Leeson on reason.tv (updated)

Peter Leeson, author of "The Invisible Hook: The Hidden Economics of Pirates", sits down with Reason.tv's Nick Gillespie to discuss self-interested pirates, the myths of piracy, and the intersection of modern economic policy and the hidden economics of pirates.

Update: Pirate Economics 101: A Q&A With Invisible Hook Author Peter Leeson from the Freakonomics blog.

Interesting blog bits

1. Homepaddock asks Do you want a sermon with that? It appears customers are being charged extra for something that will be better for the environment and then the company is using the extra money to contribute to "environmental causes". If this is a good policy for bags, why not give the majority of the profits from everything to environmental causes because everything they sell will impact on the environment?
2. Eric Crampton on Offsetting Behaviour: condom use edition. Condoms make you feel safer, so you take more risks. Always beware the offsetting behaviour.
3. Mike Sykuta on GM vs. TCE: Another “Block Upon Block”? General Motors seemingly plays the foil against Transaction Cost Economics again.
4. Matt Nolan on Tourism as low skilled and comparative advantage. May be we should do just what we are good at doing.
5. Nicholas Bloom says we are Halfway to recovery. This column says that the policy response to the financial crisis seems to have been adequate – we will not slip into another Great Depression. It argues that growth will resume by late 2009, as uncertainty is subsiding due to global cooperation. Maybe, may be not.
6. Market Power on If a Private Good Needs to be Subsidized, It's a Bad Investment. Yes, but why don't politicians get this?

How to prevent piracy

The problem of piracy is much in the news these days. The freeing of American ship captain Richard Phillips from a band of Somali pirates recently has bought the problem to the attention of the media, and bloggers. One question that many commentators have turned their attention to is what can be done to control and prevent future piracy. This question also lets me bring together my discussion of the old school of piracy, my discussion of the new pirates and my discussion of the tragedy of the commons. It may not be obvious that these are connected to how to deal with the current piracy problem but according to Peter Leeson they are.

Peter T. Leeson is BB&T Professor for the Study of Capitalism at George Mason University and author the new book, "The Invisible Hook: The Hidden Economics of Pirates" a discussion of the old school of piracy, and why it wasn't all bad. In a recent article at nationalreviewonline, Leeson argues Want to Prevent Piracy? Privatize the Ocean. Leeson writes

One suggestion that isn’t being considered, but should be, is to privatize the seas — especially those off Somalia’s coast. As the old adage (at least among economists) goes, “What nobody owns, nobody takes care of.” This is as true for oceans as it is for anything else. Piracy is just one manifestation of nobody taking care of what nobody owns when that “what” is the sea.

So who "owns" the sea now? Short answer, no one, which is why you get the tragedy of the commons type problems. Leeson goes on,

Governments exercise a kind of de facto ownership over the waters off their coasts; states have jurisdiction over, and thus control, what goes on in within so many miles of their shores. But there’s no government in Somalia to control what goes in Somalia’s would-be territorial waters. And in any event, pirates have taken to plying their trade 200-plus miles off the coast — watery territories nobody owns.

Predictably, the absence of ownership of these waters means no one has had much incentive to prevent activities that destroy their value — activities such as piracy. The result is a kind of oceanic “tragedy of the commons” whereby, since no one has an incentive to devote the resources required to prevent piracy, piracy flourishes. In contrast, if these waters were privately owned, the owner would have a strong incentive to maximize the waters’ value since he would profit by doing so. That would mean suppressing and preventing pirates.

Property rights are the answer to the tragedy of the commons. Lesson concludes his article by saying,

Rather than trying its hand at Somali state building, the international community should try auctioning off Somali’s coastal waters. According to some Somali pirates, greedy foreign corporations are exploiting valuable resources in these waters, which is allegedly why they’ve resorted to piracy (the large ransoms earned from pirating are a happy but unexpected byproduct of pursuing social justice, I suppose). If this is right, Somalia’s coastal waters should be able to fetch a handsome price. The international community can use the proceeds of the auction for humanitarian assistance in Somalia, or put it in a trust for Somalia’s future government, if one ever emerges. The “high seas” should be similarly sold. It’s not so important where the proceeds go. The important thing is that the un-owned becomes owned.

Establishing private property rights where they don’t currently exist is the solution to about 90 percent of world’s economic problems. Piracy is no exception.

Leeson's suggestion isn't one you see being discussed as a solution to the piracy off Somalia's coast, its too radical for most people, but may be it should be. At least it would get the incentives right for protecting shipping in this area.

Divided we stand ... and grow

Recently I commented on the fact that one thing missed in the debate over the Auckland supercity was the effect it would have on competition between cities. Over at Offsetting Behaviour Eric made the same point and expanded on the idea by noting that voice is nice, but the threat of exit is a more powerful check on local governments' activities. For the case of local government this was explained in the 1956 paper A Pure Theory of Local Expenditures by Charles M. Tiebout. In short, competition among jurisdictions for residents forces them to run their operations more efficiently; mobility across jurisdictions also allows matching between consumer preferences and government service bundles. So, if the rates in one of the local councils are getting steep relative to the services provided by the council, moving to the other side of town can help.

Now the same basic reasoning can be applied at a higher level of aggregation, that of the country. Competition for taxes, in a multiple state system, forces rulers to provide relatively more secure property rights. As a result, the states system encourages faster capital accumulation and growth. This is the idea that Cem Carayalcin uses to help explain the faster rate of economic growth in Europe compared to the rest of the world since around 1500.

Carayalcin's paper is Divided We Stand, United We Fall: The Hume-North-Jones Mechanism for the Rise of Europe, International Economic Review, Vol. 49, No. 3, August 2008, pp. 973-997, and the title stays much. The fact that Europe was divided and thus there was competition between states for tax actually helped it.

Carayalcin points out that the "great divergence" between Europe and the rest of the world occurred relatively recently - post around 1500. He then asks, What enabled Europe, with all its laggards, to dominate the previously successful Eastern economies? His article emphasizes one important mechanism, highlighting the contrast between the European states system and Eastern empires. Political competition for a mobile tax base in a states system forces rulers to expropriate less, to provide relatively more secure property rights and to provide relatively more public services to their footloose subjects. Rulers who do not face such competition would be more likely to choose higher expropriation rates relative to what they provide in return. By effectively limiting the "exit" options of the ruled, an empire rewards its ruler with a captive tax base that can be subjected to higher levels of expropriation. As a result, the states system encourages faster capital accumulation and growth.

Thus in the Carayalcin argument, as in the Tiebout model, the threat of exit, which is possible because of competition between states or cities, is a powerful check on a governments' activities, whether this be at the local or country level. Competition helps discipline a government's activities and thus helps induce the conditions necessary for growth.

The dangers of the drinking age (updated)

For the past 20 years, the U.S. has maintained a Minimum Legal Drinking Age of 21 (MLDA21). Recently more than 100 college and university presidents signed the Amethyst Initiative, a public statement calling for "an informed and dispassionate public debate over the effects of the 21-year-old drinking age." The reaction of many of those who support MLDA21 was to decry the statement for not recognizing that the MLDA21 saves lives by preventing traffic deaths among 18 to 20-year-olds. And who can argue with that?

Actually economists Jeffrey A. Miron and Elina Tetelbaum can. In a recent article at Fobes.com Miron and Tetelbaum write on The Dangers Of The Drinking Age. They note that the federal government in the US pressured states to raise the drinking age to 21 and then ask, So why didn't the move save lives? To understand why lives have not been saved, Miron and Tetelbaum start by explaining that a bit of history is useful. They write,

When the U.S. repealed the prohibition of alcohol in 1933, states were free to legalize, regulate or prohibit access to it as they saw fit. Most legalized but regulated it. In particular, 32 states adopted an MLDA of 21, while 16 chose an MLDA between 18 and 20. With few exceptions, these disparities persisted through the late 1960s.

Between 1970 and 1976, 30 states lowered their MLDA from 21 to 18. These changes coincided with other national efforts to enfranchise youth, exemplified by the 26th Amendment, which granted those 18+ the right to vote.

In 1984, however, Congress passed the Federal Underage Drinking Act (FUDAA), which withholds transportation funding from states that do not have an MLDA21. The justification given for the act was that higher MLDAs would result in fewer traffic fatalities.

By the end of 1988, after passage of the FUDAA, all states adopted an MLDA21. Several states had adopted an MLDA21 before the FUDAA, but the other states were less eager to change. Several passed MLDA21 legislation but set it up for repeal if the FUDAA were held unconstitutional. Others enacted "sunset provisions" in case federal sanctions expired. But when the Supreme Court upheld the FUDAA, states faced a strong incentive to maintain an MLDA21.

In recent research Miron and Tetelbaum compare traffic fatality rates in states before and after they changed their MLDA from 18 to 21. But in contrast to all earlier work they examined separately the impact in states that adopted an MLDA21 on their own and those that were coerced by the FUDAA. The Miron and Tetelbaum research shows that states that raised the drinking age to 21 since 1984, in response to FUDAA, enjoyed no statistically significant decrease in traffic fatalities for 18- to 20-year-olds. They point to the decades-long, steady decline in the rate of traffic fatalities (deaths per billion passenger miles), a decline due in large part to safer cars, improved driver education and better medical technology. Raising the drinking age did little or nothing. Miron and Tetelbaum explain that,

The results are striking. Virtually all the life-saving impact of the MLDA21 comes from the few early-adopting states, not from the larger number that resulted from federal pressure. Further, any life-saving effect in those states that first raised the drinking age was only temporary, occurring largely in the first year or two after switching to the MLDA21.

Our results thus challenge both the value of the MLDA21 and the value of coercive federalism. While we find limited evidence that the MLDA21 saves lives when states adopted it of their own volition, we find no evidence it saves lives when the federal government compels this policy.

This makes sense if a higher MLDA works only when state governments can set a drinking age that responds to local attitudes and concerns--and when states are energized to enforce such laws. A policy imposed from on high, especially one that is readily evaded and opposed by a large fraction of the citizenry, is virtually guaranteed to fail.

The major implication of these results is that the drinking age does not produce its main claimed benefit. Moreover, it plausibly generates side effects, like binge drinking and disrespect for the law--the very behavior that events planned for this month's alcohol awareness theme are designed to deter.

Offsetting behaviour.

(HT: Greg Mankiw)

Update: Matt Nolan discusses the article at TVHE here.

Does God believe in Jeff Sachs?

How can you not read a posting with a title like that?! The posting comes from William Easterly's blog Aid Watch. Easterly writes that although an Episcopalian he recently had a severe crisis of faith. When he attended a Trinity Episcopal Church in downtown Manhattan there was one part of the liturgy the congregation was reciting in unison that caused him doubts.

The problematic prayer in the liturgy was: “The world now has the means to end extreme poverty, we pray we will have the will.”

Something tells me it may take a bit more that just praying to end world poverty. Easterly goes on

The first part is apparently meant as a statement of fact, which economists currently argue about (who is the world? Whose are the means? How does “the world” with those “means” actually end poverty?) The whole prayer seems to presume a particular approach to poverty: collective global action, which again economists argue about as being the right or the wrong approach to alleviate poverty. So why is God taking sides in a debate among economists?

This prayer was the brainchild of an Episcopal priest named Jay Lawlor, who prior to his ordination was an economist working for 10 years with – you guessed it – Professor Jeffrey Sachs. He now is the head of something called Millennium Congregations, which has an even stronger statement on its flyer:

At some point in the not too distant future benign neglect and callous disregard for the world’s extremely poor (living on under $1 a day) will become a crime against humanity and a sin against the Creator. This is the time to pray, advocate, and to take action. Promises have been made, and the time for debate is over because solutions now exist.

This is really bad news: having a debate with Jeff Sachs is now a sin against God.

Maybe this all happened after Jeff’s eloquent sermon at the Washington National Cathedral on September 11, 2005, where he was billed as “The Prophet of Economic Possibilities for the Poor.”

Somehow I don't think the time for debate is over, if the so-called solutions that now exist are the solutions of Jeffrey Sachs. On the contrary I think there is much to debate, the "solutions" that Sach puts forward have been questioned by many development economists, including Bill Easterly, and far from being the time to end debate it is the time to engage in it most strongly. The questions being asked are too important for debate to be stopped, by God or anyone else.

Cheap Oil Forever?

This is not a posting to be read by those over at The Standard. I picked up on the following Newsweek article "If It's In the Ground, It Can Only Go Down" via the Carpe Diem blog.

One idea still has the power to capture imaginations and markets: it is that commodities like oil, copper, grains and gold are all destined to rise over time. Lots of smart people believe that last year's swoon in commodities prices represented a short pause in a long-term bull market.

It's a view rooted in powerful and real trends, like the growth of China and India, the decline in global reserves (many of the world's biggest and best oilfields are tapped out), fears over resource nationalization (independent oil firms now control only 20 percent of global reserves) and long-term underinvestment in energy and agriculture, which hampers supply.

Yet the fact is that the world has faced all these issues before, and for the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices).

Bank Credit Analyst, a research firm based in Montreal, has data showing major industrial commodity prices are 75% below where they were in the year 1800, after adjusting for inflation. Despite all the worries over "peak oil," the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there's usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack.

The real price of oil today is now at the same level as in 1976 and, before that, in the 1870s, when oil was first put to mass use in the United States. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. The experience of the 1980s is instructive in the current context as well.

Japan and Europe continued to grow strongly in the 1980s, and yet oil consumption remained essentially flat through that decade as both the regions strived to achieve better fuel efficiency and switched to alternative sources of energy, such as nuclear power. Similarly, 90 percent of the growth in new oil capacity since 2004 has come from biofuels, synthetic oil and natural-gas liquids. As countries get richer, their per capita consumption of commodities declines. It's a myth, then, that the boom in China and India will inexorably drive up oil and other commodity prices.

At some point, of course, commodities will spike again, but only temporarily. To date, the centuries-old slide in prices has been marked by long bear markets and short bull runs. Data from CSFB shows that the average bull market in oil has lasted from four to nine years, and the average bear market from 11 to 27 years. The bull market that ended last summer saw prices rise tenfold over nine years, mirroring the duration and magnitude of the previous bull market, which ended in 1979 (see chart above). That was followed by a bear market that lasted 20 years. If history is any guide, we're only at the beginning of another long one.

Why support private property?

Over at Defective Equilibrium, Tom M puts forward the interesting argument that

It is often assumed by defenders of largely unregulated private property that theirs is the system that takes liberty the most seriously - indeed the system with the most freedom of agency.

and

However I think many people forget to consider the flip-side, that private property is in itself a highly coercive institution. This is highlighted in the Sidgwick quote given at the start. Consider two situations. In Country A, the Government passes a law prohibiting people from boarding trains on Sunday. This is obviously a restriction on people's liberty, presuming that they were choosing to board trains on that day previously. In Country B however the Government is more laissez-faire and makes no such law. Despite this, the owner of the trains decides that in accordance with his religious principles, his trains will not run on Sunday.

From the perspective of the passengers of the train, the situation is identical (assume that the citizens themselves have identical demand for the trains between the two countries). They would like to ride the trains and are unable to do so because someone has told them that they cannot.

It seems to me that it is inconsistent to claim that one of these situations is an abrogation of liberty and one is not. However my general claim (and also Sidgwick's) if were actually concerned with the maximisation of individual liberty, we would not support the institution of private property. Indeed the very principle of private property is that the owner of the property is permitted to restrict the liberty of others to do what they want with it!

In a comment to this posting I argued, with regard to the train example,

In situation A the government has a monopoly on power, it can stop all people boarding all trains on Sunday, a private train owner can only stop people boarding his trains on Sunday. If there is competition in the transportation services then such an owner would loose business to other suppliers and consumers will not suffer much. On the other hand if there isn't competition then the problem is monopoly, not private property.

To expand on these points. If we are in a world without private property, what property rights are there? Is all property owned by the government? This has been tried and failed. Government ownership of the means of production has not shown itself as a means to more liberty for the average citizen. In fact the opposite, in countries where the state did own the means of production liberty was less than in private property owning countries. Where there are no guarantees of property there are no limits to state authority and no regulatory bodies of law and hence no guarantee of individual liberty or "civil rights". Historian Richard Pipes makes this argument in his book "Property and Freedom".

Of course it could be argued that a non-private property owning society is also a non-state owning property society in that all property is owned by everyone, in some sense. But economists would recognize that this would just be an example which would lead to the tragedy of the commons. Think of a groups of herders sharing a common parcel of land (the commons), on which they are all entitled to let their cows graze. It is in each herder's interest to put as many cows as possible onto the land, even if the commons are damaged as a result. The herder receives all of the benefits from the additional cows, while the damage to the commons is shared by the entire group. If all herders make this individually rational decision, however, the commons are destroyed and all herders suffer. As Ludwig von Mises wrote concerning the problem:

If land is not owned by anybody, although legal formalism may call it public property, it is used without any regard to the disadvantages resulting. Those who are in a position to appropriate to themselves the returns — lumber and game of the forests, fish of the water areas, and mineral deposits of the subsoil — do not bother about the later effects of their mode of exploitation. For them, erosion of the soil, depletion of the exhaustible resources and other impairments of the future utilization are external costs not entering into their calculation of input and output. They cut down trees without any regard for fresh shoots or reforestation. In hunting and fishing, they do not shrink from methods preventing the repopulation of the hunting and fishing grounds.

Under common ownership of all property you would just get a tragedy of the commons writ large. The answer to this problem? Private property rights. If you convert common good into private property, this gives the owner an incentive to enforce its sustainability. Harold Demsetz defines communal ownership as

[...]a right which can be exercised by all members of the community [...] The community denies [...] to individual citizens the right to interfere with any person's exercise of communally-owned rights. Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner's private rights [...].

and goes on to note the problem and its solution,

Suppose that land is communally owned [....] If a person seeks to maximize the value of his communal rights, he will tend to overhunt and overwork the land because some of the costs of his doing so are borne by others. The stock of game and the richness of the soil will be diminished too quickly [...]

If a single person owns the land, he will attempt to maximize its present value by taking into account alternative future time streams of benefits and costs and selecting that one which he believes will maximize the present value of his privately-owned land rights. [...] It is very difficult to see how the existing communal owners can reach an agreement that takes account of these costs.

Communal ownership is unlikely to lead to a society where liberty is maximized, in fact its unlikely to result in much of a society at all and there are strong incentives for such a society to develop into a private property society.

So private property may restrict peoples' liberty but it will also protect these same people from the monopoly power of the state and leads to the best incentives for the efficient use of property.

Robert Merton on finance

From MIT World this video is of a lecture by Robert C. Merton on Observations on the Science of Finance in the Practice of Finance. The lecture was given on March 5, 2009.

Running Time: 1:29:37

Modern day pirates

In an article on the BBC website, the BBC News website's world affairs correspondent Paul Reynolds asks Could 19th-Century plan stop piracy? At one point in the article Reynolds notes,

And the UN Monitoring Group on Somalia issued a damning report last December in which it castigated ship owners for paying ransom.

"Exorbitant ransom payments have fuelled the growth of [pirate] groups," it stated.

And there is a logic to the UN group's report. Supply curves slope upwards, the more you pay for something the more you get supplied. As far as pirates are concerned, the more money they can make, the more pirate "firms" will enter the market. So if companies pay large ransoms they could be making the piracy problem worse.

Clearly companies want their ships and crews back and are willing to pay to get them back. But while paying up will get a given ship back it could also increase the likelihood of more ships being taken in the future. Basically paying a ransom, while rational for a single company, conveys a negative externality on all other ship owners since it increases the chance of other ships being taken in the future.

Coase on antitrust

Over at Organizations and Markets, Peter Klein is blogging on Antitrust and the Theory of the Firm.

Klien notes that in the past the pioneers in the field of the theory of the firm — Coase, Williamson, Klein, Alchian, Demsetz, Teece, Masten — were actively interested in antitrust issues. The subtitle of Williamson's "Markets and Hierarchies" (1975), after all, is "Analysis and Antitrust Implications." But, he also notes, in the modern literature on the firm, antitrust doesn't make much of an appearance. None of the leading scholars, such as Oliver Hart, Bengt Holmström, Jean Tirole, John Moore, Bob Gibbons, George Baker, Kevin Murphy, Tom Hubbard, or Steve Tadelis works much on antitrust. He suggests a reason for this,

One might respond that antitrust is an economic policy issue, not a firm-strategy issue, and note that transaction cost economics (TCE) has migrated from economics departments to business schools, where it joins the resource-based view (RBV) as a leading theoretical perspective on the the firm. Indeed, while the people mentioned above are economists, mostly teaching in economics departments, Williamsonian TCE has largely been supplanted by the Grossman-Hart-Moore model among mainstream economists, while it remains highly influential within the fields of strategic management, organization theory, and marketing.

This suggests two question to Klein,

(1) Why isn't the property-rights or Grossman-Hart-Moore approach to the firm more influential in antitrust economics? (2) Why isn’t antitrust a bigger topic within strategic management (e.g., as part of a firm’s legal and political strategy)?

It maybe that economists have just given up on antitrust as interesting area of research because they are having no effect on the practice of antiturst. William Landes summaries the point in the following quote on why Coase gave up antitrust,

“Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.”

–William Landes, “The Fire of Truth: A Remembrance of Law and
Econ at Chicago”, JLE (1981) p. 193.

If, ignoring all economic evidence to the contrary, judges conclude that everything is anti-competitive, there doesn't seem much point in staying in the field.

F.A. Hayek interview

F.A. Hayek is interviewed by John O'Sullivan, for The Foundation for Economic Education. The interview was done in 1985 and is more than an hour long but worth the time.

The answer to development ignorance: more complicated advice by experts or more freedom for entrepreneurs?

A long question, but an important one. It is asked by William Easterly in his review of Alan Beattie’s new book "False Economy: A Surprising Economic History of the World". Easterly writes

Beattie accurately reflects the collapse in self-confidence among economists on our ability to usefully recommend how “developing” countries can rapidly develop. And he’s right about the reasons for this: both success and failure have often caught us by “surprise”, the key word in the book’s subtitle.

The strength of the book is its discussion of international trade. Easterly goes on

In a wonderful exposition that should make it into all undergraduate economics classes, Beattie argues that, fertile Nile or not, Egypt is not so much importing wheat as importing water. Only the Nile provides water for the mostly desert country. Wheat takes much water to grow, so the water imports are contained in the wheat imports. By importing wheat, Egypt conserves its own water for drinking and uses other countries’ water to grow wheat shipped to Egypt. This is a wonderful illustration of how trade allows countries to import scarce resources, buying in the goods that would use them, and export their abundant resources, by selling the goods that use those.

Easterly sums up by saying

Beattie’s supremely entertaining and informative book is a great reminder that the details of success are often impossible to predict or prescribe: no one can work out how to achieve each component. The best response is not to have increasingly convoluted advice by experts, but to let individuals with local knowledge roam free by trial and error to find their own successes. (emphasis added.)

So in the end, the economics profession does have more sensible things to say about achieving long-run success than Beattie allows: (relatively) free individuals, free markets, free trade, free thinking, and institutions that support all of the above.

As I said when commenting on Easterly's blog posting on The secret to successful aid.

In other words, the Hayakian approach to aid, make use of the local tacit knowledge of time and place to achieve a market based solution to the problems that these particular people face. A spontaneous order if you will.

EconTalk this week

Don Boudreaux, of George Mason University, talks with Russ Roberts, the host of EconTalk, about the microfoundations of macroeconomics and the Austrian theory of business cycles. Boudreaux draws on Erik Lindahl's distinction between microeconomics and macroeconomics, [I commented on that distinction here] emphasizing the difference between individual choices and the coordination of economic activity. Other topics include the Austrian view of capital and investment, the Austrian view of monetary policy, the issue of aggregation, and the intellectual successes of the Keynesians.

Saint Augustine on pirates

Having discussed pirates here, I was interested to find this quote on Marginal Revolution

In the "City of God," St. Augustine tells the story of a pirate captured by Alexander the Great. The Emperor angrily demanded of him, "How dare you molest the seas?" To which the pirate replied, "How dare you molest the whole world? Because I do it with a small boat, I am called a pirate and a thief. You, with a great navy, molest the world and are called an emperor." St. Augustine thought the pirate's answer was "elegant and excellent."

The US's view on Doha: reasons to be depressed

In the past I have, as have a number of others, written on President Obama's views on trade. He has always seemed to be too protectionist in his approach to trade issues. One of the most important international efforts on improving world trade is the Doha round of WTO negotiations, which the US seems to be doing very little to further. Is it just because the Obama administration has had its hands full with other issues in its early days? Or is this neglect intentional? In a column at VoxEU.org Claude Barfield argues that this neglect is intentional, that US politics have shifted against trade and the administration has acted in ways that might jettison the current negotiations. Barfield writes

In his April 4 contribution on the London Summit and trade, Richard Baldwin called the commitment on the Doha Round “pitiful” and graded it “very sad.” He attributed this result in part to the “current disarray” in US trade policymaking. Actually, US “disarray” is the most hopeful explanation. An alternate interpretation is that the Obama administration has, indeed, made up its mind about the immediate future of the Doha talks – and it has decided to raise the stakes and increase US demands for acceptable compromises, even at the risk of jettisoning the negotiations.

Barfield goes on to explain the current administration's position on trade,

To understand the Obama administration’s current stance, one must go back to the shifting balance of political forces during the latter months of the Bush administration. During autumn 2008, major US private interest groups turned increasingly negative about the negotiations suspended in July 2008. Reflecting this hardened opposition, on 24 February three leading trade associations in the manufacturing, agriculture and services sectors (the National Association of Manufacturers, the American Farm Bureau Federation, and the Coalition of Services Industries) asserted in a letter to President Obama that:

“The Doha Round cannot proceed, let alone succeed, until the negotiating texts are revised to provide balance and greater ambition from the advanced developing nations… The negotiations cannot simply be picked up where they were left off. Until all major participants recognise the Round must provide reciprocity, balance, and ambition, we do not see how there can be meaningful progress.”

Specifically, they argued that:

“Change is need in both the agricultural and manufacturing negotiations, where major US concession have not been balanced with significant new market opportunities on the part of others…The currently tabled services offer, when combined with the signals made at the July 2008 Ministerial, will not provide meaningful new market access, or even commit countries to bind most of their existing levels of access.”

At the same time (26 February), a group of 54 “trade sceptics” from the left wing of the House of Representatives (mostly Democrats, including six committee chairs and seventeen subcommittee chairs) wrote to the president calling for a whole new direction for US trade policy and criticising the Doha agenda as “outdated” and “long-beleaguered.”

The Obama administration, at least for the moment, has clearly decided to incorporate the doubts, and even the language, of the private sector regarding the current Doha manufacturing, agriculture, and services texts. Barfield continues,

In its first statement on trade policy, the new administration’s trade representative stated on Doha:

“It will be necessary to correct the imbalance in the current negotiations in which the value of what the US would be expected to give is well-known and easily calculable, whereas the broad flexibilities available to other leaves unclear the value of new opportunities for our workers, farmers, ranchers, and businesses.”

In his confirmation hearings, incoming US Trade Representative Ron Kirk reiterated this language and also indicated under questioning that the current Doha text could not be the basis for going forward. Moreover, the Obama administration has substantial bipartisan support for this position. Before she left office, former USTR Susan Schwab advocated a return to “low-key talks” and named India, China and other large emerging nations as obstacles to a successful conclusion of the Round. Sen. Charles Grassley, ranking Republican on the Senate Finance Committee, warned Director General Pascal Lamy and EU Trade Commissioner Catherine Ashton that what was on the table now is a “no go.”)

Finally, last week, just before the London Summit, USTR Kirk privately let it be known that the US would not be ready for high-level engagement on Doha negotiations until autumn at the earliest and possibly not until the end of the year. He also shot down the idea of an “early harvest” related to trade facilitation and capacity-building for developing countries, arguing that this would lessen pressure later for an all-encompassing deal.

None of this looks good for advancing the negotiations to achieve a successful end to the Doha round. It looks like Obama is giving in to the renewed protectionist pressures in the US and without the US on broad the Doha round will not be finished anytime soon. And it is the rest of the world that will suffer most because of this.

Incentives matter: fuel tax file

This from the telegraph.co.uk website.

Up until now the Department for Transport discouraged such schemes, increasing motorists' frustration at being met by a succession of red lights.

It was because the Government feared motorists who were travelling smoothly, rather than stopping and starting, would use less fuel and pay less to the Treasury in duty as a result

The quote, which comes from the story Motorists set for 'green wave', shows that up until now the UK's Department for Transport has been deliberately increasing traffic congestion and frustration to insure that the British motorist paid more tax.

Remember the government is your friend and is here to help you!

(HT: The Adam Smith Institute blog)

Pirates are not all bad ...

At the NPR website Peter Leeson - an economics professor at George Mason University and author of The Invisible Hook: The Hidden Economics of Pirates - writes In Praise of Pirates. He says

Pirates are getting a bad rep. Every month we hear more news of the Somali pirates' depredations, most recently involving an attack on an American crew. To be sure, these pirates deserve our condemnation. They're thugs and the world would be better without them.

But we shouldn't let our condemnation of modern pirates spill over, unchecked, onto their more colorful, and socially contributory, early 18th-century forefathers. These Caribbean pirates, men like Blackbeard, "Black Bart" Roberts, and "Calico" Jack Rackam, were also watery thieves. But unlike their Somali successors, they didn't only take something out of the world. They gave the world something of value, too.

This value is?

Historical pirates were harbingers of some of contemporary civilization's most cherished values, such as liberty, democracy and social safety. At a time when the legitimate world's favored system of government was unconstrained monarchy, Caribbean pirates were practicing constitutional democracy. Before setting sail each would-be pirate crew drew up and agreed to a set of written rules that governed them. These rules regulated gambling, smoking, drinking, the adjudication of conflicts and, in some cases, even prohibited harassing members of the fairer sex.

Pirate constitutions established democratic governance for their roguish commonwealths. Crewmembers elected their captains by popular vote and democratically removed captains who dared to misuse their power. Because of this surprising system, far from tyrannical, the average 18th-century pirate captain was a dutiful, elected executor of his constituents' will.

Pirates understood that the most important check on leaders' use of power is society's ability to select them. Pirates recognized this, and implemented it. Lesson goes on to write

Pirates created an early system of social insurance and enshrined this in their law. Sea dogs injured on the job received workers' compensation from the crew's common purse — five pieces of eight for the loss of an arm, 10 pieces of eight for the loss of a leg, and so on. A maimed pirate didn't have to worry about a work-sustained injury leaving him without a bottle of rum to spit in.

Pirates also embraced racial tolerance well before their legitimate counterparts. Centuries before the civil rights movement, the ACLU, or the Equal Opportunity Act, some pirates already had adopted a policy of hiring black sailors in their crews. England didn't abolish slavery until 1772. In the United States slavery persisted until 1865, and blacks didn't enjoy equal rights as citizens, politically or in the workplace, until even later than this. Some pirates, however, extended suffrage to their black crewmembers and subscribed to the practice of "equal pay for equal work," or rather, "equal pay for equal prey," in the early 1700s.

Notice that pirates did all of this without the use of a government enforced legal system.They were, after all, outside the formal legal system by definition, so another point Lesson could have made is that pirates show that law without the state is possible.

The secret to successful aid

At his blog, Aid Watch, William Easterly points out there is no secret,

[...] there is no secret. One approach to a successful aid project just is to immerse yourself in the local community, put local people in charge who are themselves highly motivated, be adaptive and flexible to respond to whatever the local people think about how they can help themselves, so that you customize the “standard project designs” to fit local circumstances. Most aid projects fail because there is nobody in the field making all these necessary adaptations and fixing unanticipated problems as they arise. The moral of the story is: be a Searcher and not a Planner.

In other words, the Hayakian approach to aid, make use of the local tacit knowledge of time and place to achieve a market based solution to the problems that these particular people face. A spontaneous order if you will. Easterly goes on to discuss one aid project. He writes,

This kind of aid project is based on a lot of personal, face to face interaction, developing trust and a shared vision, so it is small scale, it has to let things proceed at their own pace, it can’t meet rigid pre-set output targets, it could never be judged by a rigorous “randomized controlled trial” methodology. In short, it involves the kind of tacit knowledge and individual adaptation that could never be converted into a routinized project implemented by the official aid bureaucracies. It breaks all the rules, and it works.

Interesting blog bits

1. TVHE on Americans growing more tolerant of gay marriage
2. Brad Taylor on Same-sex Marriage and the Neutral State.
3. Homepaddock on Biosecurity threat or just non-tariff barrier? She asks a very important question here. We must be very careful that any opposition we have to the importation of goods is based on science and not just an attempt to reduce competition in our markets.
4. Beyond the prohibitive cost of patent protection in Europe. The European Patent Office has offered a centralised examination service for the 34 member states of the European Patent Convention since the 1970s. However, once patents are granted by the EPO, there is no uniform system to enforce them. They must be validated and enforced by each member state. This column argues that the resulting uncertainty about the validity and market reach of patents reduces innovation. Of course you could just do away with patents altogether.
5. Eric Crampton on Art instinct? Denis Dutton says we all have one. Is he right?
6. The Inquiring Mind on The irrelevance formerly known as Phil Goff. Harsh but probably true.