Superfreakeconomics

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superfreakeconomics

The follow up to Freakonomics, the successful debut by Levitt and Dubner, has been out for over a month now. Superfreakonomics - subtitled - "Global cooling, patriotic prostitutes and why suicide bombers should by life insurance" is another fantastic book on economics laid bare in simple terms for the layman to understand. You can pick this book up and open it wherever, and read about why it's more dangerous to walk home drunk than to drive home drunk or indeed why experiments with monkeys had to be ended due to their behavioural changes when money was introduced into their community.

Superfreakonomics shines a light on the subtleties that incentives have on human behaviour and explains why certain things occur. They uncover the truth surrounding the infamous, Genovesse murder in New York and the connection between TV and crime in India and the US. The chapter on cooling the globe is fascinating as it raises the question about what we as humans are prioritising and whether it is the correct approach, especially as there are plenty of cheaper alternatives.

This book is a fabulous, eyeopening and educational read. A superb follow up to their previous work which, again, is easy to absorb and understand and can be read in an afternoon.

Nothing to hide, nothing to fear?

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The government insisted that the creation of the world’s biggest DNA database was to retain vital information on criminals that would help to secure leads and aid convictions on crimes. Unsurprisingly, even official bodies are questioning whether the database is performing this role. An independent government advisory panel - The Human Genetics Commission - today announced that they have concerns over the unclear nature and practicality of the database. Of the 5 million profiles on record, 1 million are of innocent people. Is this supposed to be a database of offenders, or of the whole of the UK?

The Police and Criminal Evidence Act states that an “arrest must never be used simply because it can be used". However, evidence given to the HGC review suggests that in some cases, arrests take place simply to get hold of a citizen’s DNA. Giving evidence, a retired senior police officer claimed "It is now the norm to arrest offenders for everything if there is a power to do so. Chairman Jonathan Montgomery remarked “there was some evidence that we received, although it's hard for us to test, that occasionally people are arrested in order to retain the DNA information even though they might not have been arrested in other circumstances", and should this be perpetuated it would be of “very great concern".

The review also raises the problem that the database actually has little “forensic utility". While it rejects the creation of a nationwide database, it doesn’t call for a curb in scope of the project or the removal of innocent people from the database. This is regrettable. Retaining the DNA of those not convicted creates a class of the ‘semi-innocent’; if you are ‘bad’ enough to be arrested, you are "bad" enough to be considered a potential suspect for all future crimes. The massive overrepresentation of young black males on the database suggests the creation of a group of ‘potential’ criminals, who are arrested more on the assumption they may later commit a crime than any current misdemeanour.

The HGC’s report does however make one particularly important recommendation - that the purpose of the DNA database should be set out and constrained through primary legislation. Parliament has never formally debated the establishment of the national DNA database; it came into being through the amendment of existing legislation on the retention of fingerprints and physical evidence. There is thus no act of Parliament that exclusively or coherently outlines the purpose and scope of the project, and therefore there are no legislated constraints on its expansion. It is essential that if such a heinous contraption must exist, it should receive the official approval approval of our representatives, otherwise its creation is as undemocratic as it is authoritarian. Without the legal jargon to outline the limits of the purpose and function of the database, few safeguards exist to prevent a further ‘function creep’.

The role of recessions

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A new study by the CBI has said that the current recession will create a new era in British business, with the lessons learned from it influencing a whole generation of enterprise. In particular, the CBI says that the recession will change approaches to supply chains, finance and business ethics.

I can’t say whether those particular predictions will turn out to be true or not – no one can predict the future of entrepreneurial organizations with any real certainty – but the CBI is absolutely right to say that businesses will learn from the recession and adapt their business models for the future. That is in fact an integral part of the free market economy in general – it is a constant, dynamic process of experimentation, trial and error, and adaptation – and recessions in particular.

But I would also go further than that, and say that recessions, while clearly unpleasant for those involved in them, actually represent more than just a learning curve. Indeed, they are a necessary remedial phase in the economic cycle, in which the distortions that have built up during the boom years are unwound, bad investments are liquidated, and relative prices return to normal. In other words, recessions are a necessary step in preparing the ground for a return to economic success.

There is a real danger, however, that government will interfere with this process if their actions go beyond easing the pain of adjustment and instead represent an attempt to re-inflate the bubbles of the boom years while propping up failed business models. That is the recipe for economic stagnation, and most likely inflation too. It is also precisely what the current British government’s policies aim to do: bail out failed banks, prop up failed businesses, and pump enough money into the economy to restore the housing and financial asset bubbles, return bank lending to previous, unsustainable levels.

Wasteful competition

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altLondon to Birmingham: who can get there the fastest? Both the Conservative Party and the Labour Party are racing to see who can build a high speed railway between these two cities before the other; on paper. The Labour party are pulling out of the station with the announcement that it is to be a key manifesto pledge. The Conservative party have made promises that they will also look to build a high speed rail link in the UK, connecting London to Birmingham and on to Manchester and Leeds. Not since the mid 19th Century has this country seen such competition between two 'rail companies'.

This government has just spent £8.8bn upgrading a railway line between London and Glasgow. Upgrading it so it can run at the same speeds as before, but with better signalling. Then there is the Channel Tunnel rail link that took over 11 years to build. From its Parliamentary act in1996, to fully opening in 2007. It cost £5.2bn and covers 68 miles or £85.138m per mile. Labour claim that to get to Birmingham it will take them 8 years, but work wouldn't start until 2017. Birmingham is about 112 miles and if similar costs occurred then the total cost to us to build the railway would be £9.5bn. But of course as with everything a politician touches, the cost to us keeps on rising.

Political parties should not be promising to build railways; high speed or otherwise. Any party that promises to spend other people's money will do so without due care. What they should be promising in their manifestos is that if a private party (or parties) wish to build a high speed rail line then they would ensure it gained royal assent. The cost to us all is negligible, even more so if it fails.

Financial competition please

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financial-competition-please

As we all know, lack of competition is liable to drive up the price of goods. This is also true for the price of money , i.e. the interest rate you pay to the bank for having a loan. As banks are the main outlet of this good, lack of competition amongst them will inevitably result in higher interest rates. This is bad for a number of obvious reasons: we have to pay more for borrowing and so have less money to spend on other goods thus stifling the economy in other sectors, which of course impacts upon job creation etc.

Higher interest rates and lack of competition between lenders is also bad for businesses as outlined here in the Economist. Small and Medium Enterprises (SME’s) have a hard time getting loans for their businesses, and when they at last find a lender who will lend them money, a lack of competition ensures high costs. This consequently means that SME’s are less prepared for a potential economic upturn than they could be, as they don’t have the capacity needed, and face the threat of over-trading. Competition amongst banks is therefore vital to ensure the possible build up of the SME’s capacity so they can undertake new orders and create new jobs.

Why then are there only four big lenders back on the money market? The reason is principally a problem of entrance costs, excessive bureaucracy and regulation that keep newcomers out in the cold.

Lowering these entrance costs to increase the number of lenders will benefit everyone and it is about time government looked seriously into the problem.

From the Annals of Entirely Counter-productive Government Interventions

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Yes, we know, we're ruled by blithering idiots whose every attempt to make anything better makes everything worse: this is not cynicism about politics it is simply the wisdom which we all painfully aquire as we mature. There are also those few who drink deeply at the fountain of economic knowledge and are able to point to exactly where and when the idiots go wrong. Today's entry from the Annals, the Analects of Stupidity, brings together two wildly different economists: our own Richard Layard, New Labour Peer exemplary, and Alan Reynolds of the Cato Institute. Not people you would normally find agreeing on the colour of the sky but then that economic knowledge when imbibed does lead one to outburts of truth telling.

First, Layard on the distinguishing feature between European and US unemployment rates:

For example, Europe has a notorious unemployment problem. But if you break down unemployment into shortterm (under a year) and long-term, you find that short-term unemployment is almost the same in Europe as in the U.S. – around 4% of the workforce. But in Europe there are another 4% who have been out of work for over a year, compared with almost none in the United States. The most obvious explanation for this is that in the U.S. unemployment benefits run out after 6 months, while in most of Europe they continue for many years or indefinitely.

Elsewhere this is laid out as the pithy truth that if you subsidise something you get more of it. Reynolds makes the same point by quoting Larry Summers:

Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: "Unemployment insurance lengthens unemployment spells." That is: When the government pays people 50 to 60 percent of their previous wage to stay home for a year or more, many of them do just that.

But what has been happening in the US over the past year? Yes, unemployment has been rising to European levels and above. And what has also been happening is that unemployment benefits, or the time you can claim them, have risen to one and a half years in some states and near doubled to just under a year in all of them at minimum.

In reality, the evidence is overwhelming that the February stimulus bill has added at least two percentage points to the unemployment rate. If Congress and the White House hadn't tried so hard to stimulate long-term unemployment, the US unemployment rate would now be about 8 percent and falling rather than more than 10 percent and — rising.

Yes, OK, we know we're ruled by idiots: but do they have to be so damn expensive with their stupidity? We know that raising unemployment benefits, and extending their term, raises unemployment. So why do they extend them when we're already worried about the amount of unemployment we have?

And to have the effrontery to call it "stimulus"....sorry, but that is so stupid, it hurts.

Properly subsidized education

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Flicking through a copy of the Evening Standard last week an advert proclaimed, simply: "If your child can pass our exams, we can help you with the sums." In a move that is highly praiseworthy, eighteen London schools (listed here) have joined forces to advertise the educational opportunities to the low earning families of the capital.

Though each school may vary slightly in what they offer, the idea is one that has been at the core of quality education since time immemorial and continues in many countries. In private schools throughout the world, parents of those who can not afford to pay are not asked to. Nothing is as fair, nor simple as that. This simplistic approach gives all equal access to a good standard of education. Yet for some strange reason this model for education is seen as being grossly unfair by many.

Education in the UK is, and will remain, in need of a complete overhaul for many decades to come. The best and brightest will continue to have their minds negatively impacted upon by a poor state education system until schools and parents are released. Either politicians realise they have no right to the children, or the parents have to revolt and disavow the state, either through homeschooling or schools outside of the state system. Until then, hopefully independent schools will be able to offer subsidized places and free some children from the clutches of the politician.