Blog Review 850

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Wasn't it Will Hutton who claimed that manufacturing industry, the revival of within a banking led form of Rhineland capitalism, was the solution to all our woes? Hmm, wonder how well that's working then?

A primer on market failure and government failure.

When is an inorganic fertiliser actually an organic one? Strangely, if you rape Gaia by mining her, this is OK, but making the same chemical in a lab isn't.

Âpplauding the new President and applauding the old.

If you're going to write about the CDS market it would help if you understood it. The same goes for Polly and banking.

How we can make the banking system even worse. By ignoring property rights.

And finally, a corollary of Muphry's Law* at work once again.

* That is, that whenever you make some snotty remark about someone else's spelling, grammar, historical research, knowledge of pop music or indeed anything else, you will make at least one equal or greater error in the course of said snotty remark.

Poverty causes pollution

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We often hear about how it is our unbridled consumption which causes the pollution causing Gaia to choke on our wastes. We much more rarely hear (although we do our best around here) the point that a clean environment is actually a luxury good. It's something we buy after we've worked out how to feed and clothe ourselves. Proof of this particular pudding comes from some new research:

Burned wood and animal waste are the chief constituents of a "brown cloud" of pollution that has caused illness and death in southern Asia, scientists have discovered. For years the huge toxic sooty cloud has descended on southern Asia and the Indian Ocean during the winter months, hanging in the air for days or weeks at a time. The cloud has been traced to many deaths in China and India from heart and lung diseases. But until now experts have not been sure what it is made of. Two possible sources were the burning of fossil fuels, such as coal and oil, or of "biomass", such as wood and animal dung. The new research shows beyond doubt that smallscale home fires in which wood and animal waste is burned for heating and cooking are primarily responsible for the cloud.

The reason for that brown cloud is thus that people are poor. They're burning wood and dung to cook with, on inefficient stoves to boot (using a resource inefficiently is a useful definition of the cause of poverty by the way).

If they were richer they would, as we do, have electric or gas stoves and that brown could wouldn't exist.

Sorry, but it really isn't true that wealth is what causes pollution: it's poverty. Both in that what the poor consume creates pollution and in that only with wealth do we have the resources to use less polluting alternatives. So, how ever much some might object to the idea, the way to clean up the world is to promote economic growth.

Clean up the BBC: episode 1

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The recent calls by the Shadow Culture Minister, Ed Vaizey, for BBC salaries to be revealed should be welcomed with open arms. In fact, it is dismaying that, “fully audited accounts … [and] details of the salaries of all its top talent" are not already available. Transparency is badly needed in the opaque world of bureaucratic, state supported, quasi-autonomous statutory corporations.

The latest BBC scandal, with Ross and Brand, and wide ranging criticisms accusing the BBC of everything from London-centrism to political bias only adds weight to the case.

Far more “funny" than tasteless comedians is the very nature of the organization itself. The BBC is an exceptional entity because the cost of its product is set by government, enforced by criminal law, and imposed involuntarily. If I wish to watch only the many alternative channels, I would still have to pay £139.50 for the BBC. Therefore, it is patently clear that if such an organization continues to exist at all, it must be accountable to the public. Vaizey has a clear-cut case.

Where does this lead us? Find out tomorrow in episode 2. To be continued...

Blog Review 849

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"Fixing the economy"....unfortunately it's not a machine that can be fixed but an ecosystem. Strangely it's the same people who argue that ecosystems are so complex we can't interfere in them simultaneously argue that the economy is so simple that we can.

This government spending multiplier. Is it higher than one, less than one, or even possibly negative?

The Easterlin Paradox resolved or, no, inequality doesn't matter that much.

The real reason there's a squabble about short selling.

A wonderful tale of bureaucratic competence.

Ragging on Oliver James.

And finally, little known inauguration news.

Public service, private provision

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There was an excellent article in The Guardian yesterday by Geoffrey Wheatcroft.

The piece was inspired by a fire that occurred while he was holidaying in Switzerland. The owner of the guesthouse Wheatcroft was staying in had been called out at 4am one morning to deal with a raging barn fire – the point being that in Switzerland, as in much of the US, fire-fighters are part-time volunteers, rather than paid state employees. As he noted in his article, the same is true of the Royal National Lifeboat Institution over here: they do a fantastic job fulfilling what is undoubtedly a public service, but without receiving any state aid.

And yet most people would assume that fire-fighting and life-boating are precisely the sort of things that will not be effectively provided in a free market, and that the state is required to step in. The evidence, however, suggests otherwise.

Of course, there are plenty of other examples of things people think only government can provide, but have historically been provided by the private or voluntary sectors. Did you know, for instance, that the UK had higher rates of functional literacy before public education was introduced than we do now? Or that the vast majority of manual workers had health coverage (through Friendly Societies) before the National Insurance acts were passed? And what about the fact that most major hospitals were charitable until they were nationalized?

There is in fact a whole history of mutual aid, self-help, co-operatives and voluntarism that has been crushed by big government. The great shame is that the one thing the political left and the trade union movement could really be proud of  – the historical development of a 'welfare society' – was so comprehensively destroyed by their 20th Century adoption of Marxist-inspired socialism.

All that said, there are growing signs of a renaissance in this 'private welfare'. Here's hoping it will be a thing of the future, and not just of the past.

Northern Rock and bonus failure

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I’m confused by the news that Northern Rock employees are going to be given a 10% bonus, partly at the cost of the taxpayer – frankly, it smacks of double standards. It was only recently that Gordon Brown was urging a crackdown on big city bonuses in an attempt to curb excessive risk taking. 

I accept that the average employee at Northern Rock is not in a position to take the same risks as a city trader, but the government and it’s supporters cannot have one set of rules for investment banks and one set for itself. Only in September were the unions claiming that we should “Tax the bonus system out of existence". But now they are supporting the bonuses given to Northern Rock staff claiming that they "worked exceptionally hard in extremely difficult circumstances … they have experienced the loss of friends and colleagues through compulsory redundancy yet have continued working solidly with dedication and commitment."
 
Northern Rock failed at the taxpayers’ expense. The government has overlooked the fact that parts of the financial sector has still been making massive profits in the last year, for example, the Foreign Exchange markets. By rewarding Northern Rock the government is essentially rewarding failure. This is not the correct signal to be sending out to the market.

Hayek: understanding the financial crisis

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Given all the wasted ink spilt over this financial crisis, it was a breath of fresh air to read Philip Booth on The Telegraph website putting the case that the financial crisis shows why we should admire Freidrich Hayek. He is absolutely spot-on in arguing against the trend of a lot of reporting.  Austrian or Hayekian economics has indeed been strengthened by the facts and nature of the financial crisis.

A key point that has been missed by most commentators is that prior to the crisis an abundance of regulation was already in place. The simple truth is that the financial markets were not free. Booth is right to critique the type of regulation present and question the standardization of regulatory institutions use of highly quantitative risk models. This type of regulation forced our eggs firmly into one basket.

It should be made clear that Booth is not against institutions per se, but against government led institutions that distort the market and give people false expectations. As Booth states:

Hayek argues that unregulated markets develop institutions that ensure that trust and reputation become valuable commodities. But who cares about trust and reputation when we believe that everything will be looked after by the regulators or by deposit insurance?

And as for booms and busts:

Hayek suggests, too, that booms and busts are the product of poor monetary policy. Central banks hold interest rates too low. People consume too much and invest in business projects that would not be profitable at higher levels of interest rates. Resources then get misallocated. And then the whole things goes bang and we get a recession (in this case accompanied by a banking crisis).

Someone needs to explain these ideas to print journalists. Except the US Wall Street Journal, most are doing a very poor job of explaining what has gone wrong. I would suggest the journalists go back to school, though I would be surprised if many school libraries are stocked with the works of the Austrian economists.

Blog Review 848

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Adam Smith, pirates and the invisible hook.

Suspending trials for people who have been waiting years for trial? Eh?

Cognitive biases are useful, just as cliches can describe something well.

Odd to see the lump of labour fallacy in an inauguration speech.

Thre's still something of a knowledge problem out there in macroeconomics.

Yes, jobs are a cost when you do a cost benefit analysis.

And finally, why hasn't anyone thought of this before?

American Federalism and the Free State Project

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While all eyes are on Washington, D.C. to see what comes out of the Obama Administration and the new Democratic Congress, a different political scenario is playing out in each American state. Under the American federal system, states vary quite substantially on a number of public policies. Some states have income taxes and others do not. Some states ban smoking in all public places, workplaces, and restaurants, and others do not ban it at all.

While most states avoided the fiscal profligacy of the federal government over the past eight years, the economy and recent over-spending are hitting some states harder than others. My own state, New York, is facing a $15 billion deficit, and the governor is pushing 137 new or increased taxes or fees to close it.  New Yorkers already “enjoy" the second highest state and local tax burden in the country, at 11.7% of personal income.  Meanwhile, New Hampshirites pay only 7.6% of income to state and local governments, and the rate in Alaska is lowest of all: 6.4%.

In a forthcoming study published by the Mercatus Center, entitled Freedom in the 50 States: An Index of Economic and Personal Freedom, co-author William Ruger and I discover that New Hampshire, Colorado, and South Dakota outpace all others on both “pocketbook" and “lifestyle" freedoms considered together, while New York is by far the worst. We argue that the outliers at the bottom and the top owe their status not to a marked surplus or dearth of libertarian ideology in the voting populace, but to unique institutions, such as New Hampshire’s world’s-largest legislature (in terms of voters per legislator) and elected executive council, and Colorado’s Taxpayers’ Bill of Rights (now suspended).

Taking advantage of the powers that states enjoy to set many of their own economic and social policies, the Free State Project proposes that classical liberals and libertarians move to a single, low-population state to advance the idea of strictly limited government and robust individual freedom. The idea is that a few thousand savvy activists can leverage many more votes. The state they’ve chosen? New Hampshire. (Full disclosure: I’m one of them, although I don’t yet live in New Hampshire.) So far several Free Staters have been elected to the legislature, and about 500 have moved to the state. If this “freedom migration" continues, American politics might get much more interesting.

Guest author Dr Jason Sorens is Assistant Professor, Dept. of Political Science, University at Buffalo, SUNY