Currency manipulation

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China is being widely accused of manipulating its currency for the benefit of domestic exporters. Despite the ostensibly diplomatic stance Obama is taking on the issue, it is clear that many in Congress and the Treasury are not happy about what they see as behaviour that apparently costs US jobs.

But doesn’t the concept of currency manipulation imply some ‘natural’ currency value? Surely to manipulate this value requires an original level to have existed, free from government interference. The point may sound hair-splittingly philosophical, but I certainly think it is interesting.

Just consider that by virtue of existing at all, governments will be having an effect on currency values. Everything a government or central bank does should have some effect on relative currency values; budget deficits (i.e. USA, UK and Euro) and interest rates are a few examples.

The accusation of currency manipulation, then, is a slightly strange, not to mention hypocritical, one. Recall that the USA has deliberately weakened its relative currency value in two previous recessions in order to expand exports. I don’t think it is clear that the current Chinese actions are significantly different.

It seems that the line between ‘legitimate economic policy’ and ‘currency manipulation’ is a thin one, if existent at all. The US should remember that this issue is full of grey areas before it makes any official accusations.

The winds of change

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The Chronicle of Higher Education reports that the University of Houston is outsourcing some of its grading to Bangalore. Virtual-TA, provided by EduMetry Inc, is delivered entirely online. Graders hold masters degrees and as Lori Whisenant, a teacher of business law and ethics, states, “This is what they do for a living. We're working with professionals.” The obvious question that arises from this development is: given that Bangalore provides most of the students feedback, do the consumers of education even need a university? I would argue no.

Some teachers and institutions will feel that their position is being usurped if this process leads to its obvious conclusion. Their only hope will be to turn to the government. I don’t fancy their chances, as some established and powerful players already have some skin in this new game. After all, Oxford University already offers online and distance courses. At present, the branding of virtual universities falls short of those ‘real’ universities, but as with all technological revolutions, the shakeup in the system will lead to some new and very creative business models, amongst the inevitable destruction.

Banking reform vital, but levies aren’t the answer

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According to a new briefing from the Adam Smith Institute (ASI), proposals to introduce a new ‘bank levy’ would do little to correct the problems in the banking sector, and act as a distraction from other, more pressing reforms.

The briefing also expresses skepticism that governments would ring-fence the proceeds of such a levy for future crises, suggesting that they would soon become just another tax to finance current expenditure.

Indeed, it has already been reported that Alistair Darling favours national discretion to use the proceeds of a proposed EU-wide levy as the government sees fit, rather than reserving funds for the future.

According to Miles Saltiel, the author of the ASI’s briefing and a City financial expert, imposing such a levy is also likely to prevent banks from rebuilding their reserves – a key economic priority, in his opinion – as well as holding up lending.

Saltiel, who is a senior fellow of the Institute, also dismisses the ill-thought out populism behind ideas such as the ‘Tobin tax’, punitive regulation of hedge funds, and swingeing tax increases on bankers.

Instead he argues that policymakers should focus on six key issues:

(1) The government should abolish future expectations of “too big to fail” and encourage competition by breaking up the nationalized banks. The Williams & Glynn Bank, ABN-AMBRO and NatWest should all be filleted out of RBS, while HBOS and TBS should be split out of Lloyds.

(2) The government should also ensure that failed banks can be run down in an orderly way, by requiring so-called ‘living wills’.

(3) The UK should campaign for derivative contracts to be moved onto regulated exchanges, rather than being traded over-the-counter. As well as reducing counter-party risk, this would be good business for the City of London.

(4) The British government should take the lead in advocating tougher international capital and liquidity ratios. They should also press for stricter rules on what counts as capital.

(5) The UK should restrict how much its banks trade on their own account in capital markets by requiring higher capital reserves to be held against such activity.

(6) Legislation should require honest accounting and transparency. Governments – whose off-balance-sheet obligations dwarf those of the private sector – must not be exempt from such rules.

Tom Clougherty, the executive director of the ASI, added:

“Banking reform is one of the most pressing policy challenges facing the UK, but too often our politicians resort to crude populism rather than grappling with the real issues. This needs to change – having a more stable, more competitive banking sector is vital to our future economic well-being.”

A PDF of the briefing can be downloaded free of charge at:

www.old.adamsmith.org/files/a-levy-on-banks.pdf

Is it worth voting?

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As we enter the third day of the election campaign, voter turnout is again shaping up to be a hot topic for commentators and politicians alike. Newsnight have made the customary ‘lets find out why voters feel so disconnected and disillusioned with politics by visiting a generic working class area and talking to real people’ report.

The solutions being floated seem largely to resolve around an influx of new, energetic, honest MPs who would surely never take advantage of their positions of power in the way the current lot have. As I’ve said before, the problem of corruption is systemic and structural, so I don’t hold out much hope for the prospects of the new lot.

It’s important to acknowledge that voter turnout will likely be low because of a mixture of the relative lacking diversity between the three main parties on many key issues (NHS, welfare and tax reform) and also because of the current electoral system and over-centralisation.

Indeed, Game Theorist Ken Binmore has pointed out that individuals, recognising the relative futility of one vote under First-Past-The-Post will rationally calculate that in many cases it is simply not ‘worth it’ to get out and vote.

Decentralisation, I believe, is crucial here. It seems clear to me that when decisions are made on a more local level and voters can see more clearly where money is spent, turnout is likely to be higher. As it stands, from the perspective of numerous voters, putting a cross on the ballot paper signifies support for a group of people who are distant, legislating in the mysterious world of Westminster and largely unaccountable for up to five years. Democracy must be more responsive and immediate if the electorate is to be truly engaged.

Conservative proposals on the issue seem attractive. But given previous governments’ records on constitutional reform, I’m not holding my breath.

The Institute for New Economic Thinking

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The Institute for New Economic Thinking, George Soros’ new $50 million plaything, will be launched today at King’s College, Cambridge. The location is significant; a tribute to its famous alumnus, John Maynard Keynes. The Institute seeks a paradigm shift in economic thought, but if it is rooted in the thoughts of Keynes this is neither new nor welcome. The fact that Anatole Kaletsky defends its existence in the Times, suggests that it is likely not fit for purpose.

Kaletsky is swift to blame free markets and monetarism for what he calls ‘the near-death experience of the world economy’. He insists that free-market ideas have captured policy makers since the early 1970s, creating an academic hegemony out of touch with reality. So taken in by the efficiency of markets, politicians, he claims, have never dared to second guess market. However, he neglects to mention the cheap credit and the resultant housing boom, the moral hazard of bailouts and inept regulators, and the persistent political obsession to still avoid any contraction in the value of housing.

Kaletsky looks to the Institute for New Economic Thinking to revolutionize our understanding of economics, who will it seems, seek inspiration from Keynesianism. However, Larry Elliot’s article in the Guardian illustrates why Kaletsky and this 'new' economics is the wrong approach. Individuals will always offer the most efficient and risk free way of ordering the economy. Mervyn King, quoted in Elliot's article, seems to gets it: "Beliefs adapt over time in response to changes in the environment; and this in turn affects how economic systems behave…..there are probably few genuinely 'deep' parameters or relationships in economics.”

Given that there are indeed no perfectly rational beings with perfect information, an economy under Keynesian strictures is no way forward. A group of small, ideologically driven experts will not be better able to command the economy than simply letting people get on with their lives, spending and saving their money as they see fit. Kaletsky argues that economists frequently get things wrong. Quite right. The less they are able 'manage' the economy the better.

Nobel Peace Prize-winner orders targeted assassinations of his own citizens

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No prizes for guessing which Nobel Peace Prize-winner…

Barack Obama (the ‘Change We Can Believe In’ President) looks more like his disastrous predecessor every passing day. I am not talking about the bailouts to politically-connected cronies, ‘stimulus’ spending that doesn’t stimulate anything, or the futile throwing of money at an inefficient healthcare system. Rather, I am referring to something that Democrats and ‘proper liberals’ are supposed to agree on – the rule of law and the rejection of unconstitutional anti-terrorism policies. Specifically, I am talking about the use of targeted assassination as a policy priority.

The increase in targeted assassination of terrorist suspects is a direct effect of the policies and preferences of the current President. The frequency of such attacks has increased substantially in the last few years, as even the pro-Obama Washington Post reported. However, things have now reached a new low point – the Times reports that American citizens are now being placed in the Predator drone’s crosshairs.

Even George W Bush, in spite of all the disgraceful human rights abuses he presided over, did not target American citizens for assassination.

The argument is often rightly made that torture is severely limited in its effectiveness in gathering useful information, but it is a truism to say the same can be said of assassination. When contrasted with the capture of these terrorists, assassination offers few meaningful benefits. Any opportunity to learn something new about our enemies’ plans is lost in the bomb crater. Nat Hentoff of the Cato Institute argued this point concerning the assassination of Saleh Ali Saleh Nabhan in Somalia in February. Hentoff quoted a senior military officer as saying- “We wanted to take a prisoner. [The assassination] was not a decision that we made” These shoot-to-kill orders are coming from the very top, and they are in direct conflict with our interests in gathering information by capturing and interrogating high value targets.

Now that these tactics can be applied to American citizens, without any need for judicial approval, even die-hard Obama supporters should be wondering what good was served by believing in his plans for ‘change’.

Oh well, at least by blowing these people to smithereens on the other side of the planet, President Obama is spared those annoying calls from human rights activists nearer to home. There’s no longer any need to worry about fair trials and due process (or lack thereof), or accusations of torture (or is that ‘enhanced interrogation techniques’). As long as he keeps bombing people without trial, there isn’t really any need to expedite the closing of Guantanamo Bay either.

Is green politics a vote-loser?

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So, after an excruciatingly long delay, we are finally to be allowed to have our say about who we wish to govern us. Commonsense would suggest that we are overdue for a change of government. But given the increasing disenchantment with politics generally, an electoral system currently weighted against the Tories and the relatively small differences in real policy proposals between the parties, anything is possible. Attitudes (not even hard policies) on a few key issues may well prove decisive.

The Conservatives seem to have hit on one topic which resonates with people: the latest National Insurance increase. Here's another suggestion: if they were to break ranks on the apparent shared belief among political elites that present policies to limit greenhouse gas emissions are both necessary and effective, they are likely to tap into a deep vein of scepticism about the greening of politics among the mass of voters.

Now, given the carefully crafted image as a party deeply committed to environmental issues (which includes a puzzingly distate for both nuclear power and airport expansion) any volte face at this stage would be both difficult and surprising. However, the enthusiasms of the Cameroons are not shared by all Tory MPs (although, to be fair, the next batch of candidates might find them more to their liking). The man and woman in the street, meanwhile, are unconvinced that the planet is facing a crisis, while seeing green taxation as just a politically-correct way to separate them from a higher proportion of their earnings. Any party which shows it is willing to question the orthodoxy and think again might get a useful electoral boost.

Martin Livermore is the director of The Scientific Alliance.

Social security – The shrinkage strategy

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With the starting gun now fired for next month’s General Election, there will be widespread debate about public expenditure cuts – a near certainty given the colossal £167 billion projected public sector net borrowing (PSNB) deficit for 2009/10. Last year, the social security budget is expected to have cost £164 billion, along with a further £23 billion for the related Tax Credits.

Given Total Managed Expenditure (TME) of an estimated £643 billion for 2009/10, pre debt interest, it is clear that social security – the UK’s largest public sector programme – could yield very sizeable savings. Once the high cost of pension provision is stripped out, which – depending on the methodology used - accounts for around a third of the budget, cuts will probably be sought from the remainder of the social security programme.

Some commentators have advocated a ‘Route One’ approach by simply abolishing some benefits or by scaling back Child Benefit entitlements. The more scientific approach is to operate a top-down policy and specify a budget that must be met each year until 2014/15.

Of course, it is very difficult to forecast the precise costs of social security payments, especially with rising unemployment and uncertainty on take-up levels. But, in setting the annual budget, the relevant Secretary of State should be held responsible for delivering it.

The most sensible way of achieving savings is by imposing a shrinkage policy right across the budget – but with the pension element being exempt. If Incapacity Benefits were, for example, reduced by a modest 2% per year – and entitlement were limited to only the most deserving 97% of applicants – net savings of well over 3% should be generated annually from this component of the budget.

Apply this methodology across a social security programme costing c£100 billion per year, pre pension provision costs, and do you not achieve material savings?

The ultimate victory for tolerance

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Shadow Home Secretary Chris Grayling’s remarks regarding the right of Bed & Breakfast owners to reject gay couples may have been homophobic, or they may have been an ill-judged attempt to cater to a bigoted religious group. [Ed - I really don't think it was either. Grayling was just making a common-sense statement regarding the rights of people running businesses in the their own homes. More broadly, this whole thing can easily be looked at as a private property issue.]  However, they should have been an expression of faith in a society that would never accept such bigotry.

Without equality or anti-discrimination laws, liberals would like to think that people would boycott any institution that tried to discriminate on race, gender or sexuality. In the case of a Bed & Breakfast that banned gay couples, they would very quickly go out of business through lack of custom and popular public pressure. In the case of the BNP, activists to combat their racism abound. Even the furore over Grayling’s remarks attest to this effect. Liberals trust the people to enforce equality and tolerance.

Statists on the other hand assume that the government should take on this responsibility, creating and enforcing laws that compel all institutions to not discriminate. This is either because they think government is merely enforcing the view of the people, or because they do not trust the people to do it. I suspect it is the latter.

Some decades ago, when bigotry was more widespread, liberals would have argued that discriminating institutions would lose out to institutions that based their decisions on merit alone, proving the equality of homosexuals, women and other ethnicities, and the superiority of tolerance. Statists would have placed their trust in government rather than the free market to shatter the view that bigotry could be at all acceptable. However, in terms of banning discrimination within government itself to set an example, both liberals and statists would have been agreed.

Since then, the precedent for tolerance has been established, and the attitude of the majority has changed. If we live in a broadly tolerant society that cannot abide bigotry, which I believe we now do, equality laws should be redundant. After all, there is no need for a law that prevents something that could no longer exist. We should trust in the people to enforce equality – it would be the true test of a society, and the ultimate victory for equality and tolerance.