America’s Chief Magistrate and the Spirit of ’76
The year 1776 was a revolutionary milestone for individual liberty, with the publication of Adam Smith’s The Wealth of Nations setting forth the path of economic freedom and a Declaration proclaimed by thirteen American colonies ringing the tocsin for political independence.
But a solemn spectre of ’76 hung over the United States this November as Americans voted for representatives and senators in Congress and a Chief Magistrate to occupy the White House — for the promise of economic and political liberty has turned dark.
The spirit of ’76 was animated by the desire for personal freedom, both in our relations with others and in our transactions with them. Adam Smith wrote against the mercantilist system which thwarted innovation and entrepreneurship, while the Declaration of Independence affirmed that ‘all men are created equal’ and ‘endowed ... with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness’; that we establish governments to protect these rights, said governments ‘deriving their just powers from the consent of the governed’.
Broken windows: still not good for the economy
The weather might not be predictable, but one thing is almost certain; when natural disasters strike, you can be sure that someone will claim this is a good thing. Sure enough, journalists have made the case here, here and here. It is claimed that Sandy will provide a stimulus for the US construction sector as damage estimates approach $50 billion. It is argued that in turn this growth in the construction sector will move through into other areas of the economy, this new activity driving growth.
Those who make this case could do worse than to read Frédéric Bastiat’s “What Is Seen and What Is Not Seen”. Rather than simply generating new economic activity, destruction is not costless. The cost of rebuilding devastated areas will be a cost at the cost of other alternatives. People who might have spent money on improving their homes may now have to rebuild them entirely. They have not gained wealth; they have lost the improvements to their homes that they would have otherwise enjoyed.
If it were true that destroying homes was good for growth, we should be smashing buildings as they spring up. By this logic we would be richer as a result. These arguments are seen not just in the case of natural disasters, but also when war occurs. World War II famously saw huge production numbers as nations clawed for scarce resources to build bullets and tanks. This was not production that improved the quality of people’s lives. Railings from parks and schoolyards were melted down to build bombs.
Similarly, while many breakthroughs were made in the form of new inventions during wartime, this came at the cost of other alternatives. It is impossible to compare with what might have been, but that does not mean that it is not important. Had World War II not happened then we would have been free to pursue research and development directed at improving the quality of lives, not at winning wars.
This story betrays an alarming obsession with GDP. GDP does not usefully describe the health of an economy. What is important is that people have more of the things that they want and natural disasters destroy this prosperity. Bastiat’s classic essay dispelled this myth in 1848, yet it is clearly still rampant.
There is a good news story here, but it's not one of false stimulus. It is one of the continual process of development and production. The damage in the US has been much lower than in less developed countries also struck by Sandy. Development has helped to save lives. As we lift more people out of poverty, we can expect natural disasters to be less lethal.
Eat the rich
No, Mitt Romney wouldn't have been any better. But the video above shows the reality of the situation Barack Obama now has four years to resolve. It should be a welcome respite from the politics-focused treatment of the election today. What the Eurozone is now so painfully learning may soon be taught to the United States. In the end, politics can't trump economics.
Ten reasons to be cheerful, part 5: Employment
In the US Presidential election of 1992, candidate Ross Perot talked of the "giant sucking sound" of US jobs draining South of the border if the US signed into the North American Free Trade Area. It did; there wasn't; it won't.
4. Employment
The pessimists seem to think that the advanced economies have had their day as far as jobs are concerned. They say we can't compete against low-cost labour in the developing world, and they urge protective tariffs against imported goods to protect jobs at home.
No. What happens if government follows that course is firstly that they make their own citizens poorer by making them pay more than they need for their goods. Secondly they make their own manufactures uncompetitive by cocooning them in a protective domestic market, but unable to sell elsewhere in the world.
When we buy cheaper foreign goods we have money left over to buy other things with. It is true that some jobs go abroad and help people in poorer countries to step onto the road that leads to wealth. But it is also true that as people in those countries become richer, we can sell them more of what we produce. We no longer compete on cheap textiles, but many jobs have been created in added value areas of textiles. Developed countries face growing demand for fashion labels and designer goods from countries such as China.
It is true that electronic goods can be out-sourced to countries with low-cost labour, but those goods generate thousands of jobs in developed countries, including ones in design, in advertising and promotion, in marketing and retailing, and it is also true that those products bring convenience and utility into the lives of those who use them.
People might want to do the same job producing the same goods for the whole of their lives, but there is no civil right to do that, and the real economy embodies constant change. People become wealthier and their aspirations change. New product and processes emerge to tap those new demands. Successful economies are ones which keep moving. As goods from poorer countries undercut their cheap goods on price, people in developed economies move into areas where higher value is added, or into service jobs less susceptible to foreign competition.
As we become richer on a global scale, there will be more demand for goods and services, and therein lie the opportunities that will create tomorrow's employment.
Ten reasons to be cheerful, part 2: Water
Some people tell us that water scarcity might well be the cause of future wars as the world struggles to cope with shortages. In fact water is my second cause for optimism.
2. Water
The shortage pointed to is of usable water, not of water itself. Although four-fifths of the Earth's surface is covered by water, some 97 percent of the Earth's water is too salty for people to drink or to use for irrigation, and much of the water that is accessible is not safe to drink. The question is whether we can develop the technology required to purify water to render it of drinkable quality at a price that can be afforded.
Great advances are being made in fairly low technology solutions to water purification in less developed countries. A range of ingenious solutions has been developed from simple filtration systems that use coal ash, to solar-powered ones using plastic bottles. Great efforts are under way from a number of foundations to finance the construction of deep wells to bring clean water to villages whose nearest other source is miles away.
A combination of such developments will contribute much to ensuring adequate supplies, but ultimately it could well be desalination technology that provides an inexhaustible supply. The main desalination technique hitherto has depended on boiling seawater and condensing the steam. This works well and is in widespread use, but it is very energy-intensive.
The alternative approach that is rapidly gaining ground uses osmosis (technically reverse osmosis) to separate out the salts using membranes. This also uses quite large amounts of energy, but advances in engineering are making it more efficient as time passes. Such plants could be solar powered as those costs come down, and can be located in areas that both need water and have many hours of sunlight.
Ultimately the question of the future supply of clean water comes down to whether we can develop the technology to purify water efficiently, and the answer seems to be that we can. Of course the water will have to be where it is needed, but its transmission is again a problem susceptible to technological solutions. Both of these depend on access to cheap and abundant sources of energy if they are to be affordable, and it seems likely that the gas revolution has made the breakthrough which makes that outcome likely.
Twenty-two crisis meetings and no solutions
So, 22 crisis summits on since the eurozone crisis erupted, are the problems now solved? Hardly. France was very keen to push towards much deeper economic integration of the eurozone. Germany, which will end up paying for it, wasn't so sure. What we have ended up with is an agreement to create a single eurozone bank regulator, sometime in the summer.
The problem isn't just that summer may be well too late. Record numbers of Spanish households and businesses have been defaulting on their debts, the Greek government needs more cash to stay afloat, and southern Europeans have been putting their spare cash into bank accounts in the north or property in the UK. Nothing seems to have changed since 22 summits ago.
Being British, I find it hard to be objective about the French, but their idea is actually basically right. A monetary union can only hold together if you have a fiscal union as well. That is, a centralised tax and welfare policy. That is because in a monetary union, states cannot devalue. A country that produces its own currency can respond to economic problems by devaluing – much as happened in the UK during the years after 2007. That makes its good cheaper abroad, boosting exports, and at the same time makes imports costlier, so people economise on them. Eventually, the country starts to recover. But states such as Greece and Spain cannot devalue. When crisis hits them, they really suffer.
The US has a monetary union between its 50 states – they don't all produce their own currency – but it is also a fiscal union. If there is a problem in one state, such as a devastating hurricane, federal funds go out from Washington. That buys the breathing space for the local economy to recover. The eurozone could in theory become such a monetary and fiscal union, and the problems of the Club Med countries could be alleviated – but only by turning the eurozone into an effective superstate, like the US federal union. The trouble is that Americans think they have a lot more in common with other Americans than, say, the Germans think they have in common with the Greeks. So few countries would submit willingly to that central control.
The compromise thrashed out this week is that there will be no all-out fiscal union, but a step towards it – a banking union with a single bank regulator, namely the European Central Bank. The idea is that the ECB can prop up failing banks in the troubled states, and so avert a financial crisis, without anyone going so far as to say tax, welfare and spending policy should be completely centralised.
The argument is that the ECB can exert some discipline on hopeless banks like those in Spain, or cash-starved banks like those in Greece. And maybe a touch of discipline like that would be useful. However, to put all the eurozone's banks in one regulatory basket is asking for trouble. Central banks have not proved themselves to be good regulators. The Federal Reserve, set up to end bank crises and closures, managed to close down the entire US banking system itself in the early 1930s. The Bank of England managed to turn a drama into a crisis by squeezing down on UK banks in 2008, just as they were running out of money – hardly fulfilling its role as 'lender of last resort'. It might well do a better job of regulating banks than the Financial Services Authority, which didn't even see the crisis coming, but it is hardly a shining example.
And this is the snag in the eurozone. A one-size-fits-all banking regulator will not actually fit everyone. And when it does make a mistake, the mistake will be catastrophic because it will affect the entire eurozone, not just a single country. It is asking for real trouble.
Tweet of the day
The Nobel prize is sufficient to fund the EU agricultural policy's destruction of food markets and third world countries for 14 minutes.
— Johan Norberg (@johanknorberg) October 12, 2012
Ten very good things 9: Globalization
There is talk of food miles, of buying locally, and of self-sufficiency, as if these were virtues. The good thing (my number nine) is globalization which gives us all access to each other's special skills and products.
9. Globalization
Over the course of decades globalization is turning the world into an integrated economy instead of what it has been for most of its history, a series of relatively isolated economies. The more trading that takes place, the more wealth is created, and global trade across international frontiers has created more wealth than ever before in human history, and had helped lift more people out of mere subsistence than ever before.
To poorer countries globalization brings the chance to sell their relatively low cost labour onto world markets. It brings the investment that creates jobs, and although those jobs pay less than their counterparts in rich economies, they represent a step up for people in recipient countries because they usually pay more than do the more traditional jobs available there.
To people in richer countries globalization brings lower cost goods from abroad, which leaves them with spending power to spare and a higher standard of living. It also brings opportunities for productive investment in high growth industries in developing countries.
Those adversely affected by the global exchanges are the people in rich countries whose output is now undercut by the cheaper alternatives from abroad. They often need to find new jobs or to be retrained to do work that adds higher value. The extra wealth generated by globalization has brought an increase in service sector employment, which provides many of the new jobs needed.
Competition from abroad forces firms to become more efficient and to use resources more efficiently. Often they choose to go upmarket, seeking higher added value products that face less competition from relatively unskilled labour. Thus firms which once sold cheap textiles move into fashion and design, and find customers among the rising middle classes in developing countries.
The integration of the world economy has brought with it an interdependence. As countries co-operate in trade with each other, they get to know each other and grow into the habit of resolving disputes by negotiation and agreement instead of by armed conflict. The 19th Century French economist Frederic Bastiat expressed this pithily: "Where goods do not cross frontiers, armies will."
Ten very good things 4: Imports
My fourth very good thing is imports, one of the most misunderstood.
4. Imports
A common fallacy supposes that nations become rich by exporting more than they import. Many governments make the effort to augment exports and diminish imports. This usually involves subsidizing exports by means of grants and lower taxes, and discouraging imports by means of tariffs. Both of these are more difficult to do under the rules of the World Trade Organization, but countries sometimes find covert ways of achieving these ends.
It used to be thought that a country's wealth was augmented by a positive 'balance of trade,' under which the surplus of exports over imports would bring in more gold and silver than went out, leaving the nation richer. Adam Smith exposed this fallacy, pointing out that the wealth of nations consisted in the productive labour of its peoples rather than in bars of precious metals stored in its treasury.
In fact it is imports that make a nation richer. By importing goods that are cheaper than those they can produce themselves, nations have cash to spare as well as the goods. This makes them wealthier than if they were self-dependent. Adam Smith said that Scotland could grow grapes and produce wine "by means of hot-walls and glass houses" on the slopes of Ben Nevis, but it would cost them 30 times the price of equivalent French wine. By buying the French wine, they saved twenty-nine thirtieths of the cost and could spend it on other things.
Of course these imports have to be paid for, and exports make that possible. We export to gain the wherewithal to enrich ourselves through imports. It need not be manufactured goods we export. It can be services such as insurance, skills such as design, or the returns on our own overseas investments.
The US humorist, P J O'Rourke put it succinctly: "..imports are Christmas morning; exports are January's MasterCard bill." Imports make us richer, and exports make it possible. The self-sufficiency which is advocated as a virtue is the road to poverty. It denies us the specialized and skilful services of far-flung producers anxious to provide us with goods at lower prices than we can make for ourselves.
Making the case for open borders
I've got a post on the New Statesman's website today, beating the drum for open borders. I open with the story of Srinivasa Ramanujan, an Indian mathematician born into abject poverty a century ago:
Born to a poor family in southern India in the late nineteenth century, Ramanujan displayed a remarkable mathematical mind from an early age, developing complex theorems as a teenager.
He was a genius, but he left school in poverty and seemed destined to live a life of subsistence. By chance, Ramanujan was discovered by another Indian mathematician and ended up at Cambridge, producing ingenious new ideas and eventually becoming the first Indian to be elected a Fellow of Trinity College.
Ramanujan was lucky. Had he not been discovered when he was, he could have easily spent a life in poverty, his genius untapped and giving nothing to the world.
The west’s immigration laws make it remarkably difficult for latter-day Ramanujans to exploit their potential. Ramanujan represents not just the geniuses lying fallow in subsistence agriculture, but all human talent that is not being tapped to its full potential.
Whether the reasons are poor governance, cultural constraints, poverty or other restraints on human productivity, billions of people are being condemned to lives of relative squalor, with no way out.