Brussels Dispatch: Economic Partnership Agreements

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As Pat Barron commented last week: “[T]he reduction of development aid is an opportunity for [developing] countries to adopt their only hope of becoming "developed" countries, which is adopting capitalism to its fullest extent….Open borders to trade, without regard to reciprocity.”

This February in Strasbourg, the European Parliament adopted by 340 votes to 225 a Development Committee report on the Economic Partnership Agreements (EPAs) which moves the international development agenda forwards somewhat in this direction.  The EPAs are a vehicle for developing countries to augment regional free trade.

Capitalism and the free market represent the only known way for a country to work its way into prosperity.  Free trade is an important part of this process.  Tariffs, it should be remembered, in addition to raising revenue for the State, also ‘protect’ domestic markets from foreign competition.

So, the most important action that aid donors could perform, is to ask the question:  why are some countries good at generating wealth; whilst others remain impoverished?  The answer to removing people from absolute poverty does not lie in increasing donor expenditure; it lies in removing the inhibitions that currently impede development.

According to the OECD in the last 50 years, some $1.75 trillion has been spent internationally as Official Development Assistance on international development.  Which country is significantly richer through receipt of this largesse?

It makes me wonder whether the Left, which voted against the above report, and which defines itself by its commitment to the State and the State’s expansion - has an ideological vested interest in holding its dependents down.

Power lunch with Lionel Barber

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Lionel Barber, the editor of the Financial Times, was our guest at a Power Lunch in Westminster this week, talking about the financial crisis, the economic downturn and the political response to it. The discussion that took place (off-the-record, unfortunately) was certainly a fascinating one.

It seems to me that economists are more or less agreed on the root cause of our present difficulties: a massive credit bubble built up, then burst, and now we are suffering the predictable consequences. There is, of course, some disagreement on why the bubble got so large, with people like me blaming central banks and political interference, while others point to global imbalances and other factors. But where the real arguments are found is on the issue of what we do now.

Many respectable economists think that extraordinary times call for extraordinary measures, and that doing nothing is just not an option. The Banks needed to be bailed out, and will probably need to be nationalized. Liquidity must be increased, even if it means printing money and dropping it from helicopters. And the government must stimulate the economy with fiscal measures, regardless of the deficits they run up in the process.

Others (and I lean towards this camp) think there's more or less nothing politicians can do to 'fight the recession', since it's an inevitable result of the distortions caused by the credit bubble. There will be pain while the market adjusts, and that's regrettable, but we need to let things work themselves out before we can see the green shoots of recovery emerge. The extraordinary measures others propose will only cause more trouble in the long-run.

Whichever way you look at it, one thing is for sure: we are indeed living in financial times!

Blog Review 869

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Does school choice help? There are natural experiments that certainly point to that it does.

We really ought to be basing our laws that protect people from risk on an assessment of, umm, risk.

What is it that economists are supposed to do in a political situation?

Quite how appalling can business books be?

And quite how bad can health journalism be?

It's really a little late in history to still be blaming Reagan or Thatcher.

And finally, Russian Lolcats.

Time to scrap the FSA

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So ex-HBOS banker Sir James Crosby has quit his job at the UK's bank regulator, the Financial Services Authority. It happened just 30 minutes before Gordon Brown faced questions in Parliament, so I guess he was pushed. But the surprising thing is that Brown appointed him to the FSA in the first place. The Authority is now saying that it had been concerned about HBOS's risky investments since 2002. And then Brown makes it's head poacher into one of the gamekeepers! Absolutely bizarre.

The Financial Services Authority is no good and should be closed down. A Brown invention, it was always clunky and lumbering. With over two thousand staff, it had to make up lots of things for itself to do, so it came up with hundreds of checklists for financial firms, regardless of size and whether the tickboxes were all appropriate. The cost of its enormous bureaucracy meant that banks had to get large to carry the army of compliance officers they needed to deal with it. So the banks consolidated, and competition disappeared.

The Bank of England was a much better regulator. It knew what was happening in the markets, because they could see which banks were coming through their doors to ask for emergency cash. The FSA hadn't a clue, and when the Bank tipped them off about the flighty Northern Rock, they did (next to) nothing about it.

People blame the banks for the financial crisis, and there's no doubt that the banks have taken some shameful risks. But that's because the FSA has squeezed the competition out of the sector. And it encouraged the banks to take enormous risks with their customers' money, because everyone knew that if their bets didn't work, the government would bail out their account holders. This isn't a crisis of banking, it's a crisis of regulation. Every single part of banks' operations, from how they trade derivatives to whether they smile at their customers, is subject to regulation. That regulation hasn't worked. Sir James Crosby should be just the first of thousands to face the sack. And Gordon Brown the second.

Eamonn Butler's new book, The Rotten State of Britain is published in March.

Cameron's plan for the working man

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With the inevitable 2010 election looking like a likely win for the Tories, what will the conservative plan for prosperity be? The Times says “he [Cameron] needs a crystal clear message about how a Conservative government will spread opportunity and benefit ordinary working-class voters." Some of these measures include cutting employers’ national insurance in order to reduce unemployment as well as introducing a Swedish-influenced market system to the educational sector.

Cutting taxes for employers will allow them to hire more workers, lowering unemployment while passing some of the savings on to the employees through reduced taxes out of their payroll. As for the market-based education system, this has been long in the works of conservative thought.

Britain’s system of state run education has been missing the bar because it is far too centralized to meet the needs of every family and unfortunately, the poorest families are suffering the most. Giving low-income families, and the rest of the population included, the option to choose schools for their children will not increase taxes to provide better education, it will only increase fairness to the system and induce more schools to advance their programs if they hope to obtain students (and therefore more government tuition). If markets can teach us (and hopefully politicians) one thing, it is that people respond to incentives. But more importantly, that it does not matter whether those people are corporate executives or school administrators.

(To view some Adam Smith Institute reports on education, click here).

An unhealthy policy

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It's not difficult to complain about the misdirection and failings of the NHS. The list of problems is seemingly endless: Superbugs, waiting lists, failed computer systems..... One common theme throughout is that these problems have been caused by the poor management and misallocation of resources and Taxpayers' money.

However, news that children as young as 10 will be paid to stop smoking have raised the bar, even by the NHS' shocking standards. This scheme has been set up by the NHS in Brighton and Hove who will reward children with a £15 gift voucher if they do not smoke for 28 days and pass a carbon monoxide test. Pregnant teenagers will also be given £5 if they can prove they are no longer smoking.

I sometimes wonder who comes up with these ideas, and who approves them. This scheme is fundamentally flawed and shows a total lack of regard for taxpayers' money. If a 10 year old has the cash available to spend £5 on a pack of cigarettes will £15 worth of BodyShop vouchers really provide an incentive to kick the habit? Secondly, for any young person considering taking up smoking, this scheme could actually act as an incentive for them to start. They can try smoking and if they don't like it, they can stop and be paid in the mean time.

Children are taught from a young age that smoking is unhealthy and a bad habit to start. If I were a 10 year old, I would be pretty miffed if my classmates who were smoking and subsequently being given £15 whilst I was given no such reward for making a healthy choice.

This type of scheme is indicative of poorly considered government plans that reward and create incentives to act in a sub-optimum way. It is absurd. But no doubt a government department somewhere is cooking up an even crazier one right now.

Making the moral case for capitalism

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On Tuesday evening the ASI hosted Dr Yaron Brook, the president and executive director of the California-based Ayn Rand Institute, who spoke about 'capitalism without guilt: the moral case for freedom'. His speech, which was followed by a Q&A session and then a drinks reception, was recorded on video, so I hope to link to it in due course. For now though, here's my write-up...

Dr Brook started by emphasizing the importance of defining terms. For instance, many people say that 'unregulated free-market capitalism' has caused the economic crisis, and yet the economic system we have had in recent years does not even approximate 'unregulated free-market capitalism'. What we have actually experienced is a relatively free, but still decidedly mixed economy. And that's what has failed, not pure capitalism.

Indeed, as Dr Brook argued, it is not the free market bits of that mixed economy that have landed us in trouble. Our biggest problem has been bad monetary policy, presided over by central banks. They held interest rates so low for so long that the government was practically paying people to borrow. In the US, that was exacerbated by social policies, which encouraged lending to people with low incomes. The credit bubble and subsequent debt crisis was (and continues to be) a natural consequence of these interventions in the market.

The main argument that Dr Brook advanced, however, was that defenders of freedom must do more than just talk about economics. They also need to make the moral case for capitalism and rational egoism. Freedom to pursue your own interests must not be reduced in argument to a utilitarian system of maximizing outcomes, Brook said, but should instead be celebrated and advocated as the ultimate, moral ideal. And that, of course, is what Ayn Rand did so well.

All in all, then, an excellent evening. And despite Rand's relative obscurity in the UK, a very well attended one too.

Blog Review 868

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We hear, incessantly, about why the banking system doesn't work: less often do we hear about why central banking doesn't work.

Those Australian bush fires: hot enough to melt metal.

As ever there's a tension between good politics and good economics and, sadly, the economics ain't winning.

Migration may in fact be a problem: all the skilled people are leaving.

Isn't it wonderful having a Home Secretary with such a cavalier attitude to the use of taxpayers' money. And, of course, there is more.

Incentives do matter but only up to a point.

And finally, more Top Gear.

Bye American?

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President Obama has been wishy-washy about his leanings toward protectionist policies in the current economic stimulus package, which faced final approval in the senate yesterday. He has been reiterating the word “change" since the beginning of his campaign, and although this “Buy American" clause was certainly a change from conservative methods of economic stimulation, it wasn’t quite a change for the better.

Although exclusively using American companies in this package may seem appropriate given the current repressed situation in the states, Obama needs to remember that the rest of the world is not picking daisies in the sunshine. They are being flooded by the recession storm. The United States is neither Atlantis, nor any other kind of magical self-sufficient land. The US has depended on foreign trade to boost its economy for the past two hundred years, so why is now any different? America needs help from the rest of the world to get out of its current state.

Providing domestic workers with more opportunities from the package will surely have some short-term benefits, but it will not solve the major problem. It will simply delay the process of fixing the economy (both American and World). Protectionist policies will have the same effect on the United States as emptying water out of a sinking ship will have if that ship has a hole in the hull.

He needs to fix the problem by getting to the source, even if it means facing a tough year. Jobs abroad create wealth to buy American products, which in turn creates more jobs for Americans. Investing exclusively in American workers for government projects will not create the future demand that American industry needs because it involves shunning foreign friends. The EU threatened to retaliate against the US if Obama does decide to include the “Buy American" provision, so it is easy to see the immediate negative effects of the policy. Let’s hope that Obama doesn’t stray this way again in the future, and that Gordon Brown keeps his head clear of protectionism as well.

Level playing field

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Train meet Car. Car meet Train. There will only be one winner. The train. Yet people in cars, and more alarmingly pedestrians, are being seen to risk their own lives on a regular basis. As the video in this BBC News story testifies. A few days earlier grieving relatives and parents, criticized Network Rail for their ongoing campaign alerting people to the dangers of misusing level crossings. Claiming that as more people die on level crossings than in accidents then they must be unsafe. Whilst there may well be one or two tragic accidents occurring per year the rest of the casualties seem to be risk takers simply running out of luck.

Network Rail identifies level crossings as, “high risk" something that any rational road user should do as well. Yet the frustrations at having to wait seem to play on many people to such an extent that they then attempt to outrun a train. Imagine if there were no barriers, how many deaths would there be on the railways, and who would be liable? The railway company. Why? Because they had failed in their duty to protect their customers. Yet due to the apparent  rise in the lemming type mentality of many road users (2,000+ per year) Network Rail, and ultimately us, may well find ourselves paying for the installation of bridges and overpasses. This knee jerk reaction would be welcomed by the RMT, (a sure sign that it’s unwarranted).

If Network Rail’s attempts to educate the uneducated about how to properly stop at a red flashing light because there’s over 250 tonnes (or 12,500 tonnes of force, if travelling at 50mph) fail, then the only people who are to blame are those that ignore the warnings. Risk is inherent in life, you can either lessen your exposure to it, or you can raise it. The railways realise that they can reliably protect their customers using these methods. It is up to road users to protect themselves from the elevated risk of taking on a train.