Tag Archive | economics

On the future of the euro and Europe

I had the pleasure this evening of listening to John Peet, the Europe editor of The Economist, giving a brief yet insightful talk on the future of the euro and how it relates to the future of the “European project” – the political and economic institutions that comprise the European Union. Sadly I didn’t take any notes during the talk and subsequent discussion, but here are a few thoughts.

Mr Peet was correct in saying there seems to be something perverse about poorer countries paying to bail out those with more wealth – countries that have already been bailed out (notably Ireland and Portugal) have been asked to contribute billions of euro to a fund that will likely come tobe used to “rescue” the Italian government and European bankers and bondholders.

Another interesting fact briefly alluded to was that traditionally the European elite have been – either intentionally or otherwise – oblivious to their own role in the crisis. Countries – in particular Greece – were allowed to join the euro even though they failed to meet the fiscal and monetary conditions set out under the Maastricht Treaty of 1992. Moreover, many countries had imposed upon them enormously pro-cyclical monetary policies that caused unsustainable booms – here, Ireland is a principal example. Yet Jose Manuel Barroso has laid the blame for the ongoing sovereign debt crisis almost entirely at the feet of the “markets” and speculators, apparently refusing to contemplate the idea that the eurozone optimal currency area was nothing of the sort.

There are however areas where I found myself in disagreement with Mr Peet. I will do my utmost to represent as faithfully as I can his arguments, but I apologise if my recollection overlooks various nuances in his argument.

The prospect of a Britain largely excluded from the decision making process of the European Union (a scenario envisioned by some commentators in the wake of Mr Cameron’s “veto” of fiscal pact negotiations for the currency bloc) is, in Mr Peet’s view, a troubling one. I agree virtually without reservation that decisions imposed upon Britain without British input is a situation that should be avoided, but I don’t think that this entails the need for greater integration of Britain in an increasingly federalized Europe. Indeed, if the goal is for Britain to have as much influence as possible in the decisions that affect it, then the logical solution would seem to be to withdraw from the institutional structures of the Communities and regain “complete” influence on policy.

It was also said that should the euro fail, it would also be the end of “Europe”. It’s not necessarily true that a catastrophic failure of the single currency would lead to a disintegration of the political settlement that governs the twenty-seven members of the Union and political integration existed long before the euro, but Mr Peet is right to say that it would be made likely, with the single market weakening as national governments attempt populist economics in an effort to restore a semblance of stability should national currencies be reintroduced. Where my own assessment differs from the speaker’s is whether this would be a catastrophic event. I don’t think that it would be. Over the past century, the world has seen a trend toward ever-lowering barriers to trade between economies (notwithstanding the currently-stalled Doha round of trade talks) with free trade taking preference over protectionism. There’s no reason to think that, in the long run, this trend would be counteracted by a potential but by no means guaranteed increase in obstacles to trade between European Union members, most of whom recognise the benefits of such policies entirely independent of the existence of the political Union.

In Defence of Austrianism

Ron Paul’s comment that “… we’re all Austrians now” might seem odd to those unfamiliar with a school of economics that reached its peak around the 1930s and has since remained largely outside of mainstream thought. Cue Slate’s attempt to explain – and discredit – a system of economic thought that has helped explain the role of prices in economic calculation, discredited socialism and put forward powerful tools for analysing human action.

The article is here.

Here are a few quotes, and thoughts.

Most notably, it seeks to build a strong ethical case for strict libertarianism without admitting that this would lead to any practical problems whatsoever.

I think this point demonstrates that the author has ignored entirely a tenant of Austrian economics – namely, that it’s value free. Austrian economics is based on a priori reasoning (specifically, the action axiom).

The business cycle theory of Mises, Hayek and Rothbard argues that entrepreneurs engage in unsound investments as a result of artificially low interest rates. Slate counters:

 [I]t’s hard to understand why businesspeople would be so easily duped in this way. If Ron Paul and Ludwig von Mises know that cheap money can’t last forever, why don’t private investors? Why wouldn’t firms avoid making the supposedly dumb investments?

The difficulty for the entrepreneur comes in determining which interest rate fluctuations are driven by the changing time preferences of market participants, and which are driven by central bank manipulations. Investment in longer production processes certainly makes sense in the first case given the increase in total available savings, but evidently not in the second case. This is true particularly in longer periods of “cheap credit” where entrepreneurs who did make investments are able to make greater profits than those who were more cautious, encouraging a greater number of firms to make investment decisions that will eventually be demonstrated as unsound.

 Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting and country after country stimulated real output by abandoning the gold standard and engaging in deficit spending.

The idea that the Great Depression was an example of the failure of the free market has been tackled time and time again. Mr Hoover’s presidency was one of unprecedented deficit spending and debt expansion, and his policies of protectionism  preventing the necessary decline in real wages continued under Roosevelt. If the author of the Slate article wants an example of a recession dealt with according to a largely Austrian prescription, he would do well to look at the recession that hit the United States in 1920-21.

As a final point:

Unfortunately, however, it’s the Austrian school, which preaches despair and demands no action at all, that has the most effective political champion and the most dedicated followers.

The Austrian school does not preach despair. If anything, it does the reverse – it says the way that a society can be returned to prosperity is by getting government out of the way. Yes, recessions are evil, but they are a necessary evil. If government allowed them to occur, instead of artificially maintaining factor prices and bailing out bad business, the despair would be mitigated and the economy could return to growth on secure foundations.

Most Western economies have been subject to massive stimulus spending and monetary “easing”, more often than not without success. The proponents of this economic activism seem to be blind to its failures, and in response demand more and more intervention. I’m forever curious as to what they would view as discrediting their economic outlook – just how much money must be confiscated by taxation or the printing press before they realise borrowing your way out of debt and spending your way out of recession doesn’t work?

 

 

Crazy-nomics?

Two points stand out after watching via iPlayer Stephen Sackur’s interview with Marine le Pen, leader of the French Front National, for the BBC’s Hardtalk.

  •  Ms le Pen proposes to repeal laws that restrict the Banque de France lending to the government at low interest rates, removing her country from international financial markets. The same financial markets that have forced eurozone leaders to accept that they saved too little in the good times and spent too much in the bad and enact policies to bring their fiscal policies to more sustainable levels. In short, she proposes opening the door to massive government deficits that ultimately come at the expense of the people who are forced to pay the money back through taxes or, as is more likely, through having their spending power reduced by inflation.
  • The French economy certainly suffers from being uncompetitive on the global stage and Ms le Pen is correct that some of that is as a result of being unable to devalue the currency in much the same way the United Kingdom did during 2008 – 09. Yet uncompetitiveness would persist under her leadership even in France returned to the franc – the country’s would-be president denied categorically that France is harmed by its restrictive labour laws, including collective bargaining agreements that are imposed on third parties and the minimum wage, which serve to push up relative labour costs and actively contribute to the country’s declining competitiveness.

The Front National are not short on policies and rhetoric that should make them unelectable even discounting their apparent economic illiteracy – the people of France should take note.

Obama, Productivity and Unemployment

From Carpe Diem:

While traveling by car during one of his many overseas travels, Professor Milton Friedman spotted scores of road builders moving earth with shovels instead of modern machinery. When he asked why powerful equipment wasn’t used instead of so many laborers, his host told him it was to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs was his host’s logic.

“Then instead of shovels, why don’t you give them spoons and create even more jobs?” Friedman inquired.

President Obama has gone on record in the past as saying that ATM machines destroy jobs. He’s even developed his own theory as to why productivity gains are leading to the current jobless “recovery” in the United States. He would do well to acquaint himself with the level-headed and common sense thinking of Mr Friedman.

Property Rights, Not Regulation

The European Union has unveiled a complete overhaul of its Common Fisheries Policy, designed to prevent the endemic over-fishing of marine stocks in European Union waters. The previous incarnation was a centralised, distant and ineffective mess which did little to conserve fish stocks and much to line the pockets of special interests. In the 28 years it has been in effect, European boats have been forced to cast over the side thousands upon thousands of tons of dead fish to avoid exceeding set quotas, a move which has ultimately hurt fishing fleets both small and large. It is a relief that the Commission has recognised the abject failure of the CFP, with the Commissioner for Fisheries stating,

There is overfishing; we have 75% overfishing of our stocks and comparing ourselves to other countries we cannot be happy. So we have to change. Let me put it straight – we cannot afford business as usual any more because the stocks are really collapsing.

Indeed, the new policy has a number of features that are a vast improvement on the previous regulations. Specifics with regards to particular fish in particular seas will be largely devolved to individual states and the whole approach will mean a transition away from subsidy that has helped maintain inefficient fishing fleets and fishing boats. The proposals, however, do nothing to tackle the real reason for the seemingly terminal decline in European fish-stocks – that is, the lack of property rights and the strong economic incentives for conservation that come with them. Bureaucrats in Brussels, or London, Paris or Vilnius have no financial incentive to conserve fish stocks, and have no way of knowing whether their diktats lead to an efficient resource allocation. In other words, they are distanced from the impact of the decisions they make and face no financial repercussions should they fail in the performing of their job. The new regulations fail to overcome what economists term the “tragedy of the commons” – where everyone is free to exploit an economic resource, then individuals will tend to fish as much as possible to gain what they can before someone else comes along and does the same.

This latter situation is avoided where clear property rights exist. If I own a certain resource and make my living from it, then I have an economic incentive to conserve fish stocks so I can continue to benefit from my property over the long-term. It is a misconception to think that businesses only think short-term when it comes to resource consumption – indeed, the reverse is true.  Where I can exclude others from using my property, I will be able to prevent over-fishing and be able to tailor my fleet to take the best advantage of what I own. Moreover, and just as importantly, a business-owner who owns a resource will face the market test of profit and loss – where he does a good job, he is rewarded with profits. Where he fails to be efficient or effective in serving consumer demand, he suffers a personal financial penalty, unlike distant civil servants in the palaces and chancellories of Europe.

History is replete with examples of the over-consumption of resources thanks to “common” ownership – that is, where individuals have no direct personal stake in long-term resource conservation. It is also replete with examples of private owners ensuring that resources are used effectively and will continue to be so long into the future. Be it herds of elephant in Africa, forests or grazing land in the United States and Europe, the private sector has consistently demonstrated that it out-performs by a wide margin the state in attempts to ensure sustainability. Allow fishing stocks to be privately owned and the problem of over-fishing will all but disappear, all without burdensome regulation and crippling subsidies and diktats.  Of course, such a policy is, sadly, unlikely. Property rights don’t help to line the pockets of special interest groups, do they? In European politics, it seems that this is, sadly, what ultimately matters.