IMF: "Don't balance budgets—steal wealth!"

A disturbing Forbes piece reporting the latest IMF thinking. Which, shockingly, is that a) governments are so broke that even if they confiscated all the wealth of the richest 1% they'd still be broke; which means that b) they're going to come after everyone else's savings and pensions too; and c) that even then, governments won't be able to live within their means; so d) it will come down to all of the above, with debt defaults and inflation making up the difference.

As the Forbes piece says, the idea of governments living within their means, or getting their Ponzi-scheme pension and welfare systems under control, doesn't feature in the IMF thinking. it is more concerned about how to tax people who try to shift their wealth out of the grasp of the overspending politicians: "taxing different forms of wealth differently according to their mobility," as the Fund puts it, "...to make it harder for the very well-off to evade taxation by placing funds elsewhere."

Farewell, then, to the tax competition that might pressure governments to provide good value for their taxpayers' money. And farewell to the fiscal probity – the notion of governments living within their means – that the IMF once stressed. Instead, it seems that even the world's bank manager reckons it's OK for politicians to spend profligately and then steal the wealth of their citizens to pay the bill.

Which just shows you how deep the rot has penetrated. But at the same time, as I read all this, I get the strange feeling that Atlas is beginning to shrug. 

Would US default be so bad?

The fact that the American government is up and running again is very bad news. Not for the obvious reason that the American government is bloated, self-serving, unproductive, and completely incapable of spending the nation's money efficiently. But for the fact that the budget deal simply postpones problems that should be squared up to.

The fact is that, with a $17 trillion debt ceiling, the American government is really deep in debt. Britain's £1.2 trillion debt looks positively virtuous (which it isn't). But is Congress slicing up its credit card, reining back on its spending and cutting out luxuries, like everyone else has to do when we get into trouble? Not a bit of it. The American government is still living far beyond its means.

The deal hasn't even bought much time. It will keep the government running only until 15 January, and there will have to be more discussion (or horse-trading) on the debt ceiling from 7 February. It doesn't 'solve' anything.

If 'America' (notice how so many commentators say 'America' when they really mean its government) is determined to carry on spending as it does, then it will have to carry on adding to its debt. The only other option is to print the money it needs – in other words, more quantitative easing. And that, of course, is very good for markets – because the new money comes in through the financial institutions, and quite a bit of it tends to stick in the asset markets, inflating the prices of stocks, businesses, houses and the rest. So investors see the benefit even if the rest of us don't.

That might explain why the markets are so sanguine about something that is, in fact, a complete denial of financial prudence within the American government. The trouble is, as we discovered in 2008, you can put off the day of reckoning for quite a time, but eventually your imprudence catches up with you. You can carry on a bit longer by putting everything you can on the credit card, but eventually something messy is going to happen. Nobody knows when that might be. Perhaps a default in the New Year might not be such a disaster, but would make Congress realise that the books have to balance. For long-term American investors, that might actually be cheering news.

Is democracy killing Indian growth?

Lord Desai, former LSE prof and expert on Marxian economics, seems to have lost any faith he once had in the ability of governments to manage an economic system. Talking of his home country, India, at an Adam Smith Lecture in Edinburgh (organised by the Asia Scotland Institute), he complained that the country's growth was being held back by 'policy paralysis'. After some major reforms in 1991 and opening up to world trade, India has been growing at 8% or so until the last couple of years, when the rate has fallen to 5% – something that UK Chancellor George Osborne would dream of, but not great for a large, developing economy. Inflation, meanwhile, has hit double digits. Interest rates have been raised to over 9% in the attempt to control it. Public spending is high, and the current account is in deficit. A third of government revenue goes on debt repayment.

India has had coalitions for quarter of a century, which does not help. Nor does the fact that the Congress Party has been dominated by the Ghandi family for all that time. In a country where two-thirds of the population are under 35, one would expect to see a less patriarchal (or occasionally matriarchal) form of politics. The BJP, for its part, is more ideological and its candidate for PM is a popular outsider. But both parties are statist and neither is fiscally responsible: cronyism and corruption is rife, and with two-thirds of the population getting food subsidies in one form or another, India's welfare state spending is getting even harder to rein back.

And, for a time after 1991, it was all going so well. Perhaps the difference between India and China is that India is a democracy. So Indian politicians are always keen to make promises and give favours to electors at the expense of other people, including future generations who are yet unborn and so cannot complain. No surprise then that its welfare state and public spending are expanding – and, though the economy is still growing, the wealth-creation engine is starting to slow. China, less troubled by such things, might well become wealthy before democratic pressures for redistribution start to do the same. Fine institution though democracy is, it works only if the powers of government, and the potential exploitation of wealth-creators, are strictly limited.

America's shutdown to a Briton's eyes

What to make of the Yanks and their budget? As Newt Gingrich pointed out in last Saturday’s FT, we might start by dialling down the hysteria: shutdowns are no novelty.

“Democratic Speaker, Tip O’Neill presided over twelve…government shutdowns…with presidents Jimmy Carter and Ronald Reagan, and even while Democrats controlled both Houses of Congress….No one in the O’Neill era saw shutdowns as catastrophic. They were irritating, complicated and frustrating but also part of the legislative process.”

The GOP is fussed about Obamacare, which no-one in the UK gets. Its main point is not to provide hospital care for indigents (something already provided under Medicaid and common-carrier obligations), but to oblige healthy youngsters to sign up so as to reduce costs by bringing them into the insurance pool. This makes some sense – it more or less happens elsewhere - but putting it like this explains why Americans see it as intrusive and the scheme is so unpopular.

More generally, the Tea Party is up in arms because the new obligations of Obamacare come at a time when the US (as pretty much universally) is testing the limits of what a government of free citizens can afford to take on. Hysteria is now extending to lefty commentators, who are calling apocalypse if the debt ceiling is not raised on 17 October, fearing without quite admitting it that the markets will bear down on the President. They have been joined by some big bondholders who ought to know. Now we hear that “constructive talks” are under way - on the ceiling at least. But recall that great changes in national direction only come with grubbiness and mess: think of Lloyd George threatening to pack the Lords after they turned down the Peoples’ Budget, Roosevelt menacing the Supreme Court over the New Deal, or Bevan getting the NHS past hold-out doctors by “stopping their mouths with gold”. That’s politics.

But is Obamacare a good thing? Hard for a Brit to say. US healthcare is costly by our standards, yielding outcomes which at their best are world-beating but not universal. Maybe they need more private “managed care” systems to reduce costs, but that is not the same as Federal intervention.

Back to the limits of government. King Charles I - the one who lost his head - had a legitimate gripe about the irresponsibility of his parliaments. They were bloody-minded, sent mixed signals (singe Papist beards; raise no new taxes) and generally messed him about something rotten (not to mention that losing the head thing). But they and their successors established the principle that the executive shall be controlled by the power of the purse, exercised by representatives of the taxpayers. The Tea Party is also bloody-minded and given to mixed signals. But it is fully seized of that most essential component of American DNA, snappily put by the Culpeper Minutemen, “Don’t tread on me!”

No doubt, the immediate outcome of this month’s stand-off will be the customary fudge. That’s politics too. But make no mistake: the Republicans in their confusion, the Tea Party zealots in their flyover-state gaucherie are onto something: where shall government find its limit? It’s not a trivial question and it won’t be answered in just one go.

Rolling down a slippery slope

Warnings about ‘slippery slopes’ are often overused by defenders of individual liberty. That’s probably inevitable, since we often end up defending a principle against a seemingly-pragmatic policy that, by itself, is not very objectionable.

For instance, I find it hard to muster any specific argument against energy efficiency labelling of washing machines, but the principle of letting people do what they want with their own stuff means that I’m still pretty suspicious of them. It’s hard to convince someone else who doesn’t already share my belief in that principle without resorting to things like slippery slope arguments .(First they label the washing machines – next it’ll be health warnings on cans of Coca-Cola!)

But, overused as they can be, slippery slopes really do exist. Tobacco regulation is an interesting example, because it's often used as the thin end of the wedge for other kinds of paternalism. After plain packaging of tobacco was passed in Australia (will the new, nominally Liberal government repeal this legislation?), its advocates moved straight on to calls for plain packaging of alcohol. To quote our 2012 paper:

Australian Senator Cory Bernadi recalls: “[O]n the very first day [after the plain packaging legislation was passed] they moved onto drinking. People who were advocating plain packaging were saying “We should have this for alcohol. We should have it in fast food”. Where does it end? The nanny state will never end because there is always another cause to advocate for.”

Some health groups in Australia have also called for plain packaging of ‘junk food’, whatever that is.

So it’s worrying when tobacco is treated as a special case in international trade agreements, as is happening in Trans-Pacific Partnership negotiations between a number of major Pacific Rim countries, including Australia, the US, New Zealand and Japan.

The US and Malaysia have proposed exemptions for domestic tobacco control measures from the provisions of the Partnership. Not many people will object to that on its own, but here’s where the slippery slope problem comes in. Most free trade agreements are riddled with special exceptions, but using them to reinforce domestic paternalism is particularly ugly.

A free trade agreement that institutionalises tobacco as being ‘non-normal’ is a hop, skip and a jump from one that does the same for all sorts of other things that people probably would have a problem with being told are abnormal, like booze. And the infantilization of adults – much harder to pinpoint than the number of lives supposedly ‘saved’ by tobacco control measures – rolls on.

Don't fear immigration from Romania and Bulgaria

Barely a week goes by without some politician or newspaper warning of an imminent immigration apocalypse after the expiration of temporary immigration controls on Romanian and Bulgarian workers in 2014. They predict unprecedented strains on housing, welfare and the NHS – not to mention a coming “crime wave”.

Examining the profiles of migrants from these two countries currently living in the UK, as well as survey evidence from potential EU migrants, it becomes clear that such doomsaying simply isn’t accurate. As is typical for new migrant groups, Romanians and Bulgarians already in the UK are predominantly young and have small families; as a consequence of this demographic profile, they are statistically far less likely to “have a significant impact on health services as a whole”.

The demographic make-up of potential Romanian and Bulgarian future migrants is, according to a BBC survey conducted earlier this year, extremely similar. Research also strongly indicates that EU immigrants are significantly less likely to claim benefits or social housing compared to UK natives.

As for the numbers themselves, several factors point to some of the more outlandish predictions as being without factual basis. Remember that it is not just the UK, but the entire EU, that will have lifted previous restrictions for 2014. As the Oxford Migration Observatory explains, “the UK might not be uniquely attractive to migrants who would have similar labour market access in other major EU economies like Germany and France”.

Indeed, historically, the UK has not been a strongly favoured location for Romanian and Bulgarian migrants, who often prefer the cultural similarities and pre-established personal networks in countries such as Spain and Italy. The falling unemployment trends in both Bulgaria and Romania weaken claims that joblessness will be a major factor in encouraging migration from these two countries to the UK. 

Immigration is a net fiscal benefit to OECD countries; the hysteria directed at potential Romanian and Bulgarian migrants to the UK is counter-productive in the extreme.

The real reason we like immigration so much

Martha Gill has a good piece on immigration on the Telegraph Blogs site today, pointing out the simple fact that people often forget: the main reason immigration is such a good thing is that it's really, really good for immigrants.

Sure, immigrants make the rich countries they arrive at richer and subsidise those countries' welfare states, but people in rich countries have a lot already. It's people coming from places like Somalia and Sierra Leone that have the most to gain from being able to work in the UK.

Michael Clemens's study, "Trillion dollar bills on the sidewalk", looks at estimates of the global GDP gains that would come from open borders. The gains range between 67% and 122%, depending on how many people actually migrated. Those benefits would overwhelmingly accrue to the world's poorest people, and that's a good thing.

Gill's piece is directed at the left, which is fair enough given that most defenders of immigration are on the left. But no side owns cosmopolitanism. Almost everyone has heard the slogan "trade, not aid" from people on the political right. They (correctly) see international trade as a much better way to improve the lives of people in poor countries than development aid. They want free trade because it works for poor people around the world, not just because it would also happen to make us a little bit richer.

It doesn't seem out of the question that the same kind of altruism might eventually spread to the right's view of immigration. That might seem unlikely, but the political right was once a bastion of protectionism, and that changed.

Fundamentally, immigration restrictions are laws that ban firms from employing certain people and landlords from renting or selling their property to certain people. What's right-wing about that?

Worse than nothing

Like many countries, the government offers advice to new and would-be exporters. If the advice is sub-standard, it may be worse than no advice at all.

The organisation charged with this function is called UK Trade & Investment (UKTI) and is a combination of civil servants from the Business (BIS) department, Foreign and Commonwealth Office and staff “volunteered” by their companies. It is about 2,500 strong, half overseas and half in the UK. UKTI’s Annual Report is a challenge to the reader as they are preoccupied with whether these are FCO or BIS staff and confused between the very distinct roles of helping export as and helping overseas investment in the UK.

Most of the overseas staff are locals who know little or nothing about the new and would-be UK exporters. Only about 10% of the total are actually engaged, on the ground, in advising UK exporters. They are far outnumbered by their colleagues drinking tea in Whitehall meetings.

Should we look at the quality rather than the quantity of advice?

Firstly there is no sign in the UKTI that they benchmark there advice against academic studies or the advice given by other countries. How do we know how the UK advice rates if we have no idea of the quality of our competitors’ advice? In fact the Australian advice, for one, is much better.

20 years ago Chris Styles, then working on his doctoral thesis and now Dean of the Australian Graduate School of Management, and I researched, for the then Department of Trade and Industry, what did and did not work for new exporters. The research conclusively showed that the government’s standard advice that one should choose the market through formal market research and then oneself draw up a marketing plan was comprehensively wrong. Numbers only reveal the state of play, not what a market could become, still less what it will become since that depends on what the exporter will do. Were Iceland, for example, to have no fridges, would that imply a potential demand for fridges or simply a dislike of, or no need for, fridges?

Relationship with the importer proved to be the crucial thing: the better and stronger that relationship, the better was the performance.

This blog does not have space for all the detail. Suffice it to say that the DTI accepted all our findings both empirical and theoretical. Checking current UKTI advice, however, shows that they has reverted to the same old rubbish we disproved 20 years ago. It was wrong then, it is wrong now and British exporters are being misled. 

Fair trade really isn't the way to do it

There is, as we all know, something called Fair Trade out there. The idea being that you make sure that you're buying only from poor farmers who meet your own moral standards (on things like diversity, sustainability, whatever) and that you'll pay them a bit more for their producing as you would like to see things produced.

This is, of course, just quite lovely. For it is you exercising your consumer choice, spending your pennies as you wish, to make the world a better place according to your lights. We all here support you doing exactly that.

However, you might want to have a little think about this in hte lights of these quite astonishing numbers:

An interesting statistic is that in 2010, retail sales of fair-trade-labelled products totalled about $5.5 billion, with about $66 million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers. There has to be a better way of helping poor farmers. Having only 1.2 cents out of every dollar spent on fair-trade products reach the target farmers is a hugely inefficient way of helping these people. If people wish to help these farmers there has to be charities out there that can transfer more than 1.2 cents per dollar to them.

It may well be that you are exercising your consumer choice as a way to make the world a better place. It's just an incredibly inefficient method of doing so and thus you might want to reconsider that plan.

My own supposition is that the reason Fair Trade is so appallingly inefficient is the number of Interchangeable Emmas who have to be paid from that money supposedly going to producers. It takes very many poor coffee farmers' incomes to pay for the PR bod advertising Fair Trade coffee from an office in central London. It might well be better to simply do as Madsen urges, and buy things made by poor people in poor countries. Then send the money saved by not paying the Emmas off to a charity of some minimal efficiency. Or even, if coffee farmers are really your thing, simply drink an extra cup or two a day and send the money by increasing demand for their production.

The good news about world poverty and globalization

On my own website today I draw attention to the Economist story about the progress of world poverty between 1990 and 2010. I point out that:

"World poverty has halved in two decades. The measure used is the $1.25 a day of consumption that is the average poverty line for the 15 poorest nations. This figure shrank from 43 percent in 1990 to 21 percent in 2010. This was not achieved by redistributing wealth from richer countries, but by having wealth created in poorer ones by economic growth."

The ASI responded to the "Make Poverty History" wristbands that celebrities popularized in 2005 by pointing out that the slogan did not indicate how this might be done. It implied redistribution, with more aid to flow from rich countries to poorer ones.  We produced our own wristbands that read, "I buy goods from poorer countries," and sent them out free to anyone who asked for one.  We gave away many thousands. 

Our point was that poorer countries become richer if we open our markets and buy their goods.  It is this, rather than aid, that has made a difference to the lives of a billion people over those two decades, and can change the lives of the billion still to be lifted from poverty.