Buy books via the ASI blog

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As you may have noticed, I've changed the right hand column of the blog. While RSS feeds, category archives and so on can now be found in the left column, the right column is a collection of recommended books. If you click on an image, it will take you to an amazon.co.uk page, and if you buy the book, we get a cut of the sale price. So please – shop away! And if there are any good political/economic books you think we should link to, email them to info@old.adamsmith.org or leave a comment below.

On a related note, I've added paypal functionality to our online shop, so buying Adam Smith busts, ties and medallions has never been more convenient. Remember to think of us when it's time to do the Christmas shopping!

Blog Review 749

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Somewhat in contradiction to Naomi Klein's thesis in The Shock Doctrine, crisis seems to bring on an expansion of State power....or at least, attempts to do so.

On which subject, no, we've not really tried having tax cuts, not yet.

Assuming a recession but no depression, the finance boom will have given us more than it will cost.

What happens when you really don't trust the banks.

Some sense amongst the nonsense about drugs.

The fruits of innovation: ain't capitalism great?

And finally, the journalistic cliche crash.

What next for the Republicans?

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The smart money says November is not going to be much fun for the US Republican. The Democrats are going to do very well in the House and Senate elections, and in the last month or so Barack Obama has assumed a commanding – and probably decisive – lead in the presidential polls.

Most of the blame can be laid at the feet of the Bush presidency. On domestic policy, ambitious plans to reform social security and immigration failed abysmally, while Bush's allegedly conservative administration nationalized public education (No Child Left Behind), created a massive new entitlement programme (the prescription drug benefit), and became the biggest-spending government since LBJ's 'Great Society'. And as for foreign policy...

However, you can't blame Bush for everything. John McCain must take some responsibility too. At its best, his campaign has been lacklustre. At its worst, it has been downright nasty and cynical.

Perhaps though, spending some time out of power might be the best thing for the Republicans. Like most political movements that have spent too long with their snouts in the government trough, they have lost sight of what they stand for and what their purpose is. Until they recover their political raison d'etre, no amount of clever campaign strategy is likely to help them.

What kind of party will emerge from such a period of reflection? At this point, it's hard to predict. Given the decentralized nature of US politics, various brands of conservatism will be trialled in the various states before, eventually, a coherent new message is developed at the national level. That may be some years away.

That said, there are a number of obvious possibilities. The Republicans could shift in an even more populist, big government direction, moving to the left on economic issues and to the right on social 'wedge' issues. Or they might move to the centre, adopting something akin to David Cameron's 'liberal conservatism'. They could even go back to their roots and become a party of limited government, individual freedom and personal responsibility.

Time will tell.

Tiptop

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So the BBC reports that hospitals are already allowing top-up healthcare. Frankly, most people have known this for a long time, but politicians and the media have largely ignored it, in much the same way that they have ignored the costly failure of the NHS.

Of course, professor Mike Richards will present his review of co-payments at the end of this month. Given the pressure coming from the general public, one can only assume that this will formally allow them.

The results of this will be twofold. Firstly, it will finally lay to rest the hugely misguided idea that government could ever provide a comprehensive health service completely free at the point of use. Secondly, it will transform NHS care from an open-ended entitlement to a defined benefit. The inevitable spread of co-payments and private top-up insurance that follows will surely lead to a revaluation of the future role the NHS.

Certainly, a safety net should always exist to guarantee a basic standard of healthcare for all UK citizens, but beyond that minimal guarantee the state, and politics, needs to be taken out of healthcare altogether. People should be free to take control of their own healthcare by redirecting largely wasted taxes into personal health saving accounts, and paying their doctors directly for services rendered. That would be far more efficient, and far more likely to encourage healthy living, than the bureaucratic monolith we have at the moment.
 
Systemic NHS failure is starting to force the hand of politicians, yet they are not keeping up with events. Labour has poured money into healthcare to little effect, the Conservative’s are not prepared to rock the boat, while the Liberal Democrats have a long way to go in their tentative exploration market based solutions.

In fact it is the Liberal Democrats who are best placed to put healthcare reforms on the agenda. With the Conservatives focussing on the less divisive educational reforms, health reform could (and should) form the central pillar to sell the party to the nation. Now where did that orange book go?

Blog Review 748

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This changing the face of finance forever: do we really want to throw the baby out with the bathwater?

The big news of course is the Nobel for Paul Krugman (far more important than the economy going to hell in a handcart, far more so). Why we should be happy about the views of the pre-eminent left wing economist.

What he's actually got the prize for in terms of theory.

One of his more interesting theories and a modification of it.

Thankfully he does have a lot to be proud of.

Back to the economy. Yes, it really could be a failure of regulation we've got here, not a failure of markets.

And finally, pictures, words, 1,000.....

Was Hayek right?

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So Paul Krugman has won this year's Nobel Prize for economics. Well, congratulations, I suppose, but Krugman's not exactly our kind of economist. Anyone described as neo-Keynesian has got to be bad news.

One interesting question, which I was asked yesterday, is whether there should be a Nobel Prize for economics at all. Friedrich Hayek, who won it in 1974, subsequently said that had his opinion been consulted, he would “have decidedly advised against" its creation.

I can see his point. After all, the old joke is that if you take two economists, you get three points of view. It’s not like physics, where you can test things and then everyone can agree at the end of the test. Economics is complicated. It’s a human science, and human beings are unpredictable.

At the same time, most economics is very academic, very rarefied. Its link with what’s actually happening in the world is tangential. It is too much based on mathematical theorems with little basis in reality.

Hayek used to say the success of a country was inversely proportional to the number of economists. I don’t think he was wrong. But then again, all the economists were Keynesians in his day.

Now I think about it, yes, maybe we should get rid of the Nobel Prize in economics – at least once Israel Kirzner has won it, anyway.

Cause and effect

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Situated as we are in the midst of the financial crisis, many of the major papers (tabloid and broadsheet), are confusing the effect of the crisis with cause of it. As such, it is good to see that Bruce Anderson in The Independent has written instead on the original sin that caused this crisis.

Anderson writes: “Excessive benevolence is much more to blame than excessive greed." Going on to elucidate that “In the late 1990s, a Democrat-controlled Congress virtually compelled US banks to advance mortgages irrespective of the applicants' financial status. Racial factors played a role in this; a large percentage of sub-prime borrowers were Black or Hispanic. But everything was underpinned by economic optimism. The assumption was that the economy would just keep on growing, so that even the poorest families could have their stake in the American dream."

We at the Adam Smith Institute have been making this point for a while now. Certainly, blame should be apportioned to many individuals outside of the US government, but the fact remains that the nascent cause of the current trouble was anti-redlining laws instituted in the US in 1977 and strengthened in 1995, along with the enormous expansion of the money supply that took place under the auspices of Fannie Mae and Freddie Mac (backed by the Department for Housing and Urban Development). Even as the severity of the credit bubble was becoming increasingly evident, such socialistic polices were advocated by the likes of Polly Toynbee in The Guardian, suggesting that poorer people should be given even more opportunities to borrow.

Bad government policies sowed the seeds that made this current crisis. It is time that the press at large acknowledged this, instead of confusing cause with effect. Government’s must learn their lesson and not be allowed to introduce such utopian policies again. Once again the problem was too much government, not too little.

Caroline Porter joins the ASI

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Hello – My name is Caroline Porter and I have just started my eight week internship at Adam Smith Institute.

I am currently a junior at Fordham University in New York City, but am studying abroad for the fall semester in London through Boston University. I am working towards a Bachelors degree in Economics, but also have interests in Politics and Sociology. My plan for what to do after college remains undeterminded, but I am looking forward to learning more about my field of study as well as British policy formation through this internship.

Besides school, I am greatly interested in music and travel, and I am a major fan of Law and Order reruns.

Blog Review 747

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blog-review-747

Not the way that many will think about it, but markets have positive externalities and they are public  goods. They will therefore be undersupplied by the market itself. Our task is thus to both create and aid markets, so that we can enjoy more of those externalities.

An interesting book about how you can start from the bottom and get on in the US. Unfortunately, the fact that millions of immigrants, legal and otherwise, manage the same thing every year makes the need for the book and the experiment somewhat moot.

The fact that the expert opinion changes so often should make us somewhat wary of experts' opinions.

More on why the unwinding of the Lehmann CDS positions is better news than some think.

A brave new world of banking is being ushered in. Let's hope it's not back to the 1970s.

Yes, there really was a goal in the US to get more homeowners, more people with low downpayments, more people who were marginally capable of paying a mortgage to do so.

And finally, the joys of the division of labour, or round pegs for round holes.

Depository Trust and Clearing Corporation

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This is something I didn't know: and it appears that most writers for the financial press didn't know this either. The credit default swap market is not some vast swamp of toxic unknowns, rather, it does indeed have a clearing house and tabs are indeed kept on who holds what and owes to whom. This is done by the Deposit Trust and Clearing Corporation and their straightening out of some misconceptions is here.

Since it was set up in November 2006 the vast majority of CDS contracts have been registered: and the major players have back registered those contracts they wrote before this date as well. The number of such swaps that relate directly to mortgages are under 1% of the outstanding market and that market has a nominal value of $35 trillion or so, down $10 trillion from earlier this year.

But the two most important things I take away from their statement is that, firstly, we do know (or, rather, someone knows, which is good enough) who owes what, where. Secondly, that net exposure is a great deal less than gross (as of course we would expect it to be).

The payment calculations so far performed by the DTCC Trade Information Warehouse relating to the Lehman Brothers bankruptcy indicate that the net funds transfers from net sellers of protection to net buyers of protection are expected to be in the $6 billion range (in U.S. dollar equivalents).

That $6 billion compares to the gross contracts outstanding on the same CDS contracts of some $440 billion. If we run the same percentage against the total market we'd have net payments of some $750 billion.

It's an interesting measure of how things have changed in the past couple of weeks that I originally wrote "only $750 billion" and was quite relieved. Actually, about the only thing that I know about that number is that it's wrong in detail but it seems to be correct in order of magnitude.

No, of course this doesn't mean that everything is going to be peachy, most certainly not. But it is a sum that can actually be dealt with, it's of the order of 1-2% of world GDP for example. Oddly, about the same percentage that the climate change worriers tell us we need to spend to avoid disaster in 2100 and beyond.

You can call me selfish if you wish but I think I'd rather we sorted out the banking system first: after all, we can always start on the CO2 next year and that'll be a great deal easier if we do still have a banking system, won't it?