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January 18, 2006

Talk on aid

Yesterday evening’s One World Week discussion was on aid effectiveness. The list of participants can be found here.

Two interesting points mentioned were –

a) The complicity of donors in perpetuating corruption: Aid has not always been conditional on quality of governance. Withholding aid on the basis of corruption may increase willingness of states to reform, but people will die as a result. Perhaps the moral imperative to assist outweighs concerns of value for money. Additionally, the optimal level of corruption is not zero. Eliminating corruption is prohibitively costly, which is why it exists in the developing world too. Donors decide on an acceptable level of money misuse.

b) Progress in the Doha trade round: David Loyn (BBC Developing World Correspondent) and a member of the audience criticised Economics professor Kent Jones for saying developed nations should make concessions too. They said that given the wealth of OECD nations and their historical misuse of power, responsibility for progress fell on their shoulders and poorer nations should liberalise at a rate of their choosing. Jones said that one-way liberalisation would be better than nothing, but it’s just not feasible politically. In the real world, countries won’t give things up for free. Poor nations should thus compromise if discussions are not to be a complete waste; they have the most to loose. Underlying this point was the probably erroneous assumption that protection is a necessary condition for progress. Chomsky has aired this view before

Furthermore that's true of every single developed society. That's one of the best known truths of economic history. The only countries that developed are the ones that pursued these techniques. The ones that weren't able… There were countries that were forced to adopt "free trade" and "liberalization": the colonies, and they got destroyed. And the divide between the first and the third world is really since the 18th century. It wasn't very much in the 18th century, and it's very sharply along these lines.

The fact that we’re trying to persuade the richest nations in the world to eliminate barriers is a testament to the persistence of trade distortions. It’s thus odd to see people encouraging the poor to hold onto theirs.

The panel were pretty positive towards aid, so a more vocal opponent would have been interesting. In defence of aid, David Loyn and Sam Sharpe (DFID) mentioned many projects that had proved beneficial to different groups. However in itself, that means little unless contrasted with the number of failed initiatives. Additionally, they correctly reconciled any observed decline in performance by saying that aid limited the extent of the decline. Still, I said here, that it'd take incompetence on an immense scale for billions of dollars in aid not to have some positive impact.

I know lives are at stake, but the issue of value for money deserved a mention. Other issues not mentioned were micro-credit, convergence towards ‘quality’ governance or the relative importance of the different issues aid is directed towards.

In all, it was a good discussion which highlighted the very real effect beneficial effect aid can have on its recipients.


January 16, 2006

Environment: Different paths

Madeleine Bunting writes in today’s guardian on Kyoto protocol and the environmental movement in general. She thinks too much attention has been focused debt and trade issues relative to the EU emissions trading scheme and post Kyoto terms.

Looked at objectively it makes no sense. Climate change will dwarf the damage the common agricultural policy subsidies wreak on African farmers; it is already costing at least 150,000 lives a year as warmer temperatures encourage disease, and erratic rainfall will starve millions in coming years. Here is an issue that makes all the aid and debt deals of 2005 look like an afternoon parlour game. Yet such was the momentum of the Make Poverty History campaign that climate change slipped off the public radar and environmental groups felt they couldn't compete.

Contrast with the supposed pro-growth, pro-technology stance of the Asia-Pacific Partnership for Clean Development and Climate. From nature.com

The first meeting of the Asia-Pacific Partnership on Clean Development and Climate, which comprises Australia, the United States, Japan, South Korea, India and China, was hosted in sunny Sydney this week. Together the countries came up with a scheme to address climate change that they say will be good for both the economy and the planet.

Their plan focuses on the creation of eight government-business task forces, which will concentrate on cleaning up power generation and distribution, the building trade, and the industries of steel, aluminium, cement and coal mining. These task forces are to devise action plans, time frames and performance indicators, but details are vague at present. The plan does not specifically mention nuclear power.

January 14, 2006

Outsourcing Primer

The Foundation for Research on Economics and the Environment hosts an easy to read document on outsourcing which answers some frequently asked questions. On this issue what jobs will take prominence in the US & Europe as many tasks are carried out elsewhere, it says the following

Uncertainty frightens people. Imagine telling a farmer in 1900 that in 100 years, farm jobs will only be 2 percent of the workforce. What jobs could possibly come along to replace the farming jobs?

Federal Express and Motorola and Intel and Microsoft and General Motors; The farmer couldn’t imagine the products that these companies would make.

Imagine being told a decade ago that some people would make their living writing software for iTunes. “What’s iTunes? Oh, it’s a place where people download music into their iPods. What is downloading music?”

Think how much the world has changed in just 10 years, and all the jobs we couldn’t have imagined that are now here. A quarter of all Americans now work in jobs that didn’t exist in the Census Bureau’s occupation codes in 1967.

Read it in full here.

It’s understandable why smart individuals who see value in concrete plans and forecasts find such suggestions unacceptable; the desire to take control of proceedings and engineer an ideal state of affairs though intervention is irresistible though history suggests it’s misguided. Few politicians would stand up and admit that their knowledge of future technological developments, patterns of competitiveness and consumer preferences, both here and abroad, is severely constrained. Therefore actively preventing the outsourcing movement is at least as risky as embracing it, particularly when we consider the higher average living standards resulting from the latter policy.


January 09, 2006

Cameron on Tuition Fees

From BBC News:

The Conservative Party has announced a U-turn on student finance and proposes to keep student tuition fees. Previously it had promised to scrap all fees, including top-ups being introduced from this autumn in England. On Monday party leader David Cameron told sixth formers that if universities were to be well funded, the money had to come from somewhere. In another change Mr Cameron also said he believed there should be no limit on student numbers..At the last election, the Conservatives said they would scrap all tuition fees while retaining Labour's reintroduced grants for poorer students. Instead they had said they would have bigger student loans at a commercial interest rate, rather than the effective zero rate that applies now.

Provided he adopts Labour’s plans to allow deferred payment of tuition fees, this sounds fair. Large loans reduce the need for less wealthy students to work while at university, which limit the amount of time that can be spent on academic work. The deferred fees arrest the decline in the quality of UK universities relative to those abroad. These are the key problems highlighted by LSE’s Nicholas Barr an avid proponent of variable income-contingent fees. In a report for the House of Commons Education and Skills Committee he states,

There is agreement, first, about two core problems:

Students are poor because the system of support does not give them enough to live on. Two results follow: students have to turn to expensive overdraft and credit-card debt and/or to extensive part-time work; and the parsimony of support is an impediment to access for people contemplating university.

Universities are poor, creating worries about quality. The UK would have to spend an extra £3.5 billion per year to reach the EU average.

It’s understandable that the prospect of hefty debt following university may put people off; particularly the poor, for whom further education is most needed. However, if people are forward looking enough to think about the debt they’ll leave with, should they not also consider the higher earning potential yielded by a marketable degree? Rather than being a justification for subsidies, an aversion to taking on debt is reason for parents and teachers to engage students in serious, practical discussions when these decisions must be made.


January 07, 2006

Ignoring Arguments & Conservative Policy

Conjectures & Refutations recently linked to a piece describing how people on opposite sides of an issue can talk past each other; each appearing to misrepresent and ignore the key arguments of the other. It outlines a subconscious tendency to do a disservice to arguments which are likely to cause cognitive dissonance. Here’s a quote

What you see here is..[someone] tapping into his understanding in order to formulate a rebuttal. But that rebuttal probably won't be very good, because he has not allowed himself to be fully aware of that understanding [that comes from not subconsciously disregarding the argument]. The "understanding" is locked up in a mental cage so it can't hurt him.

There are many warning signs that this is taking place. One you may recognize is "Yes-butting", where the person replies, "Yes, but" to every challenging statement they hear, then makes a fairly lame rebuttal.

Antiprocess [term used to describe the rejection of troubling info] doesn't help Bob get any closer to truth, but his mind has already assessed the information in advance and perceived a threat. Thus, the last thing it wants is understanding, even if that means turning away from truth. That's because at a level below Bob's awareness, his mind has decided that there is a threat to his mental equilibrium.

Read it in full here.

The article explains why the public may dismiss Conservative party statements containing loaded statements like ‘tax cuts’, ‘private sector’, ‘efficiency gains’, ‘business competitiveness’, etc.* Cameron’s choice to focus on social issues and to co-opt positive themes of family, society and wealth inequality is thus a sound strategic choice. Perhaps with better use of language, he could illustrate how less interventionist policies could help achieve the left’s goals of better opportunity for the less well off to a better extent than the traditional left.

A strategic choice or not, I suspect Cameron has as much faith in his ability to engineer 'better' social structures and public services as Brown & Blair. That miguided confidence doesn't bode well for proponents of liberalism. That he has even allow the party be associated with a scheme of compulsary social service (see here) says something. This view was aired by David Green of Civitas in a Telegraph article earlier in the week.

Mr Cameron was elected without anyone being quite sure what he stood for. Now quite a few of the blanks have been filled in. Yesterday, he ruled out social health insurance. Oliver Letwin, his head of policy, has said he would be "utterly astonished" if education vouchers were accepted, and has called for welfare policy to be based on egalitarian redistribution. It is beginning to look as if the policy commissions will not be open investigations of policy options at all. The "right answers" have already been decided for health, education and social security, which account for about 55 per cent of public spending.

On Sunday, Mr Cameron declared the police to be the "last great unreformed public service". They are no such thing. Health and education remain public-sector monopolies, frayed at the edges by talk of consumer choice but firmly under state direction.

Rapid, radical upheaval of existing structures is unpractical but it’s unfortunate to see options closed off so early. I'm no longer sure what I should be looking forward to under a Cameron leadership.

*This isn’t to say those who don’t agree with traditional Conservative policies are in any way foolish. The process works in the reverse too.


January 02, 2006

Articles on the Minimum Wage

A recent article from the Mises Institute discusses minimum wage legislation.

The rate of unemployment tends to be directly proportional to the excess of labor costs over productivity. In many European countries with official minimum wages of more than $10 an hour, the rate of unemployment is measured in double-digit rates although governments spend massive amounts on make-work projects. Some victims readily submit to their fate and endure a life of idleness and bare subsistence. Many learn to labor in black markets where goods are produced and services are rendered in violation of minimum wage edicts and other regulations and controls. But most victims are young people with little training and know-how who tend to react angrily and violently. Their rate of unemployment actually amounts to multiples of the official rate. And if society should be divided ethnically, youth training and productivity may be lower yet and its rate of unemployment may approach 100 percent. Such a labor situation is laden with anger and fury which not only breeds high crime rates but also, at any time, may turn to violence by mobs of unemployed youth. The recent riots of French youth clearly resembled the riots of unemployed Americans in Watts in 1965, in San Francisco in 1966, Detroit and Baltimore in 1967, Chicago and Cleveland in 1968, and in Los Angeles in 1992.

Read in full here.

Few would dispute that higher wages are a good thing. The same applies to other employee benefits like holiday entitlements, maternity leave and legislation governing layoffs. Benefits accrue to those in employment, but on the other side of the equation you have those who would have been granted a job had employment costs been marginally lower. When it comes to the minimum wage, those on the ‘wrong’ side of the equation are the most vulnerable members of society; the very young, the highly unskilled and those susceptable to discrimination.

The welfare system is supposed to compensate these vulnerable groups. The government doesn’t want people to make claims indefinitely. Welfare should be a temporary solution whilst a job search is in progress. I’m sure in most cases that’s what happens, but for those with limited literacy, numeracy and experience I bet it’s not easy. Raising the cost of employment via minimum wages increases the likelihood of long term dependency.

Suppose such legislation was eliminated and we had jobs paying £1, £2 and £3 per hour. It’s pitiful compensation by average expectations, no doubt. However from the view of the recipient, the benefits aren’t just monetary. This paragraph from Walter Williams sums it up well

The primary beneficiaries of so-called McJobs are people who enter the workforce with modest or absent work skills in areas such as: being able to show up for work on time, operating a machine, counting change, greeting customers with decorum and courtesy, cooperating with fellow workers and accepting orders from supervisors. Very often the people who need these job skills, which some of us might trivialize, are youngsters who grew up in dysfunctional homes and attended rotten schools. It's a bottom rung on the economic ladder that provides them an opportunity to move up. For many, the financial component of a low-pay, low-skill job is not nearly as important as what they learn on the job that can make them more valuable workers in the future

Read it in full here.


December 28, 2005

Government Sponsored Holidays

Libby Purves wrote an article in yesterday’s Times about assisting poor families who’re unable to go on holiday. She stresses the benefits such assistance would yield

What struck the Laurances [friends of the author] strongly was the frequent report from families and social workers that the simple holiday week could “spread” over much more of the year. Families talked about it in advance, chippy children worked and saved up, grandparents joined in, and for months afterwards everyone shared memories of the laughs and the novelty. All these things assuaged the difficulty of life, fostered optimism and made children do better in school. I was haunted at the time by two cases of parents committing suicide and taking their children with them: listening to the Laurances it struck me that if you had a memory of your child laughing on a beach that would be at least a bit harder to do.

Read it in full here.

That makes sense. I’ve spent the last couple of summers visiting relatives in the US. The trips are something to look forward to during the holiday and the pictures taken will yield a smile at many points during the year. Periodic breaks make the tedium of work and school more tolerable, and it's unfortunate that not everyone can disappear elsewhere once or twice a year.

However, she does the issue she’s campaigning for a disservice. Firstly she doesn’t consider how it’ll be funded. Practicalities are boring, yet essential if ideas are to meet reality. If higher taxation is implicit in the discussion, we’re in a sorry state. After all, there are innumerable programs that would benefit some group or other. Poor families may benefit from holidays, but my local stamp collecting club, the RSPCA and international NGOs are also clamouring for those funds. The stamp collectors may not be as worthy a beneficiary as the poor, but if they’ll be made better off, don’t they deserve something? Adopting any proposal that yields benefit to some group, however large, is folly. If Purves doesn’t want higher taxes, she needs to state what she’s willing to give up in return for those holidays. Nothing comes for free, and she’s miles off in stating this is a ‘win-win’ proposal. Somebody must pay, or something must be sacrificed.

All that could be forgivable had Purves outlined why holidays for the poor will do more to enhance their welfare than contributing more money to the NHS, schools, local transport and generally trying to remove the need for state sponsored holidays in the first place. Whether or not you think such efforts are reasonable, they’re alternative uses of funds, and they weren’t addressed by Purves. If she admits that the provision of holidays is secondary to these alternatives the article was a waste of column space.

As mentioned earlier, the potential gains from allowing poor families to take a yearly holiday are real. However, the proposal is akin to the surveys I mentioned yesterday; without addressing cost, it should be left on the pile of other good, but unpractical ideas. In fairness this is being overly harsh – newspaper columns have word limits after all. However the point needs to be made given that many well meaning people proposing grand schemes act as if the money appears from nowhere.


December 27, 2005

What do the public want?

Don Boudreaux references an old article of his on how seriously we should take the voiced desires of individuals in polls. He states that surveys showing that voters want more money spent on education, defence, etc. shouldn’t be taken as gospel given that any one individual has relatively little influence on the eventual outcome and will bear a negligible amount of the cost.

Even the most scrupulously conducted poll cannot discover "what people really want."..polls by their nature cannot uncover what people want in an economically relevant sense. The verb "to want" has two different meanings. This difference is linguistically slight but economically weighty, insensitivity to this difference in meaning causes confusions—including being misled into thinking that polls elicit reliable information on what people want.

So when British citizens claim in a poll to "want" such things as greater welfare disbursements and continued police efforts to prevent adults from smoking pot, these answers do not mean that British citizens "want" these things in the same way that i want my 1992 Toyota or the bag of groceries that I just purchased. Such poll results reveal only Britons’ unconstrained wants, not their economically relevant ("constrained") wants. Because opinion polls do not reveal people’s constrained wants, it is illegitimate to use polls to guide government policy-making.

Decisions are thus made (and preferences expressed) most responsibly when the individual stands to gain the majority of the benefits or suffer the majority of the cost as tends to occur via market transactions. Not sure about anyone else, but in the past I’ve spent more time worrying about whether I’ve picked the right mobile phone, digital camera and capacity for my Ipod, than whether or not I chose the right party to vote for.

Read the article in full here.


December 19, 2005

Hazlitt on Gordon Brown & Full Employment

Earlier, I commented on a recent speech from Gordon Brown. In it, generating full employment was a responsibility Brown claimed for the government. On those lines, there’s a chapter from Henry Hazlitt’s Economics in One Lesson entitled “The Fetish of Full Employment”. It’s a chapter of relevance given growth in public sector employment. Is society made significantly better-off by the employment of Cultural Development officers for £35k per p.a. and Corporate Directors of Regeneration for £110k p.a?

Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods (which are both a cause and a consequence of a shortage of capital) and not unemployment. Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. World War II provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.
It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs. A much smaller proportion of the American population needs to work than that, say, of China or of Russia. The real question is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living? The problem of distribution on which all the stress is being put today, is after all more easily solved the more there is to distribute.

The book is available in full here. (via Newmark’s Door)


December 15, 2005

Gordon Brown on the State

Yesterday's times mentioned a lengthy speech recently given by Gordon Brown. The occasion was the Hugo Young memorial lecture, Young being a late political journalist for the Guardian.

The transcript is given here. Brown covers plenty of ground, discussing the importance of liberty in society, positive obligations that come with that liberty and the role of the state. What stands out immediately is the breadth of citations; individuals quoted include Shaw, Hume, Roosevelt, Hazlitt, Voltaire, Locke and Smith. However, the strong conclusions he draws from these very different individuals are inaccurate.

Great emphasis is placed on ensuring fairness in society.

The twentieth century innovation has been to give new expression to fairness as the pursuit of equality of opportunity for all, unfair privileges for no one. And in this century there is an even richer vision of equality of opportunity challenging people to make the most of their potential through education employment and in our economy society and culture

Brown that it is through securing individual liberties and each of us exercising our obligations that this fairness is brought about. Private institutions alone are deemed insufficient to guarantee fairness without assistance.

Charities can and do achieve great transformative changes, but no matter how benevolent, they cannot, ultimately, guarantee fairness to all. Markets can and do generate great wealth, but no matter how dynamic, they cannot guarantee fairness to all. Individuals can be and are very generous but by its nature personal giving is sporadic and often conditional.

That paragraph is central to Brown's eventual conclusion that the state has a key role to play. He cites the recent Live 8 events as an example of private institutions being limited in their ability to change things. Live 8 and its associated meetings with government representatives were designed to increase foreign aid, encourage debt cancellation and promote fair trade. Without government action, these efforts would have been pointless. Therefore Brown says, "For the good society to flourish to the benefit of all, private endeavour must be matched by public endeavour." However the example doesn’t acknowledge that excessive debt burdens and 'unfair' trade rules were created by government in the first place. It is past judgements of fairness made by politicians that caused the problems private individuals and organisations sought to change via Live 8. The same can be said of many problems government seeks to solve. Policy is implemented, the consequences aren't as expected, more policy is developed to correct faults, etc.

Along the same lines he says,

So whether it be enduring responsibilities for full employment, or new frontiers balancing work and family life or caring for our environment or, more generally, addressing poverty and investing in schools, hospitals science and infrastructure to equip our country for all the global challenges ahead – if you will the ends, fairness to all, you must be prepared to will the means – enabling, empowering government to make fairness possible.

The truth is, Brown doesn't really know how well private institutions would fare in ensuring fairness, or equality or opportunity. How can you judge the effectiveness of market mechanisms in dealing with the environment when there aren't complete property rights for air space, bodies of water and areas of land? How can we say markets can't ensure a fair education system when the state affects admissions procedures, curricula and exams? In healthcare, the government owns the hospitals, owns the medical schools, regulates certification for practitioners, sets budgets, etc. It’s taken as gospel that doing something trumps doing nothing. Now Brown would readily admit that his ideal of fairness has yet to be achieved even though government had a hand in many spheres of public life. At no point in time has the ideal ever been achieved. In accordance with the adage "if you do what you've always done, you'll get what you've always gotten" Blair has even decided to do away with much state assistance. Whatever he says of free markets and charities, government has proved equally incompetent.

Brown claims, “I have come to understand that..[Smith’s] invisible hand [was] dependent upon the existence of a helping hand." That may be so, but Brown overestimates the extent of help needed.


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