Gentlemen, kickstart your engines

Tim Worstall, no stranger to these parts (and author of probably the best blog in the UK blogosphere), is using Kickstarter to generate support for his next book, ‘How to Create a Liberal America’. As you’d expect from Tim, it’s a very smart idea: he wants to outline the sort of regulatory regime the US would need to have a ‘Swedish’ system – in other words, a fairly redistributive but also fairly unregulated, free market economic system.

That’s exactly the sort of argument that I’d like to see more libertarians making – yes, high taxes are bad, but the real meat is in looking at how the regulatory state holds back wealth creation at every turn. Political debate has settled along the redistributive divide: if you want quite a lot of wealth redistribution, you’re a lefty, if you want quite a bit less wealth redistribution, you’re a righty. That’s a shame – as Tim will hopefully be getting a chance to argue, there’s no reason you couldn’t pair a deregulated, dynamic free market with a fairly redistributive state that gives quite a lot of money to people at the bottom of society.

Kickstarter itself is a great idea. For those who don’t know it, you pledge a certain amount of money in order to get a certain project off the ground – but you only pay if the goal is reached. It's a great idea and gets around a lot of public goods and internet piracy problems.

Here’s an example: Suppose internet piracy means that the next Adele album isn’t profitable to make and then sell, even though she has lots of fans who would be willing to pay if they didn’t have the piracy option. A Kickstarter-like project could allow Adele to say, alright, the cost of making the album (including the earnings I want to make it) is around £1 million. Like Tim Worstall, she might have a few different tiers of support – if you pledge £20, you’ll receive the album once it’s made; if you pledge £50, you’ll get this free t-shirt as well; and so on.

The big advantage here is that people will really be paying for the album to exist – piracy, at this point, isn’t an option. Yes, you will still have free riders but, as with other public goods, free riders aren’t a problem if enough people are willing to pay for something to exist. (Consider how many privately-funded charities and public monuments exist.) It’s true that Adele probably won’t earn as much from this as she might have fifteen years ago, but if she’s earning enough to make the product and benefit society, who cares?

You can imagine a similar scheme for lots of other public goods that we usually imagine that only government can provide, like street lighting. And sites like this can bring out the best in people: here's a project on a similar site to raise money to rebuild a mosque that was burned down in America — it's raised $260,000 in just sixty hours.

Head on over to the Kickstarter page to read more about Tim’s project. I've backed it — now let’s hope it gets off the ground.

Let the market decide what happens to Libor

In a speech today, the head of the new Financial Conduct Authority (FCA), Martin Wheatley, will say that the structure and governance of Libor – the interest rate at which Britain's banks agree to lend to each other – is 'no longer fit for purpose and reform is needed'.

Nonsense. Libor works perfectly well. Like any other system, of course, it can be undermined by fraud – people deliberately trying to manipulate it in order to benefit themselves or their organisation. And as in any other system, the way to deal with that is to prosecute the wrongdoers for fraud. A few people facing fines or imprisonment for such misdeeds then encourages the others to guard their own probity.

And in the case of Libor, such prosecutions should not stop at the foot-soldiers who deliberately misrepresented their own banks' credit status to get better terms. They should include any executives who connived in the fraud – and indeed any officials in government and regulatory agencies who deliberately encouraged such misrepresentations. And indeed any politicians who might have given orders to do so.

Getting Libor right is important, because it is a key market indicator of how sound people believe our banks are. It might well suit politicians, officials and bank executives to suggest that things are rosier than they are, but that remains a deception and must be prosecuted as such.

Tearing up Libor would have further consequences, because so much financial business, so many financial products in wide circulation, are priced in line with it. And what would 'reform' involve. I can see it now: some panel of bureaucrats from a new and untested regulatory authority, collecting vast amounts of information from the banks (at huge expense), and pretending to sift through it all, from day to day, in order to establish some 'objective' borrowing rate. But I don't think that bureaucrats would be any better at that than they would be at deciding the price of strawberry ice-cream.

Politicians and officials, through more of a decade of over-borrowing, keeping interest rates too low, printing money and doing anything else they could think of to create an apparent boom, in fact created a fantasy land in which everyone – home-owners, borrowers, consumers and indeed bankers – did some pretty stupid things. Not surprisingly, people tried to blag their way out of trouble.

When that blagging turns into deliberate misrepresentation, which could create real financial losses for millions of ordinary holders of loans and pensions, that is fraud and should be treated as such. You need to go back to the root causes of the problem, and to make sure that politicians and officials no longer have the power to debauch our currency and abuse the public finances, and also to prosecute anyone who, even in such a fantasy world, engaged in straight fraud. What you certainly do not want is to replace markets with bureaucrats.

A problem solved

The world's energy problem seems to have been solved, but governments do not  seem to have noticed.  A relatively clean and abundant source of energy has not been produced by wind, solar or tidal power, nor even by nuclear power.  It has certainly not come from bio-fuels that create less energy than they use.  It has been solved by human ingenuity and technology.

The world has suddenly uncovered vast reserved of natural gas, largely because advances in horizontal drilling and hydraulic fracturing (fracking) technology have enabled it to be extracted from shale deposits previous thought undrillable.  The price of gas in the US has dropped to less than a quarter of its 2008 level (down from $13 per million BTUs to about $3).

Gas is still a fossil fuel, but the reserves of it are already estimated to last for 100 years, and possibly 200 years.  Ongoing technology will by then almost certainly develop new and low-cost alternatives to replace it.  Furthermore, gas is relatively clean, putting out less pollution and carbon emissions than coal or oil.  Gas-fired power stations will give us a cheap, relatively clean supply of electricity for many years to come to power our factories, our transport and our homes.

Gas is not renewable, and does not need to be.  Renewable energy is only desirable when energy is in short supply, and the gas revolution means that it no longer is.  Governments which have succumbed to environmental lobbies to subsidize wind farms and solar power generation will find they have unnecessarily increased energy costs to their citizens and their businesses, as well as disfiguring their countrysides.

Gas has the additional advantage that its reserves are not located in politically volatile or hostile parts of the world.  It will free the developed countries from dependence on Middle Eastern or Russian energy supplies.  The US will soon be self-sufficient in energy and become a net exporter, and even Britain could be.

Environmentalist organizations will lobby hard against it, citing all kinds of reasons for opposing it, but the main reason is the political one that it does not require changes in our behaviour, or the requirement to live more simply.  We can instead continue to develop new opportunities, and the lower cost of energy will free resources to make its use cleaner still.

The energy problem has been solved, and someone should at some stage tell this to governments so that their behaviour might change.

The story of Yeru Anka

Paul Anka is remembered for hit singles including Diana, and for writing the words of My Way.  His brother David, though less well known, had a distinguished career as a development economist.  He advised African countries on import substitution and tariff barriers, and was known as 'Yeru' (wise leader) by the African recipients of his help. 

Although long retired, his legacy still survives.  Even today when development economists advise on import substitution and tariff barriers, the Africans will crowd round, chanting the name of their former 'wise leader.'  "Yeru Anka!" they shout, "Yeru Anka!

The free education dilemma

A friend of mine, a committed Christian, sent me this story about how taxpayer dollars are being used to teach kids in Louisiana all sorts of wacky things. America's 'voucher schools' – rather like Britain's new Academies and Free Schools – manage themselves, though the cost of the education they provide is subsidised by taxpayers. The aim is to give parents choice and the benefits of real competition between independent school providers, while making sure that every child has access to education, no matter how rich or poor their parents might be.

A noble ambition. But what happens if schools teach creationism, say? Or for that matter, promote Islamic fundamentalism? Denmark, which has had the same sort of private-provision/public-finance model for decades, used to have so-called 'Red' schools, which promoted socialist thinking. Are such things a legitimate use of taxpayer cash, however much the parents in question might actively seek out schools teaching such stuff?

It's an interesting problem. The libertarian view would be that the state shouldn't be involved in education at all. Education departments in Britain and America, certainly – and probably in most other countries – have not added at all to the quality of education, nor to children's access to it, say libertarians. Most kids got a good education long before the state got involved. Parents in Africa on just a few dollars a day make sacrifices to send their kids to 'penny schools' and consider it a good investment – as Professor James Tooley has documented in great detail.

At the other end of the spectrum, look at the disaster of state-financed and state-produced education. It was this model, in the postwar years, that brought us the so-called 'progressive' approach that was so ashamed of what it produced that it did not even publish examination scores – so parents had no way of knowing what state schools were actually doing for their children, if anything. They were expected just to pay up through taxation and let the 'experts' get on with whatever they were doing to their kids. And later, in Britain, we had the utter inanities of the National Curriculum, in which the country's history and culture barely got a look in.

The idea of voucher and quasi-voucher schemes is precisely to break down that kind of state monopoly in eduction. It's reckoned that you cannot do everything at once: so let's free up the supply of schooling first, while still maintaining the guarantee of state support so that nobody is left out. It is actually that model, first introduced in Britain by Mrs Thatcher's government, that brought us the National Curriculum just mentioned. The view was that if taxpayers' money is being used, then the authorities have a right to make sure that it is spent properly. Unfortunately, when you leave it to state providers and state-employed education experts to decide what a 'proper' education is, well, you get a very silly answer.

So should we just leave it for parents to decide? This is probably the leading market-economics answer. Even if the state is paying, so the reasoning goes, parents will tend to make sensible choices for their children, whom they want to succeed. They are not going to choose schools that paddle their kids into some intellectual backwater. And so, like any other competitive market, you will get standards being bid up, and the quality of schooling will improve.

Except that actually, many parents would indeed like their children to be paddled up the backwater. Some fundamentalist families may not wish to see their female offspring learn too much. Others may deeply believe the creationist paradigm and want their children to share it. Some might believe that the Western values that give them the choice of what to learn are fundamentally wicked, and that their children should learn to hate them.

So should the state insist that taxpayers' money should not be spent on such things? To override the wishes of parents is to say that some state 'experts' should decide. And we know where that leads us. So it is not an easy question. On balance, I would say yes, parents should decide; I have faith that the overwhelming majority will make sensible decisions for their children. Better choices, on balance, than the professional state educationalists have made over the last half century.

The lottery and the Olympics

Some oppose the cost to public funds of the Olympics, and some criticize the inconveniences to which Londoners have been subjected.  There can be few, however, who deny credit for the superb performances of our athletes.  They have shown a dedication and commitment that has rallied most of the nation behind them in their efforts, and given them generous praise for their achievements.

That so small a nation can do so well is remarkable, and many commentators, including Lords Coe and Moynihan, have praised the role of the National Lottery in this.  The Adam Smith Institute is proud of the role it played.  In 1990 we invited the orchestra conductor, Denis Vaughan, who had suggested the idea, to write a paper for us setting out the case.  Within two years of that publication, the National Lottery bill had cleared Parliament, with credit to Sir John  Major and Virginia Bottomley for the role they played.

The lottery is voluntary. No-one has to buy a ticket, and those who do can dream of the chances of winning millions. Funds are raised that taxpayers might not be prepared to give.

The distribution of lottery receipts has been remarkable.  Of every £1 spent on tickets, 50p has gone into the prize fund.  Of the remaining 50p, 28p is assigned to good causes, 12p in government duty, 5p to retailers as commission, and 4.5p in operating costs to Camelot, and 0.5p as their profit.  It returns to good causes a higher proportion of each £1 than any other official lottery.  It is reckoned to have increased funding for the arts and sport sevenfold. 

Perhaps too much lottery money has gone to support institutions such as the Royal Opera House, where more might have been given to local arts ventures, repertory companies and youth orchestras, but large numbers of people on modest  incomes have benefitted from the support it has given to sports activities.  Lottery funding has enabled athletes to undertake full-time training in preparation, to attract top-ranking international coaches, and to train in the world-class facilities that it funded.

The pay-off achieved by our athletes at the Beijing Olympics and even more in London is the reward for a bold idea well executed.  The arts, medical and other charities have been aided by the National Lottery as well, but the Olympics highlights the difference it has made to sport.  And every penny is raises is freely given.

The monkey's paw

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.  

On business cycles and economic engineering

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.

Will HS2 be kicked into the long grass?

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.

The Olympics and public choice theory

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.