outperformance of US equity markets:

U.S. equities arguably have been outperforming. In the first four months of 2010, U.S. markets were up roughly 6.5%, compared with 2.6% for global equities. Many European markets were in negative territory; only Japan was outpacing the U.S. When the sovereign-debt crisis escalated in May, European, Japanese and emerging markets stocks all fell more sharply than U.S. markets. The bottom line is that the U.S. has generally performed better on the upside this year and held its ground better on the downside.

While I would have once been sympathetic to this argument, the case for outperformance of US equities has been undermined by growing US convergence with European public policy outcomes. I’ve already indicated I’m on the side of John Quiggin in the Quiggin-Caplan wager, because the US is thinking more and more like Quiggin and less like Caplan.  Public policy in the EU is not appreciably worse than it has been in the past, but the rate of deterioration in the US implies that their respective structural unemployment rates should converge via a faster rate of deterioration in the US.  The capital allocation process in the US is now so compromised by political intervention that there is little reason to believe in the continued structural outperformance of the US economy.  Differences in labour market institutions won’t matter much in this context.  Caplan himself puts his chances of winning at only 60%.

posted on 08 June 2010 by skirchner in Economics, Financial Markets

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‘A Politician with Rage at His Core’

Samantha Maiden reviews David Marr’s profile of Kevin Rudd and the barely contained rage that motivates the Prime Minister. At the same time, Paul Kelly discusses Kevin Rudd’s Whitlamite experiment in big government:

Kevin Rudd is taking Australia on to a new policy trajectory of state intervention, control and faith that “government knows best”.

This looms as the decisive judgment on the Rudd era. It constitutes a break from Australia’s post-1983 tradition of pro-market, middle-ground economic reform. It is not necessarily unpopular but raises the alarm that Australia is marching a false policy path…

Yet Labor keeps moving in the direction of Rudd’s maiden speech philosophy. “I believe unapologetically in an active role for government,” he said. He repudiated the view that “markets rather than governments are better determinants of not only efficiency but also equity”. It is a sweeping statement. And it is entirely consistent with his interventionist car industry agenda, plans to build 12 new submarines, compulsion for new spending programs, government-directed nation-building across several fronts and declared timetables to reduce homeless levels and close the gaps for indigenous Australians.

The unifying idea is that government direction or intervention or ownership is the way forward. It fits into a more personal theme: Rudd knows best.

Sadly, Rudd has no shortage of enablers, including the likes of Paul Kelly, who continues to cheer the fiscal stimulus in the linked story. Kelly does not seem to understand that the problems with the stimulus spending are not simply problems of implementation.

posted on 07 June 2010 by skirchner in Economics, Fiscal Policy, Politics

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The Bipartisan Failure on Immigration

A WSJ editorial wags its finger at Scott Morrisson:

This marks a bipartisan failure. While government and opposition duke it out over a few thousand asylum seekers, neither party seems overly concerned about expanding legal work opportunities. Mr. Rudd’s government is oddly proud that net immigration will likely fall to around 250,000 this year. Representative Scott Morrison, the opposition point man on the issue, told us his party supports skilled migration but that immigration levels “need to be sustainable”—code for sympathy to restrictionism. Both sides miss the key point: Australia doesn’t know what skills it will need in the future or who has those skills. If that “low-skilled” but bright and hardworking teenager from Malaysia can’t get into Australia to wash dishes while he goes to night school, he’ll one day start a billion-dollar company somewhere else.

posted on 04 June 2010 by skirchner in Economics, Population & Migration

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Atlas Shrugged in Pre-Production from June 11

According to Deadline New York:

Atlas Shrugged will be directed by Stephen Polk, an actor/producer whose father, Louis Polk, was once MGM chairman. He considers Atlas Shrugged to be his feature directing debut, though Polk acknowledges he stepped in and helmed the 2008 indie Baggage. Aglialoro was unavailable to speak directly, but sent a missive indicating that he’s courting actresses like Theron and Maggie Gyllenhaal to play Taggart. Sources in the camps of both actresses were aware of the project, but neither is planning to go to work on Atlas Shrugged next month.

Charles Murrary reviews the two recent Rand bios (my review can be found here). Brooks and Barone expound on themes that would have been all too familiar to Rand.

posted on 03 June 2010 by skirchner in Rand

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The Misanthropic Origins of Declinism

Tim Black reviews Matt Ridley’s The Rational Optimist:

Just after the end of the First World War, Britain’s Liberal prime minister David Lloyd George lamented: ‘How can Britain run an A1 empire with a C3 population [medical categories for army recruits]?’ This was no isolated complaint – it was indicative of a wider sense of Britain’s national decline refracted through the prism of biology. ‘If you go back to the turn of the twentieth century’, Ridley says, ‘there was an absolute domination of the book-publishing world by “declinism” literature, particularly about the so-called “degeneration of the race”. In the view of many at the time, this was because “stupid” people were having too many babies, the lower classes were evil, nasty and full of tuberculosis, and didn’t have the requisite physical strength. All this ludicrous stuff was hugely dominant.’

The web site for the book can be found here.

posted on 02 June 2010 by skirchner in Economics

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