South Canterbury Finance and all that jazz (updated)

There have been a number of good blog postings on the South Canterbury Finance saga so let me just make a couple of brief comments on what I agree with or disagree with from these postings.

Matt Nolan over at TVHE makes a number of good points including

1. The government had to pay the money when the receivers came in – they had no real choice, after all SCF was guaranteed by government.
2. However, it does show you the type of cost that can be associated with such a scheme – and raises the question of whether putting finance companies in the scheme was a good idea

What I would take from these two points is that we should not have had the deposit guarantee scheme in the first place, so I agree with Matt when he says

Surely this tells us that it is at least near the time to get rid of this deposit guarantee scheme – and why not do it retroactively so they all don’t “fail” just before the scheme runs out. Investors that get burned because they saw a high return and decided to face a high risks should have to deal with the consequences of it.

No Right Turn is also right to highlight the moral hazard issues in all of this. Where I disagree with him is here,

Banks have customers, who are innocent victims in any collapse. Finance companies, OTOH, have investors, people who are effectively gambling.

I see no real difference between "customers" and "investors". Consumers are a type of investor and thus should take all the same precautions as regular investors and face the outcomes in the same way as regular investors..

Eric Crampton writes

AntiDismal called the other day for ending deposit insurance. I'd be reluctant to pull deposit insurance for the banks until after the current financial mess is over with. And even then, I'd worry that the government now has zero credibility in the face of potential bank default and so may be stuck with deposit insurance for the longer term - at least in that case, they collect premiums on the insurance.

I am, obviously, less reluctant to pull deposit insurance since this would at least help send the message that the government is serious about letting the banks deal with any default themselves and this should reduce the chance of such a default. Unfortunately I think Eric is correct when he says,

If things stay as they are, the message to Kiwi investors is pretty clear. Forget all that "diversify your portfolio" nonsense. Put everything into a government-guaranteed roulette wheel. Heads you get high interest payments; tails the government covers you.

So lets change things!

David Farrar is right when he says,

Which is well intentioned. But he lent too much bad money, and in the end he has left the taxpayer with the bill. That is not generosity. Allan Hubbard is not the victim here – the taxpayer is.

We lose again. :-(

Update: Mongrel Dog comments here.

EconTalk this week

Daniel Pink, author of Drive, talks with EconTalk host Russ Roberts about drive, motivation, compensation, and incentives. Pink discusses the implications of using monetary rewards as compensation in business and in education. Much of the conversation focuses on the research underlying the book, Drive, research from behavioral psychology that challenges traditional claims by economists on the power of monetary and other types of incentive. The last part of the conversation turns toward education and the role of incentives in motivating or demotivating students.

Africans do not want or need Britain’s development aid

The letter below was published in the Telegraph (U.K.) on 22 Aug 2010 under the subtitle noted above.

SIR – The parlous state of the public finances in Britain provides the perfect opportunity for British taxpayers to end their half-century-long experiment with “development aid”, which has, since its inception, stunted growth and subsidised bad governance in Africa.

As Africans, we urge the generous-spirited British to reconsider an aid programme they can ill afford, and which we do not want or need. A real offer from the British people to help our development would consist of the abolition of the Common Agricultural Policy, which keeps African agricultural exports out of the European marketplace.

It is that egregious policy, combined with the weight of regulations, bad laws and stifling bureaucracy, subsidised by five decades of development aid, which prevents Africans from lifting themselves out of poverty.

Andrew Mitchell, the Secretary of State for International Development, speaks about a “moral imperative” to combat poverty around the world. We could not agree more. The British have a unique opportunity to cut the deficit and help Africa: please, ask your new government to stop your aid.

Andrew Mwenda
Editor, Independent newspaper, Uganda
Franklin Cudjoe
Executive Director, IMANI Center for Policy and Education, Ghana
Kofi Bentil
Lecturer, University of Ghana and Ashesi University, Ghana
Thompson Ayodele
Executive Director, Initiative for Public Policy Analysis, Nigeria
Temba Nolutshungu
Director, Free Market Foundation, South Africa
Leon Louw
Law Review Project, South Africa

The interesting thing is that the abolition of the Common Agricultural Policy would not just help Africa it would also help the U.K. by lowering consumer prices and saving the taxpayers a fortune.

(HT: Aid Watch)

The joy of being a zealot

From the Herald we learn:

Supermarkets are drug "pushers" who are selling high quantities of discounted wine and should be viewed the same as dealers dishing out Ecstasy pills or morphine.

It may seem extreme but it's a view that Professor Doug Sellman, director of the National Addiction Centre and spokesman for the Alcohol Action Group, is taking quite seriously.

Professor Sellman believes the Government should remove alcohol from supermarket shelves and limit the amount of advertising operators are allowed for liquor, among many changes he hopes might alter people's attitudes to drinking.

The alcohol Taliban are at it again. The good professor should realise that the majority of people don't need their attitudes to drinking changed, but may be he does.

Actually Sellman may be on to something here. There may be something to be said for supermarkets selling drugs in the same way they do alcohol. Legalisation of the sale of drugs would be a big step forward.

Hans-Hermann Hoppe interview

Hoppe is interviewed by Emrah Akkurt, Turkey-Association for Liberal Thinking. To be published in a forthcoming special issue of the economic journal Piyasa on socialism.

A couple of interesting answers given by Hoppe.

Akkurt: In its modern version, Austrian economics, with its emphasis on property rights, entrepreneurship and freedom have natural allies among different schools of economics. For example, the property rights approach of Alchian and Coase come mostly to similar policy positions with Austrians. Do you think, Mises’s writings were somehow influential on the emphasis on property rights and market based approach besides Austrians. Was there a visible link between Mises and some of these people?

Hoppe: I am not aware of any intellectual link between Mises and the modern Chicago law and economics school, in particular Coase, and in his footsteps, Richard Posner. On the other hand, Hayek was one of Coase’s professors at the London School of Economics.

In any case: I believe the similarity between the Austrian and the Chicago view of law and economics to be merely superficial. In reality, both intellectual traditions are fundamentally opposed to each other. It is a common but serious error to think of the Chicago school as a defender of property rights. In fact, Coase and his followers are the most dangerous enemies of property rights. I know, this may sound unbelievable to some people. Thus let me explain, using one of Coase’s examples from his famous article on “Social Cost.”

A railroad runs beside a farm. The engine emits sparks, damaging the farmer’s crop. What is to be done? From the Austrian (and the classic as well as the commonsensical) viewpoint, what needs to be answered is who established property first, the farmer or the railroad? If the farmer was there first, he could force the railroad to stop emitting sparks or demand compensation. On the other hand, if the railroad was there first, then it may continue emitting sparks and the farmer would have to pay the railroad to be spark-free.

Coase’s and Posner’s answer is entirely different. According to them, it is a mistake to think of the farmer and the railroad as either ‘right’ or ‘wrong’ (liable), as ‘aggressor’ or ‘victim.’ Let me quote Coase from the very beginning of his famous article. There he says “the question is commonly thought of as one in which A inflicts harm on B and what has to be decided is, How should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would be to inflict harm on A. The real question that has to be decided is, Should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm.” Or put differently, the problem is to maximize the value of production or ‘wealth.’ According to Posner, whatever increases social wealth is just and whatever doesn’t is unjust. The task of the law-courts, then, is to assign property rights (and liability) to contesting parties in such a way that ‘wealth’ is maximized.

Applied to our case this means: if the cost of preventing sparks is less than the crop loss, then the court should side with the farmer and hold the railroad liable. Otherwise, if the cost of preventing sparks is higher than the loss in crops, then the court should side with the railroad and hold the farmer liable. But more importantly, this means also that property rights (and liability) are no longer something stable, constant and fixed but instead become ‘variables.’ Courts assign property rights depending on market data. And if these data change, courts may re-assign such rights. That is, different circumstances may lead to a re-distribution of property titles. No one can ever be sure of his property. Legal uncertainty is made permanent.

This seems neither just nor economical. In particular, this ‘variable’ way of assigning property rights will certainly not lead to long-run wealth maximization.

and

Akkurt: What are your views on the public choice school. If I am not wrong you criticize James Buchanan for defending the state. Would you briefly describe your view on this issue. Why is there a tension between your thinking and public choice?

Hoppe: The Public Choice school—most notably Buchanan and Tullock—is typically credited for the insight that people within government are just as much self-interested as people outside of government, i.e., in private business. People do not change their nature and become less self-interested upon becoming a government official.

Now this is of course a fundamentally correct insight. But this insight is not new. You can find it all over in the literature. Certainly ‘realist’ political sociologists such as Gaetano Mosca and Robert Michels knew this much, and ‘Austrians’ knew it too, of course.

What is new about the Buchanan-Tullock school is its theory of the State and political (as contrasted to economic) action. However, this innovation is patently false.

Buchanan and Tullock think the State is essentially a voluntary institution, on a par with private business firms. They claim that ‘the market and the State are both devices through which cooperation is organized and made possible.’ (Calculus of Consent, p. 19) And since the State is like a firm, Buchanan then concludes in his Limits of Liberty, whatever happens in politics, every status quo, ‘must be evaluated as if it were legitimate contractually.’

Now, I regard all of this as dangerous nonsense. Until Buchanan & Tullock, there existed almost universal agreement, regardless of whether one was a State-apologist or an anarchist critic of the State, as to the nature of the State, i.e., what a State actually was. States were recognized as categorically different forms of organization than firms: unlike firms, every State fundamentally rested on coercion. Buchanan’s claim to the contrary would have been regarded as a childish intellectual error.

The great Austrian economist Joseph Schumpeter (himself a member of the Lausanne rather than the Vienna or Austrian School) once remarked on views such as Buchanan’s: a “theory which construes taxes on the analogy of club dues or the purchase of the service of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of minds.” I wholeheartedly agree with this verdict.

Is South Canterbury Finance really is too big to fail?

This is a no brainer: No! When discussing this issue Bernard Hickey writes:

Receivership would trigger a payout to investors under the government guarantee of around NZ$1.7 billion. Some believe that shock to the government's finances would be enough to trigger a review of New Zealand's sovereign credit rating downgrade by Standard and Poor's and/or Moody's.

The message here is that we should not have had the government guarantee in the first place. So let South Canterbury Finance go under and get rid of the government guarantee scheme so that this problem doesn't arise in the future.

Size matters: the global operations of European firms

From VoxEU.org comes this audio in which Gianmarco Ottaviano of the University of Bologna talks to Viv Davies about The Global Operations of European Firms, a report that analyses data on 15,000 firms in seven countries to show that firm size, productivity, skill intensity and the ability to innovate are associated with better export performance, foreign direct investment and outsourcing. He argues that firms can improve their competitiveness within the European single market, but competing effectively in the future will require more than just exporting to neighbouring EU countries.

Incentives matter: cigarettes tax file

From Reuters we learn:

(Reuters) - Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead.

Criminal gangs and impoverished Roma communities near borders with countries where prices are lower -- Serbia, Macedonia, Moldova and Ukraine -- have taken to smuggling which has wiped out gains from higher excise duties.

Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third.

and

Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy.

While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. "However, this (too) looks unlikely at present," Bezlov added.

and

Romania's top three cigarette makers -- units of British American Tobacco, Japan Tobacco International and Philip Morris -- contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP.

They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

And what's the bet that the tax rise has had little or no effect on the amount of smoking? Smokers just substitute illegally obtained cigarettes for legal ones.

The irony of it (updated)

Having a brain capable of deciding not to eat meat may in fact be due to .... eating meat. The following is from an interesting book by Haim Ofek, Second Nature: Economic Origins of Human Evolution

No longer incidental is an adaptive effect recently suggested under the expensive-tissue hypothesis (Aiello and Wheeler, 1995): the idea that only animals with cheap guts can afford expensive (i.e., large) brains. It suggests that the metabolic requirements of a relatively large brain must be offset by a corresponding reduction of the gut. The enlarged human brain is a highly expensive organ in terms of the quantity of energy it consumes. It costs us roughly 16% of our total basal metabolic rate (BMR). To fuel (with substrate and oxygen) such a large brain and still maintain a normal BMR, another expensive metabolic tissue must be reduced. The key argument is that this has to be the gut.

In fact, the increase in mass of the human brain appears to be balanced by an almost identical reduction in the size of the gastrointestinal tract. Now at 15% of total BMR (reduced, presumably, from a previous total of 25%), the gut is the only body part that could have possibly varied in size sufficiently to offset the metabolic cost of the encephalizing human brain. The reason for this is that other metabolically expensive organs - liver, heart, kidneys, and lungs (accounting for 19,11,8, and 4% of total body BMR, respectively) - could not be reduced since they are physiologically constrained in fairly strict proportion to body size. Gut size is only partly related to body size. Its size and proportions (in a species) are in large measure also determined by diet, that is, by behavior. It follows that the relatively large brains in humans (and to a lesser extent in other primates) could not have been achieved without a shift to a high-quality diet. In this respect, Aiello and Wheeler emphasize the consumption of greater quantities of meat relative to plant foods as a likely possibility. (Ofek 2001: 68-9)

The abstract of Aiello and Weeler (1995) reads,

Brain tissue is metabolically expensive, but there is no significant correlation between relative basal metabolic rate and relative brain size in humans and other encephalized mammals. The expensive-tissue hypothesis suggests that the metabolic requirements of relatively large brains are offset by a corresponding reduction of the gut. The splanchnic organs (liver and gastrointestinal tract) are as metabolically expensive as brains, and the gut is the only one of the metabolically expensive organs in the human body that is markedly small in relation to body size. Gut size is highly correlated with diet, and relatively small guts are compatible only with high-quality, easy-to-digest food. The often-cited relationship between diet and relative brain size is more properly viewed as a relationship between relative brain size and relative gut size, the latter being determined by dietary quality. No matter what is selecting for relatively large brains in humans and other primates, they cannot be achieved without a shift to a high-quality diet unless there is a rise in the metabolic rate. Therefore the incorporation of increasingly greater amounts of animal products into the diet was essential in the evolution of the large human brain.

• Aiello, L. C. and Weeler, P. (1995). The Expensive-Tissue Hypothesis: The Brain and the Digestive System in Human and Primate Evolution. Current Anthropology, 33: 199-221.

Update: Tim Worstall comments, How very amusing about vegetarianism.

The falling university premium in Spain

Economic Logic comments on the falling university premium in Spain. The university premium is the difference between the wage of a worker with a university degree and one without. Note that this has been steadily increasing in the United States. But not in Spain. Economic Logic writes:

Florentino Felgueroso, Manuel Hidalgo and Sergi Jiménez-Martín show that the college premium in Spain has actually been decreasing, especially for males, and is at about 70% to 95%, depending on the definition. Why is this evolution so different from the United States? First, there seems to be a much more prevalent mismatch between skills and occupations. Higher education in Spain is much more specialized, which is a disadvantage when you cannot find a job in your specialization. This would indicate the drop in the college premium is a composition effect. But the premium also decreased for well-matched workers. Second, job rotation has increased and temporary jobs have become more prevalent. Shorter experience in a sector depresses wages, and this evolution seems to have been particularly strong for educated workers.

Interestingly, it appears that this trend started with the last major labor market reform in Spain, when employment subsidies were introduced along with employment promotion contracts that are supposed to reduce unemployment among the young but came with the cost of a surge in temporary contracts. Shorter tenures are not necessarily bad, especially when firing costs are too high, and a neither is a decline in the college premium. But one would have expected the US story to be even more true in Spain, as industry adapts faster than workers and its fast modernization would have outpaced the supply of skills from the workforce. Apparently not with those particular labor market reforms.

The "law of unintended consequences" applies once again.

Death and taxes

Well taxes mainly. This is from Kiwiblog:

City Paper reports:

For the past three years, Marilyn Bess has operated MS Philly Organic, a small, low-traffic blog that features occasional posts about green living, out of her Manayunk home. Between her blog and infrequent contributions to ehow.com, over the last few years she says she’s made about $50. To Bess, her website is a hobby. To the city of Philadelphia, it’s a potential moneymaker, and the city wants its cut.

In May, the city sent Bess a letter demanding that she pay $300, the price of a business privilege license. …

She’s not alone. After dutifully reporting even the smallest profits on their tax filings this year, a number — though no one knows exactly what that number is — of Philadelphia bloggers were dispatched letters informing them that they owe $300 for a privilege license, plus taxes on any profits they made.

Even if, as with Sean Barry, that profit is $11 over two years. …

And what is a "business privilege license" anyway? Are there no depths to which governments will not go to steal people's money?

Minimum pricing of alcohol

In a previous posing, The alcohol law reform package, I noted that,

A minimum price regime is just as stupid for alcohol as it is for any other product. If the price is set below equilibrium it doesn't matter and if it is set above, then supply will be greater than demand and consumers lose out.

Now thanks to Offsetting Behaviour I see I could in fact be right, consumers do lose out from minimum prices. Eric quotes from this article in The Press and Journal:

The Scottish Government’s plan to control the price of alcohol will barely tackle problem drinking while costing consumers £184million a year, according to a leading consultancy.

The Press and Journal article is reporting on research by The Centre for Economics and Business Research. Their reports are available here and here.

In my posting I also said,

Also it will just make it easier for retailers to find ways to collude and increase prices for alcohol sales.

The CEBR says

In effect, minimum pricing legislation forces firms to price as if they were in a cartel.

In addition to promoting cartel style profits, minimum pricing is also likely to lead to a reduction in the number of alcohol producers and brands available to consumers, as such price levels would ‘crowd out’ producers at the lower end of the market.

So minimum prices do nothing to effect problems drinking, imposes huge costs on consumers, leads to cartel pricing and actually harms some producers.

Senior CEBR economist Benjamin Williamson said: “This report shows that the case for minimum pricing is extremely weak. It would not target problem drinkers and would have a genuine negative economic impact in terms of jobs, trade and costs to the consumer.”

Well those have to be great reasons for wanting minimum prices ...... Not!

Trade is old .......

no, really old!

From Yahoo!news comes this article Egypt discovers 3,500-year-old oasis trading post:

CAIRO – Egypt's antiquities department announced Wednesday the discovery of a 3,500-year-old settlement in a desert oasis, showing the existence of vibrant desert trade routes that stretched from the Mediterranean down into Sudan from the early days of the Egyptian civilization.

and

The ancient routes stretched from the Darfur region in Sudan through the oases and the Nile Valley up to the ancient Palestine and Syria, with long caravans of donkeys bringing wines, luxury goods and wealth along with them. It would at least be 1,000 years before the camel made its appearance.

"The oases were large well watered nodes along major Egyptian caravan routes that had traffic coming in from all over the known world," said Darnell, contrasting their importance in antiquity to their relative isolation in modern times.

"2,000 years ago these (oases) were major trade emporia where you would have been passed everyday by caravans bringing in much more exotic material than you could find in Kharga Oasis today," he added.

Globalisation has been with us for a very long time.

Optimistic about free markets

Words of optimism from Eamonn Butler of the Adam Smith Institute:

Though my colleagues at the Adam Smith Institute regard me as the 'down' man, always seeing the difficulties presented by any new idea, underneath I'm really an optimist. I really believe that the free market will triumph, despite everything that our system of government conspires to do to shackle it. The free market is an entirely natural system, like evolution itself, which grows and adapts whatever adversity it faces. You can concrete over a path but still, before long, the grass pokes through. So do markets.

Butler is optimistic that the UK will sort out its tax and benefits system, and adopt a flat tax on income and a negative income tax to relieve poverty. He sees positives in the first tentative proposals of the coalition government in general and of the welfare and pensions secretary Iain Duncan Smith in particular, he thinks that we can see the first green blades of common sense breaking through. He is an optimistic man indeed! I just hope he's right.

Economists in agreement

Tell me it can't be true!!!!!

At TVHE Matt Nolan writes,

So Don Brash spoke out against compulsory savings, as did Gareth Morgan (note that both would benefit personally from the policy, to a large degree).

John Carran’s article sums up how Infometrics feels about the policy. And I am under the impression that every single NZ economics blogger that has touched the issue has said that compulsion is the wrong policy.

As Eric Crampron says in the comments to Matt's posting,

Count me as against too. I thought it so obvious that I’d oppose that it wasn’t worth blogging.

I'm with Eric on this. What exactly is the case for compulsion anyway? One size does not fit all, let people make their own decisions on how and what to save for their retirement. People themselves have the best information and incentives to base their savings decisions on, let them do it. As Brash writes,

But a compulsory superannuation scheme not only deprives people of the right to choose when they save, it would do little for our national savings rate, would do nothing to ease the future fiscal burden of NZ Super unless NZ Super were means-tested, and might not even help then if the Government felt obliged to offer subsidies to persuade people to sign up for a compulsory scheme.

So there you have it, economists do agree!

The efficiencies of central planning

John Taylor writes at this blog Economics One:

That’s why I was so interested in Paul Gregory's recent blog about this summer’s grain export ban in Russia. It’s a current event well worth telling students about. After the damage from the heat to Russia’s grain crop, Prime Minister Putin imposed a ban on grain exports. But as Paul Gregory shows the reason the story is worth telling is that Russia is now an exporter of grain. In contrast the Soviet Union actually had to import grain from the United States and other countries, because of the inefficiency of the collective farms and misallocation of resources under central planning. Recall that President Carter put an embargo on U.S. exports of grain to the Soviet Union, using it as a lever to get the Soviet’s to leave Afghanistan.

In the years before the Russian Revolution, Russia was an exporter of grains. Ukraine was considered the breadbasket of Europe. Now after the collapse of the Soviet Union, Russia and the Ukraine are exporting again. So this fall the inefficiencies of central planning in the Soviet Union can be explained with a current event after all.

Before central planning, a grain exporter, during central planning grain importer, after central planning grain exporter again. I'm sure there is a message here somewhere .................

Savings working group

Matt Nolan at TVHE is nicer to the Savings working group than I would be. From stuff.co.nz we learn that

Mr English said the group would have a wide brief to consider how to improve national savings.

"Improving the level of national savings is the next step in the Government's programme for tilting the economy towards savings and exports,'' he said.

Well if Mr English is really worried about national savings then why doesn't he get the government to save more? But more to the point, Why is he worried about national savings? What is the problem here? What is the "right" level of savings? Are people not saving the optimal amount? If not, why not? Are they just stupid? Can one not ask:

So if the main justification for compulsory super the savings working group is that “people are too stupid to save for themselves”, how can we say that a government working group made up of these same people will be able to determine the “right” level of savings?

Or is it that the working groups knows what is good for us, whether we know it (or want it) or not?

Then there is the question of why we want be tilting the economy towards exports. As I have argued before Imports good; exports bad. This sounds all too mercantilist for me.

EconTalk this week

Mike Munger of Duke University talks with EconTalk host Russ Roberts about private and public rent-seeking. When firms compete for either private profit opportunities or government contracts, there are inevitably firms or people who spend resources but end up earning little or nothing. What are the differences, if any between these two forms of competition? How do they related to competitions that award prizes for discovering new technologies? The conversation begins with a discussion of a recent trip Munger took to Chile where he observed the current state of the Chilean bus system, a topic he has discussed in the past.

The alcohol law reform package (updated)

Overall not great, but could have been a lot worse had the government listened fully to nanny-staters like the Law Commission. From Kiwiblog:

So what is in the Government’s proposals.

1. More powers for local authorities to set a local alcohol policy which will determine locations for licenses premises, trading hours etc. This is sensible in my opinion as the needs of Wainuiomata (for example) may be very different to Courtenay Place.
2. Tighter criteria for off-licenses so only eligible are retailers where alcohol is 85% of sales or grocery stores where food is 50% of sales, or hotels/taverns – unless there are a lack of premises in the area. Again, no real issues with this.
3. Provision of free drinking water a requirement for premises which sell alcohol for consumption on the premises. At present this is a custom, not a requirement.
4. A maximum trading hours for off-licenses of 7 am to 11 pm. I don’t support this, but am glad they at least changed it from 10 pm to 11 pm. I often am doing supermarket shopping at 10 pm, so will be able to grab a bottle of wine still.
5. Maximum trading hours for on-licenses from 8 am to 4 pm. Again I don’t support this, but it is only an hour earlier than the de facto 5 am close most places have. It isn’t true nothing good happens after 4 am – ironically by that time of the night you are normally on non alcohol drinks sobering up. So forcing a closure at 4 am may in fact make things worse.
6. Rejected the proposed one way policy from 2 am. Thank goodness for that. It would have destroyed Courtenay Place as you wouldn’t be able to have outside drinking areas under such a policy. It would also have led to all sorts of problems as people can’t catch up with their friends etc.
7. Local authorities can vary the national trading hours (both shorter or longer) if they wish. So Queenstown for example might set a time beyond 4 am. However their decision can be appealed for reasonableness. I think this is good flexibility.
8. Parliament loses it exemption from liquor licensing laws.
9. Split purchase age of 18 for on-license and 20 for off-license. This will be a conscience vote. This is better than a 20/20 age but is quite deeply flawed. As one looks at the details one will still be able to supply alcohol to 18 and 19 year olds (just not sell it directly) so it will create a culture of supplying alcohol to those who can not legally buying it. You will hear more on this point.
10. Ironically 19 year olds will be able to sell alcohol in supermarkets and bottlestores, but not buy it! To be fair, currently a 17 year old can sell alcohol also.
11. Parents can continue to supply alcohol to their own children at home, or in any private setting or at certain licenses premises such as restaurants.
12. Under 18 year olds can not possess or drink alcohol in public, unless with a parent. This will be a $200 infringement.
13. Consent of a parent is needed to supply alcohol to an under 18 year old, and supply without consent can be a $2,000 fine. Long overdue – finally it is an offence to give a 14 year old a bottle of vodka.
14. The adult who supplies alcohol (with consent) to under 18 year olds must do so responsibly and supervise the consumption. Again – long overdue. This is what may have made a difference to the Kings College case.
15. The 50% increase in excise tax is rejected. Yay. I have yet to see a compelling economic analysis that the current excise tax does not cover the external costs of alcohol.
16. A minimum price regime will be considered in a year’s time once they gather data from retailers. I have some sympathy for a minimum price regime, as loss-leading on alcohol isn’t that desirable. It is a better response than an across the board excise tax increase.
17. Will be an offence to promote excessive consumption of alcohol or to advertise in a way that appeals to those under the purchase age. Also can not promote free alcohol or make purchase of alcohol mandatory for other goods and services.
18. The recommendation to have a total ban on all alcohol advertising and sponsorship has been rejected and sent back to Russia. Having said that I do think the current ASA code on alcohol advertising is ineffective and do actually support there being some sort of penalties for advertisements that breach the code. At present the only penalty is the advert gets withdrawn.
19. Makes it an offence with a fine of up to $2,000 to make a false representation of age. So having a fake ID could not be very expensive. Also an offence to lend someone your ID so they appear 20.
20. They have rejected the proposed $200 fine for people who spend the night in the cells detoxing. I like this proposal but the argument against is it would cost more to set up the fine system, than it would bring in, and also it may discourage drunk people from approaching the Police for assistance – which could lead them to more harm.
21. The Ministers of Justice and Health can ban certain products deemed undesirable such as alcoholic milk, or alcoholic iceblocks. I never knew one could get alcoholic milk!
22. RTDs to be a maximum 5% and also a maximum 1.5 standard drinks. This is also a good move, as it was the RTDs that had four or five standard drinks in them which were plastering people. At 1.5 standard drinks they actually become difficult to get too drunk off.

A few quick comments: Number 1) just means we get local nanny-staters making decisions on how we are to run our lives, rather than national nanny-staters. Is this really any better? God knows what the People's Republic of Christchurch will do with such powers! 1) and 2) look like a windfall for liquor outlets already in place. For more on this see here. Changes to trading hours just stupid. Will do nothing to control drinking and just piss-off people like me who like to shop at late hours. 6) good. 9) This effectively gives a competitive advantage to on-licenses so you will just see an change in demand away from off-licenses towards on-licenses. The total amount of drinking may not change much. And it's not clear why off-licenses should be "taxed" in this way. 15) is good. There is no compelling economic analysis that shows that the current excise tax does not cover the external costs of alcohol. In short, don't believe BERL, believe Crampton-Burgess! For more see here. 16) is stupid. A minimum price regime is just as stupid for alcohol as it is for any other product. If the price is set below equilibrium it doesn't matter and if it is set above, then supply will be greater than demand and consumers lose out. Also it will just make it easier for retailers to find ways to collude and increase prices for alcohol sales. For more see.

Update: Not PC comments here, Roger Kerr here, Keeping Stock here, No Right Turn here, The Dim Post here, Offsetting Behaviour here and Not PC again here.

Quote of the day

Bill Easterly at Aid Watch

We have a big opportunity here to educate perverts about economic development.

Well ..... ummmmmm .....errrrrrrrr .... Is this really a job for an economist?

Repugnant marrage markets

It appears that in Egypt marrying an Israeli is a repugnant transaction.

"CAIRO (AP) -- An Egyptian appeals court on Saturday upheld a ruling that orders the country's Interior Ministry to strip the citizenship from Egyptians married to Israeli women.
"The case underlines the deep animosity many Egyptians still hold toward Israelis, despite a peace treaty signed between the two countries 31 years ago.
"The Supreme Administrative Court's decision also scores a point for Egyptian hard-liners who have long resisted any improvement in ties with Israel since the signing of the 1979 peace treaty.
[...]"Saturday's decision, which cannot be appealed, comes more than year after a lower court ruled that the Interior Ministry, which deals with citizenship documents, must implement the 1976 article of the citizenship law. That bill revokes citizenship of Egyptians who married Israelis who have served in the army or embrace Zionism as an ideology. The Interior Ministry appealed that ruling.
..."In 2005, former Grand Mufti Nasr Farid Wasel issued a religious edict, or fatwa, saying Muslim Egyptians may not marry Israeli nationals, ''whether Arab, Muslim, or Christian.'' The possibility of a Jewish spouse was not mentioned.
"Mohammed Sayyed Tantawi, the late Grand Sheik of Cairo's Al-Azhar, Sunni Islam's premier institution and oldest university, has said that while marriage between an Egyptian man and an Israeli woman is not religiously forbidden, the government has the right to strip the man of his citizenship for marrying a woman from ''an enemy state.''"

(HT: Market Design)

Raghuram Rajan interview

From VoxEU.org comes this interview in which Raghuram Rajan of the University of Chicago talks to Romesh Vaitilingam about Rajan's new book ‘Fault Lines’, in which he outlines the deep systemic problems in the world economy that threaten further financial crises – high US inequality, patched over by easy credit; excessive stimulus to sustain job creation in times of downturn; and the choices of Germany, Japan, and China to focus on export-led growth rather than domestic consumption.

The Horwitz challenge

At EconLog Bryan Caplan puts forward what he calls The Horwitz Challenge.

On Facebook, Steve Horwitz writes:

The next time you're engaged in a political discussion with someone who has very strong views different from your own, ask them if they can name two famous thinkers or politicians whose politics are opposed to theirs who they also think are very smart and genuinely concerned with making the world a better place. If they can't, it's not clear they are able to grant the good faith such discussions should have.

For me John E. Roemer and Jon Elster. What about yours?

For Adam Smith fans

From Edinburgh Festivals comes this, Interview: Nicholas Phillipson - 'This is Adam Smith as mountain gorilla' This is a report on an interview with Nicholas Phillipson, author of a new intellectual biography of Adam Smith: Adam Smith: An Enlightened Life by Nicholas Phillipson which is published by Allen Lane, London.

A very good question

Over at TVHE Matt Nolan asks,

So if the main justification for compulsory super is that “people are too stupid to save for themselves”, how can we say that a government made up of these same people will be able to determine the “right” level of savings?

The question is a good one but I would say it is the question you should ask about many government interventions in the economy. The "people are stupid" reasoning lies behind many government actions and thus Matt's question applies more generally. Add to this the fact that the people themselves will have better information about their situation and incentives than those in government and you really do have to ask how is the government to know what is right.

The Fed can't solve our economic woes

is what Gerald P. O'Driscoll Jr. tells us in the pages of the Wall Street Journal. O'Driscoll opens by saying,

A policy of low interest rates is a textbook response of monetary authorities to the economic weakness brought on by deficient aggregate demand. The policy is justified by pointing to various ways in which money can promote economic activity—including by stimulating investment, discouraging savings, encouraging consumption spending, and allowing individuals to lower their debt burdens by refinancing existing debt. While these effects are theoretically plausible, this textbook policy does not apply to our present situation.

He goes on to note,

First, our lingering crisis and economic weakness was brought on not by a Keynesian failure of effective demand, but by a Hayekian asset boom and bust. Second, the textbook case for low interest rates treats the policy as one of benefits without costs. No such policy exists.

The housing boom and bust was a classic asset bubble, such as occurred frequently in the 18th and 19th centuries. Easy money working through cheap credit made long-term investments appear more valuable than would otherwise have been the case. In most cases, investment booms drive industries with sound fundamentals. When the cheap credit keeps flowing, however, fundamentals are forgotten and the process evolves into a mania (to use the old-fashioned term). What cannot be sustained will not be, so the boom ends in a crisis.

In these scenarios, the collapse of demand is a consequence—not the cause—of the bust. Policies to address crises must get cause and effect right.

and

The financial panic and ensuing great recession was a classic balance-sheet recession. As balance sheets shrank in value, demand collapsed. There was a liquidity crisis as well, centered around Lehman's collapse, but the driving force was collapsing balance sheets, impaired capital values and, for many, insolvencies.

The declines in home values, investor portfolios and 401(k) plans, and the uncertainties surrounding retirement plans, have all had a big impact. The solution lies in restoring balance sheets. For financial firms, that means raising capital. For consumers and businesses alike, that means saving more of their reduced incomes.

He continues,

What is in short supply is not liquidity, but savings. The Fed can supply the former but not the latter.

and goes on to say,

[...] historically low interest rates—about which the Bank of International Settlements, the bank for central banks, sounded a warning in its 2009/2010 annual report—will inevitably distort economic activity, as they did during the housing boom. Low interest rates slow the process of restoring balance sheets by keeping asset prices artificially inflated. They also penalize saving, thus prolonging the process of rebuilding balance sheets.

O'Driscoll ends by saying,

Markets are resilient, but their recovery can be impeded by bad policies. At present, both monetary and fiscal policies are on the wrong track.

Add to this the moral hazard problems that the handling of the crisis has created and we can rest assured we're not about to see an end to current problems any time soon.

EconTalk this week

David Kennedy of Stanford University and the author of Freedom from Fear talks with EconTalk host Russ Roberts about the Great Depression and its political and economic relevance. Kennedy talks about the economic policies of Hoover and Roosevelt, and how the historical narrative was shaped and evolved over the decades. The conversation concludes with Kennedy's thoughts on the nature and value of history.

Compare this with an earlier EconTalk on the depression: Higgs on the Great Depression.

Less liquor stores means ........

monopoly profits! According to this article at stuff.co.nz

A long-forgotten bill that lets anyone object to liquor stores being built in their neighbourhood will make a timely return to parliament this week.

Does anyone really think this will reduce the amount of alcohol consumed? If people want to buy alcohol they will just have to drive a little bit further to do it, that's all. That is unlikely to stop them drinking.

What it will do is make the existing liquor stores very, very happy as they now have a great way to reduce competition. Less competition just means more profits for the stores lucky enough to be in place now. The big liquor chains, like Liquorland and Liquor King, must love this bill. They have stores in place already in the areas they want them, and now they could have a huge barrier to entry for anyone want to challenge their dominance of the market. All they have to do is object themselves, or pay (under the table) someone else to do it for them and at the very least they can slow down the approval of the granting of a new licence for a competitor. With luck they could stop it altogether. I wonder what the Commerce Commission will have to say about this. This has to be one of the most anti-competitive ideas put forward in years.

The Stuff article also says,

It was supported on a conscience vote by every National Party member at its first reading - only Act Party MPs Rodney Hide and Heather Roy voted against it.

Well done Rodney and Heather.

Thomas Sowell interview

In this video Judge Andrew Napolitano interviews the economist Thomas Sowell on FreedomWatch.

Why is so much parking free?

A question asked by economist Tyer Cowen in this piece in the New York Times. Cowen writes

[...] 99 percent of all automobile trips in the United States end in a free parking space, rather than a parking space with a market price.

Cowen goes on to say,

Is this a serious economic issue? In fact, it’s a classic tale of how subsidies, use restrictions, and price controls can steer an economy in wrong directions. Car owners may not want to hear this, but we have way too much free parking.

Higher charges for parking spaces would limit our trips by car. That would cut emissions, alleviate congestion and, as a side effect, improve land use.

The basic problem is that there isn't a market in parking so that we don't have prices to guide our parking decisions the way we so with most goods and services. Cowen continues,

If developers were allowed to face directly the high land costs of providing so much parking, the number of spaces would be a result of a careful economic calculation rather than a matter of satisfying a legal requirement. Parking would be scarcer, and more likely to have a price — or a higher one than it does now — and people would be more careful about when and where they drove.

The subsidies are largely invisible to drivers who park their cars — and thus free or cheap parking spaces feel like natural outcomes of the market, or perhaps even an entitlement. Yet the law is allocating this land rather than letting market prices adjudicate whether we need more parking, and whether that parking should be free. We end up overusing land for cars — and overusing cars too.

So once again not using the market lends to inefficient outcomes.

Most courageous person in academia?

Or so asks Nicolai Foss over at the Organizations and Markets blog of the author of this paper:

Straight is Better: Why Law and Society May Legitimately Prefer Heterosexuality
by George W. Dent Jr. of the Case Western Reserve University School of Law

Abstract:

America is embroiled in a culture war over homosexuality. The homosexual movement demands the end of “heteronormativity” - the social and legal preference for heterosexuality. It insists that “Gay Is Good” - just as good as heterosexuality. This article presents a defense of heteronormativity; it argues that straight is better. In particular, it argues that naturally conceiving, bearing and raising children is intrinsically good for parents; that it is both intrinsically and instrumentally good for children to be raised by their biological parents who are married to each other; and that traditional marriage is both intrinsically and instrumentally good for women and men. Because of the unique benefits of traditional marriage, it is also beneficial to society. Because of these benefits, society may legitimately favor heterosexuality (e.g., in public education), although it may not punish other forms of sexual behavior that are not harmful.

Unlikely to be the position that a classical liberal would take on this issue.

Profits are a good thing

Thanks to BK Drinkwater for point me towards this article from the New Zealand Herald. In it Ralph Norris argues that Kiwibank's current capital constraints are its own fault because it had not generated enough capital internally from its own profits. The article states,

Kiwibank had essentially undercharged for too long and was now reaping the fruits of not being profitable enough, Norris told Radio Live's Andrew Patterson.

"The situation for any business is that if you're undepricing your products then you're not generating enough capital to grow your business.

"There's always the balance of getting your pricing right in order to make sufficient profit to generate capital within the business," Norris said in the interview pre-recorded last week in Sydney.

In other words if you don't maximise profit you can not grow your business. This of course may not be a problem for Kiwibank as it can steal the capital it needs from the taxpayer, assuming the government is that stupid. Kiwbank needs to be put on a truly commercial footing where it can't get capital from the taxpayer. How to bring this about? Privatise the bank.

Later in the article Norris is quoted as saying,

"Kiwibank introduced a more parochial effect into the market. New Zealanders looked at Kiwibank as a New Zealand institution and the other banks have had to clearly show that they are committed to the NZ market and New Zealanders," Norris said.

That is to say, Kiwibank has introduced a xenophobic element into the banking industry.

Someone said it

I came across a book "you can't yell "get in behind" to a kiwifruit", published in 1985, yesterday. It contains a number of examples of wisdom from bureaucrats, newspapers and politicians.

The Karori News tells us:

The public is to be given the opportunity to study the City Council's proposals for sewage disposal at Moa Point with an extensive display in the foyer of the Rates Office in the Council's Wakefield Street administration building.

I've always thought local politics was a pile of ......

One for the lawyers. The NZ Law Journal tells us

The cost of providing many of the services performed by the Department lags behind what it costs to provide them.

The Bay Sun points out that there seems to be a difference between "closed" and "officially closed".

The east end of Durham Street between Hamilton and Harrington Streets is officially closed. However, the road will remain open to traffic and normal traffic laws still apply to its use.

There are also traffic problems in Southland. From the Southland Times we learn

There would be give way signs at each approach so that once a vehicle entered the intersection it would stay there until it left.

And for the economists among us, The Economist notes

New Zealanders can count themselves lucky that they were rich to begin with. If theirs had been a developing country, the Muldoon Treatment would have made it one of the world's disasters.

and from the then Social Credit finance spokesman Les Hunter comes this,

The financial policy is being completely rewritten without changing the underlying principle.

What is it with journalists in this country? 2

Matt Nolan at TVHE points us to this piece of economic genius from Chris Barton in the Herald:

Those who call for a cost-benefit analysis of the plan don't understand the internet

No, those who call for not doing a cost-benefit study don't understand cost-benefits studies. As Matt notes,

His implicit point is that there are benefits in the future, and there is uncertainty around how these benefit will pan out – while this is true, it makes a proper cost-benefit analysis more important, not less. Bleh.

Bleh indeed. Surely it is not too much to ask for a journalist to actually learn about cost-benefits studies before talking about them.

EconTalk this week

Robert Laughlin of Stanford University and the 1998 co-recipient of the Nobel Prize in Physics talks with EconTalk host Russ Roberts about energy use and the future of the earth's climate. Drawing on his forthcoming book on energy, Laughlin predicts that we will continue to use cars and planes and electricity long after coal and petroleum are exhausted and speculates as to how that might play out in the future. The conversation concludes with discussions of other concerns of Laughlin's--the outlawing via legislation and taboo of certain forms of knowledge, and the practice of reductionism rather than emergence in the physical sciences

Were pirate ships firms?

In his recent book, The Invisible Hook: The Hidden Economics of Pirates (Princeton University Press, 2009), Peter Leeson argues that pirates were firms - or firm-like organisations, at least. In a new paper, Bylund (forthcoming), Per L. Bylund takes issue with this. Bylund writes,

But no succinct reasons for the assumption that pirates were entrepreneurs (in the layman sense) are given, so the reader is expected to accept the author’s judgment. This is problematic since the economic theory and illustrations provided in the book show only how pirate institutions supported their organization and purpose—not necessarily that the organization entailed a firm. Undeniably, that the pirates were formally and even contractually organized, and their collective endeavor motivated by profit, are certainly common and even necessary traits of firms. But they are not sufficient conditions.

Bylund goes on to say,

Contrary to Leeson’s view, pirate organization seems strikingly similar to that of traditional cooperatives

Bylund seems to see cooperatives as being something different from firms (tell that to Fonterra!!), in particular different from investor-owned organisations. But as Henry Hansmann argues all forms of businesses can be as cooperatives, even investor-owned ones:

In fact, the conventional investor-owned firm is in a sense nothing more than a special type of producer cooperative-a lenders' cooperative, or capital cooperative.

So I don't see why even if pirates were a cooperatives this stops them being a firm. I tend to agree with Leeson in his reply to Bylund, Leeson (forthcoming), when he writes,

I am fine with calling pirate crews “cooperatives” provided that we recognize that pirate cooperatives organized team production for the purpose of making profit — i.e., as long as we consider a “cooperative” a variety of firm rather than a separate category of economic organization. I do not care much what we call pirate crews. But if we want to understand them, we cannot ignore their fundamentally firm-like features.

If I wanted a reason to say pirates were not firms it would be that they didn't produce for outsiders. Normally when we think of an organisation as a firm, that organisation produces some good or service which is consumed, at least in part, by people outside the firm. But this isn't true of pirates. Pirates "produced" for their own consumption. There are two issues here: one is that they didn't really produce anything at all, they just redistributed wealth and second, there were no third party receiving the redistributed wealth. It could be argued that many charities main activity is to redistribute wealth but they redistribute it to third parties, not themselves (or so we hope).

So the lack of outside consumers seems a more arguable reason for thinking that pirates were not firms.

• Bylund, Per (forthcoming). `Piracy, Inc.—on the bearing of the firm analogy to pirate organization', Review of Austrian Economics.
• Leeson, Peter T. (forthcoming). `Pirates', Review of Austrian Economics.

The university website

This is soooooooo true. From xkcd,

What is it with journalists in this country?

I have just come across this wonderful piece of economic wisdom from Colin James,

Is it GDP per capita - gross domestic product (GDP, or total output) divided by population? If so, which GDP? Australia averages three different GDPs (production, income and expenditure) for its commonly used figure. New Zealand uses production only for its commonly used figure.

The production, income and expenditure versions of GDP are all the same, they are designed to be! Surely it is not too much to ask for a journalist to actually check the definitions of GDP before talking about it.

The usefulness of macro

There is an interesting discussion going on over at TVHE in which Matt Nolan puts up a defence of macro forecasters, see here and here. Read the comments on both posts, especially those myself, of course!, and Eric Crampton. My basic position would be that macro can tell us that things are happening but explaining those things is in many cases a micro issue. I think the best defence Matt can put up is the "market defence". If someone is willing to pay for macro forecasts then they are showing that they think they add value. If they didn't think that, forecasters would go out of business.

EconTalk last month

David Brady of Stanford University talks with EconTalk host Russ Roberts about the state of the electorate and what current and past political science have to say about the upcoming midterm elections. Drawing on his own survey work and that of others, Brady uses current opinion polls to predict a range of likely outcomes in the House and Senate in November. He then discusses the role of recent health care legislation in the upcoming election as well as Obama's approval ratings. The conversation concludes with Brady's assessment of how Congress might deal with the demographic challenge facing entitlement programs.

Robert Service of Stanford University's Hoover Institution and the University of Oxford talks with EconTalk host Russ Roberts about the life and death of Leon Trotsky. Based on Service's biography of Trotsky, the conversation covers Trotsky's influence on the Russian Revolution, his influence on policy alongside Lenin, his expulsion from Soviet Union in 1928 and his murder in 1940 by Stalin's order.

John Taylor of Stanford University talks with EconTalk host Russ Roberts about the state of the economy. Is the economy recovering? What policies have helped and hurt? Taylor gives his views on both monetary and fiscal policy including the stimulus package passed last year, and current Fed policy. The conversation closes with a discussion of the global economy, particularly Poland and its recent success in avoiding recession.

Paul Gregory of the University of Houston and a Research Fellow at Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about Nikolai Bukharin's power struggle with Stalin and Bukharin's romance with Anna Larina, who was 26 years younger than Bukharin. Based on Gregory's book, Politics, Murder, and Love in Stalin's Kremlin, the conversation explores the career and personal life of Bukharin and how his career and personal life intersected. Bukharin was one of the key founders of the Bolshevik Revolution that led to the creation of the Soviet Union. In the late 1920s, he disagreed with Stalin's policy of collectivization. Stalin ruthlessly pursued him, eventually had him arrested, tried and convicted in the one of the infamous Show Trials, and executed. Anna, his wife, is then sentenced to the Gulag and later exiled. The power and poignancy of the story lies in Bukharin's refusal to believe that his old friend Stalin is out to kill him. Gregory also discusses Bukharin's economic policies and whether Stalin or someone like him was inevitable.

Farm sales to foreigners

David Farrar makes two points about foreigners buying farms in New Zealand.

Foreign investment is generally beneficial to New Zealand. If you restrict foreign owners from purchasing land in NZ, there are two potential negative impacts:

1. The current owner of the land is unable to sell the land for as much as they otherwise would have got. This means less wealth in NZ.
2. The foreign owner of the land, as they valued it more highly, may be able to put it to better economic use (as they need higher returns to cover the higher capital) and this can contribute to a more efficient economy.

He is right on both points. I'm not sure why people think selling land to foreign investors is so bad. Do they think these evil foreigners are going to dig the land up and take it back to their homes in their suitcases? Also why are the people who want to stop foreigners buying "our" land also not trying to stop New Zealanders buy foreign land? It's just economic xenophobia.

Catching Australia?

Matt Nolan writes over at the TVHE blog:

However, there is one place where I disagree with NRT AND John Key – “catching Australia” is a managerial consultants view of policy, and doesn’t make sense on either economic or social policy grounds. (Comments here, here, and here).

Matt makes a good point, there is little that the government can do to really help increase New Zealand's productivity. They can do bad things to slow down our already slow rate of productivity growth but the good things that a government can do have been done, that's what helped get us into the group of high income countries. I have made comments on this before here.