All 44 entries tagged Politics

Russians, Be Careful What You Wish For

Writing about web page http://www.themoscowtimes.com/news/article/5000-protest-duma-election-results/449327.html

The Russian parliamentary elections show that, whichever party Russians voted for, whether they voted under free and fair conditions or not, they voted overwhelmingly for a strongman. United Russia (one half of the vote) is for Putin. The Communist Party (one fifth) is for Ziuganov. The Liberal Democrats (one tenth) are for Zhirinovskii.

Neither liberal nor democratic, the Liberal Democrats' favourite term of abuse for advocates of a free and competitive political system is der'mokraty, "shittocrats." The Communists have called for Russia to undergo "re-Stalinization." United Russia follows the hazy notion of "sovereign democracy," implying a non-competitive dialogue between rulers and ruled.

On the face of it, the outlook for democracy in Russia is hopeless. Apparently, nearly all Russians espouse one or another form of authoritarianism.

All the more surprising and encouraging that 5,000 Muscovites have taken the risky course of public demonstration against vote rigging and electoral fraud. But what do 5,000 demonstrators count, out of 65 million voters?

More than would appear at first sight, perhaps. A new article by Henry Hale(2011) of George Washington University suggests how much may be going on below the surface. Hale argues that we often misinterpret Russian opinion polls and election outcomes. When we find that many Russians take a dim view of "democracy," we fail to check that we and they understand democracy the same way; it turns out we don't. When we find that Russians frequently favour a strong leader, we assume that this is in conflict with the idea of competitive elections and we fail to check whether Russians see the same conflict. This too turns out not to be true.

On the evidence, Hale argues, most Russians do favour a strong leader, but the same Russians, even those who rail against der'mokratiia, also favour competitive elections. They want a strong leader that they have chosen, a strong leader who will govern according to the law, treat the people fairly, and then submit himself to competitive re-election as the constitution requires.

Such attitudes set up an obvious paradox, Hale observes. Russians know what they want, but they cannot have it for long. Any leader strong enough to rule as Russians want to be ruled is also strong enough to bend the law, pressure the courts, and stuff the ballot boxes. This seems like an electoral equivalent to the Weingast (1995) paradox: "A government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizens."

Hale has two conclusions. First, "Russia’s leaders, including even the highly popular Putin, are desired not as dictators but as powerful delegates with an expansive—but still limited—mandate to ‘get things done’. Limits include: that the basic rights of the opposition not be violated; that the leader not have a right to remain in complete power for life; and that the people retain the right to select a successor in a free, fair and competitive process when that leader’s constitutional term limits are up." It is logical therefore that, as Putin has increasingly overstepped these limits, he should gradually be losing his earlier support and legitimacy.

Second, Hale confirms that Russians are "the enablers of their own autocracy—but for reasons different from those usually given." The underlying problem is "not any kind of culturally embedded or historically developed support for autocracy, but the preference for a kind of democracy that nevertheless relies on electing a strong leader as a way of concentrating national efforts on the resolution of major national challenges."

Or, in the words of W. W. Jacobs: "Be careful what you wish for."

References

• Hale, Henry E. 2011. The Myth of Mass Russian Support for Autocracy: The Public Opinion Foundations of a Hybrid Regime, Europe-Asia Studies 63:8, pp. 1357-1375.
• Weingast, Barry R. 1995. The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development. Journal of Law, Economics, and Organization 11:1, pp. 1-31.

Mark Harrison : 07 Dec 2011 11:00 |  Tags: Politics Russia Stalin |  Comments (0) |  Close comments |  Report a problem

The Return of DIY Economics

Writing about web page http://www.ft.com/indepth/autumn-statement-growth-review-2011

Some years ago, David Henderson coined the phrase"do it yourself economics." DIY economics, he argued, was made up of the practical models of causation that ordinary people use to understand the economic world around them. In the world of DIY economics, he noted, public spending and exports are good because they create jobs;industry is more deserving of support than services; cheap goods made by foreigners are a curse, not a blessing; and whatever the problem is, the government ought to do something.

DIY economics is clearly expressed in responses to yesterday's autumn statement by the Chancellor. I'm going to comment on just one aspect: the length of causal chains. In the world of DIY economics there is never more than one step from cause to effect. I will give two examples, one concerning the burden of taxes and another concerning the housing market.

First, who bears the burden of taxes? In the world of DIY economics, if you tax the rich and give a benefit to the poor, the rich become poorer and the poor become richer. Full stop. In other words, the burden of taxes is borne by those that write the cheques. The converse must also be the case, as Polly Toynbee argues in this morning's The Guardian:

George Osborne's autumn statement blatantly declares itself for the few against the many ... What was missing from his list? Not one penny more was taken from the top 10% of earners. Every hit fell upon those with less not more. Fat plums ripe for the plucking stayed on the tree as the poorest bore 16% of the brunt of new cuts and the richest only 3%.

The chain of causation suggested by modern economics is somewhat longer, yet each step is still simple and transparent. The burden of taxes is spread beyond those that write the cheques to the government. Ultimately, who pays for a tax on profits? A tax on profits increases the cost of capital to firms, so that less capital is employed and every worker is less productive. The result is lower wages (as well as lower profits). A tax on labour increases the cost of labour to firms, so that fewer workers are employed. The result is fewer jobs (as well as lower wages and profits).

In short, who writes the cheque is a poor guide to whether a particular tax will help the poor. Whether taxes are levied on capital or labour, the workers bear much of the cost, which is likely to exceed the revenue raised.

Second, who should we blame for the mess that George Osborne is trying to tackle? In the world of DIY economics, there is only one step from cause to effect. So, if you see the effect, you only have to go one step back to find the cause. The recession began with a credit crunch, so the suppliers of credit, the bankers, are to blame for everything. Most certainly, we are not to blame. This morning, as public sector workers strike to protect their pensions, my facebook page is full of comments that replicate the following confident assertion:

Remember when Teachers, Policemen, Police staff,Ambulance staff, Nurses, Midwives, Doctors and Fireman crashed the stock market, wiped out Banks, took billions in bonuses and paid no tax? No, me neither. Please copy and paste to status for 24 hours to show your support against the government's latest attack on pensions and public sector workers.

Behind this, however, lies a longer chain of causation that implicates us all. Where did the credit crunch come from?* The sub-prime housing market. Mortgage lenders in western economies had overextended credit to households that had no hope of repaying from their incomes. What provided the impetus to excess housing credit? Well meaning government policies that had responded to rising inequality by promoting and subsidizing "affordable" housing (actually the opposite). Bankers and mortgage lenders colluded actively with this, of course. So I'm not particularly delighted that part of the British government's strategy for economic revival is new help for homebuyers. Haven't we been here before?

Then, why did the housing crash ripple so devastatingly through the economy? Because the same governments had already given up their room for fiscal manoeuvre by bloating their public sector wage bills and unfunded pension promises. (Promises to whom? Oh! Teachers, policemen, ambulance staff, nurses, midwives, doctors and firemen.)

So, Mr or Mrs Public Sector Worker: No, I don't let you off the hook. In fact, no one should feel free of responsibility. I might blame the last Labour government, but somebody must have voted them in. (It might have been me.)

Not everyone will agree with this diagnosis. In the real world, causal chains are long and complex. For the same reason, they are also generally uncertain. That is enough reason for disagreement, before we get around to ignorance, bias, and vested interests! The one claim I make confidently, however, is that one-step causation is rarely enough.

* To anyone who wants to read more, I recommend any of the following. There's an American tilt in my list; I don't think our own investigators have done a good job yet (but more recommendations are welcome).

• Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (Time Books, 2011).
• Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton University Press, 2010)
• John B. Taylor, Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis (Hoover Press, 2009).

Mark Harrison : 30 Nov 2011 08:14 |  Tags: Economics Politics Recession |  Comments (7) |  Close comments |  Report a problem

Plan B or not to B

Writing about web page http://clients.squareeye.net/uploads/compass/documents/Compass_Plan_B_web.pdf

Plan B was launched over the weekend to much fanfare. There was much excited analysis in The Guardian. In The Observer, one hundred economists told George Osborne that Plan A is failing.

I will focus on one small aspect, the Plan B critique of current fiscal policies. Behind Plan B is the idea that "current policies … may do the very opposite of their avowed intention, by actually increasing the deficit." The logic underlying this argument extends he Keynesian multiplier: public spending cuts put people out of jobs and reduce their incomes, so that they pay less in tax; if taxes fall by more than spending, the deficit will widen, ending in higher, not lower public debt. Turn this argument around and there would be scope, apparently, for Britain to spend its way out of debt.

Another idea behind Plan B is that "the UK national debt is not large by long-run historical standards." Judging from the historical record, it seems, Britain can easily afford a higher public debt. While debt reduction may sound virtuous, it is suggested, it is currently unecessary (and the policies designed to achieve it may be actively harmful).

The outcome of Plan A, according to Plan B, is economic "sado-masochism": We are enduring the pain of public spending cutbacks to no purpose (since the cutbacks will not reduce the deficit) when the purpose (to reduce the public debt) is not even necessary in the first place. Or is there pleasure for some in the pain of others?

This weekend, by coincidence, the Royal Economic Society Newsletter (no. 155, October 2011) published my short paper Surely You're Joking, Mr Keynes?This paper makes two points.

First, it's true that Britain has carried much larger debts relative to its GDP in the past, but this was almost entirely the result of wars; do we have a comparable excuse today? It's completely unhistorical, moreover, to compare Britain's credit today with that obtainable when Britain was the world's dominant economic and financial power. The world has changed; is that something we still need to get used to?

On this, I conclude:

Historically, having a debt twice the size of the national income has been a sign that something went terribly wrong: a run of major wars, for example. Faced with the worst recession in 80 years, the British government was right to let its budget go into deficit temporarily. At that moment an increase in Britain’s debt was inevitable. Now it looks essential to bring it back under control over a few years.

Second, there is no robust evidence in the historical data that deficit reduction is self-defeating. There is claimed to be evidence, but I show that it crumbles when you touch it. On average, in fact, deficit reduction has reduced the national debt -- as one would expect.

Here, I conclude:

It remains true that, once the public debt is set on a particular course, it is hard to change that course quickly. But this is only momentum that takes time to reverse; there is no evidence of destabilizing pushback from Keynesian multipliers.

To sum up: I have taken aim at two common beliefs about the British public finances. One is that we should borrow our way out of recession; the other is that we can spend our way of debt. These beliefs are based on intriguing stories. But, like many good stories, they are fictions. Our country cannot spend its way out debt. In today’s world, we can afford to borrow much less than in the past, and that may be just as well.

Mark Harrison : 31 Oct 2011 15:26 |  Tags: Economics Politics Recession |  Comments (4) |  Close comments |  Report a problem

Predator v Wealth Creator … Or Not?

Writing about web page http://www.bbc.co.uk/news/uk-politics-15081234

"Are you on the side of the wealth creators or the asset strippers?" Ed Milliband asked the Labour Party conference (September 27, 2011).

Milliband tells a morality tale with two sides. On the good side are the producers, who "train, invest, invent, and sell." On the bad side are "the predators ... just interested in the fast buck, taking what they can out of the business." The example is "what a private equity firm did to the Southern Cross care homes. Stripping assets for a quick buck and treating tens of thousands of elderly people like commodities to be bought and sold. They may not have sold their own grandmothers for a fast buck. But they certainly sold yours."

In reality, the Southern Cross story is not one of asset stripping. There are two ways to think about this, one simple and one more complicated, but they lead to the same conclusion.

Here's the simple story. In 2004 Blackstone, a private equity firm, bought Southern Cross for £160 million. When Blackstone sold its last stake in 2007, Southern Cross was profitable, solvent, and worth £770 million. This was a story of asset growth, not assets stripped.

Now for the more complicated story. Over this period, Blackstone actually bought, amalgamated, restructured, and eventually sold three care providers: Southern Cross, NHP, and Ashbourne Care. Before acquisition, all of these companies were already operating predominantly on leased property. This included NHP, but the latter owned the property company as well as the care provider, with the latter leasing its homes from the property company. Blackstone separated out the property company and sold it. The care provider continued to lease the same homes, but these were now under the ownership of RBS, which sold them on to the sovereign wealth fund of Qatar. Southern Cross itself also sold off and leased back 21 properties -- a small number within its eventual total of 750 homes.

Why did this make sense? At this time the housing market bubble was inflating rapidly; a collapse was inevitable. Blackstone did exactly what my colleague Andrew Oswald was recommendingfor private families: sell property, put the proceeds into shares, and move into rented accommodation. What Blackstone did was not strip assets but change their form -- property for cash, which could go into business expansion.

In the process the Blackstone directors made a huge amount of money. Where did this money come from? It did not come from selling anyone's grandmother. Blackstone's profits came from two sources. One was a rationalization of the assets of the three care providers. On this, you'd have to say that Blackstone took a long view of the future of the care industry. You could call that view right or wrong, but it was a long view. The other source of Blackstone's profits was from selling near the peak of the housing bubble. Here there was a clear loser, but it was not the customers or shareholders of Southern Cross, who were saved from a huge capital loss. It was the Qatari investment authority, which was holding the homes when the crash came.

Why then did Southern Cross fail subsequently? As a public company, Southern Cross saw its revenue squeezed by government austerity, and allowed its occupancy rates to sag, while at the same time borrowing too much. You could blame it on circumstances, or on poor management, but it was not a result of asset stripping, which did not take place.

If Southern Cross is not a good example of asset stripping, then what of Ed Milliband's larger point? Asset stripping does happen; aren't we all its victims? Here we need a little precision. Some asset stripping is criminal. Suppose the employees of a company steal the roofing and wiring and sell off the materials on the side. The victims are the shareholders. That's rightly against the law. But that's not the point here. Milliband was talking about legal asset stripping by the owners of a business. What this means is that you buy a business and, instead of operating it, you sell off the property, the machinery and stocks, sack the employees, and take the cash.

You have the right to do it; does that make it right?

It sounds terrible.

But think for a moment: why would someone do that? You would make money on it, only if the market value of the parts of the company were greater than the value of the company as a whole. If that were not true -- if the value of the company as a going concern exceeded the sum of values of its parts -- you'd make more money by keeping the company going and either running it yourself, or hiring someone to run it for you, or selling it to someone else who would do just that.

In technical terms, when the market value of the parts of the company exceeds the value of the company as a whole, its Tobin's q is less than one. Now, any first year textbook will tell you that, if Tobin's q is less than one, you can increase the value of the company as a whole by shrinking its capital -- not replacing it as it wears out, or selling it off. Oh -- that sounds like asset stripping!

There are three points of interest. One is all the economics textbooks that tell us that what the world calls "asset stripping" is a normal response to a normal situation. Of course, that in itself doesn't make it right.

Another interesting thing is that you can't decide to become an asset stripper without taking the long view into account! How's that? Think: If the company is truly worth more in the long term as a company than the disposal value of its parts now, someone will be willing to pay you that value now, to take it off your hands as a going concern and prevent you from breaking it up. And you will make more money by selling it on than by breaking it up and selling the parts. So it is the logic of the market that makes you take the long view into your calculation.

Finally, the ability to make that hard decision -- if it's better to break up and sell the assets than manage the company for the long term -- is essential for the long term health of the market economy. If we can't run down declining industries, we would still all be mining and weaving -- and we would all be as poor as the miners and weavers of today's global economy. In fact, we would be poorer, because today's miners and weavers can at least afford mobile phones that are designed and produced by people who gave up mining and weaving long ago for something more productive.

To conclude, asset strippers are not the predators of the market economy. They are the carrion eaters, the recyclers. Nobody wants to cuddle a vulture, and no party conference will ever give them a cheer. Yet they play an essential part in the global ecology. It's not a case of predator v. wealth creator, or even asset stripper v. wealth creator. All play their part.

Mark Harrison : 29 Sep 2011 12:13 |  Tags: Economics Politics |  Comments (2) |  Close comments |  Report a problem

Britain's 50p Tax Rate: The Evidence Against

Writing about web page http://www.ft.com/cms/s/0/d92b0bc4-d7e9-11e0-a5d9-00144feabdc0.html

On his excellent blog Analysing British Politics, my Warwick colleague Wyn Grant (with whom I taught The Making of Economic Policy last year) has announced: Economists disagree shock. Yesterday, nineteen other economists and I signed a letter in the Financial Times urging a rapid retreat from Britain's "temporary" 50p tax rate on higher incomes. Today, two more economists (Alan Manning of LSE and Warwick's own Andrew Oswald) have responded, noting that the evidence linking personal location decisions to marginal tax rates is unimpressive. Wyn points out, also, that the precise fiscal effects of the 50p tax rate will not be known for some time.

It is no surprise to find that economists disagree. Wyn and I teach on our course that the world is complex; we often remain uncertain about exactly how causation works, even long after the event. Uncertainty is not the same as total ignorance, however. While the letter that I signed emphasized the tax competition argument against the 50p tax rate, I supported the argument on other grounds for which there exist clear empirical foundations. Because economic causation is uncertain, there is also contrary evidence. I place particular emphasis on the evidence I've selected, partly because I regard those that have produced it as fine scholars.

First, those who support higher income taxation appear to ignore the price we pay in economic welfare. With rare exceptions, taxes distort the allocation of resource and worsen economic efficiency. Some do this more than others. We can rank them by the losses they cause per unit of revenue raised. It turns out that taxes on immovable property cause the smallest losses, followed by consumption taxes and taxes on movable property. Taxes on personal income cause more losses than any of these. Only profit taxes are worse from this point of view. This finding is from work by Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, based on data from 21 OECD countries, 1970 to 2005: "Tax and Economic Growth," OECD Economics Department Working Paper No. 620 (2008).

Second, those who think it's okay for the Exchequer to grab some extra money every now and then from the rich, or from banks or oil companies, ignore the price we pay for a volatile, unpredictable tax regime. When businesses contemplate long-lived investments, they must predict the structure of taxes five or ten years in the future. They need a clear idea of where the line will be drawn between public and private property, and where taxation and regulation will start and stop. Temporary taxes are bad, because they can be withdrawn or added to with equal probability. "Regime uncertainty" is bad because businesses lose confidence that they will be allowed to reap the benefits of their ventures. Our world is full of new opportunities, yet business investment is flatlining because of such uncertainties. The baleful role of "regime uncertainty" in prolonging the Great Depression in the United States under the New Deal has been documented by Robert V. Higgs in his article "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War," The Independent Review 1(4) (1997), pp. 561-590. From this point of view one thing that is wrong with our 50p tax rate is that it is temporary; it should not have been introduced in the first place, and our current indecision is making that worse. Another thing is what it stands for: a populist willingness to raid the rich on the pretext of collective guilt for past and future crimes.

Third, social justice is said to require tax cuts for the poor before the rich. I understand this argument but I find that it is faulty on several grounds. Richer households already pay far more than their share of income taxes. The one percent of taxpayers that pay the 50p tax rate contribute around one quarter of all income tax receipts. What is the principle of social justice that says this is not enough? Besides, the most important measures that will get low-income households out of poverty are job creation, welfare reform, and investments in the family life of children before school (because inequalities in educational outcomes are significantly formed before children ever get to school, and because higher rates of family breakdown contribute in distinct ways to both rising inequality and some children's stunted pre-school development; see The Hills Report: An Anatomy of Economic Inequality in the UK. Report of the National Equality Panel (John Hills, Chair; Mike Brewer; Stephen Jenkins; Ruth Lister; Ruth Lupton; Stephen Machin; Colin Mills; Tariq Modood; Teresa Rees; Sheila Riddell). London: The Government Equalities Office (2010)). Higher taxes on rich people are either irrelevant or harmful to these objectives.

Fourth, it has been said that the economy will benefit more from tax cuts for those on low incomes, because poor people will spend the money and the rich won't. As far as temporary tax changes are concerned there is little basis for this view in either economic theory or evidence. The best recent evidence comes from the United States where John Taylor has shown the complete lack of response of household consumption to the mailing out of millions of tax rebates in 2008 and 2009 and to the "cash for clunkers" programme. For a diagram that says it all, go to http://johnbtaylorsblog.blogspot.com/2010/10/cash-for-clunkers-in-macro-context.html.

Fifth, it has been said that the rich deserve punishment for bringing the current recession on us. I understand the sentiment but I reject it. It assumes that the only wealth is that gained at the expense of the community. This cannot be true in general: Britain is one of the richest countries in the world, despite our present troubles, because of 250 years of private enterprise, not because of government intervention or controls. I acknowledge that some people gained at the expense of others and this played a part in the financial crash that preceded and caused the recession. Some (not all) were bankers (and not all bankers were at fault in this). This is a serious issue. But the appropriate response is to punish those guilty under the law, and strengthen competition regulation and financial regulation, not to inflict arbitrary collective punishment on the entire class of people on whom we must rely to rescue our economy from its present plight. Besides, it is clear that politicians should share the blame for what went wrong. The credit crunch began in the housing market, which is already highly regulated in most western economies; politicians and regulators were deeply implicated in the overextension of subprime credit. The most convincing argument (measured by standards of evidence and logic) that I have found is that advanced by Raghuram Rajan in his book Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton: Princeton University Press 2009).

Finally, it has been said that the signatories to the FT letter are self-interested, because they are surely all 50p tax payers. On this I speak only for myself. I am not even close, and I never will be. My only reason to oppose this tax is concern about the harm done to the community in which I live.

Mark Harrison : 08 Sep 2011 22:28 |  Tags: Economics Politics Recession |  Comments (0) |  Close comments |  Report a problem

Reform of the West: Lessons from the East

Writing about web page http://keithhennessey.com/2011/07/30/risk-and-the-governments-credit-rating/

Twenty years ago, the idea of post-communist "transition" looked straightforward. There were 30 or so economies that qualified as "transitional." The starting point (communism) and the end point (a democratic market economy) would be roughly the same for all of them, with a short one-way street in between.

Looking back, what impresses is the astonishing variety of routes out of communism, more and less marketized and more and less democratic. Compare Poland with Russia, China, Belarus, and Uzbekistan, for example. Explaining that diversity is a vast and worthy undertaking.

I'm reading Timothy Frye's new book, Building States and Markets after Communism: The Perils of Polarized Democracy (Cambridge University Press, 2010). Using lots of quantitative and narrative data from the former Soviet bloc, Frye argues that post-communist reforms were faster and more consistent, with more social transfers, when the political system was democratic. He shows, however, that the benign influence of democracy was conditional on low political and socio-economic polarization. Polarized democracies pursued reforms at a slower pace, with less perseverance and more wavering, and less generous assistance for the losers. The outcomes of polarized democracy were scarcely better than those of autocracy.

Polarized democracy: What Western country does that remind you of? America springs to mind. Growing socioeconomic inequality and increasing Red-Blue polarization have made America's problems increasingly intractable. America's public finances demand reform, but reform has been delayed and inconsistent. The debt-ceiling process was just a high-profile symptom.

Before Europeans start thumbing their noses at America, remember that the reform gridlock in the European Union looks as insoluble, or worse. Europe is polarized between debtors and creditors. And, for the purposes of the only reform that looks able to solve this polarization, a fiscal union, Europe lacks democratic government at the centre.

It turns out that reform of the West could be informed by the experience of reform in the East.

An afterthought: Let me belatedly advertise the most insightful comment that I've read on America's fiscal stalemate, Risk and the government's credit rating, by my Hoover colleague Keith Hennessy, published online just before the decisive vote in the House of Representatives. He argues that American leaders were balancing liquidity risk, solvency risk, and political risks (to themselves). Did they get it right? Read and find out.

Mark Harrison : 08 Aug 2011 19:03 |  Tags: Economics Politics |  Comments (0) |  Close comments |  Report a problem

Pakistan: Is the War Contractible?

Writing about web page http://www.ft.com/cms/s/0/3574b5ee-ab15-11e0-b4d8-00144feabdc0.html

Relations between the United States and Pakistan have been going downhill since the killing of Osama bin Laden. Ex ante, it seemed likely that the Pakistan Army had offered some degree of shelter to the world's most wanted terrorist. Ex post, Pakistan has halted U.S. access to a drone base on the Afghan border; cut back on visas for U.S. training missions; and detained a doctor said to have helped U.S. intelligence identify bin Laden's family. In retaliation, the United States is now threatening to withhold $800 million in military aid.

The Pakistan response to this threat throws further light on the status of Pakistan as a U.S. ally in the war against Al-Qaeda and the Taliban. On July 10, 2011, the Financial Times reported:

Lieutenant General (retired) Moinuddin Haider, a former Pakistani interior minister, said that the halt on US aid would further strain the two countries’ relationship and called on the US to reconsider. “This move will only add to the anti-Americanism in our country,” he said.

The following day, Reuters reported:

Politically, [the suspension of aid] would be damaging to the relationship, said Pakistan's former ambassador to the United States, retired Major-General Mehmood Durrani said, reflecting a widespread view in Pakistan that it was fighting America's war, for which Washington must reimburse it.

So: Is Pakistan an ally or an enemy? Neither, it seems. There is anti-Americanism, but Pakistan is not an enemy. For Pakistan does make available services and facilities to combat AQ and the Taliban. But Pakistan is not an ally, either.

Nearly 50 years ago, Mancur Olson and Richard Zeckhauser worked out the basic theory of burden sharing in alliances. Consider two countries -- call them A and P -- that face a common enemy. A and P can fight together or separately. By fighting together, they can share the synergies from each other's efforts. For this reason, an alliance is vulnerable to free-riding: the more A contributes, the less P needs to put in. This turned out to explain quite well the pattern of burden sharing in NATO under the doctrine of massive retaliation.

The same theory leads to a straightforward prediction about what will happen if A suspends assistance to P for some reason. On its own, denied the help of A, P will put more resources into the struggle.

But what Pakistanis are saying does not fit this model. What they are saying is that, denied the help of America, Pakistan will fight less, not more. It is "America's war."

If neither an ally nor an enemy, what is Pakistan? Pakistan is a contractor. There is a contract between America and Pakistan, so that America mostly pays and Pakistan mostly fights or helps America fight. Pakistan will help resist AQ and the Taliban if America pays, and not otherwise. It is the same as a contract between me and a builder: I pay, so the builder builds, and not otherwise. There is no intrinsic common interest that we share. Incentives are aligned by agreed payments, not by anything else.

The work that my builder does, however, is contractible. That means we can write a contract that spells out the obligations of both sides with reasonable completeness, and includes most reasonably foreseeable contingencies. He works to my wife's satisfaction, I pay, and we part amicably. Otherwise, we may end up in court.

The war on AQ and the Taliban may not be contractible in the same sense. There are three reasons.

• First, there is asymmetric information. It's hard to tell whether the Pakistan Army is doing a good job, because it is hard for the Americans to monitor progress in harsh terrain among often hostile communities. As a result, America cannot know whether Pakistan is fulfilling its part of the bargain.
• Second, there is moral hazard. The Pakistan Army can explain almost any setback by "We didn't know" (that bin Laden was living under our noses) or "They got away." As a result, Pakistan has a strong incentive not to try very hard.
• Third, the Pakistan Army has residual ownership rights in the literal sense that it owns much of the Pakistani economy and is much more of a sovereign government than the nominal civilian government in Islamabad. As a result, when contingencies arise that are not in the contract, it can control its response in ways that do not formally breach its understanding with the United States over Afghanistan, yet are not ones that the United States would choose. For example, it can secure nominal improvement on the North West frontier by diverting Islamists into Kashmir or on to Mumbai.

A standard solution when a venture is non-contractible is vertical integration. In this case it would require the United States to take on the responsibilities of a colonial power. Ruling this option out on grounds that probably don't need spelling out, we are left with an interesting problem and no obvious solution.

Mark Harrison : 15 Jul 2011 21:24 |  Tags: Economics Pakistan Politics |  Comments (0) |  Close comments |  Report a problem

Mine's a Litre: Are We Paying Too Much for the Road Lobby?

Writing about web page http://www.guardian.co.uk/business/2011/jan/09/fuel-prices-truckers-threaten-blockades

Yesterday a friend asked if I liked UK Petrol Blockade 2011. It turned out to be a cry for Something to Be Done:

Fuel has gone up too far now the tax is mad By the end of 2011 it will rise to over 1.50 a litre so remember the petrol blockade in 2000 Time for that again i say it will lose the Fuel companys money so the government will also lose money and look bad as the companys will add pressure on to the government so will have to do something about it it will take time but we need to do something now

I didn't take this too seriously until this morning, when I read in The Observer:

The spectre of trucks blockading streets in protest at record fuel prices – on top of student and public-sector worker demonstrations – will be raised tomorrow when the haulage industry unveils a campaign to force government to halt rises in petrol duty.

I thought hard about this. What was it all about? It seemed to be aimed at the government. Maybe the logic behind it was this:

• Fuel taxes are rising because the government needs more revenue just to pay for public services and welfare benefits that are currently funded from borrowing. Let's stop the government raising some of the taxes it needs, and force them to strip even more funding out of benefits, care homes, and so on. 

No, it couldn't be that. Maybe the real target was the oil companies:

• Pension funds are already hurting because BP suspended dividend payments after the Gulf oil spill. Let's hit the pensioners even harder by disrupting oil company operations so that they face higher costs and lose more revenue and profits, and cut dividends further ...

No, it couldn't be that, either. Maybe it was simpler than I thought:

• Consumers are already hurting because of job losses and price and tax increases. Let's hurt them some more by blockading fuel supplies so that we can't move around, go to work, or buy stuff ...

Hmm. Somehow, I thought, we're getting further and further away from reality. This was my last throw:

• Food and oil prices are rising because the global economy's recovering from a dangerous recession. The recovery is increasing jobs, incomes, and the demand for commodities. As a result, oil prices have risen again. If the recovery is the problem, the solution's obvious. Let's stop the recovery and take the economy back into recession. If we can bring back the recession, oil prices can drop back down, making it cheaper for the people who lose their jobs a second time to drive the cars they won't be able to afford any more ...

I'm still struggling with that one.

The fact is that fuel should be taxed, for two reasons. First, fuel taxes are hard to avoid, so it's a good way to raise revenue. Second, burning fuel emits a lot of pollution and carbon dioxide, and the people that use it should pay society back for the damage they do to the environment we all have to share.

Is there any kind of case for giving the road haulage industry special treatment? A case that's been made involves unfair foreign competition.

Britishtruckers.com is arguing that UK firms are more at risk because of competition from abroad with foreign vehicles able to operate in Britain using cheaper fuel picked up on the continent.

It sounds compelling -- but think about it. There is less here than meets the eye.

Some truckers compete with foreign vehicles; others don't. The ones that face foreign competition are on the same routes as vehicles from overseas. That means they have exactly the same opportunities to pick up cheap fuel on the continent as their competitors. It's their choice if they fail to do so. No unfairness there.

In reality, the truckers that compete internationally are a situation no different from those that compete in the domestic market. If their fuel costs go up, they can either pass them on or not. If they can pass higher costs on to the customer, they're all right. If they can't, because their customers won't pay, there's a message in that -- like it or not.

It's not a case for special treatment.

On one point, I agree. In the UK, taxes on fuel are too high, relative to road charges. Fuel taxes should come down and, to compensate for this, congestion charges should be put in place in city centres and motorways. (And, of course, these charges will be paid the same by British and foreign truckers.) Why should this happen?

It is costly to provide roads, but in the UK nearly all road use is free. Because road usage is not priced, many of our roads are over-used. As a result, there is pressure to expand the road network, creating costs that would be avoided if road usage was not free of charge.

Other results of our lack of road charging include excessive wear and tear of roads (mainly by heavy trucks) and congestion (mainly by light passenger vehicles). Congestion wastes everyone's time and also increases fuel consumption because vehicles burn too much fuel while idling, creeping forward, and starting and stopping.

Some of the burden on motorists should be shifted from taxes on fuel consumption to charges for road usage. With less traffic on the most congested roads, we can save money on providing and maintaining them, and less time will be wasted in queues and jams. We could all end up better off.

There's only one problem: Campaigners for lower fuel taxes often turn out to be the most vehement opponents of road charging (not to mention speed limits, speed cameras, traffic lights, and other stuff). In other words, they're not interested in improving things for society. They just want to shift the costs of their own choices and activities onto other people.

Ironically, therefore, the road lobby itself is one of the biggest obstacles to moving towards a more efficient distribution of the tax burden -- including lower fuel taxes. Everyone's aware of the price we pay for petrol, but what about the price we pay for the road lobby? It may be higher than you think. Someone should do something about it.

Mark Harrison : 09 Jan 2011 19:51 |  Tags: Economics Politics Recession |  Comments (2) |  Close comments |  Report a problem

Russia in 2010: One Step Forward, Two Steps Back

Where will Russia go in 2011? Under Putin and Medvedev, Russia is not a democracy but the Russian government is not heading back to Soviet-type totalitarianism. The absence of political competition is not the primary problem; it is the absence of the rule of law.

Russia today has markets and private property. It is not the Soviet totalitarian state; nor is it, strictly, a “mafia state.” That is one step forward. But Russia’s government seeks the power to intervene at will, selectively and at its own discretion, in markets and property relations. The government stands above the law. The result is two steps back. You can see this clearly in four stories from 2010.

Story no. 1: Russia suffered a harvest failure and nobody died

My first story comes from agriculture. The summer of 2010 saw a severe drought across Russia. Harvests failed disastrously. In the Soviet past, failures on similar proportions occurred in 1932 and in 1946. When that happened, there were severe regional famines in which millions of people starved to death.

After the harvest failure of 2010, two things happened that were in striking contrast with the Soviet past. First, no one died. Instead, when food prices at home threatened to rise, the Russian government responded by imposing an export ban, requiring Russian food suppliers to break their contracts with foreign buyers. Second, this exposed the fact that, for the first time since the 1920s, Russia is exporting food to the West. Under a market economy, Russian agriculture has become a competitive success. (It does not take much to be a success by Russian standards.)

The reflex responsive of the Russian administration was a bad sign, however: to try to control prices by restricting the market and breaking contracts. This will limit the incentives for Russian farmers to make the forward looking investments that will reduce harvest volatility in the future. Foreigners will become less ready to make forward contracts for Russian exports, knowing the state can override them at any time. 

Story no. 2: President Medvedev has seen the future, but can he make it work?

In 2010, President Medvedev visited Silicon Valley – the urban sprawl south of San Francisco that has generated the world’s biggest concentration of innovation start-up ventures. Now, the Russian government wants to build an analogue in the district of Skolkovo outside Moscow.

The goal is to promote five presidential high-tech directions (one is tempted to substitute the Soviet-era jargon of “priorities”) of modernization: Energy production, IT, telecommunications, and bio-medical and nuclear technologies.

There is some sound logic behind this. Yes, it’s true that economic development involves new urbanized configurations. Yes, it’s true that Russians don’t live today in the right places for innovation.

Most Russians are spread out across Russia’s vast landmass in small and medium sized towns. They are too immobile (apart from the ones that have gone to live abroad, many in places like Silicon Valley). Lots of young people need to move to big sprawling cities and suburbs to squash up and rub together, mix ideas and talents, get funding, and start up new innovation-based ventures. In fact, quite a lot of them would like to, but can’t because Moscow is congested and operates a restrictive system of residence permits.

Like other poor countries, Russia may also need to experiment in new ventures to uncover new comparative advantages.

In short, there is a respectable case for the Russian government to do more to encourage movement away from rural districts and remote small towns, and let its largest cities grow further. It should also stand ready to subsidize pioneering entrepreneurs.

But what Medvedev actually has in mind is to create a controlled environment for approved people and favoured companies to sit in a green field outside Moscow. This is not the process that gave rise to Silicon Valley. The Russian government will not be able to commit itself not to meddle and grab. The powerful military-industrial lobby will not be able to stand aside and let individual enterprise make and take profits.

If it is ever built, Russia’s new innovation city will drain the state budget of grants and subsidies. There will be just enough spin-offs that everyone will declare it a success. The aggregate net benefit will be zero or negative.

Story no. 3. You have been warned: Russia has a new law on the secret police

After the Soviet Union collapsed, Russia went from a government system of micro-controls on everything to too little government control. In the 1990s, public confiscation was replaced by “piratization” (from the title of a book by Marshall Goldman). The Russian state went from having far too much capacity to having too little capacity to raise taxes and regulate public life. In fact, the thing that gave the first Putin administration its legitimacy was public recognition that some restoration of state capacity was deeply necessary.

Up to a point.

But Prime Minister Putin is ex-KGB, and part of his mission has been to restore the power and prestige of Russia’s secret services.

Russia’s Parliament has given first reading to a new law on the FSB (the domestic security service), which illustrates the direction of movement today. It gives the FSB the power to issue legally binding warnings to people who might be about undertake illegal actions. This reinstates the legal basis of the KGB practice of controlling the behaviour of persons who were on the edge of politically or culturally deviance or defiance by warning them off.

The reinstatement of the early warning system matters not only in itself, but for what must lie beneath. The KGB’s ability to control deviance by giving out early warnings rested on a vast apparatus of informers and mass surveillance. It could hand out tens of thousands of warnings a year across the vast Soviet territory because it kept individual tabs on millions. Mass surveillance enabled the selective intervention that kept the population quiet and conformist.

The new law on the secret police does not bring back totalitarian control, but it makes little sense unless the FSB is quietly rebuilding its networks of spies and informers on a mass scale.

Story no. 4: Some go to jail, some go free

After the violent London demonstrations over tuition fees, the British police identified and arrested 180 participants suspected of carrying significant responsibility. After race riots in Moscow, the Russian police rounded up no less than 800 ringleaders (I don’t know what happened to them after that). So there is something, at least, that the Russians can do better!

Probably, no one I know is going to shed any tears over the fate of violent ultra-nationalists and fascists. I confess to feeling ever so slightly sorry for them. They were used by the Russian government as a lightning rod until the voltage ran out of control. Now they can be slapped down, at least for the sake of appearances. Moreover, the same police that could locate and arrest hundreds of suspects in the course of weekend doesn’t seem to be able to find the murderers of dozens of journalists killed in Russia in the Putin era. Hmm.

Which brings me to the latest victim of selective Russian justice: Mikhail Khodorkovskii. Khodorkovskii was put away originally for trying to break away from the “mafia state” that originally gave him his fantastic wealth. The first time, he was put away for evading taxes on his company’s profits. The second time, it was for stealing his company’s entire revenues.

If you treat this literally, it is then hard to explain how it was that his company was making taxable profits at the same time that Khodorkovskii was stealing the revenues. But the underlying principle is not that complicated. In Russia, the state decides first who is guilty. Then, it decides what they are guilty of.

It is cheering to see violent thugs get what’s coming to them, but it is still a mistake to cheer when you see a few unpleasant people put behind bars. Under the rule of law, you go to prison because you have broken the law, not because some official has decided you might be a threat.

These four stories suggest where Russia is moving: towards a state with increased discretionary power to intervene as it chooses to control prices and direct resources, subsidize favoured interests, control deviance, and lock up or kill inconvenient people. By the standards of Russia’s Soviet past it is definitely one step forward. This one step is hugely important. Russia is no longer a totalitarian state of mass mobilization and thought police. But, compared with the “normal” society that Russians deserve, and that Russia's friends wish for, it is two steps back again.

PS The best things I have read about Russia recently are:

• How law may come to Russia, by Anatol Lieven in the Financial Times, December 6, 2010.
• And, on Medvedev versus Putin, The Khodorkovsky Verdict: The Power Struggle Is Now On, by Paul Gregory in his blog, December 28, 2010.

Mark Harrison : 31 Dec 2010 10:25 |  Tags: Economics Politics Russia |  Comments (3) |  Close comments |  Report a problem

The Welfare State: Reports of Death Exaggerated

Writing about web page http://www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/documents/digitalasset/dg_191696.pdf

Panic is in the air, especially in the British public sector. Yesterday's comprehensive spending review prompted BBC Radio CWR to ask me this morning if this marks the end of Britain’s welfare state.

There will be a major contraction, for sure. At the same time, it is far from the end of welfarism as we have known it since the late 1940s. George Osborne’s cuts, if and when they take effect, will bring the government’s share of GDP back down just below 40 percent – that is, where it was in the early 2000s. At that time, less than a decade ago, the welfare state was still alive and well.

What will have changed? Most likely tomorrow's welfare state will be smaller than it is now. And the principles on which it is based are evolving. But given the scale of cutbacks, the evolution of the principles is surprisingly slow.

Principles of the Welfare State

At their simplest, the principles of welfare that were implemented after World War II can be put like this: The state would make minimum provisions for everyone. Coverage would be universal; no one would be allowed to opt out. The insurance provided would be lifelong, from the cradle to the grave. Everyone would contribute according to their means; everyone would get the same low, flat-rate benefits in case of need at any time in their lives.

At first sight, it’s not obvious why we, as a country, couldn’t afford this now and forever. After all, the main changes that have happened since 1950 would seem purely advantageous. On average, we are several times richer now than then. On average we lead longer, healthier lives. What could spoil this?

At the core of the problem is a simple fact: while our lives have improved rapidly, our sense of entitlements has increased out of proportion. This is best illustrated by the problem of pensions.

Why Old Age has Become a Problem

Work produces the wages and profits that are taxed to pay for the welfare state. Since 1950, childhood and retirement have encroached on the years of life in between, during which most people work.

• In 1950, many people left school at age 14. Today, in contrast, many do not enter the workforce until their early twenties.
• In 1950, male retirement was normally at age 67. Today, the average age of men’s retirement has fallen to their early sixties.
• In 1950, most men died before retirement. Only a minority lived long enough to collect a pension. Today, men’s life expectancy has increased to exceed the retirement age by about 15 years.

Old age has become a joy for millions. Free of family chores and work responsibilities, still in good health, our seniors can please themselves – provided they have an income. But the proportion of retirees in the population is rising steadily while the proportion that works to pay for them is declining. It can’t go on.

The government is bringing forward increases in the normal retirement age, one year at a time. It would be more sensible to link these changes to measured life expectancy. For example, if we should expect to spend half our lives working, then the retirement age should rise by six months when life expectancy rises by a year.

From Universal Benefits to the Means Test

The principles of minimum provision and universal coverage are still surprisingly strong in the British welfare state. There is still universal health care that is largely free, and there is free compulsory primary and secondary schooling. There is still a universal state pension with universal pensioner benefits – free TV licenses, bus passes, and winter fuel allowances.

If anything, it is a problem that these benefits are too generous. They are no longer at the low level that made the welfare state affordable in the 1950s. The fault lies largely with the strength of the pensioner lobby – all those healthy voters with time on their hands and nothing better to do than demand more rights.

To me it is a scandal that, over 60, but in good health and in full time employment on a good salary, I'm entitled to a bus pass and a winter fuel allowance. We know winter fuel allowances aren’t spent on winter fuel. These benefits go to millions of people who are neither poor nor fuel-poor. The poor exist, for sure; but the idea of the "fuel-poor" is just a vote-selling scam.

Although the principle of universal benefits is still alive, the British welfare state has always imposed means tests for some entitlements. Their role has been increasing for some time; in fact, as chancellor under Tony Blair, Gordon Brown made important use of means tests to target funding on child poverty and pensioner poverty. George Osborne has now extended the practice, most notably by stopping child benefit payments to higher rate taxpayers.

it seems inevitable that high level income support and care funding will become ever more conditional and selective. This started long before George Osborne and will continue long after him. But the spirit in which it is happening right now owes a lot to the coalition government’s approach to fairness, as I see it.

The Undeserving Poor

The comprehensive spending review claims that the burden of cutbacks will fall disproportionately on the highest income groups. This claim has been criticized already on the grounds that it includes higher-rate income tax increases adopted by the outgoing Labour administration. Actually, it seems reasonable to me for the government to borrow some credit for this. Under better circumstances, surely, Conservative leaders would have liked to reverse the Labour income tax increases. To them, therefore, it was a deliberate choice to retain them. If that deserves a little credit, then let them have it.

Undoubtedly, however, a considerable burden must still fall on the poor. What I see in the spending review is a perspective on fairness that sets out to be fair to one section of the poor: the deserving poor. As for the rest, they are undeserving.

The idea of the undeserving poor goes back centuries; it is not even Victorian, although many Victorians followed it; see Alfred Doolittle’s well known definition.

Who, in George Osborne’s book of morals, are the deserving poor? They are the working parents and the pensioners that worked long and hard to save for retirement. To these will be given. To the undeserving poor, especially the parents that don’t work and the pensioners that took early retirement and didn’t save up for it, the spending review offers only tough love.

Controlling the Consequences

For a country of its size, Britain is said to have one of the most centralized systems of local government finance in the world. A significant paragraph in the spending review cuts away at overcentralization. While central government funding of local authorities will fall by one quarter, most of the ring fencing will be removed, freeing the hands of local councils to decide on local priorities.

Much of the non-cash dimension of the welfare state is decided locally through spending on social and care services, both residential and in the community. The removal of central government controls will increase local discretion over the amount of provision and the rules that say who gets it. And your local councillors, not your MP -- and not George Osborne -- will be to blame.

In Sum

The welfare state is not dead yet; managed prudently, it should last my lifetime and yours. But it will become smaller and less open handed.

Whether it will be more or less fair depends on your standpoint. If you care more about the equality of personal outcomes, then you'll see British welfarism moving away from fairness. If fairness is more about the balance between personal outcomes and personal efforts, however, you'll probably welcome the direction in which we are going.

There will always be unintended consequences. The process of change must create grave risks of harm to vulnerable and needy people. Against those risks is the impossibiity of continuing as we have done.

Mark Harrison : 21 Oct 2010 15:33 |  Tags: Economics Politics Recession |  Comments (0) |  Close comments |  Report a problem