Blog Review 932

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Once again, how to encourage development? Hayek was right it seems (quelle surprise!)

The exciting shenanigans haven´t stopped yet in the financial markets. Goldman´s made a nice profit in the first quarter you will have seen in the newspaper. But where did December go?

Nice to see that some politicians don´t even pretend to understand economics.

Ouch this hurts. Something of a blow to climate science. The models are about as accurate as economic models.

My word, the things that surprise! Taxpayer funded organisation insists more taxpayer funding is necessary.

A glimpse at the intricacies of modern art.

And finally, an installment of not the Business Secretary´s diary.

Mobile phone-tapping

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When our faux-fascist Home Secretary Jacqui Smith proposed that the UK authorities should keep a log of our phone calls, email and internet traffic, just in case we happened to be terrorists (or maybe drug pushers, or speeders, or litter bugs or something), there was a wave of public outrage that forced her to backtrack. Her argument was that the authorities wouldn't actually be recording our calls or snooping into the content of our emails. She and her bumblers in blue just wanted to know who we were corresponding with. They might be terrorists (or maybe drug pushers, or...), after all.

Of course, Jacqui's email and web visit demand has all been overtaken by EU legislation demanding that internet providers keep exactly that information for the authorities to fish through as and when they please. But what about phone calls?

Well, it's remarkably easy to snoop on people's mobile phone conversations. And to monitor, in real time, exactly where they are. You can even programme someone's mobile to record what they are saying. This video shows how bad guys can do this to you.

And what about the good guys? Well, there are all sorts of 'legal safeguards' when the security authorities try such things. But I wonder how many judges actually rule against such phonetaps when the police demand them? And is the division between good and bad guys even clear any more (I cite the recent G20 police-v-protesters footage in evidence).

Eamonn Butler's latest book, The Rotten State of Britain, is available to buy here.

Wanted: Teachers who understand economics

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If there was not already enough reason to worry about the quality of economics teaching in our schools, last week’s call by the National Union of Teachers for a 10% pay rise has provided ample evidence.

At a time when prices are flat, the UK economy is shrinking rapidly and the Bank of England is warning the Government to keep a lid on public sector spending, it might seem to the casual observer – or the student of economics – that this was no time to be increasing the wages of public sector workers at all, let alone by a tenth.

Yet the Times Educational Supplement reports that: "The nut is calling for a pay rise of at least 10 per cent plus a bonus of almost £1,400 for the average teacher, despite the worsening economic conditions. Christine Blower, the union’s acting general secretary, has warned the Government not to use the recession as an “excuse" to offer a low pay package. While the demands of other teaching unions are not quite as exaggerated as those of the NUT, “They are all lobbying for an increase of more than 2.3 per cent this year".

It seems that Ms. Blower and her union friends could use an economics lesson.

In a free society, wages – like any other price - would be determined by supply and demand. Parents (who are ultimately the paying customers) would bid up wages until a sufficient quality and quantity of teachers were available to teach their children, while would-be teachers would bid each other down until there were no more would-be teachers of sufficient quality than there was parental demand. Thus, one would know whether wages were at the right level by examining whether supply and demand were in equilibrium: if the number of would-be teachers was falling it would suggest that prices were too low; if applications for teacher training courses in England have risen by 10% this year (as reported by the Training and Development Agency) then it would suggest that wages were (more than) sufficient.

Unfortunately, neither parents nor teachers are given such freedom. But in the absence of market mechanisms, the government can use overall rates of wage and price changes as a proxy. Thus, government should freeze public sector pay if money and prices are stable, and reduce wages if money and prices fall.

Indeed, falling wages are essential if unemployment is to be kept down. It stands to reason that if there is less money in the economy and if there is less money for government to spend, then there must be either lower wages or fewer waged. What is more, if prices are falling, wages can fall without undermining workers’ standards of living.

Sadly, the NUT and the other teaching unions still believe that they can apply political pressure to squeeze extra money out of government at the expense of other workers all across the UK, whose own wages are falling and whose jobs are in peril.

Even more sadly, there is a reason for this. All too often, they have been proved right.

Expenses give MPs multi-millionaire lifestyle

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MPs’ generous expenses, index-linked pensions and second-home allowances give them a multi-millionaire lifestyle that their constituents could scarcely dream of, shock figures reveal today.

The effective income of the average MP is £319,165 – nearly 18 times the pay of the average voter, according to Bournemouth University tax expert Richard Teather, who has also produced a ‘fat-cat ranking’ for each of our Westminster representatives.

In his report, fTeather takes MPs’ basic salaries – ranging from £64,766 for backbenchers to £194,000 for the Prime Minister – and adds in their pension rights, another £17,357 for backbenchers, up to £52,059 for Gordon Brown.

But what is the value of all those expenses claims – from barbecues to bathplugs – that the rest of us would never have a hope of getting through our employers, never mind Her Majesty’s Revenue and Customs? Teather says that to pocket what the average MP claims in expenses, free of tax and National Insurance, the rest of us would have to earn £228,215.

It all amounts to a total pay package worth £319,165 – and that is just the average. Welsh Secretary Paul Murphy tops the league table with a package of pay, pensions, and expenses worth £423,932 a year. That is more than 28 times the average income of his Torfaen constituents.

On the best interest rate currently available – 1.83% from Birmingham Midshires, you would need over £23 million (£23,165,683) to get an income matching Paul Murphy’s annual £423,932. You would need over £17 million (£17,440,710) to earn in interest what the average MP earns from Westminster.

To read the highlights of Richard Teather's research, click here

To read the coverage in the Mail, click here

Rockonomics

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While browsing the excellent free-market website Division of Labour, I stumbled upon an interesting page called From ABBA to Zeppelin: Using Music to Teach Economics. In order to teach fundamental aspects of economics, lyrics from selected popular tunes are examined with an economic assignment for the listener. The lessons range from using Oasis’ “Cigarettes and Alcohol" as an example of the discouraged unemployed to rebutting Alvin Lee’s cries for income distribution in Ten Years After’s “I’d Love to Change the World." Although slightly gimmicky in nature, the lessons are well thought out and range various topics in economics while the lyrics cover enough genres to hold a sixth-form or college student’s interest. One of my favourite lessons uses “Thousands are Sailing" by The Pogues to tackle the topic of immigration:

The island it is silent now
But the ghosts still haunt the waves
And the torch lights up a famished man
Who fortune could not save

Did you work upon the railroad
Did you rid the streets of crime
Were your dollars from the white house
Were they from the five and dime

Did the old songs taunt or cheer you
And did they still make you cry
Did you count the months and years
Or did your teardrops quickly dry

Assignment: What is the effect of emigration on the country of origin? What is the effect of immigration on the host country? Do you think most immigrants work (for example on the railroad, or as police officers) or do you think they take government assistance (dollars from the White House)? How quickly do immigrants assimilate into a new country: is it “months and years" or do their teardrops quickly dry?

Who said economics has to be the “dull science?" I’ll be waiting for the lesson where they explore fluctuations in commodity prices using The Rolling Stones’ 1971 hit “Brown Sugar." Or wait, maybe that song is about something else…

Contents maybe hot!

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Watch out! Tea or coffee may be hot. Tut-tut. Shockingly poor use of the English language from the BBC.

Blog Review 931

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Just a couple more on Draper, Guido and the emails. Should a physiothereapist be describing someone as nuts? And what does the professional body think of that? Ohters think it's all just part of the Westminster bubble.

Continuing with politicians: cap and trade is in theory more desirable than a cabon tax it's just that, well, politicians would have to be involved in designing cap and trade.

And of course there would be lobbyists too: perhaps the most lucrative investment known, paying politicians to write the law your way.

Where our (rather than the bribery) money goes: on layer after layer of bureacuracy.

And then there's the things where instead of taking our money they decide to take our time. The oxymoronic compulsory voluntary service. Which apparently won't apply in Gordon Brown's own (Scottish) constituency.

Given the technological choices being made it is now certain that the national ID card scheme will not be secure. So why bother to have it?

And finally, the present for the man who no longer has everything.

Nudging the state toward better behavior

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The Obama Administration is very impressed by the findings of behavioral economics and its proposed government policies designed to nudge private individuals toward “better" behavior like increased savings for retirement, stopping smoking, controlling weight, and so forth.

We are also told that Peter Orszag, the federal budget director no less, uses a “behavioral" method to get himself to prepare for running marathons so as to overcome his own lack of sufficient willpower. He has somehow arranged things so that if he does not meet his running goals he will automatically donate money to a charity he doesn’t like.

Orszag, as a private citizen, may do what he likes. Perhaps he should write a book of self-help advice.

What I should like to see, however, is the Obama Team come up with nudge-style techniques to make the government engage in better behavior. Whatever mess people make or do not make of their own lives is a matter of some concern to people with strong fellow-feelings. But what government does affects us all, in my view usually for the worse. It affects even those who lead exemplary lives by creating economic difficulties, by engaging in unjustified wars, and by abridging our liberties – just to name a few examples.

Today the United States government is implementing enormous fiscal stimulus and the Federal Reserve has engaged in the unprecedented creation of money. Some economists, including me, have questioned the wisdom of all this. Nevertheless, even among those who support these policies, there is general agreement that they must be reversed once economic recovery is underway.

We are to suppose that, unlike Peter Orszag, those with the power to control these matters will have the (political) willpower to carry through with the less popular side of counter-cyclical policy. Why should we simply suppose this?

If the Obama Team has such confidence in behavioral techniques, they should apply them to this very important case of potential bad behavior: the possible (probable?) failure to implement the contractionary part of the stimulus cycle.

Congress should pass a law right now specifying that when the rate of growth in the U.S. gross domestic product becomes 1% or greater for two consecutive quarters that a certain overall percentage reduction in government spending take place. The law should further require that if Congress does not pass the enabling legislation at the appropriate time later, then 25% of the salaries of all members of Congress will automatically go to a group of organizations that will promote reductions in government spending. This could be arranged to occur automatically through the members’ respective banks. (A similar nudge might be arranged for the Board of Governors of the Federal Reserve System but that would be more difficult because of the supposed independence of the central bank.)

It is true that members of Congress could undo the nudge at the time – just as, I suppose, Peter Orszag could reverse his charity commitment. But then, having taken this extraordinary step, they would have to admit publicly their failure or rationalize it away – costly options.

This is just one possible implementation of the nudge-technique to create better government behavior. Perhaps others, like Cass Sunstein (the nominee for regulatory czar and coauthor of Nudge,) can come up with better ones.

Guest author Dr Mario J. Rizzo is associate professor of economics and co-director of the Austrian Economics Program at New York University. He blogs regularly here.

Bad money

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Money is not the root of all evil, but it is at the root of economic malaise and this economic crisis.

In the years preceding the subprime crisis, money acted a super stimulant. In many countries, bubbles began to form, and as the system inflated things felt so good. Protected by incompetent and impotent regulation, government directives further stimulated subprime lending and encouraged risky practices. Many investors, imperfect as they are, were duped by it all - the booming house prices and the strong credit ratings, and used every trick in the book to gear themselves and multiply nominal gains on the way up. But as the bubble beneath did not lead to a sound expansion of production, what came next was inevitable. As Mises noted in Human Action, “Credit boom is built on the sands of banknotes and deposits. It must collapse."

The evil of bad money is doomed to return unless we learn the lessons of history. Directed government stimulus plans increasing the quantity of money, and excessively cheap money with interest rates held down too low for too long, both lead to the same conclusion.

When inflation backed fiscal stimulus is implemented and noticed, the inflationary results act as a stealth tax by the government as our money falls in value. When monetary growth is better hidden, it drives many into a state of economic irrationality which one day terminates abruptly.

Monetary stimulus may help in the short run, when looking to relieve the nation of economic malaises such as unemployment, and searching for political boost but over time consistently bad money will cause greater woe: mal investment, bubbles, inflation, and crisis.

A more conservative policy goes some of the way to improving the quality of our money, but actually achieving sound money is a much more difficult task.

Good money

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Much harder than seeing the flaws of bad money is deciding exactly how to get good money.

If price level targeting is to remain, it must be much more conservative and consistent in nature, ensuring genuine price stability and an equilibrium between the supply and demand of money.

Perhaps a Friedman type monetary rule under which the money supply is increased at a constant rate regardless of changing conditions is the way forward.

A more Austrian line to follow would be a return to a standard, most likely gold. This has the advantage of limiting the scope for official bodies to inflate the money supply. Unfortunately, even if one were able to reinstate such a standard, and ensure it was maintained for some time, governments wouldn’t necessarily play by the rules.

Governments would be unwilling to follow constant rules and in times of economic woes might abandon restraint especially to avoid short term pain.

The most revolutionary approach and in theoretical terms attractive, is that there need not be "a single producer of the medium of exchange (Friedman & Schwartz) echoing Hayek‚s thoughts in the Denationalisation of Money. Good money can only be achieved if the issuer is truly forced to preserve its value. The problem is that there is no clear precedent for sound, privately run, inconvertible money. Perhaps, we will never get good money with a government monopoly, but these are uncharted and rocky waters.