I'm excited about Raspberry Pi
Today sees the launch of the Raspberry Pi, a fully-functional computer the size of a credit card selling for about £22. It’s a brilliantly stripped-down device, with a mobile phone charger power socket, a modest (but functional) amount of memory, a few USB ports and a video output that works with most televisions. It comes bundled with Linux and some software that teaches you the basics of computer programming.
It’s an exciting product. Funded entirely by the project’s developers on a non-profit basis, it’s being aimed at schoolchildren, and the first 10,000 built will be shipping to schools. It’ll be great to see how that goes. I don’t know if learning computer programming in school is going to make many students love it – it’s hard to find good IT teachers and, in my experience, having something forced on you at school is a recipe for hating it. But even still, lots of kids will be able to teach themselves on these, either at home or outside normal class time, and that’s great.
I wouldn’t be surprised if the real benefit of the Raspberry Pi device, though, is the rest of the world. Once production of the Raspberry Pi ramps up to meet demand for it, millions of people will suddenly be within reach of owning a computer, instead of having to rely on internet cafes. That means they can spend much more time on them, learning exactly the sort of computer skills that are easily sold across the internet. Adding wifi to the device through a standard wifi dongle would mean that businesses could sell wifi access in poor neighbourhoods.
The tragedy of the modern age is how much talent is being wasted in subsistence farming work, with little access to the benefits of the ongoing technological revolution. People across Africa have used cheap mobile phones to develop sophisticated banking and credit systems that have helped to spur investment and remittance transfers from relatives in rich countries. The Raspberry Pi may just be a way of unlocking some of that human capital and unleashing a second, human revolution.
New at AdamSmith.org: The global economics of corporate tax cuts
Jim Flaherty, Canada’s minister of finance, may well be exasperated. Speaking of the federal government’s plan for a national corporate tax of 25 per cent, the Minister affirmed that ‘we believe lower taxes create investment and jobs. I continue to encourage our provincial partners to follow our lead.’ Unfortunately, his counterparts remain to be convinced, with British Columbia and Ontario signalling their intentions to halt the downward trend.
How times have changed! ‘On New Year’s Day,’ reported Neil Reynolds, ‘Canada’s corporate tax rate — federal and provincial rates combined — fell to 25 per cent, giving Canada the lowest rate in the Group of Seven countries, and a more competitive economy on a global basis.’ (According to the 2012 Index of Economic Freedom, Canada’s federal rate of 15 per cent compares favourably with the United Kingdom’s 26 per cent.)
Flaherty could remind officials in the provincial treasuries of the global consequences of their actions, citing an economic truism published in The Wealth of Nations two-centuries-and-a-half ago.
New at AdamSmith.org: The triumph of global capitalism
The rise of global capitalism since 1980 has been the central factor in the massive rise in global quality of life. In this article, Jacob Lundberg explains why more liberalized global markets have meant richer and freer people.
When she was young, Maria Vargas moved from the countryside in northern Brazil to Sacadura Cabral, a poor suburb (favela) of São Paolo. (Melo, 2002) She worked as a maid and in the textiles industry, but was injured and had to provide for herself and her seven children – one of whom died as a four-year-old – by sewing after the death of her husband. Maria is only one of the many faces of poverty.
But poverty is decreasing and the world is gradually becoming a better place to live in: health is improving, school enrolment is increasing and democracy is on the rise. Many people seem to be unaware of this fact. An important reason for the progress that is taking place is the fact that during the last decades of the 20th century, there was a movement towards liberalization and globalization almost everywhere.
World trade has become considerably freer over time – the median global tariff rate has decreased from 26 percent to 9 percent since 1980. (Gwartney & Lawson, 2009) Today, 80 percent of developing countries’ exports to industrialized countries do not face any tariffs, up from 54 percent in 1998. (UN, 2010, p. 68) Government intervention in agriculture has become less pervasive. An obvious case is China, where agricultural output has increased considerably since liberalization.
Can the GOP defend capitalism?
Of America’s two political parties, Republicans are viewed as the better friend of the market-place. But these capitalist credentials have taken a beaten in the race to choose a candidate to challenge the Democrats for the White House. Two recent events on the campaign trail epitomise GOP troubles.
The first sign of danger came in January when former Massachusetts governor Mitt Romney’s business career came under scrutiny, with former Speaker of the House Newt Gingrich (and Texas governor Rick Perry) calling into question Romney’s tenure at Bain Capital, a private equity and venture capital firm — which Perry characterised as ‘vulture capitalism’. An independent Gingrich Super PAC exacerbated the issue with an incendiary video from which even the candidate distanced himself.
Facing outrage from the business community, Gingrich soon abandoned this avenue of attack to focus on Romney’s personal tax records in a South Carolina exchange. A few days later in Tampa, Florida, Romney complicated matters with a populist appeal against Gingrich’s own zero capital gains tax policy, quipping that ‘under that plan, I’d have paid no taxes in the last two years.’
Romney mounted a belated counter-offensive in a CNBC interview with Lawrence Kudlow, but his on-the-stump sop on taxes deserves reproof: For whereas the supply-demand, profit-loss principles of capitalism are easy to grasp, the obfuscation that underpins disingenuous ‘the rich should pay their fair share’ class warfare arguments need vigorous refutation.
Double taxation lies at the heart of the subterfuge, when a capital gains tax (15% maximum) is heaped upon wage incomes that already have been taxed (35% maximum) — an ant-grasshopper taxation policy where capital investors pay while capital consumers play.
Michael Tanner, a senior fellow at the Cato Institute, deconstructs President Obama’s so-called ‘Buffet rule’ (a 30% minimum tax on high earners):
Buffett makes most of his money from investment income (capital gains and interest), and he pays a capital-gains tax rate on that money. [...] However, the president’s narrative ignores the fact that Buffett’s income had already been taxed at the corporate level. When the effect of both taxes is combined, the real effective tax rate is closer to 45 percent. That is quite a high rate on an inherently risky activity — investing — that our tax code should encourage.
Dan Mitchell, another Cato senior fellow, further unravels the capital gains tax canard with an explanatory video and chart.
Romney committed a second own goal during a February interview on CNN, saying ‘I’m not concerned about the very poor; we have a safety net there. If it needs repair, I’ll fix it’. Again, Gingrich took the putative front runner to task, arguing that ‘I think what he said and the underlying part of that is very revealing. I think we want to replace the safety net with a trampoline. We want to have policies ... to help the poor become middle class, to help people get out of poverty.’
It was Texas Rep. Ron Paul, libertarian extraordinaire but long-shot nominee, who came to Romney’s defence in both instances. With respect to Bain Capital, Paul said of Romney’s Republican critics: ‘I think they’re wrong. I think they’re totally misunderstanding the way the market works. They are either just demagoguing or they don’t have the vaguest idea how the market works.’
And in relation to the poor, Paul defended Romney, saying that he didn’t believe that the governor was unconcerned about the poor, but that ‘I think the problem is he’s a victim of his own economic theories, rather than him being cold and heartless.’
What is shocking about these misguided economic smears is how the supposed defenders of free markets shape their vision according to the language of ‘social democracy’. As Friedrich Hayek opined in The Intellectuals and Socialism, ‘That a particular measure tends to bring about greater equality has come to be regarded as so strong a recommendation that little else will be considered.’
But for Republicans, the issue is even more invidious, for in trying to counter the Democrats’ strongest electoral message — ‘social justice’ — they have ceded the field of first principles to their opponents: ‘Since on each particular issue it is this one aspect on which those who guide opinion have a definite conviction, equality has determined social change even more strongly than its advocates intended,’ wrote Hayek.
The overall picture is ominous:
...today in most parts of the Western world even the most determined opponents of socialism derive from socialist sources their knowledge on most subjects on which they have no first-hand information. With many of the more general preconceptions of socialist thought, the connection of their more practical proposals is by no means at once obvious; in consequence, many men who believe themselves to be determined opponents of that system of thought become in face effective spreaders of its ideas.
With the GOP’s championship of capitalist tenets not above reproach and with Democrats preparing to run on a platform of redistributionist measures, wealth creators are put on notice.
Though the true path to eradicating poverty lies in innovation, entrepreneurship, and capital accumulation, rich and poor alike will be sacrificed in the 2012 race for the White House to easy rhetorical platitudes and political opportunism. Between the safety net or the trampoline, will voters be given a real choice?
An entry to the Wolfson competition
In December 2011, the Adam Smith Institute asked one of its Senior Fellows, Miles Saltiel, to form a team to compete for the £250,000 Wolfson Prize for an essay on the best course for the Eurozone if members decide to drop out. He assembled a crew of City professionals and economists. They pored through the law-books, worked up the sums and took the counsel of an international group of seasoned veterans. They concluded that the legal situation is so ambiguous that drop-outs will have strong negotiating hands. The sums are plain scary:
- Bank contagion of €740bn , swamping even German bank capital;
- Policy cost of €1tn, including reform, monetary and fiscal easing; and
- Haircuts for selected creditor classes of 100%, if the ECB sticks to its guns by insisting on its status as an “official creditor”.
Most alarming is the institutional mismatch: the ECB should be taking the lead but is hampered by its own statutes; not even Germany is in a position to ride to the rescue. And the need to minimise turmoil means that any secession will come as a surprise.
- This is no excuse to for policy-makers to bury their heads in the sand. They need to brace themselves and be ready to tweak the international mechanisms to meet the specifics of dropping out from the Eurozone.
- The occasion of secession should be handled calmly all round, with the seceding state making provisional agreements with its neighbours and others to minimise spill-over.
- Restructuring needs the skills of the IMF, who in turn need local leadership. If the ECB can’t step up, European states and others should create “Resolution Funds”, possibly one for each seceding country, to finance reform and supervise restructuring.
- The EU needs to take an adult approach to restructuring. Fines make no sense and treaties have no force. Once realistic plans are agreed, the EU should co-operate with drop-outs while they stick to their promises, but hold out the threat of reduced decision-making rights if they stray. So too must the regulators act with maturity, restraining pro-cyclical burdens on financial organisations including central banks.
- The eventual settlement should be embodied as a treaty, to iron out the complexities and regularise the dislocation of secession.
Click here to see the essay, setting out the analysis and proposals in full. It is offered as a contribution to the debate between contestants for the Wolfson Prize, which we see as playing a positive part in adding to public understanding and the formation of professional opinion.
Any plans for this decade?
I’m sure the folks in Brussels-land mean well with every intention of making the world a better place but you do wonder what planet they live on. Maybe it’s the dull weather or the flat vistas of the Belgian plain that give us Viviane Reding, vice president of the European Commission and EU Commissioner for Justice, Fundamental Rights and Citizenship, and her plan for the rest of this decade.
In an opinion piece in Wednesday’s Wall Street Journal Europe, Ms Reding notes the 20-years since the Maastricht Treaty and lays out a five-point plan of action for 2020, ending with European political union. As the continent struggles with a debt crisis, lagging competitiveness and anaemic economic growth, Ms Reding is confident that “Our European House now stands ready to weather further storms” but that “we still need to win the hearts and minds of European citizens.”
Maybe we’re too simplistic in the belief that the only cure for most of the real and perceived woes of Europe – and indeed the world – is sustained and robust economic growth. Nothing else will deliver the means to deal with ballooning health and pension costs, unemployment, social unrest, failing education, immigration, welfare reform, national security and climate change. Without that economic growth, you have, well, Greece.
But Ms Reding proposes yet more fussing with EU institutions for the next nine years and makes it all sound so reasonable and easy. In the real world, though, it would unleash a process that would sap the energy of our political leaders and divert them from their most urgent task – definitive and comprehensive completion of the Single European Market. Until that bit of “Europe” is done, nothing else really matters.
Ms Reding first proposes that, in 2013, European governments “should begin an open debate…about the Europe they would like to have by 2020.” Why in 2013? Because it’s the “European Year of Citizens” and that’s as a good a reason as any.
Point 2 says the European Parliament elections in 2014 could be the occasion for “a broad debate: Should we complete the European House and move toward full-fledged political union?” Well, full marks for honesty of intent but does she really expect a clear cut answer from an electorate more worried about job prospects, pensions and health care?
Onto point 3 which proposes that, prior to the elections in 2014, European leaders should agree that the next Commission president would also become president of the European Council. Sounds like a significant change, right? Well, Ms Reding points out that current treaties have been “deliberately worded in a way that allows for this.”
Then comes point 4, the big one – a convention to draft a treaty on European political union so that the European Parliament becomes a true European legislature – followed by point 5 which notes that 2016-19 will be devoted to ratification of the new treaty.
Now, if you’re a business, big or small, local or global, and Europe’s political elite have just told you they’ll expend their limited political capital for the next decade on yet more EU constitutional rearrangements rather than completing previous commitments on open markets, where would you invest?
With competition laws like this, no wonder Europe is doomed
A French court has found Google guilty of "unfair competition" and ordered it to pay €500,000 to a rival. (H/T Cato @ Liberty.) Google's crime was to offer its Maps application for free to anybody who wanted to use it. A rival firm which charges for its product sued Google for allegedly plotting to eliminate rivals from the market and then start charging for Maps.
For a start, this is obviously wrong. Google's entire business model is based around making money from advertising in free products: see its Gmail, Blogger, Youtube, Calendar and Search sites for examples. Google don't even charge businesses for using its products with their own branding (Google Apps). This is the dominant business model for most successful sites. The court has failed utterly to grasp business in the internet age. A product that doesn't charge can still make money from advertising, as Google and Facebook both do with some success.
That the rival firm is too backwards to be able to compete isn't a problem for the consumer. The only people who think Google will ever charge for any major service are the same tweenage girls who post Facebook statuses about "Facebook Gold" coming in at midnight unless 10,000 people post this message as their status. And the French courts.
This sort of kowtowing to uncompetitive firms victimized by "unfair competition" hits on why Europe's outlook is so bleak. "Unfair competition" laws put the needs of inefficient businesses ahead of those of consumers. The laws have been spectacularly abused in the last twenty years. Microsoft was fined €497m for bundling Windows Media Player into Windows, Samsung has had devices banned from sale because they used a 4x4 rectangular layout for its smartphone screens that looked a bit like Apple's, and Apple is currently being sued because its Apple Stores are too good and outcompeting local French stores. In every case, the consumer has lost out.
Most recently, Google's new privacy policy is facing an EU probe. Not only is Google wrong to provide high-quality products to everybody for free, it seems, but it must also let the EU determine its privacy policy. A normal person might think that, if you object to a company's privacy policy, you should just not use that company's products. But EU commissioners are not normal people — they seem to think that everybody has a right to use Google as they see fit, whether Google like it or not.
Absent state intervention, firms will only be successful if they satisfy consumers better than anyone else. "Unfair competition" laws punish firms that have satisfied consumers the most. They are conceptually and practically anti-consumer. With rulings like the French Google Maps decision on one hand, and the European Union's bizarre, anti-private interference in private citizens' contracts on the other, it's hardly surprising that there are no French Googles or German Facebooks.
Euros and sense
In all the panicky talk of haircuts and economic Armageddon, it might be wise to step back and consider the two basic options: Euro or no Euro. The Euro is only a means not an end and preserving it at all costs makes little sense. With hindsight it might just look like an interesting experiment.
German leaders are keen on the Euro, even if their electors are not, because its weakness keeps German exports competitive, it lowers exchange costs and it is a step towards the United States of Europe governed from Berlin. To the extent that the current troubles lead to central, i.e. German, management of national finances throughout the Eurozone, the pain is worth the gain. There was a price for bringing East Germany in from the cold and there is now a price for fiscal union in the Eurozone. But there is a limit to the subsidies German electors will tolerate and Angela Merkel is walking a tightrope.
So the long term Euro retention option boils down to whether Germany is prepared to pay the costs of fiscal union in the Eurozone. The northern fiscally correct countries will play along albeit with some nervousness about the end game. The Mediterranean group will focus on how they can appear to be conforming to the rules whilst actually clearing the till each night. In other words the costs will not stop with the current round of negotiations.
Even Bismarck had to accept that there were limits to German expansion in his day and Germany may now decide the game is not worth the candle in which case the question becomes how to dismantle the Euro with least economic cost.
My friend Richard Warner, a banker from the days when bank bonuses were modest, has figured out that the solution is for the strongest currency to secede first, followed by the next and so on. His reasoning is that if the weakest, say Greece, leaves first, no one will believe the initial Euro:Drachma exchange rate and the drama will continue even though the Greeks can then hoist interest rates. We had a taste of that with the ERM. Double digit interest rates only scared the markets more.
On the other had, if Germany exits first the Euro:Deutschmark exchange rate would be regarded and fairly stable and the two currencies could settle at their own levels allowing the next most stable, the Netherlands perhaps, to exit next.
He has a point, don’t you think?
New at AdamSmith.org: The future of European Monetary Union: early background and long-term thoughts
Until a couple of years ago, any suggestion that the great experiment of European Monetary Union was in trouble met with a hostile response, but since then the problem has become more obvious and much has been written on it in the daily and weekly press. The 10th anniversary of the introduction of the currency and an apparent period of relative calm seems an excellent opportunity to stand back and look at the broader context. Where are we now, how did we get there and where do we go from here?
European Monetary Union (not an obvious "optimum currency area") was launched with fatal design faults: the long awaited, but disappointing, 1995 Green Paper [2] completely failed to address the real economic problems which those of us looking sympathetically but critically at the project had identified. The rules adopted made the change "irreversible" with no provision for countries to leave, or be expelled from, the union and no mechanism for dealing with asymmetric shocks. Creating the euro in such an inflexible form was a disaster waiting to happen, but had believed and hoped that, given the political will behind the project, the need for changes would be recognised and acted on before it was too late. This has not happened and the taxpayer’s money has been thrown at a futile attempt to “save the euro”, when the real problem is to prevent a financial catastrophe. Whether this was deliberate is a matter for future political historians but Peter Oborne and Frances Weaver (CPS September 2011) think they were `Guilty Men’.
Hayek on the euro
"In many respects a single international currency is not better but worse than a national currency if it is not better run. It would leave a country with a financially more sophisticated public not even the chance of escaping from the consequences of the crude prejudices governing the decisions of the others. The advantage of an international authority should be mainly to protect a member state from the harmful measures of others, not to force it to join in their follies."
— FA Hayek, The denationalization of money: the argument refined