Ireland and the law of unintended domino effects
Ireland bailed out its banks to stop the much vaunted but never explained domino effect of banks going down. As a result its debt went up, and its AAA credit rating went down. Most investment funds are required to be established in AAA countries. So, it is said, Ireland’s financial industry is increasingly moving abroad to places like Luxembourg.
How’s that for a domino effect?
When individuals make a mistake, it may have a domino effect. But so do the state's mistakes. The only difference is that when the state creates a domino effect it will be of far greater magnitude than an individual's.
On top of that, the state making mistakes is more likely than an individual making mistakes, because of Hayek's Knowledge Problem: central decision makers simply do not have the knowledge about individuals' choices and opportunities that those individuals have. That state intervention usually has side effect is generally accepted — the left's response is to mend it with more regulations which in turn will fail. State failure is therefore not so much a domino, it is a spiral.
The domino effect was the argument which was successfully used by politicians to explain why they bailed out the banks with taxpayers' money. The domino effect of banks collapsing remains elusive, but in the UK the domino effect of bailing them out is very real indeed: the debt rising to £1 trillion; no growth; and sky-high unemployment.
The cost of the War on Drugs
Marking Martin Luther King day in the US yesterday, Russell Simmons and Dylan Ratigan have an article on the Huffington Post on the new government persecution of blacks – the War on Drugs. I’m not entirely convinced by the article’s thesis about business support for the Drug War, but the statistics it gives are startling:
• Since 1971, there have been more than 40 million arrests for drug-related offenses. Even though blacks and whites have similar levels of drug use, blacks are ten times as likely to be incarcerated for drug crimes.
• There are more blacks under correctional control today -- in prison or jail, on probation or parole -- than were enslaved in 1850, a decade before the Civil War began.
• As of 2004, more African American men were disenfranchised (due to felon disenfranchisement laws) than in 1870, the year the Fifteenth Amendment was ratified prohibiting laws that explicitly deny the right to vote on the basis of race.
• In 2005, 4 out of 5 drug arrests were for possession not trafficking, and 80% of the increase in drug arrests in the 1990s was for marijuana.
• There are 50,000 arrests for low-level pot possession a year in New York City, representing one out of every seven cases that turn up in criminal courts. Most of these arrested are black and hispanic men.
Fifty years after the end of segregation, black Americans have the highest rates of poverty and, by far, the highest rates of incarceration for drug-related crimes. America’s prisons are violent, gang-infested hell-holes. It isn’t surprising that many young men imprisoned for the “crime” of getting high become sucked into much worse. That these young men are usually black helps to explain why poverty, family breakdown and crime are so endemic in black communities there, and why their situation is so desperate and stagnant compared to other racial minorities. And by making conventional narcotics more expensive, drug prohibitions are also probably to blame for the rise of highly potent new drugs like crack and crystal meth, a depressing example of unintended consequences of government legislation.
Tom has written about the horrendous impact of the Drug War on Latin America, but statistics like those above show how bad it is for the US as well. Just as many people once turned a blind eye to the evils of slavery and segregation, today many otherwise-decent people are ignoring the consequences of drug prohibition. That has to change.
Some fallacies are more equal than others
One of the central arguments of The Spirit Level - the Bible of self-styled “egalitarians” - is that income inequality erodes trust and social cohesion. This lack of social capital is blamed for a host of societal problems, including a reluctance to help others. The book’s authors, Richard Wilkinson and Kate Pickett, say that “individuals who trust other people are more likely to give to charity”. This may be true, but unfortunately for their argument, the empirical evidence shows that people in ‘more equal’ countries do not give more to charity. On the contrary, they tend to give significantly less.
Wilkinson and Pickett fill this hole in the theory by focusing on the amount of cash given by governments to developing countries (which is negatively associated with inequality) while ignoring the money given to poorer nations by individual philanthropists (which is positively associated with inequality). When the private and the public are combined, there is no association with income inequality, but the reader cannot be expected to know this since only public funds are discussed.
If income equality leads to trust, and trust leads to charity, then the issue deserves more attention than it receives in The Spirit Level. Recently on this blog, Tim Worstall mentioned the Charities Aid Foundation’s (CAF) latest report ‘The World Giving Index 2011’. In this document, CAF uses Gallup survey data from 153 countries which asked people whether they had done the following in the last month: donate to charity; volunteer for an organisation; help a stranger. These are classic measures of social capital and, by the logic of The Spirit Level, citizens of the more egalitarian nations, such as Sweden and Finland, should should outperform the sullen and withdrawn residents of the USA and Australia.
But when we chart the results on a graph, the wealth gap appears to be redundant at best (as in The Spirit Level, the graphs use Wilkinson and Pickett’s measure of inequality and show the world’s richest countries, with Portugal as the poorest).
We should not be surprised to see high levels to charitable giving in countries such as the USA, which ranks top of the CAF’s list overall. Tim noted in his post that “perhaps it’s the low tax which leads to charity.” This is not wishful thinking. In a previous report, CAF acknowledged that: “Giving tends to represent a lower proportion of GDP in countries with higher levels of personal taxation”.
People in the ‘more equal’ (read: ‘high tax’) countries can hardly be blamed for giving less to charity when the state leaves them less to spend, but what excuse can these supposedly more cohesive and trusting societies have for not outperforming the “brutal” Anglo-Saxon nations when it comes to lending a stranger a hand or volunteering their time? As the graphs show, there is no statistically significant association in either direction.
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Data from one report is obviously not enough to torpedo The Spirit Level’s whole hypothesis (that has been done elsewhere). It is just one more piece of evidence that fails to support it, and when taken together with the data showing that people in ‘more equal’ countries are not more involved in the community, are less likely to join social clubs and do not enjoy better social support networks, the evidence that big government fosters social capital is scant indeed.
Antidote to New Year blues
Well, that was a depressing kick off to 2012. Have you ever seen so much doom and gloom in New Year forecasts, starting with our own Prime Minister and on out to every pundit, analyst, politico, clergy and media outlet?
Here it is Tuesday morning after the bank holiday and the BBC’s Blues Combo is already in full throat with fraught reports on “failing” social care, private pension “collapse” and more hand wringing about the catastrophic consequences of a eurozone break-up. We’re quickly off to a long year of seeing every last bit of hope and optimism ground out of us.
So here’s a couple of quick antidotes that may help deflect at least some of the negative waves. It’s the Iowa caucuses today and long-time libertarian Ron Paul is doing well in advance polling. The Iowa caucuses are a poor indicator of ultimate presidential candidate winners but, if you need a caffeine hit on this miserable, storm-tossed day, spend some time at Ron Paul’s official 2012 campaign website. Realistic libertarians know we can never get everything we want in any single candidate but there’s a refreshing consistency to Mr Paul’s agenda of truly bold alternative thinking.
And in preparation for the end-of-day optimism-pummelling from Newsnight, try business news channel CNBC at 8 pm London time for its Closing Bell show (Sky channel 505 and Virgin channel 613). It’s a riotous and frenetic look at the state of the world from the financial markets’ perspective and kicks off with reports from the stock, commodities, currency and bond markets. Oh, they’re all unashamed hucksters for capitalism and the American dream but at least the show features people who actually put their own money where their mouth is, not taxpayer money where somebody else’s mouth is.
Mr Paul may soon fade away and the financial markets may lose all your money but we can all use the sugar hits they offer.
I look forward to the UK being the 22 nd largest economy in the world
Oh dear, oh dear, looks like we've got a nasty outbreak of league tables on our hands again.
CEBR chief executive Douglas McWilliams said: "Brazil has beaten the European countries at soccer for a long time, but beating them at economics is a new phenomenon. Our world economic league table shows how the economic map is changing, with Asian countries and commodity-producing economies climbing up the league while we in Europe fall back."
However over the next 10 years, Britain is expected to fare better than France, which is currently the fifth-largest economy behind the US at number one, China, Japan and Germany.
The CEBR forecasts that the UK will be the eighth largest economy by 2020, with France in ninth spot, Germany in seventh spot and Russia and India in fourth and fifth place.
It simply doesn't matter which country has the largest economy. For an economy is not a country nor is a country an economy. What we actually want to measure is how well the economy of any place (whether village or continent and anything in between) adds to the gaiety of life in that place, how it aids in increasing the happiness of those who live there. Possibly even their freedom and liberty, sdmiles on children's faces and the choices that people are able to make.
Which means that looking at this 192 million people over here (Brazil) and comparing it to this 62 million over here (the UK) is simply nonsense. For once we've adjusted for population size we find that the UK manages three times the living standards of Brazil: sunshine, capirinhas and football be damned.
I myself look forward to the time that the UK has the 22 nd largest economy in the world. For as the 22 nd largest nation by population that would mean that the billion odd Chinese have overcome decades of Maoist lunacy, the more than a billion Indians have got through decades of Nehru's foolishness, that 230 million Indonesians have overcome Suharto's (and Sukharno's) greed corruption and avarice and joined us in that sunny upland of being just about as rich as it is possible to be at our current level of technology along with everyone else as well.
For the economy really isn't a zero sum game and their getting rich will make us richer too. And who really wouldn't want that to happen?
Which is the most generous country in the world?
Which is the most generous, the most charitable, country in the world is rather a difficult question really. We know what the official answer is, a neck and neck tie between Norway and Sweden for those are the countries that give the highest portion of their economy as official overseas aid each year. You know, well over that 0.7% of GDP that is supposed to be gioven away as Official Development Aid (ODA) and the number which the current Coalition has insisted that we will maintain even as everything else is up for grabs in budget negotiations.
You can see a country listing here. The figures are a little old which is why the UK is so far down the list. But look, for example at the US: the meanies!
However, that's not really measuring which country is the most charitable. It's in fact measuring which governments are most charitable with the citizenry's money. Which politicians are most willing to use the power of taxation at gunpoint to feed money to foreign potentates.
There's another way entirely of measuring who is most charitable and that's to actually go out and count those who are charitable. Who gives money voluntarily, who helps strangers, who volunteers at charities and projects. Which is what the Charities Aid Foundation has done. The results are really very different: The US is the world's most charitable country, Ireland second, Australia, New Zeland then the UK fifth. Norway's down at 32 and Sweden languishes 40 th.
There's a number of ways you can look at this information: that what governments do purportedly on our behalf is not the same as what we do ourselves. Or even that government's priorities are not the same as ours. That the most charitable nations seem to be the relatively low tax Anglo-Saxon ones will come as a surprise to many: but then again, perhaps it's the low tax which leads to the charity. We find our desire to do good not being crowded out by government: or even we find we've a small enough tax bill that we can afford to do good directly. Possibly, even , that in certain countries they know that government is handling it so why bother to do anything oneself?
I think the biggest point that I would pluck from this though is that it's easy enough for politicians to take our money and spend it they way they wish: but charity requires rather more than that and it does seem to be those countries where the exactions of the revenue are lower that have room for that rather more.
Yes, they do know it's Christmas
News just in from South Africa:
CAPE TOWN. After 28 years of silently tolerating it, a group of unemployed local musicians have joined forces to release a Christmas single, entitled ‘Yes we do,’ in response to the Bob Geldof inspired Band Aid song, ‘Do they know it’s Christmas?’.......
Speaking at the launch of the single, whose proceeds will go towards teaching discipline, literacy and contraception at British schools, composer and singer Boomtown Gundane said that for years he had been irked by Geldof’s assumption that hungry Africans were also stupid.
“Or was he just saying that Africans were stupid? Of course we knew it was Christmas.”......
“Just because we don’t have Boney M or Christmas advertising in September doesn’t mean we are oblivious to it,” said Gundane who went on to suggest that Africans were a lot like the Irish.
“They made it through disasters like the potato blight and the invention of the Protestant church without forgetting Christmas – why did they think we would forget it?”......Gundane said he hoped that his involvement with the song would turn him into an expert on British politics and economics in the same way ‘Do they know it’s Christmas’ had turned Geldof and Bono into the world’s leading experts on Africa.
And on that note, a very Merry Christmas to all.
Why Kim Jong Un should trade more with Tim Worstall
For of course everyone should trade more with Tim Worstall. But there is a specific point to be made here. Trade is, as we know, how we all get rich. And I am not suggesting that North Korea's lack of trade with one middle aged Englishman is what makes the poor benighted nation poor. I am though pointing out the fact that we can see that they are poor by how little they trade with this one specific middle aged Englishman.
That's quite a famous photo of the Korean peninsula from space. As you can see, North Korea has almost no lighting that can be seen. South Korea quite massively more. And as I'm sure I've told you old hands around here before, in my day job I deal with one of the metals that is used in making those sorts of light bulbs that can be seen in these sorts of photos from space. I've even been told (but cannot confirm) that 50% of the light that you see in these pictures comes from bulbs using the material that I handle. No, I don't mean as in it's just the same metal that I handle, I mean as in the actual pieces of it that I have done.
No, this has not made me a fabulously wealthy man, do not worry, but it is still true. We can see, from the absence of light at night, where the poor places in the world are and this is a symptom of their not trading enough with Tim Worstall. For if they did they would have the bulbs to light up the night.
That the poor parts of the world don't trade enough with anyone is why they are poor. But I will admit to a certain egotistic frenzy about the way that we measure this poverty, the absence of light at night, which means that we measure such poverty by the absence of trade with, umm, me. No, really, we do!
GDP growth is often measured poorly for countries and rarely measured at all for cities or subnational regions. We propose a readily available proxy: satellite data on lights at night.
New at AdamSmith.org: Law and order in Kenya – BABS Security Services Ltd
My first real encounter with the Kenyan police came late one night on a motorcycle. I rounded a corner in the darkness of Langa-Langa, a large neighborhood on the outskirts of the city of Nakuru, Kenya. I was sleepy and my dinner-host – a young Kenyan named Dickson – had stuffed me full of delicious local cuisine. The motorcycle's headlights illuminated a Soviet-era military truck with several heavily-armed men scattered around its edges. All of them peered with hostility from the shadows cast along its camouflage lining. I felt my stomach sink. They muttered something threatening in Swahili -- one thrust his assault rifle skyward and stepped out to block the road. I tapped the driver on the shoulder “Twendeni! Let’s go!” I shouted over the engine. We accelerated past, the men in the truck yelling after us. "Who are they?" I asked. "The police," he said.
Many times the police are conspicuously absent with most of their resources devoted to protecting formal, well-established (and usually well-connected) firms and streets near City Hall or in a city’s central business district. But private security is everywhere in Kenya. A local bar and mzungu (Swahili for ‘foreigner’) haunt proudly displays on its entrance: “Protected by Robinson Security.” Two stoic guards in pressed blue uniforms frame the open gate of a supermarket in Nakuru. Before entering a night club, a friendly but stern door guard frisks those entering. Indeed, throughout Kenya’s cities and along the roads to and from the capital, cars emblazoned with security services roll past stalled motorcycles and traders hawking their wares to trucks ensnared in Nairobi’s impenetrable traffic.
Europe's road to serfdom
The deal was struck. The EU and the eurozone are on a new path towards a more strict fiscal union. And with the deal, it is very likely a move towards a double speed Europe, or a union within a Union. Britain has isolated itself from the new treaty by a veto from its PM David Cameron. Whether such a move is good or not for the UK, only time will tell. It would be frivolous to make predictions now, as it is likely that Britain will remain a part of the EU, only now left out of some main decision making and possibly regulatory standards. This isn’t necessarily bad, as Britain mostly suffered under various EU labour and financial market restrictions, but it is an open question on how Britain might suffer politically.
The treaty agreement itself is much more a plea towards fiscal discipline and austerity than it is a solution to Europe’s major problems. It lacks a long term strategy apart from hope that within a fiscal union there will be less scope for irresponsible behaviour and everyone will have to act as Germans. If they were treated as Germans by the bond markets before, now they will finally have a chance to act like ones.
The budgets of eurozone members need to be balanced or in a surplus. This will be introduced in each country’s legal system and possibly be overseen by the European Court of Justice. If any country breaches the 3% deficit ceiling (which was the initial requirement for the euro introduction) it will suffer automatic consequences and possible sanctions unless, of course, the majority of other nations oppose. I see room for political mischief once more.
The financial measures in place were designed to increase the firepower of the eurozone institutions to rescue the currency and its most endangered member states. There is a new rescue mechanism, the European Stability Mechanism which is to hold €500bn, and there is an additional €200bn to arrive through the IMF.
The problem with the current plan is that it requires more and more bailouts, which essentially implies more and more debt accumulation. The socialist foundations of Europe are falling apart simply because they refuse to realize (or are unable to realize) that socialism and the welfare state are unsustainable, once you run out of other people’s money, that is. The dependency of peripheral nations is causing the highest burden on the eurozone. Its core members don’t have sympathy towards these countries, they require bailouts to save their own countries’ banks who plied up on peripheral debt due to Basel capital requirements – another example of European regulatory oversight that ended up increasing systemic risk of the financial sector rather than decreasing it.
As long as the EU officials close their eyes on the only plausible solutions left – defaults that will end further bailouts and dependency – Europe will remain in dire straits. More socialism and more faulty policies that caused the current situation cannot be the answer to its problems. The response must come from a different perspective – just like it did in the 1980s. The question is how much longer will it take for the policymakers to realize they are on the road to serfdom.
