Blue Sky Thinking

Long queues are a clear indication of supply failing to meet demand. In the Soviet Union, you queued for bread and butter. In the UK not too long ago, you queued for the GPO to install a telephone. The mismatch was usually due to some government agency mucking things up.

So it is now with Britain’s airports where arriving passengers have faced queues of up to two hours due to an inefficient UK Border Force. The solution is obvious – privatise the UK Border Force. Let the airports, airlines and passengers sort out amongst themselves how to deliver an efficient immigration service. Let them decide how much to spend and how much to charge and when and where to staff.

In the government’s defence, they’ve been forced to slim staff numbers as part of its overall priority to get a grip on the nation’s finances, but that’s why more imaginative thinking is required. That process may have started amid reports of talks to increase charges on airlines to hire more Border staff. That makes eminent sense – users and beneficiaries should pay.

Willie Walsh, head of the company that owns British Airways, has said that airlines would be prepared to pay for the right service but then hit the nail right on the head with his comment that this willingness disappears if the government was wasting money. Indeed, as Labour proved with health and education, you can’t just pour endless cash into a government agency without accompanying structural reforms.

Unsurprisingly, Ryanair’s Michael O’Leary weighd in with his claim that “The big problem with the queues at Heathrow and at Stansted is they are treating EU citizens like potential bloddy terrorists and they are not.” He claimed it wasn’t short-staffing as a result of budget cuts but rather a work-to-rule mentality.

So don’t offer the government more money to carry on as is; privatise the whole process.

In the spirit of airline pricing, there could be first, business and economy immigration lanes or the equivalents of easyJet’s Speedy Boarding and Ryanair’s Priority Queues. A really clever company would roll out trolleys with refreshments when queues do build up or maybe offer up work experience students to hold your place in any queue while you take a toilet break. How about immigration hall buskers?

Private companies have a much better record in chopping and changing to altered circumstances and in adopting and adapting modern technology. Let them get on with it.

Oh, the vested interests will squawk that national security is too important to be left to the private sector, just like teachers claim that children cannot be entrusted to anyone but their own guarded priesthood. However, assorted government agencies over the years don’t have a spotless record when it comes to keeping out undesireables.

No wonder we have bank bailouts: regulators will always be captured by the firms they're meant to oversee

One important free market argument against government regulation of the economy is that regulators tend to become captured by corporate interests. When faced with a brief they know little about, politicians turn to the experts to devise policy and advise them on the ins-and-outs of the different industries they’re expected to regulate.

Who are those experts? Business leaders who’ve made their money by mastering their industry. The very people who stand to gain the most from some insider political power to protect themselves from competition. Firms are constantly looking for a way to exclude new entrants from the marketplace –  when governments have a lot of power over the market, the incentive for firms to try to bend that power to their will is overwhelming.

This is an unavoidable aspect of the fact that government officials – politicians, civil servants, and even “independent experts” the government loves to put in charge of its policy commissions – are human. They are no more or less greedy or easily swayed than anybody else.

This concept of “regulatory capture” is one reason I tend to prefer rules to individual discretion when thinking about regulation. There’s no way to ensure that only the angels get into power, and I’d prefer to avoid much discretionary power being invested in the hands of individuals, in case they misuse it.

All of this is important in understanding where we are and where we’re going. One of the most remarkable phenomena of recent years has been the revolving-door relationship between Goldman Sachs and the US government. Goldman Sachs is not a morally bad company, but its success has led to its executives being tapped up for senior roles in the Clinton, Bush and Obama administrations – notably Hank Paulson, a former Goldman CEO who presided over the Troubled Asset Relief Program (TARP), the first major bailout for US banks during the financial crisis.

There is no need for conspiracy theories here. It is sufficient to presume that Paulson’s ties to the financial world made him sympathetic to calls for bailouts and to the idea that established firms in the financial sector could not be allowed to go bust in an orderly fashion.

Paulson is not, personally, the one to blame: the system that gave anybody the power to pervert the market with bailouts is. If Paulson had not been in that position, someone else had – and if not someone tied up with Goldman Sachs, then with JP Morgan, CitiBank, or one of the other large banks. The mindset that these established firms have to be protected at any cost would be there, wherever the Treasury Secretary had come from.

All this came to mind yesterday when reading that Goldman Sachs’ Jim O’Neill is rumoured to be in the running to succeed Mervyn King as Director of the Bank of England. No doubt O’Neill has a lot of valuable experience – although I find his much-celebrated categorization of the “BRICs” (Brazil, Russia, India and China) as must-invest powerhouses slightly underwhelming. But, like all ex-financiers who enter the political-regulatory nexus, he would be beholden to the established firms that made him who he is today.

For different reasons, an academic may be little better, unless he was a truly radical visionary. But, if O’Neill or someone like him gets the job, I know what response my money will be on when the next financial crisis rolls around.

Cheerio, not goodbye

As some readers will already know, I am moving on from the Adam Smith Institute. Friday was my final day as Executive Director here, and in June I will be moving to the United States. I'm heading for Washington, DC, where I am going to be Managing Editor at the Reason Foundation, a libertarian think tank which also publishes Reason Magazine and produces Reason TV.

I'm very excited about this new opportunity, but, needless to say, I am also very sad to be leaving the Adam Smith Institute. It has been a great five years, and I have so many wonderful memories to look back on. I will miss all the people I have worked with enormously.

We have done so much since I started in 2007, that it is hard to pick favourites. But here are few personal highlights: unveiling the Adam Smith statue back in 2008; running Freedom Week in 2011; filling the LSE with libertarians for last year's Hayek v Keynes debate. I have also hugely enjoyed establishing a top-notch ASI lecture series over the last few years. Tour de force talks by Tara Smith and Kevin Dowd stand out as particularly memorable moments.

More broadly, there are a handful of overarching themes that have characterized my time here: the resurgence of Austrian school economics in response to the financial crisis; the emergence of unabashed libertarianism as a distinct voice in the political debate; and the creation of a fast-growing libertarian youth movement in the form of the UK Liberty League and European Students for Liberty. I will always be very proud of the role we have played in these developments.

My final words, though, must go to Madsen and Eamonn – who gave me an opportunity few people fresh out of university could dream of – and to the Adam Smith Institute's friends, supporters, and donors, who make everything we do here possible. Thank you, and farewell.

Cardinal Keith O'Brien's misplaced faith in the Robin Hood Tax

Cardinal Keith O’Brien, the head of the Catholic Church in Scotland, has called for the government to introduce a “Robin Hood Tax”. This is hardly a surprise. O'Brien's expertise is in the field of faith and the supernatural, which is just where support for the “Robin Hood Tax” comes from. (Incidentally, this isn't the only dumb political statement the Cardinal has made in recent weeks.)

It hardly needs to be said that the “Robin Hood Tax” (or financial transaction tax, to give it its correct, non-adolescent name) is a sham. No, it would not raise £20bn in revenue, as its supporters claim – that number is based on a static analysis that supposes, wrongly, that the tax wouldn’t affect behaviour.

In fact, it would affect behaviour a great deal, by crippling financial traders’ ability to engage in high-volume, low-margin trades that give volume to markets and help it to adjust quickly to new real-world information. A “small” 0.05% tax adds up to be quite substantial as you make several trades a day, as these traders do.

Most likely, a financial transaction tax would drive many traders overseas – to Zurich, Wall Street, Singapore, or somewhere else. That’s what happened in Sweden when that country tried the tax: within less than a decade of the tax’s implementation, trading for over 50% of Swedish equities had moved to London. Futures and options trading virtually ceased in Sweden altogether.

Advocates of the tax in Sweden claimed it would raise 1.5bn kroner per year (approximately £330m in current figures). In reality, it raised just 50m kroner (£11m in current figures), or one thirtieth of what was promised. The advocates of the “Robin Hood Tax” today are spinning the same fraud, and their numbers are worthless.

The “Robin Hood Tax” is, basically, a case of charities misusing their organizations for political purposes. It has nothing to do with charity, and everything to do with the left-wing agenda those charity employees want to advance. It’s a huge shame to see organizations like Oxfam and others misappropriated by the hard left to give PR heft to this silly idea.

The "Robin Hood Tax" is faith-based economics at its worst. But if Cardinal O’Brien really wants to help the poor, there’s plenty he could do himself. The Catholic Church is one of the richest organizations in Britain. They say charity begins at home. If O’Brien wants the government to get richer, waiving his church’s tax-exempt status would seem like a good place to start.

Let's sell the BBC: if the Chinese can do it so can we!

China continually surprises: it's ever so slightly odd to find yourself outflanked on the free market, capitalist, side by the remnants of a communist state. But that's what has just happened in China and it gives us the example of what we should do with the BBC. Sell it.

For that is exactly what the Chinese are doing, selling off chunks of the State broadcasters:

China's People.cn Co Ltd finished 74 percent higher on its first day of trading in Shanghai after a $219 million IPO as investors flocked to the state-backed news portal

And:

Beijing has actively encouraged its state-owned news media organizations to list in the domestic market in order to secure capital to improve services and extend Beijing's control in the free-wheeling Internet sector.

Xinhuanet, the Internet portal of state news agency Xinhua, is also set to raise 1 billion yuan in Shanghai,

The joy is that of course we'll be able to get the happy approval of all of the usual lefty media luvvies for this. You don't have to go far these days to hear someone praising the way that the Chinese state directs investment, manages the economy, builds infrastructure and so on.

So, we should be able to get over the cries of horror when we suggest flogging of the BBC simply by pointintg out that this is what the Chinese are doing and doesn't that make it wonderful?

And I have to admit, I'd be very tempted to buy it myself. Just think of the joy that can be had in slashing the bureaucracy, putting the self-appointed defenders of the 90% on the wages of the 90% and, joy of joys, rejecting licence fee funding by taking advertising! So, so many media types to affront and so, so little time alas.....

How Apple and Amazon show that stock market investors really do think long term

I know, I know, we're told that stock markets are short termist in outlook, obsessed only with the next quarter's results. This is an appalling indictement of neoliberal capitalism and must be stopped immediately by putting politicians who only look to the next election result in charge.

I realise that this next little point is not proof of anything, nor an entirely solid refutation of the above, but I do think it indicative:

The situation for Amazon now resembled "what we saw back in the 2004 to 2006 time frame when the company was making a lot of investments and margins got squeezed. Then in the years following, margins expanded and revenue accelerated. It looks like the company is in that position right now."

Shares in the company leapt to $225 in extended trading, further swelling the company's already lofty valuation of more than 70 times earnings.

In comparison, the 12-month forward price-earnings ratio for the S&P 500 stands at about 12, while Apple is trading at 13 times forward earnings.

Amazon is, famously, a company that is willing to sacrifice the short term in order to create a long term exploitable profit opportunity. Apple makes great products, oh yes they do, it's also had a blinding run recently. But they're not, in anything like the same way, building a structure as Amazon is doing. They're retailing their products and their continued success in doing so depends upon continuing to develop new products rather than exploiting an ecosystem as Amazon is doing.

Apple makes vastly more in profits than Amazon does, this is true: yet each $1 of profit that Amazon makes is more highly valued than each $ that Apple does. Another way of saying the same thing is that investors believe that Amazon's business model will produce greater profits in the long term.

Now I agree, this doesn't answer all the other indictements of appalling neoliberal capitalism: but it's most certainly not evidence that investors are short term in their outlook, is it?

A positive agenda for financial reform

Detlev Schlichter is on excellent form today, outlining a way out of the crisis and towards monetary sanity:

Step 1: Privatize the central bank.

Do not even introduce a gold standard. Just transfer ownership of the central bank officially to the banks that have an account with the central bank. This is the first step for the state to exit the sphere of money. The central bank is no longer a public institution run by bureaucrats and politicians but an entirely private undertaking. It is owned and operated by the banks.

The central bank administers bank reserves and provides certain clearing functions. The banks need this, for now at least. Shutting the central bank down is not that easy. But its most pernicious aspect is that it is a policy tool. This would end abruptly with its privatization.

Step 2: The state revokes with immediate effect ALL laws and policies that relate specifically to banking and money.

From this moment on, banks are capitalist enterprises just like any other normal business. There is no lender of last resort (at least not one run by the state), there is no inflation target or other official monetary policy for which the banks function as conduits, which under the present system puts them in the strange position of being profit-seeking enterprises and policy-transmission mechanisms simultaneously. But equally, there is no backstop for the banks from the state any longer. No guarantees, no deposit insurance or taxpayer bailouts. If a deposit insurance institution exists, it is handed over to the banks, similar to the central bank. Again, the state has exited the business of regulating, supervising, licensing, subsidizing and backstopping the banking industry.

Entry into the field of banking is now free. You do not need a license. You do not need an account with the now privately owned central bank (although without such an account clearing with other banks might be difficult). There are no legal tender laws anymore, so if anybody has any bright new ideas about money (Liberty Dollars, bitcoin) they are most welcome to try them. The consumer alone will decide over success and failure.

Monetary policy has ended. Bernanke testimonies on TV will be replaced with reruns of old Simpson episodes. Senators and congressmen will have to find new soapboxes from which to propound their personal economic theories.

Step 3: The state’s gold hoard is handed over to the banks.

What? A gift to the bankers? – I do not consider this a gift to the banks but more a return of property to the bank depositors. The bank depositors are the ones that should benefit from this transfer most.

The present monetary system could only have come about because it was once based on gold. Deposit banking spread at a time when banks still promised to repay deposits or banknotes in specie, and when all banks were thus required to hold (some) gold reserves – reserves that no political entity could create at will. Only slowly and gradually was the gold backing removed and replaced with various implicit or explicit state guarantees, all of which are now practically failing.

This is all sensible, practical stuff. As Detlev notes, this would stabilize the banking system by imposing the discipline of the market onto it, and go a good way towards ending the cycle of boom and bust that money and credit expansions drive. And, by removing the printing press from the government's arsenal, it would raise the cost of government borrowing. This is a feature, not a bug: a government forced to borrow at higher rates will have no choice but to live within its means, as private firms and households do.

With drugs reformers like these, who needs prohibitionists?

Last weekend was the third annual conference of Students for Sensible Drug Policy UK, a student organisation that campaigns for an end to the War on Drugs. Whilst it was both an interesting and valuable experience, it highlighted the differences between libertarians and the rest of those in the drugs policy movement.

As one might expect, the conference was dominated by social democrats, who generally favoured extensive government regulation. We were told, during the first panel discussion, that the way we currently tax and regulate cigarettes was a good model for how we could control all drugs once they were legalised. Cigarette plain packaging laws were hailed as a model to emulate and America was chastised for being ‘behind’ on the issue. Americans' tendency to view advertising as a first amendment right was actually portrayed as a bad thing!

Many were sceptical of drugs being provided by the market. Instead, they argued, drugs should only be provided by the state due to their addictive qualities. When talking to Steve Rolles (of Transform Drug Policy Foundation) later that evening, he tried to persuade me that the public would never get behind the idea of drug liberalisation unless there was an almost excessive amount of regulation involved.

Now this might well be the case, and it certainly gives us in the libertarian movement something to think about. Yet what the conference largely overlooked was the moral case to be made for allowing companies to sell and advertise a legal product. There are, of course, practical considerations as well. If taxed and regulated too much, people would continue to buy drugs on the black market. Libertarians can’t sit back and let the left dominate this issue; we need to remain actively involved to keep the regulators in check.

Ultimately, however, even a heavily regulated legal market would be preferable to the status quo – and that simple fact will ensure that the alliance between libertarians and the rest of the drugs reform movement will remain strong.

Fighting the culture wars

Looking through Madsen's "Think Tank – the story of the Adam Smith Institute," the one achievement that stands out is the seismic shift it helped to make in popular thinking.  Starting out in a world dominated by the postwar consensus, the leftist assumption that only the state could run an economy, the ASI played a leading role in shifting that over to a belief in enterprise and private initiative.

How was it done?  It was done by a mixture of policy and populism.  Armed with a self-confident narrative, they took every opportunity to push for radical, free-market policies, while at the same time propounding those ideas through every outlet available.  They wrote articles in the Mail, the Sun and the Sunday Post, as well as in the more highbrow journals.  They regularly appeared on popular radio and TV shows.  The fact that this was done with minimal resources makes the story all the more compelling.

The book has the effect of making the reader more determined to oppose the banker-bashing anti-achievement culture that the left seems intent on peddling today.  "Think Tank" shows how a belief in enterprise transformed national thinking, as well as the nation itself.  It is a stirring lesson.

The Jeremy Hunt affair is simply public choice in action

Poor Jeremy Hunt is perhaps the latest victim of the Leveson Enquiry. Whether this is the end of a promising career or not remains to be seen – politicians of any stripe love to clamour for a ministerial resignation and the Coalition is racking them up fast (I count three at cabinet level). Still, whatever the ins and outs of Mr Hunt’s involvement with News International and his relationship with James Murdoch, there can be only one clear conclusion: if politicians and bureaucrats are allowed to regulate markets, corruption, monopoly and loss of general welfare must be the result.

First of all, it is salutary to remember that this is not a party political issue. As evidence to the Leveson Enquiry itself shows, politicians are drawn to newspaper proprietors and editors like flies to the proverbial. The two have a symbiotic relationship with each other, and always have done. Clearly this relationship is the result of a classic public choice style problem – politicians have power but need votes and newspaper editors can deliver votes in exchange for a chance to influence how that power is directed. Of course, this is a very reductive description of the relationship but that is what it boils down to.

Such a relationship is evidently corrupting and open to the exploitation of special interests at the expense of general ones. How should we prevent this? Whilst party politics calls for the minister to fall on his sword, such an action will hardly prevent future occurrences. The general tone of public discourse suggests the introduction of rules, guidelines and procedures on ministers with greater bureaucratic control and less personal control by the minister. In many ways this represents the general trend of constitutional developments over the past 100 years or so. Powers should be vested in ‘disinterested’ civil servants or, better yet, in ‘independent’ Quangos like OFCOM or the Competition Commission, rather than politicians.

The bureaucratic solution, however, is no more acceptable – as any fan of Yes Minister will confirm. Aside from the issues of democratic accountability such developments raise, we should remember that civil servants and bureaucrats are human beings and have a series of vested personal and ideological interests of their own. Bureaucratic rule-making is just as susceptible to corruption as ministerial rule-making. This is especially true in the case of newspapers, which are extremely well-placed to use their influence in order to promote their own interests. Again, the Leveson Enquiry shows us exactly this situation: journalists allegedly entering into corrupt relationships with police officers.

To suggest that newspapers themselves should be more strictly regulated is similarly fraught with danger. Regulators are, after all, highly susceptible to capture by large market occupants – we see this is the revolving door that tends to exist between jobs in regulators and the large firms they regulate. However, even assuming that bureaucrats or ministers could be objective in their decision-making and chose the best number and size of firms in a particular market, their decisions will have unintended consequences. Compliance costs favour large firms who are better able to meet them and have more effective lobbying organisations. This means that they can exclude market entrants, create an oligopolistic situation and drive up prices whilst preventing innovation. Large firms love big government and big government can only co-operate with large firms.*

Any serious examination of the implications of such behaviour suggests that the best means of limiting the prevalence of such relationships is to limit the power available to public officials, elected or otherwise. In this case, it means removing the ability of ministers or civil servants to make decisions regarding the size and shape of markets. This would eliminate both the public choice and the ‘knowledge problem’ effects outlined above. A minister or civil servant with little power to control outcomes is hardly likely to be a sensible target for corruption after all (this would bring the nice benefit that fewer civil servants represent a smaller drain on the public purse – viz. the failed ‘bonfire of the Quangos’, which failed because the functions of the Quangos themselves were not eliminated).

Of course, in the present state of our economy it is extremely difficult to eliminate competition authorities. The vast level of state interference, regulation and taxation creates a swathe of instances of anti-competitive behaviour and monopolistic markets – conditions which simply would not exist under free markets. Open markets in the UK mean foreign state-backed monopolists can simply move in and create new monopoles. Vested interests mean that large companies and the bureaucrats that support them cry foul at any attempt to liberalise markets. At the same time, sincere but mis-guided ‘Occupy’-type groups and celebrities call for more intensive regulation of various markets, thinking that this will result in more competition when we see exactly the reverse to be true. This is a very long way from the position of one embattled politician, corrupt or not, but it behoves us to remember Lord Acton’s dictum ‘power corrupts, absolute power corrupts absolutely’. Without power there is no corruption.

*As an aside, we should bear in mind that the really dominant player in the broadcasting news market is not BSkyB, but the BBC which controls 60% of UK audience share. It is the presence of the BBC, paid for out of the licence fee, far more than that of Sky, paid for voluntarily by subscribers and advertisers, which distorts the broadcast market and prevents the emergence of real competition.