Madsen & Eamonn win Enterprise Award

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Dr Madsen Pirie and Dr Eamonn Butler will be presented with the National Free Enterprise Award today. The Award will be made at the Institute of Economic Affairs annual conference on the state of the economy, held in the Institute of Directors near Westminster. It will be presented by Professor Stephen Littlechild.

The National Free Enterprise Award goes back three decades. Its lustrous past winners include the airline entrepreneurs Sir Freddie Laker and Sir Richard Branson, hotelier Lord Forte, Nobel economist Friedrich Hayek, politicians Sir Keith Joseph and Margaret Thatcher, Buckingham University head Dr Terence Kealey, and financial journalist Neil Collins.

The panel of judges includes prominent supporters of free enterprise from various walks of life, and most made Pirie and Butler their first choice for the award. The pair have been prominent for defending bankers during the recent crisis, and pinning the blame on inept central banks, spendthrift politicians, and incompetent regulators. As Eamonn Butler put it: "The cause of this crisis was the tsunami of paper money that the US and UK kept printing over fifteen years. At first, all of us who surfed on it enjoyed the ride. But inevitably, it crashed into reality and of course destroyed everything before it."

The pair are known for humour as dry as their politics. Butler described his 30-year professional partnership with Pirie as "one of the great double-acts, like Jekyll and Hyde", while Pirie assured journalists that "absolutely no bullying was used on the judges."

Click here to find out how you can attend a reception this evening to celebrate this achievement.

We gain from trade with China

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To protectionists and Sinophobes, the news of China recently surpassing Germany to become the world’s largest exporter represents yet another nail in the coffin for manufacturing in “[insert Western country]”. But China’s exports include Apple’s ubiquitous iPods and countless other products designed in the West. More than a reflection of China’s growing economic might, this is testament to the erosion of economic, political, physical and technological barriers to production. The fall of the Berlin Wall and the collapse of communism as a viable model, together with containerised shipping, GPS, just-in-time supply, and other technological marvels, has spawned a global division of labour and production that defies traditional analysis – and trade accounting.

Typically, Chinese producers are at the final node of an assembly line that snaps together raw materials (say, minerals from Australia) and components (say, microchips from Taiwan), using software developed by teams in Redmond and Bangalore, while implementing designs from Cambridge (Massachusetts and England); all thanks to capital raised by consortiums based in New York City and Sao Paulo.

Two important points are worth making: “Chinese exports” are underpinned by valuable activities elsewhere, and product assembly adds less value than other activities along the production chain. For example, a recent University of California study concludes that the Chinese value-added embedded in a 30G Apple iPod accounts for only $4 of the total $150 cost. The fearmongers see the entire $150 chalked up as a Chinese export, and miss the money flowing back to Cupertino in the USA.

One of many local examples that follow a similar production pattern is Cambridge Audio. Its products are designed by teams of well qualified and richly-rewarded engineers here in the UK and are assembled cheaply in China. This offers Western consumers better quality at cheaper prices and allows the company to invest more in product development, which will ensure competitiveness, promote innovation and sustain high value-added jobs in the UK.

Don’t be afraid of China’s booming exports. In today’s economy, we all have a stake in their success.

Alec van Gelder is Project Director at International Policy Network.

Capitalism corrupted?

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There's a new book out, The Corruption of Capitalism by Richard Duncan. He's American but I guess he's in London because he was on the Today Programme this morning. The argument, which I subscribe to and which is reflected in The Alternative Manifesto, is that capitalism works just fine, but it has been corrupted by paper money and government borrowing. Before 1972, the US dollar was tied to gold, and other world currencies were pegged to the US dollar. So there was a limit to how many paper dollars (and pounds, and yen) could be printed. That did cause problems occasionally, but it kept our money sound.

Since 1972, there have been no such restraints. Governments could print as much money as they wanted. Meanwhile, the postwar belief in the desirability of large government spending programmes, and the Keynesian orthodoxy that the government could spend its way out of any crisis, made governments think they needed more and more money. The result is that they flooded the world with the stuff, using it to fuel excessive government growth and spending. (Our money is worth about 2% of what it was at the end of World War 1).

As soon as the gold restraint was gone, the Heath government set about printing so much money that inflation rose to 26%. The Wilson government that followed then raised expenditure even more, producing stagflation. In the mid1980s there was another boom, corrected only by a another recession, stock market crises and the rest. Governments still didn't learn, and off the cycle went again, bigger and bigger. Any crisis – the 1985 Savings and Loan Crisis, the 1997 Russian default, 9/11 in 2001 – was met by the authorities flooding the world with money, in a coordinated effort by London and Washington.

It was a huge fake boom, and as always it produced a huge real bust. The authorities have again tried to staunch it by printing money. If they hadn't, the scale of the bust would be obvious – about as big as the Great Depression. Of course, not many people want to go back to a gold currency – particularly when the Russians own so much of the world's supply. But we need something like it. The first duty of our monetary authorities is to keep the currency sound, not to debauch it. Governments need to be forced to balance their books, with strict spending, borrowing, and debt limits. And we need tougher reserve requirements on the banks, so that they cannot magnify the amount of money that governments produce and turn a drama into a crisis. And we need to get on with it now.

It's not too late to give Paris a call you know

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We've been told endlessly that the London Olympics is going to make us all such a wonderful profit! You know, never mind the expense, just feel the width of all that infrastructure. Poeple will be so impressed with London that they'll all come as tourists for years to come! Slightly missing the point that anyone who has the money to travel has almost certainly heard of London already.

To assuage our doubts over all of this we've been offered a number of papers from the various organisers and boosters stating that all will indeed be well. However, here's a paper looking at the costs, in an impartial manner, of the current Vancouver Games. Agreed, it's a student paper but at least it's not being paid for by people looking for a particular answer.

And the answer that's found is that, even if the Games stuck to their orignal book costs (an assumption in our own case which has been blown through by a factor of four already and we've still two years to go) then the nett benefits of the Games would be negative. There's a very clever little observation in there as to why this might be so as well:

“Economic theory casts doubt on a substantial windfall for the host city from the Olympic Games. Cities competing with one another for the Games would theoretically bid until their expected return reached zero.”
(Rob Baade)

Quite: in order to get the games you've got to bid more than everyone else. More in terms of the new stadia you will build, more you'll spend on making it the bestest outdoor jamboree for track suited drug addicts ever. And it takes place in an auction atmosphere, which leads to the winner's curse, the bidding is done by politicians which is never a good sign and the bidding is done with other peoples' money which is a violation of Uncle Milt's the four ways to spend money.

Then we go off and hire a bunch of superannuated politicians (look, Seb Coe was a great runner and is a nice man but losing your seat as an MP in Falmouth does not make you a great construction manager) and we're surprised when the Olympics bankrupt most of the places that hold them?

I'd just like to repeat the point that it's really not too late to give Paris a phone call and ask if they're still interested. Indeed, I think we might find that Athens has everything necessary and it's certainly true that they could use the influx of what cash there is right now. They've already built all the stadia anyway....

H/T Anti-Dismal.

Dismantling the pensions pyramid

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Others here at the ASI have written at some length about the need to dismantle the government's Madoff-style pension fraud before it unravels and plunges us all into fiscal disaster. However, the dire warnings have usually been countered by fears that current retirees will not be protected, or that the younger generations will have to pay an unfair amount to cover them during the transition from state to private – in effect, paying twice.

I propose that both of these difficulties in privatizing the state pension scheme can be overcome by adapting a plan developed for the American Social Security system by the Cato Institute. This plan can spread the costs of ensuring cover for older people, without unnecessarily burdening one generation with debt. Crucially, it phases in the reform slowly, and gives people a rational choice of whether or not to participate.

At the moment, the government dishonestly promises young people that they will be entitled to a state pension when they retire, but has no means of guaranteeing it. If the government were honest about the predictable future shortfalls, young people could act rationally; saving nearly half of their National Insurance Contributions privately to provide for their own retirement, whilst relinquishing their right to a state pension that will likely not materialise anyway. Thus they could still support the older generations who rely on state aid, whilst being allowed the freedom to secure their own futures.

A more detailed look at the proposal can be seen in the Think Pieces Section here.

Tough on crime, tough on the causes of crime

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We are continually being told that the causes of crime are both complex, built into the very structures of our society, and simple: it's all inequality, innit? Poverty, deprivation, righteous anger at the greed of the rich: fill in your own quotations from Polly Toynbee here.

However, there's another theory entirey: that much crime, if not most of it, is opportunistic. It takes place because those who would have more and are willing to get more through either violence or other illegality meet up with those who have the more and cannot defend it. Our problem is of course that we very rarely get the sort of natural experiment that we need in order to test which of these two is correct: or, if we are to be fair, or both could have some relevance, which explains the greater part of it. Rarely, but not never:

The Baltimore example is that over the period of the recent blizzards – when most potential victims were stationary, and not accessible to the police, the crime rate dropped.

For example, murders – of which there were 18 in the first 37 days of the year – dropped to 0 in 9 days.

Now it certainly isn't possibly true that inequality, poverty, deprivation or righteous anger dropped in those days of the snowstorms. It's also most certainly not true that policing had anything to do with it as they were as trapped as everyone else. No, we're rather left with our second explanation: the root cause of crime appears to be the opportunity to commit a crime. When that opportunity isn't there, nor is the crime.

A state of distrust

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The ASI has long campaigned against intrusive government; they lack the right to pry into citizen's lives, and cannot be trusted to look after and use the information they amass responsibly. And now, new polling by the Joseph Rowntree Reform Trust suggests that the average Joe is becoming increasingly wary government activity too.

63% of those questioned were worried about the government holding data on them, up from 53% in the 2006 poll. 53% respondents now believe that ID cards are a 'bad' or even worse idea; a staggering leap from opposition of 33% in 2006. In addition, 56% of people think government power too centralized, while a massive 88% of respondents want local communities to have more say over decisions that effect them.

What these figures clearly show is that people are becoming fed up of government projects that gather and centralize information and power. Indeed, the significant rise in the number of people who are concerned about the Big Brother state is striking. The current low standing of politicians and past scandals with lost data have surely gone some way to increase the public's aversion to the retention of personal information. However, somewhere along line, New Labour's erosion of our privacy has also caused people to switch from thinking 'If I have done nothing wrong than I have nothing to hide', to having real apprehension about government's plans.

Obviously, the incumbent government is charging full steam ahead with Operation Observation, by rolling out ID cards on a (for now) voluntary basis to the 16-24 year olds of London. While both the Conservatives and Liberal Democrats have pledged to scrap the cards, neither party has developed a meaningful agenda to really break down the monolithic state that currently looms over Britain and sucks in political and economic power at every opportnity. In politics, too much information and power is held by too few, and the Rowntree poll results suggest that a tipping point in the nation's tolerance could well be approaching.

Dr Butler in the Times today

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Focus on growth. Don’t argue about cuts.

What Bernanke's trying to do is really very, very interesting

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I know, I know, central banking never scores all that highly on the excitement meter. However, what Ben Bernanke's trying to do over in the US is indeed fascinating. The discount rate (the rate at which the Fed will lend to banks) has risen but it's not expected to have much effect on market interest rates.

The increase widens the spread between the Federal funds and the discount rate to half a percentage point, the upshot of which will be to encourage banks to borrow from the short-term credit markets rather than using the Fed – until this decision the cheapest source of short-term funding.

A little explanation perhaps (I didn't say that all of this about central banking would be interesting). In normal times banks do a great deal of lending to each other on very short term bases. Overnight, 7 day, that sort of thing. Just juggling around the surplus or deficit cash balances they have: the differences between what people have dropped into the bank/taken out of it that day/week. This so called "interbank" market pretty much disappeared in the crisis. It was the disappearance of this that led to the worries about ATMs running out of money in 2 hours, the collapse of the entire banking system thing. If you didn't know whether the bank you were lending to would open its doors tomorrow then you wouldn't lend to it overnight, would you? Credit risk entirely overwhelmed the market in short.

The solution at the time was the same in both countries: banks lend their surpluses to the central bank and borrow to cover their operating deficits from it. The bank removes all of that credit risk. We have functioning short term credit markets again and a functional banking system. Excellent.

What Bernanke is trying to do is wean the banks off that credit guarantee that the Fed is offering and push them back into standard short term credit markets. The surpluses should once again be lent direct, the deficits covered direct.

So far so what? I can hear you saying. But this has a huge implication for that Robin Hood Tax thing. For their aim is to apply a 0.05% tax to all such interbank loans and borrowings. Such a tax is, when the interest to be earned from overnight lending something like 0.002%, obviously going to kill the market entirely. In fact, the tax alone makes overnight lending, when calculated on an annual basis, cost 15% or so. Indeed, for some supporters of the tax this is the very point: to stop banks using such short term markets.

There are two implications of this: if Ben Bernanke is deliberately trying to reopen the interbank and short term credit markets then he's not going to look kindly on a tax which entirely kills those markets. I think we can assume that the Federal Reserve will not support the Robin Hood Tax and thus, as an international idea, it's dead.

The second is that if we've got one of the world's most respected monetary economists (even if he is a central banker) saying that we need and want these markets, perhaps we might want to pay less attention to the likes of the nef, RSPB, The British Dietetic Association, the Chartered Association of Physiotherapy, the Musicans' Union (no, really, they're all signatories) who are not respected monetary economists who say we don't want and need these markets?

Hands up for school choice

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A few years ago, relatives of mine in India mentioned that they were profiting from investing in new private schools. Contrasted with the bureaucratic nightmare that is Britain's school system, this came as something of a surprise.

The Conservatives plan to adopt Swedish-style school reform would enable exactly the sort of innovation that is rapidly improving Indian schools, but was yesterday attacked by The Independent. They claim that the improvements in Sweden were only due to the fact that school choice was totally non-existent beforehand. The UK, with its 'extensive school choice' (for those who lie about their religion, or have the money to move to a new catchment area/pay privately) would see minimal improvements.

The fact that choice and competition amongst UK schools are really at the embryonic stage was missed by the great minds at The Independent. Failing schools are still insulated from the effects of poor performance and are accountable, not to parents, but to government bureaucrats who dole out the money. In the Swedish school system, the parents control the money and hold schools to account.

The Independent argues that some parents would not be as effective as customers because they "[lack the] personal resources to access and understand information about school quality". If they can distinguish this from Sir Humphrey Appleby's claims that the intellectual superiority of civil servants makes them better at choosing schools than parents, I'd welcome their rebuttal. However, they will also have to explain why the most enthusiastic supporters of school voucher programs in America live in deprived inner city neighbourhoods.

Similarly, the authors argue that teachers and head-teachers are against the plan. What they go on to say is that the National Union of Teachers is against it, which is not exactly the same thing. This is an opportunity. Only teachers who aren't competent have anything to fear.

However, it is hardly surprising that teachers unions are not too keen on the school choice program. Their counterparts in the USA persuaded President Obama to abandon it in Washington DC. Of course Obama had the means to educate his children privately. The unions' line appears to be that competitive education is good for the wealthy but not the poor. The ASI's line is much more egalitarian.