The monkey's paw

Written by Dr Madsen Pirie | Wednesday 08 August 2012

One way to catch a monkey, it is alleged in parts of Africa, is to place fruit at the bottom of a narrow-necked jar.  The monkey reaches in for the fruit, but when it makes a fist holding it, its hand is too big to withdraw.  The monkey is trapped, and remains so until the villagers come to collect the jar.  Of course the monkey could just let go of the fruit, but it wants it so bad that it will not do that.

There are some parallels with the euro.  The single currency was created for political, not primarily economic, reasons.  Its purpose was to bond its members into a closer union that can be translated into closer political union.  And it had the side aim of challenging and later unseating the dollar as the world’s reserve currency of choice, thereby elevating what were perceived as European interests over American ones.

Their hand closed around it, and now they are trapped, like the monkey in the jar.  Danger approaches, but they want unity so bad that they won’t let go.  If Greece, and maybe others, had left two years ago, there would have been defaults and devaluations, and the basket-case economies would probably by now be lifting themselves up and starting to grow again.  But they won’t let go because they are reluctant to loosen their hold on the fruit of ever closer union.  To let go of that fruit would be to dispel the myth of one-way progress.

Economic growth in the eurozone might be gone for a Japanese-style wasted decade.  Some of the EU’s bigger economies might be unable to finance themselves.  The euro itself might ultimately go down.  But even if it took the EU down with it, and even the whole world’s economic prospects, they won’t let go.  They prefer to convince themselves that if they simply keep trying, they’ll be able to keep the fruit of unity and extricate themselves from the trap.  The monkey didn’t escape.  

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On business cycles and economic engineering

Written by Sam Bowman | Tuesday 07 August 2012

I've made no secret of my love for LearnLiberty's videos before (among other things, they've saved me once or twice when I really couldn't think of anything to put on the blog the next day), but this series of videos may be my favourite. With each one spending about five minutes on one of the key theories of the business cycle, they're essential viewing for anybody interested in where we are and how we got here. It might be a little much to hope that our rulers would be able to give a rudimentary outline of these theories without having watched these videos, but for the one or two who were dozing in class that day, these should still be useful.

I tend to think of these theories as stories that can tell us a bit about business cycles: one may be able to tell a great deal about a particular cycle and very little about another; two may together be able to tell us everything we need about a certain cycle; and we may not have a good story to tell at all about some cycles. For my own part, I find the Austrian school emphasis on capital malinvestment and liquidation during the bust especially compelling, which may be influenced by the fact that I grew up in Celtic Tiger Ireland. But I try to keep an open mind — I think there are some important compatibilities between Austrian and parts of Real Business Cycle Theory, and I find the Monetarist theory of the bust fascinating. 

What always strikes me is how uncertain all of this is. There are smart, sane, informed economists in each 'camp', and many in no camp at all. Yet politics has demanded that economists provide one grand answer to our problems, as if the book is closed and the questions are settled. (Harry Truman famously asked for a one-armed economist who couldn't answer his questions with, "Well, on the other hand...".) Some economists have obliged them, offering superficially easy, get-rich-quick schemes to 'end this depression now', and they're celebrated even if their area of technical expertise isn't where they're now giving out free advice.

It would be nice if more politicians would realize that the economy isn't a straightforward engine that just needs the right engingeer, but a highly complex spontaneous order that may give surprising and unpleasant reactions to well-intended stimulii. The economist who, to quote Hayek, 'demonstrates to men how little they really know about what they imagine they can design' may never be as popular as the one who offers the no-fail solution. But I hope they keep pointing it out until someone in charge starts to listen.

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Will HS2 be kicked into the long grass?

Written by Nigel Hawkins | Monday 06 August 2012

The much criticised flagship HS2 rail project, which seeks eventually to build a new £50+ billion high-speed rail route between London and Scotland, has had a difficult few months.

Phase 1 from London Euston to Birmingham is due for completion by 2026, whilst the construction of Phase 2 – a Y-configured route from Birmingham to take in both Manchester and Leeds - is scheduled to operate from 2033. 

Recent confirmation of heavy investment in several much smaller rail projects in the North and the Midlands, a series of legal challenges to HS2 and even bureaucratic foul-ups at the Department for Transport (DfT) have all been negative for the project’s future.  And, at the macro-economic level, the UK economy is basically flat-lining thereby substantially deferring the year when the UK’s public sector net debt (PSND) will eventually start to fall – it recently passed through the previously unimaginable £1 trillion threshold.

As such, further deep public expenditure cuts seem certain as the UK seeks to protect its treasured AAA sovereign debt rating. Whilst the HS2 project has many flaws, such as its environmental impact, its weakest case remains financial. Quite simply, the numbers don’t stack up. And, even assuming that the optimistic passenger growth projections until 2033 are accurate, it is difficult to discern how a decent commercial return can be generated. A Tory minister was quoted in the Spectator recently as saying that the project was 'effectively dead'.

Compared with other EU countries, HS2’s projected Phase 1 capital costs per mile are way higher, whilst its claimed financial benefits are seriously inadequate. A Benefit-Cost Ratio (BCR) analysis by the DfT for Phase 1 barely shows a positive return, even before many risk factors. Not surprisingly, the DfT prefers to focus on the various contentious non-commercial benefits. In times of economic crisis, previous Governments have axed major projects. Within the next three years, the highly uneconomic HS2 project is a strong candidate to be shunted into the sidings.

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The Olympics and public choice theory

Written by Whig | Monday 06 August 2012

I view the Olympic Games as a prime example of a Public Choice dilemma. It has grown from being a relatively small-scale, privately-funded and organised event into a behemoth supported by a large bureaucracy, state-enforced monopolies (so-called ‘exclusive sponsorship rights’) and vast amounts of state subsidies. Public choice theory coherently explains why countries are so keen to host the Olympics and why such rent-seeking behaviour occurs at the expense of the public good. 

Concentrated special-interest groups benefit from the Games both directly and indirectly: the IOC bureaucrats with their junkets, Olympic organisers in the host nation such as LOCOG and the London Legacy Development Corporation, athletes who raise their profiles and win sponsorship deals, corporations and construction firms who benefit from contracts and via advertising opportunities and so on (one might also say that the Olympics represents a classic example of Corporatism, an unholy alliance between Big Government and Big Business).

Politicians also gain from being an Olympic host nation from a Public Choice perspective. On the one hand, they may benefit directly from the lobbying that inevitably takes place from the special interest groups. On the other hand, there is clearly an expressive interest at stake – one might rather aptly call this the ‘bread and circuses’ approach, developed particularly by Geoffrey Brennan and Loren Lomansky. Much of the public support for the Olympics is given on the basis of an expressive interest rather than an instrumental one and politicians of all stripes seek to benefit from the public mood of good cheer and enthusiasm that do – genuinely – seem to surround the Games.

The instrumental arguments for the Olympics are much less convincing. Much emphasis has been placed on the legacy, particularly in terms of the sporting infrastructure and the ‘regeneration’ of run-down parts of northeast London. It is highly doubtful, given the level of success of previous Olympic legacies and the general record of government spending and top-down regeneration how successful this will be. Moreover, there can be no doubt that the transfer of resources via taxation of £9billion (or more?)  represents a similar problem to all other government spending in that we cannot know what use the resources would have been put to, had they been left in private hands. What we can tell is there will be a significant deadweight cost, not only because of the usual deadweight costs of collection and reallocation but also because the Games themselves represent a one-off, deadweight cost with no tangible benefits.

From a Public Choice perspective, however, it is clear that the concentrated interests of particular groups who might benefit from the spending - certain people in Newham, sportsmen and women, the bureaucrats responsible for administering the legacy and so forth – have benefitted instrumentally from the Games at the expense of the broader public (especially Londoners) who have suffered a loss. That this loss is small per capita is precisely the reason why opposition to the games has not proven more substantial. Moreover, as opponents to the bid and then the spending had no real means of expressing their opposition, even in the unlikely event that they were willing to do so, given the small per capita cost involved. This is, however, exactly how the Public Choice process works and we must not construe such tacit consent as legitimising such spending relative to the Olympics or any other areas of public policy. 

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Why we shouldn't tax companies: because companies don't pay taxes

Written by Tim Worstall | Sunday 05 August 2012

It's not unusual to hear the economically illiterate insisting that companies must pay more in taxes. This is illiterate because companies do not pay taxes. They cannot, for only people can bear the burden of a tax: someone's wallet has to get lighter and that wallet must belong to a person.

The really big question therefore is who does pay a tax if we try to levy one on a company? The only three groups possible are the shareholders of that company, the customers of it or the workers. At  which point we have an interesting new paper on what that incidence is in the European example:

A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996–2003, we estimate the long run elasticity of the wage bill with respect to taxation to be −0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents.

As we can see, the workers are paying 50% of that corporation tax bill. Meaning that anyone (and everyone) shouting that companies must pay more in taxes is in fact saying that they want to reduce the wages of the workers.

Something useful to keep in mind when considering the Robin Hood Tax proposal for example. You're not taxing the banks because banks, being companies, do not pay taxes. Which rather blows apart even the spurious justifications for said tax.

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Yes! Let's close the libraries!

Written by Tim Worstall | Saturday 04 August 2012

I'm not going to do my reputation as a b'stard neoliberal here any good (hmm, well, it might increase it perhaps) but CityUnslicker makes an interesting point: why shouldn't we be closing the libraries?

We can happily wander back to Adam Smith and point out that general literacy is a public good, that such a public good can be usefully bolstered by some tax funding, sure. But we also need to consider technology: most specifically whether the tax funded provision of dead tree printed books is the best way of advancing that public good.

And there's a strong argument, one gaining strength every passing month let alone year, that it isn't. For the written word is going digital.

The whole concept of a library (and before that, of public lectures at a university) is based upon the concept that books are an expensive thing. That they are too expensive for the average person to purchase and own and thus that there should be some method of borrowing them for a short time. It is rapidly becoming true that this is no longer so. Certainly the canon of western literature is now available for free online: and there's any number of very cheap newer books available as well.

At which point the concept of a library as a physical space in any one town rather loses its function. It's possible to think of all sorts of alternatives: from simply saying the entire idea is past it to some form of online library where government does the (much lower of course) funding of maintaining a stock of titles for lending to the impecunious.

And this highlights one of the problems with government provision of things. We've seen over recent years how public libraries have added all sorts of things to become more "relevant", CDs, videos, internet access and so on. All as the book part of it falls away. Out in that red in tooth and claw market part of the economy suppliers who become technologically irrelevant go bust and disappear. As computer games are increasingly downloaded then expensive retail stores supplying the physical box go bust. Indeed, some 10% of retail space in the country is empty as some 10% of retail sales take place over the internet: something of a clue there really.

So I present the idea, perhaps we actually should be closing the libraries? Not just as some austerity measure but as part of that culling which we have to do as technology changes. In a digital world why would we want to subsidise the distribution of physical books? And given that the public sector does not have that market driven bankruptcy to do the winnowing of old technologies, perhaps this is something that we have to do more aggressively through direct action in that public sector?

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Get the Olympic rulebook out of our private lives and legalize steroids

Written by Pete Spence | Friday 03 August 2012

We’ve seen quite a few sporting upsets at the London 2012 games so far. But what remains predictable are disqualifications for drug use, with an Albanian weightlifter and Uzbekistani gymnast being banned and some Chinese swimmers facing allegations of doping.

The reasons for cheating are clear. Performance enhancing drugs (PEDs) offer improved performance and detection is far from certain. A constant arms race between drug developers and those who test for them has led to a situation where even the World Anti-Doping Agency Director-General himself has confessed that they are catching “the dopey dopers, but not the sophisticated ones.”

Only users who poorly time their intake get caught, while those on more intelligent cycles can avoid detection at the games themselves. Simultaneously, the rules on what is allowed constantly change to account for new substances. At different times caffeine and Vitamin D have been prohibited. Bizarrely, blood doping is now banned while training at high altitude to achieve the same effects is permitted.

Many have responded by asking for greater international cooperation in cracking down on the drugs trade. There are alternatives, however. The Chairman of the IOC takes the view that a more stringent out-of-competition testing system, with a greater use of the “whereabouts” policy, would improve detection.

Further restrictions on PED markets will not just affect performance athletes, though. The vast majority of users do so recreationally for aesthetic reasons. Growth in users has been dramatic in the past few years, particularly in poorer areas such as the Welsh valleys, where 60% of recycled hypodermic needles are from steroid use, not heroin use. 

These users do not have the professional team that Olympians do, procuring drugs and ensuring their quality. As with mood-altering drugs, steroids are often cut with other substances, such as baby oil. The legal status of these drugs also means that users are often restricted to purchasing products developed for bulking up cows or the treatment of injured horses. Legalising supply would ensure that fitness enthusiasts could rely on brand strength for the quality of their drugs as they can do with legally available supplements now.

Many of the health complications that arise as a result of use can be put down to a poor circulation of information. Many learn how to use steroids by word of mouth or from internet forums. Moves to legalise the use of drugs would help to open the world of PEDs, so that those who do choose to use them can educate themselves to do so as safely as possible.

Steroid use is swelling, and whatever happens in the world of professional athletes, the rules of their games should not affect the lives of those outside them. We should ignore calls for tighter controls (especially when those who decide what is permissible change their definitions so often) as these clearly have not stopped the use of steroids skyrocketing in recent years. Rather, we should push for legalisation of all performance enhancing drugs so that those who are more vulnerable can be safer in pursuing their fitness goals.

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The blunder that is France's Tobin Tax

Written by Sam Bowman | Thursday 02 August 2012

I'm in City AM this morning writing about the new French Tobin Tax, something we're particularly interested in here at the ASI:

WHEN Napoleon Bonaparte’s regime executed an aristocrat on trumped-up charges of treason, stirring up bloody memories of the Revolution, his chief of police is said to have remarked that it was “worse than a crime; it was a blunder”.

The same could be said of this week’s introduction of a Tobin Tax in France. The measure imposes a 0.2 per cent tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading.

This is a form of the EU-wide Tobin Tax on all securities exchanges proposed by Nicholas Sarkozy last year. Though less disastrous than that would have been, the unintended consequences of this tax may leave President Francois Hollande wishing he had let these proposals die along with the Sarkozy government.

Read the whole thing.

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The time bomb keeps ticking

Written by Tom Clougherty | Thursday 02 August 2012

Last Saturday’s Wall Street Journal (US edition) carried an essay by David Wessel, author of the forthcoming book, “Red Ink: Inside the High-Stakes Politics of the Federal Budget”. It provides an excellent breakdown of the budget crisis looming over the US federal government.

Perhaps the most striking fact contained in the essay is that 63 percent of the US federal budget is on auto-pilot: “Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds.” In technical jargon, this is non-discretionary spending – unless Congress actively stops it, such spending continues every year without the need for any further authorization. Throw in an ageing population and inexorably rising healthcare costs, and it becomes clear that such spending is only heading in one direction – skywards.

What is most worrying is that the US federal government currently only funds 66 percent of its spending through taxes. For the rest, it has to borrow. And while that may be bearable in the short-term, as nervous investors around the world pile into US Treasuries and push bond yields to record lows, it spells big trouble in the medium- to long-term. Every cent the government borrows now means more debt interest payments – and even more non-discretionary spending – in the future.

For an idea of just how bad it could get, take a look at this 2010 working paper from the Bank of International Settlements (BIS). Its projections indicate that without a policy shift, US public debt would rise to more than 400 percent of GDP by 2040. That would translate into annual debt interest payments equaling 23 percent of GDP – well in excess of total federal tax revenues, which have averaged a little over 18 percent of GDP since the Second World War. Such a scenario is plainly impossible: the US would be forced to default on its obligations long before things reached that point.

The policy implication here is straightforward enough: non-discretionary spending programs like Social Security, Medicare and Medicaid need urgent, drastic reform to put them on a more sustainable footing. The problem is politics: neither party is really serious about dealing with this fiscal time-bomb. Politicians’ electorally-driven time horizons are just too short to permit the sort of significant, structural changes that are required.  Perhaps a rise Treasury yields will force the issue. Maybe another showdown over the debt ceiling will do the trick. But I won’t be holding my breath. As Detlev Schlichter puts it, when it comes to debt, governments around the world are determined to “extend and pretend”.  Sadly, it is only a matter of time before reality catches up with them.

Tom Clougherty is managing editor at Reason Foundation, a libertarian think tank with offices in Los Angeles and Washington, DC. This article was originally published at reason.org.

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New at AdamSmith.org: 'We built it together, Mr President, through the division of labour.’

Written by Stephen MacLean | Wednesday 01 August 2012

Is Barack Obama right that entrepreneurs 'didn't build it' when they look at their own achievements? No, says Stephen MacLean - he should re-read his Adam Smith.

Friday the thirteenth wasn’t kind to Barack Obama.  In a speech in Roanoke, Virginia earlier this month, it was the American president’s bad luck to proclaim a howler heard round the world:  ‘If you’ve got a business — you didn’t build that. Somebody else made that happen.’ — An affront to sound economics and Adam Smith, for whom Malthus’s ‘dismal science’ was instead a path to personal freedom and prosperity for all.

Obama privileges ‘corporate’ co-operation at the expense of individual achievement.  It’s not that he emphasises the benefits of civil society where we come together voluntarily for mutual benefit, which is a good thing.  No, when he says ‘we succeed because of our individual initiative, but also because we do things together’, the subtle message is that we are a means to a communal end greater than ourselves, for ‘if you were successful, somebody along the line gave you some help.’

Government is at the apex of this ‘you’re not on your own, we’re in this together’ pyramid, as evidenced by the President’s redistributive tax policy.  By no means was Adam Smith a private property anarchist, for in The Wealth of Nations he acknowledged ‘the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (IV.ix.51).’  Such is the theme of Book V of this great work, ‘Of the Revenue of the Sovereign or Commonwealth’ (which occasions opprobrium from contemporary libertarians).  Rather, it was the State’s coercive tax policies in aid of social justice to which Smith objected.

Read this article.

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