ja_mageia

President Barak Obama has now got his dream car, the hybrid car Chevy Volt, produced only after intervention from government and labour union- owned Government Motors.

In one way it reminds us of the German predecessor: the Volkswagen. A car not produced according to market demand, but for dubious ideological targets. However, the new ‘Voltswagen’, on sale for $41,000, costs, when all subsidies are accounted for, about $81,000. Not only is it worlds apart from the original Volkswagen, but its creation signifies a distorted economy: taxpayers funding a vehicle which can only lead to loss and a shortage. In addition, comes the government subsidy of $7,500 for purchasers of the car, a nice addition for ‘upscale urban liberals’, some of Obama's strongest supporters.

People who are trying to justify such immense subsidies argue that this is necessary to get the electric car industry up and running, because they are in their infancy. The truth is that electric cars of some sort have been around for a century and the market still did not absorb them. Why supply when there is no demand?

But would it be a good thing if we all switched to electric cars? The point is to reduce CO2 emissions, right? But in some regions, we get our electricity from CO2­spewing coal. The more electricity pulled from the grid, the more coal is burned, essentially replacing dirty oil with dirtier coal (which is why some coal backers see much promise in electric cars). Studies confirm that China – which is allegedly “beating us” in the race to a green economy – would produce vastly more greenhouse emissions if it switched to electric vehicles.

Government intervention stymies market forces. Furthermore, the creation of the ‘Voltswagen’ blatantly derives an ‘is’ from an ‘ought’: there should be electric cars, whether supply is economically feasible or demand is there.

Yes, I too am up with the idea that markets are not perfect. Yes, I too am up with the idea that markets can be made better by judicious intervention.

But the problem is that said intervention is going to be made by politicians: people who depend upon votes, lucre to gain votes, to gain their position.

As an example:

The unrelenting heat has also extended one of the worst droughts in Russia's history. The government will ban grain exports from Aug. 15, as the outlook for this year's harvest shrinks and domestic grain prices continue to soar, local news agencies reported. Mr. Putin told a government meeting that he supported the ban, and that 35 billion rubles will be allocated to supporting victims of the drought.

Righteous and just you might say. Fires mean less wheat, so let us not export that wheat, we might say.

Well, yes, perhaps, but there is something else that we might say about this. Russia, amazingly to anyone who remembers the need of the Soviet Union to import the components of bread, that staff of the proletarian life (and absolutely not to the amazement of anyone who understands how markets increase production), is now one of the major exporters of wheat to the international markets. As, umm, it was before communism and as it is now after such (such a lesson in agricultural economics, eh?).

That something that we might say about this is that in a supposedly "free" market, it is still possible for producers, even consumers, to capture the bureaucracy that over sees that market. As Adam Smith pointed out, with the businessmen, conspiracy against, and so on.

The whisper in the grain markets is that various Russian exporters were promising a large amount that they could export.  The drought has meant that they cannot. This, so far, is fine, they lose money on what they promised to supply but cannot. However, if the Russian Government insists upon no exports, then they can declare force majeure and the export contracts are voided.

No, obviously, I do not know that the export ban has been caused by those exporters not wishing to lose their money. But that is the way I would bet.

And if so, it's a grand reminder of one of the most basic points about the world: yes, really, absolutely everyone would like to use the power of government to screw us over. That's why we shouldn't allow government, of any type or stripe, the power to screw us over.

Minister for Employment Chris Grayling said earlier this week that employers in the adult entertainment industry will no longer be permitted to use job centres to search for workers to fill posts involving “direct sexual stimulation.” According to The Telegraph, the restriction will apply to a broad variety of professions that will include strippers and topless female bar attendants. Mr Grayling stated that he issued the ban in order to protect the unemployed from “exploitation.” Mr Grayling’s decision is an unfortunate instance of legislated morality that will harm, not help, the unemployed.

Placing a job advertisement does not force anyone to do anything; a job advertisement merely relays to job seekers information about the different types of work for which people are willing to pay. If a person finds such work to be exploitative, as Mr Grayling does, they will simply not take the job. But if the person finds it to their advantage to be a stripper or topless bar attendant, the advertisement simply makes them, and their potential employer, better off by facilitating the transaction. The new regulation will merely make it less likely that such people find gainful employment in a timely fashion.

Though denying such employers from using job centres is admittedly quite different from an outright prohibition of such work, Mr Grayling’s decision is nevertheless a worrisome intervention. Government job centres essentially subsidise the distribution of job-related information in a community. All members of society, including owners of strip clubs and topless bars, pay for this subsidy. The prohibition on advertising certain types of jobs ensures that the subsidy is directed to certain types of work that Mr Grayling finds to be acceptable, and denied to other types of work that he personally finds to be “exploitative.” Not everyone agrees with Mr Grayling’s assertion that strippers and topless bar maids are exploited, and the ban consequently represents the arbitrary imposition of Mr Grayling’s personal preferences upon job seekers.

As long as an employer is looking for an employee to fill a legal job, he or she should be permitted to use government-funded job centres. Instead of helping workers, the ban will prolong the duration of unemployment for some merely to score points with voters who happen to agree with Mr Grayling’s concept of morality.

If we are throwing quangos into the bonfire, I'd like to fuel the flames with a couple of 'consumer protection' bodies. I figure that government agencies that aim to protect us from faulty goods and inadequate services do no such thing – and indeed, leave us more exposed to them because they tend to reduce competition in consumer markets.

One of the great myths about the free market is that something dire has to happen before producers change their ways. For a start, I just don't accept the fact that producers and sellers are deeply unethical and will gladly sell us dangerous products if it makes them a quick buck. Most people I know in business are as ethical as the rest of us and don't want to do any such thing, any more than they want to profit from selling drugs or guns. They want to make money by serving their customers.

And, being good businesspeople, they know that you do not make money by serving a customer only once. It costs money to search out customers and pitch your product at them. You don't want to have to do that over and over. No, what you want is customers who are so delighted with what you sell them that they come back to you over and over. Remember also that businesspeople work at the margin. If just a few customers don't like what you are selling and go to another supplier, that it your profit gone. If they tell their friends, that's even worse. Long before you've killed any customers or had to fight any lawsuits, you will have changed your ways. Choice is by far the most effective consumer protection imaginable.

For some reason, people assume that taking these same market principles into services like healthcare or schools, which are run by governments today, would mean an endless round of painful closures and particular schools or hospitals going out of business. It's true that most new businesses fail. Their owners simply misjudge the market, or do not have the right skills and resources to capture it. But once they are established, firms close much less frequently. They learn where the market is and how to serve it, and they adapt to serve the changing tastes of their customers.

If they sometimes get it wrong, or can't keep up with the changing nature of demand, then yes, they might have to close. But far more often, you find they merge with or are taken over by other firms. There is usually something of value in the business that is useful to another. If we commercialised or privatised schools and hospitals, I would not expect to see them closing down all over the place. Long before closure threatened, they would have changed, and for the better I would expect to see them improve and change and try to take on the competition, and if they could not stand the pace, others would step in and take them over and upgrade them. The service standards that were tolerated in the monopoly state system would simply no longer be tolerated, and service users would be far better protected, as consumers, than they are in the state monopolies today.

Some much-needed changes may soon arrive to council estates around the country, according to recent announcements by members of the government. The Prime Minister, speaking in Birmingham on Tuesday, explained his desire to transition to fixed-term council house tenancy in order to better accommodate the changing needs of tenants, as well as encouraging social mobility. Housing Minister Grant Schapps announced the introduction of a National Affordable Housing Swap Scheme, in which tenants in public housing who want to move for whatever reason may exchange houses with anyone in a similar situation in another part of the country.

The status quo is unfair to both taxpayers and residents, and causes considerable economic damage by reducing the flexibility of the labor market. Under the current system, council residents enjoy lifelong tenancy, and can even transfer council houses to their children. 1.8 million people are on waiting lists for social housing, and tenants’ ability to remain in social housing indefinitely seriously undermines any incentive for individuals to move out of subsidised housing, which in turn damages the government’s ability to provide for those who truly are in need and squanders taxpayers’ money. Moreover, despite the existence of some “mutual exchange” programs, many public housing tenants are still unable to move without giving up their house. The result has been an unreasonable system in which 234,000 units of social housing are overcrowded, while 456,000 others have excess capacity. Both the policy of lifelong tenancy and the difficulty of moving make it difficult for people to move to areas of the country where they may find better paying or otherwise more rewarding jobs. This not only harms the individual by preventing them from advancing themselves, but also prevents Britain from adjusting to new economic conditions in a swift manner. An end to lifelong tenancy would ensure that those who occupy public housing are those who need it the most, and the housing swap scheme would dissolve much of the rigidity present in the current system.

The discussion about social housing, however, must go further. A considerable proportion of Britons, approximately 13%, live in some sort of social housing, and demand for subsidised housing clearly exceeds the supply. Waiting lists and rationing are not an efficient way of allocating any scarce resource, housing included. More privatisation of the public housing stock and a more relaxed and realistic approach to housing and planning regulations would allow more people to make their own decisions about where they live, and would permit developers to step in and fill the demand for low-cost housing.

The government has announced that the default retirement age will be phased out by October 2011. The default retirement age permitted employers to retire workers at the age without justification, and is an exception to United Kingdom labor law, which prohibits employers from making employment decisions on the basis of age and forces them to provide justification for dismissing a worker. Personnel groups and those supportive of the elderly cheered the announcement, while business groups such as the Confederation of British Industry expressed concern about the law. There is merit in both reactions.

The decision to scrap the default retirement age reflects the growing need for Britons to continue working later, given that people are living longer and healthier lives. The average British male aged 65 today can expect to live past the age of 82, and the average 65 year-old female is expected to live even longer, until the age of 85. This is a full five years longer than elderly Britons lived in the 1970s. The retirement age, however, has failed to increase in commensurate fashion, and these lengthy retirements require substantial taxpayer support. In light of this problem, the spirit behind the decision to scrap the retirement age is encouraging, and the benefit it is hoped to bring to the strained public budget is welcome.

Yet there exists another side to the coin as well. The default retirement age allows for a certain degree of flexibility in that it permits employers and employees a chance to reevaluate the employment contract, and to terminate it if it is not beneficial to one party. The law does not force workers to retire, and is merely a mechanism that alleviates the burden of labor market regulations. When the changes go into effect, employers will be more constrained, and will be forced to undergo a costly firing process to eliminate redundant or underperforming elderly workers. The semblance of at-will employment that is permitted to exist under the current law will disappear.

Sixty-five is certainly an inappropriate retirement age for many Britons, but the law as it exists now encourages this. Yet instead of further regulating the market, the government could relax the regulatory requirements of firing a worker, whether they be elderly or young, which would, in turn, lessen the risk of hiring a new worker. The decision of when to retire could be made entirely by the individual, without any government interference that encourages sixty-five as the appropriate age. As we have discussed before, we could divorce retirement from the collection of state benefits altogether. In any case, the government’s changes are a welcome start to a much-needed national discussion of how to cope with Britain’s ongoing demographic shift.

An interesting paper over at Vox EU which looks at one of the reasons why some places stay poor while others get rich. No, that's not the major focus of the paper but it is one of the things that gets partially explained.

But that just raises the question, “what is this ‘policy uncertainty’ firms hate?” Is it unpredictable inter-temporal changes in the rule? Or, they could be taking a firm level view and regard policy, not at the high level mapping, but policy is what happens to them. With weak capability for implementation even if the policy doesn’t change, there could be a great deal of uncertainty for individual firms about what the agents of the state are going to do. They may ask themselves: what are the deals available to me?

Another way of putting the same point is that it's not so much what are the laws which are important, what are the hoops we've got to jump through, barrels we've got to jump over, but which of the laws are going to be applied? Not, is the profit tax rate, or the minerals extraction tax rate, 10% or 50%, but whatever the rate is, will my competitor have to pay the same, will I have to pay tomorrow what they tell me I've got to pay today?

In short, less what the law is but that the law will be applied impartially, that we actually have the rule of law rather than the rule of men and deals.

Now, yes, this is about uncertainty in Africa but it spills over into two further points applicable to our own, much richer, economy. The first is that to avoid the same problems we must insist upon it being the letter of the law which has to be obeyed, not the spirit. For that spirit is of course an interpretation by whoever is doing the interpreting: the rule of men again, bringing with it uncertainty.

The second is that government simply shouldn't be negotiating with business to provide deals to some which they do not offer to others. no special tax breaks, no relocation funds, no special terms on capital or loans, for this brings us back again to that rule by man and thus privileges to those who have the ear of The Man. Set the general rules, write the laws and then enforce them impartially.

Like so much else in this world, if it's true in Africa it's true here too: we are all humans and we do all have much the same reactions to the same incentives.

One of the little things that seems to get missed in the conversation about economic growth is how it actually happens and what might be out there preventing it from happening. We hear a great deal these days about how if there isn't enough aggregate demand then there will be unemployed people and other resources laying idle. We must therefore inject more government (in the form of spending) into the economy and thus growth will rise.

Well, yes, OK, let's just, for the moment, take that as being true. But let's also look at the other side of this government/growth equation:

On January 10, 2008, our company actually, shockingly, had a creative idea. Instead of refueling our boats at a lake in Ventura County, CA using zillions of 5 gallon gas carriers, lets put in a small double wall gas tank. It would save a ton of useless labor, it would greatly reduce fuel spills on the lake (the nozzle, unlike the 5 gallon cans, has overflow protection), it would save lots of trips into town to fill gas tanks — a winner all the way around. Granted this was a pretty small idea, but sometimes success in small business is a lot of bunts and singles. After hundreds of manhours of effort, numerous checks written to the County and the state, and I don’t know how many forms filled out, on July 1, 2010, exactly 901 days after we got the creative idea, Ventura County gave us the last permit we needed to go forward.

No, I don't claim that government is always a problem, nor that government is always the problem. Just that sometimes the "efficiency" of government is a drag on that economic growth. And that, given that economic growth is the only way out of our current mess, that perhaps we ought to be looking at where government is that drag: and then stop it being so.

Another way of putting much the same point is that a lack of aggregate demand leaves us below the trend growth rate: a bad thing. The red tape with which government swathes the economy reduces that possible trend growth rate: just as much a bad thing.

All of which means that those who are calling for that greater fiscal stimulus in order to boost aggregate demand, that macro-economic solution, should also be calling, as vociferously as we do here for that micro-economic solution, for that bonfire of the regulations which constrains potential trend growth. The only puzzle left is why they don't: it would of course be far too cynical of me to suggest that those calling for more spending are those who make their living by doing the spending, while those not calling for a reduction in red tape are those who make their living by administering red tape.

Far, far, too cynical.

Over on Cato-at-Liberty, Jeffrey A. Miron writes about EU plans to cap bankers' bonuses. He thinks it is a pointless step:

The key question about compensation limits is why shareholders and creditors have not imposed these on bank executives already. If the possibility of large bonuses indeed generates excessive risk-taking, then bank stakeholders have ample incentive to adopt such limits without government coercion.

The answer is that bank risk-taking was not necessarily excessive from the perspective of the bank stakeholders, since banks were living in a world with private gains but public losses. Stakeholders stood to earn large returns when times were good, and they knew taxpayers would cushion the losses — via deposit insurance or accomodative monetary policy — when times went bad.

Since events of the past two years have done nothing but reinforce the view that major banks are too big to fail, the incentive to pile on risk is stronger than ever.

Miron is exactly right. Effective reform of the banking sector requires three things: (1) an elimination of moral hazard; (2) monetary stability; and (3) a more competitive market. Bankers' bonuses are a politically appealing but largely irrelevant sideshow.