A very clever way of proving Lord Stern wrong

The particularly controversial part, from an economic point of view, of the Stern Review into climate change was the use of a very low (near zero) discount rate. The discount rate you use of course being vitally important as you try to translate possible future damages into current numbers so that you can compare them with hte current costs of trying to avoid those damages.

The argument was and is that we know that humans are subject to hyperbolic discounting. Given our lifespans we tend not to think about the far future as much as we perhaps should. Thus market interest rates are fine as a guide to events in coming decades but not to things in centuries.

There’s now been a very clever piece of new research which measures how we do actually discount for events in that far future. English property law allows for both freehold land and leasehold: and those leases can be from a century to near a millennium long. Looking at the price difference between the two it is possible to work out that discount rate that we actually do apply:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

This discount rate is rather higher than the one Stern used in his report. And the implication of that is that if we use this new and improved discount rate then our proposed carbon tax should be lower, we should be expending less effort in attempting to avert future climate change.

We could, of course, stamp our pretty little feet and insist that humans should not value the future in this manner. That all of us should value things as Stern says we should. But the fact is that we do not: and it’s rather better to try to run the world taking account of the way we all are rather than as certain dreamers would have us be. And the simple truth seems to be that we value damages to people in a century or two rather less than the costs of averting them. So, we should do less to avert them.

UKTI—overseas or drowning?

Other blogs and reports on UKTI have mainly focused on the UK but what about UKTI operations overseas?  The National Audit Office reported, with its customary discretion, that our diplomatic posts were not commercially oriented and the linkages with the UKTI personnel embedded within them were poor.  Roles were confused and, by inference, the UK was not getting value for the “£420M spent by the FCO and UKTI on supporting UK business overseas 2012-13”.  The FCO promised to reform but they have been promising that for nigh on 100 years.

Visit the UKTI overseas websites and part of the problem becomes clear.  They are mostly the standard bromides about the role of UKTI.  The events to which they refer are not in the country in question but back in the UK, mostly foreign language courses.  The overall message in each one is about helping the nationals of that country export TO the UK.  “Business partnerships” is a term much used but they have it the wrong way round: UKTI is supposed to be building the UK economy through, inter alia, exports, not weakening our balance of payments through encouraging imports, still less weakening our manufacturers through increased competition.

The Morocco and Algeria UKTI websites make an interesting comparison.  The Morocco one names three UKTI representatives, with contact details and their specialist areas of expertise.  Exemplary.  The Algeria one just has the details of the British Embassy.  Maybe the switchboard there will find someone to take your call, maybe not.  My source in Algeria tells me that our last two ambassadors there found no one from UKTI up to the job and had to bring in two of their own FCO people to cover trade matters.  Obviously the ambassadors would be too diplomatic to confirm that.

So Morocco is well UKTI staffed and, given the size of its economy, possibly overstaffed, whereas Algeria, whose economy is twice the size of Morocco’s and has far more opportunities for British business, is barely staffed at all.

The coalition government has decided more exports would be good and therefore more money should be awarded to UKTI.  This is simplistic.  UKTI is drowning in its own bureaucracy.  They need to learn how to swim.

Economic Counter-Terrorism: Legalising the export of pharmaceutical-grade opium from Afghanistan

Vishal is the winner of the Adam Smith Institute’s ‘Young Writer on Liberty’ competition. The subject of the competition was ’3 Policy Choices to make the UK a Freer Country’, and below is one of Vishal’s three submissions.

Although only 12% of Afghanistan’s land is arable, 70% of the population rely on agriculture for their subsistence and the country is the world’s largest producer of illicit opium (~90% of total global output). There has been discussion of granting farmers licenses to cultivate opium but we should also consider it as a potential method of covert, economic counter-insurgency. This would reduce the need for troops on the ground, alleviate poverty and deal with the NHS’ shortage of opioid drugs (this shortage has meant that people are literally dying of pain).

Many corporations (such as GlaxoSmithKline, Mallinckrodt, Abbott Laboratories and Johnson & Johnson) already legally import from India, Turkey and New Zealand. Why not add Afghanistan to the list and kill several birds with one stone?

Prior to the 2001 invasion, the Taliban declared opium ‘haram’ (sinful) and they sharply reduced opium output in Afghanistan during this crackdown. However, in a hypocritical move intended to help fund its insurgency, they have been earning money from opium farmers, smugglers, etc. – being the ‘middleman’ generates some serious revenue for the Taliban.

Legalisation would eliminate the need for middlemen by allowing farmers to directly supply to pharmaceutical companies instead. Farmers receive a fraction (<25%) of the profits. The rest goes to kingpins and warlords. One can easily see why the opium farmers would subsequently have a disincentive to fund any operations by the Taliban against those who are responsible for their livelihood and newfound wealth. How many producers could seriously be interested in killing off their customers?

Many young men have benefitted from the opium trade (becoming the ‘new rich’). So, supposing that the Taliban were to try to wrest control of cultivation or extort from the cultivating communities, they would be causing discontent amongst the same people whom they physically require to fight.

The Taliban pay up to $200/month for men to fight for them (versus the $70/month offered to join the national police force) – legalisation would give those youth some alternative, lucrative sources of employment. Fewer able, young Afghans willing to fight means that we wouldn’t require as many troops to be stationed there and that the Taliban’s grip over certain provinces would naturally loosen.

These self-reinforcing socioeconomic mechanisms, amongst others, would naturally undermine the Taliban both socially and financially.

 Legalisation can be a means of economic counter-terrorism that enables double-sided welfare gains and getting troops out sooner rather than later.

Mark Andreessen’s half a good idea

Mark Andreessen has half a good idea here. He points out that while everyone’s trying to create more Silicon Valleys that’s not actually what we need. SV is the global agglomeration of the world’s computing nerds and their necessary support services. That’s what makes the place work. However, what we would rather like to have is similar global agglomerations of the world’s materials processing nerds, of the geeks who get organic chemistry and so on. For this is the way that industries manage to develop: building themselves where people already grasp the basics. It’s still true, for example, that if you’rte going to set up in non-ferrous metals in the UK you’ll do it around Sheffield or Rotherham, if in pottery in the Potteries, chlorine chemistry is Tyne- and Tees- side.

So, politicians who would like a development cluster should look to what areas already have some footing in and then attempt to build upon them. That’s sensible and that’s the half the good idea. However, we then get to the other half:

Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on. There’s a key difference from the if-you-build-it-they-will-come argument of yore. Here, the focus is more on driving regulatory competition between city, state and national governments. There are many new categories of innovation out there and entrepreneurs eager to go after opportunities within each of them. Rethinking the regulatory barriers in specific industries would better draw the startups, researchers and divisions of big companies that want to innovate in the vanguard of a particular domain—while also exploring and addressing many of the difficult regulatory issues along the way.

Selectively reduce the regulatory state in various areas and see what happens. But this doesn’t go far enough: as we saw with the Urban Development Corporations of St. Maggie’s era. For if reduced regulation is going to increase growth, and we are already assuming that, then why would we reduce regulation in only one geographic area?

Once we’ve accepted the basic argument, reduce regulation so as to encourage innovation, then our answer should be to reduce regulation everywheree.

Politicians Without Borders: A proposal to abolish the nationality requirement to run for election

Vishal is the winner of the Adam Smith Institute’s ‘Young Writer on Liberty’ competition. The subject of the competition was ’3 Policy Choices to make the UK a Freer Country’, and below is one of Vishal’s three submissions.

If representative democracy is characterised by the citizens voting for those who they think will represent their interests most accurately – why is this choice restricted? I am referring specifically to the nationality requirement to run for election in all nation-states.

Interestingly, European Parliament elections do not require candidates to be of the same nationality as the citizens of the constituency they hope to represent. For example, Anita Pollack was an Australian who represented a UK constituency, Maurice Duverger was a Frenchman representing Italians, Ari Vatanen was a Finn who represented the French and Monica Frassoni was an Italian who represented Belgians. Why, then, should we be denied such choice when electing individuals to national parliaments?

One may argue that the right must be deprived due to security concerns and because ‘foreigners may not have the country’s best interests at heart’. However, we could say the same for domestic politicians – this is not sufficient. Furthermore, when we consider that there are many humanitarian projects in various countries that involve people of different nationalities, sometimes it might just be reasonable to believe thatpeople actually want to help others, regardless of their nationality!

Currently, all mainstream parties in all countries are nationalist and abolishing the nationality requirement would pave the way for non-nationalist alternatives (at the very least) which may actually help preserve peaceful relations with other countries by providing a voice to those who do not believe in a potentially dangerous, exclusionary nationalist agenda.

Furthermore, the extra competition from foreign nationals might make the transmission of public policy ideas and implementation of public policy more effective. Voters could essentially call for certain foreign politicians to run and ‘import’ politicians whose policies they think they would help the country more than their domestic alternatives (people might prefer, for example, some Scandinavian, German or American MPs). Essentially, domestic politicians would have to increase their performance in response to foreign competition and this would improve overall political performance over time.

After all, if George Osborne can legitimately appoint Mark Carney, a Canadian national, to control the country’s money supply on the grounds of competence, why should the British public not be able to directly elect the foreign politicians whom they would like to see governing the UK? Simply abolishing the nationality requirement and thereby increasing choice for voters would ultimately lead to a net gain in welfare for British society.