Will Ryanair Charges Change Travellers Behavior?

While I have not taken any flight aboard its planes, Ryanair is a corporation that I have lots of respect for because it has perfected a mechanism to ensure air travel at very competitive prices. Part of the strategy appears to be that it keeps the flights very simple and saves customers from paying for the style that goes with flying and thereby only provides a seat and minimal entertainment and snacks during flight.

A story here shows that the corporation has introduced the idea of charging for luggage that its passengers carry onto flights. The plan is to allow only a single piece of luggage and to resort to punitive charges in a bid to alter the behavior of its customers. As the story states, the rates applied for extra luggage could surpass the amount paid for the ticket itself.

In spite of complaints from consumer organizations quoted on the piece, the express announcement that the airline intends to ensure that there is little luggage to transfer to the hold is defensible. Its easy to see that for a lower budget airline, quicker turnaround times added to a low staff costs are immensely significant factors. It would be worthy of assessment whether consumers in the future opt to travel light and save money or simply take up the costs. Travellers would have to consider the value of carrying three bags onto a flight across cities. While I am unsure about the determination of the price, one can see that someone in this corporation knows that incentives can be used to change behaviour. It may be that passengers fail to respond in the expected way but for as long as they do not travel with a competitor, this may be a welcome revenue stream. Flights may be run inexpensively but perhaps not so for luggage. I am sure that competing airlines are observing this very keenly.

Is Northern Rock the End of Gordon Brown?

Forecasting about the futures of politicians is a game that this blogger eschews because I think that it is the hobby for charlatans. However, it is clear that since his elevation to the premiership, Gordon Brown has faced really difficult times and takes responsibility for bad policy decisions of his government. Anatole Kaletsky of the Times writes about the decision by Gordon brown to save Northern rock, a bank that has faced financial difficulty.

It is a fine article in terms of the analysis of the errors of the convoluted arrangement and the fact that it will merely ensure that tax payers assume the risks while the profits from the rescue package are largely taken by private corporations. I agree that it does not represent a good deal for British tax payers and represents political opportunism. As the piece states, as it stands, this is merely the "nationalization of risks and the privatization of gains".

This blogger accepts that the risk of contagion makes it necessary to attempt to forestall the collapse of banks. However, in light of the principle of considering the opportunity costs of such a delayed and expensive package in addition to the moral hazard, it is clear that decisions to save banks should be the exception as no bank should be saved at all costs.

The Lessons of High Commodity Prices

Part of the argument regarding global trading has been the uninformed view that commodities from low-income countries are available at low prices hence the poverty of farmers and the citizens of commodity exporters. Less informed commentators even suggests that there is a widespread conspiracy to keep citizens of low-income countries poor by depressing the prices of these commodities. Prices of agricultural and other commodities have risen substantially in the last three years and this has been a boom for the citizens of these countries who grow these commodities.

One of the commodities that has seen a rise in prices internationally is palm oil from which is produced most edible vegetable oils. This story shows that the price hike has led to rising incomes but the more important factor driving that trend is the rise in demand for the product. Indeed, the increased demand is a boon but it has had several unintended consequences. One of these is that fact that food prices are trending upwards too with serious consequences on the ability of low-income people to purchase sufficient amounts. Equally interesting is the smuggling and movement of the product to markets where the subsidy levels are lower such as Singapore. The differences in policy are creating real opportunities for arbitrage and more market distortion.

As the high prices provide incentives for growing more crops both for bio-fuels and for food, the products will find use in the industries that will ensure higher returns for the producers. The lesson is that the clamour for higher prices for commodities is fine but efficient markets should be the better choice. As is expected with commodities, the real prices will come down over time even if it looks extremely idiotic to mention that in January 2008.

Trade Between the UK and China to Expand

Gordon Brown is on a visit to China and part of the news coverage from BBC news captured the discussion of the expected expansion of trade between the UK and China over the medium term. However, I am inclined to believe that neither the British Prime Minister nor premier Wen Jiabao are sure that trade between the two countries would expand 50% by 2010. How could they be so specific?

Surely, the two must be aware that there's no way that international trade is bound by a linear formula that would tell about the amount of future trade flows with that degree of accuracy. Indeed, through trade agreements and mutual cooperation agreements, the trade would expand. Still, the idea about pinning a specific number is meant to impress the press and the businessmen in the audience.

What is required is an unequivocal undertaking towards unilateral trade liberalization which would expand trade between the two nations and other nations too. There's no need to pluck from a magic hat to illustrate the importance of trade between the two nations. impressive part about the event is the confidence that Gordon Brown exhibits that Chinese manufacturing could be gelled with the UK's service industry advantage for the mutual benefit of both.

PFI Projects Fails Value for Money Audit

There is a reasonable argument for outsourcing functions that are performed by the public sector to the businesses under the Private Financing Initiative. The logic is that the public sector in most countries is not so established to undertake routine repairs and maintenance work and therefore it is sensible to have outside corporations contracted for those tasks.

Oftentimes the private corporations present very competitive bids in the first instance and after the vigilance is reduced, begin to hike costs and engage in profit maximization at the expense of the tax payers. This report states that the national Audit Office of the UK found that there's an almost tenfold variation in the prices for carrying out certain tasks. This flagrant overcharging gives the idea of outsourcing and private public partnerships a bad name. Still, it appears that design of the system to ensure that the public gets value for money. Granted that the report appears to have highlighted the worst cases of abuse by contractors, even outsourcing and private contractors may game the system.

Are Think Tanks Useful?

Arguments about the contribution of think tanks to public policy remain in spite of the existence of very influential institutions in both Europe and the United States. This argument is rehashed here and provides a definiton then proceeds to traceing the emergence of think tanks in the UK and the policy influence that a select number have had. While this blogger acknowledges readily that the variety of think tanks in the UK and most of the world is no evidence of their utility, it is disingenuous and cynical to state that this influence has been the exception.

An interesting point that may be mentioned is that the quality and utility value of ideas put forth by think tanks is varied and that it is possible that some are sharper with advocacy than with research. It is also incorrect to argue that the only value that think tanks would have is to directly influence policy because those that maintain opposing views possibly cancel each other out. Public education on the workings of the market mechanism and the benefits and costs of alternative economic policies through research forms a significant activity by major think tanks.

Apart from the IEA, the Adam Smith Institute and Globalisation Institute in the UK, there are a number of influential think tanks generating cutting edge research in the UK and other parts of the world. However, the US remains the capital of think tanks with a very rigorous research and publication record in areas of public policy.

Betting on India or China

To the extent that a natural experiment on economic development has been set up, the different political systems and trajectories taken by India and China will be instructive . The reason for this being that they are large in both geographical and population terms in addition to having a largely rural and peasant populations. Pertinent differences between them starts with the fact that China's development is based predominantly on manufactured exports while India's growth is presently driven by a service industry of highly educated citizens. added to the differences in the drivers of growth is the fact that India is defensibly classified as a democracy whereas China's government is still authoritarian.

For this blogger, the nation to bet on has been India on account of the fact that its democratic system of governance may be cumbersome, but it allows for a variety of policies to be tested and discarded. On the other hand, China is able to keep dissent underground and make difficult decisions momentarily but that this is impossible to maintain indefinitely. Indeed, a number of publications show that China may be calm but is not necessarily conflict free. Some of the main posts on this blog have therefore consistently questioned the conventional wisdom stating that China's rise into an economic power is inevitable.

John Kay seems to consider that India's growth model based on export of services is unprecedented while China's approach seems to be in the tried and tested path of attracting peasants from land and into wage manufacturing. It states that this industrialization model allows for mass participation in the economy. Will India have to revise its growth drivers before China is compelled to address the political reforms that it's citizens will demand? The experiment is on and the next decade will begin to yield answers.

Scottish Criminals Subsidize Football Teams

A certain category of crimes are motivated by desire to derive economic benefits from an activity that is considered illegal. Governments are therefore resorting to statutes that ensure that the proceeds of crime are confiscated by the state. In an earlier post here, I have stated my reluctance to support laws that are designed to directly confer benefit to police forces or other law enforcement units. The main reason being that this leads to a distortion of incentives towards pursuit of criminals who hold property. In addition, there are a number of activities such as narcotics enforcement that could be handled by structured legalization because the profits from them arise from the fact of illegality in the first instance.

BBC News reports that in pursuit of its laws defining the treatment of the proceeds of crime, the Scottish Government has dedicated ₤2.2 million to support schools-based football teams. The Cashback for Communities Scheme focuses on this activity and is probably intended to get public support for the overall scheme. However, I am reluctant to accept that this is an efficient way to use the money in addition to questioning the assumptions about supporting youth activity to deter future crimes.

In addition, this cash injection is an overt subvention to both the Scottish Football Association and by extension the professional football clubs who would employ the successful students from the coaching. Affluent enterprises such as professional football club should not benefit from the confiscated property of criminals. This merely demonstrates the bizarre effects of the zest to punish criminals. Greater thought ought to go to better use of the money.

Let Apple Price its Music

This IHT story shows some really bizarre actions by the European Competition Commission against Apple. The substance of the action is that the commission accused apple of unfairly making British buyers of music from the iTunes stores in the UK to pay a higher price than equivalent consumers in the rest of Europe.

Despite my unqualified enthusiasm for enforcement actions that increase the degree of economic competition, I am not sure that the commission is working in the the interests of the consumers by trying to impose a standard price within the EU countries. Instead, the Commission would be better advised to seek to abolish the requirement that buyers of music must use a payment card that was issued by a bank based in the country from which the purchase is being made.

Considering that music is a now a good being purchased and delivered through the internet and consumers should not be compelled to make purchases from specified sites based in certain countries in the first instance. That restriction is a far greater hindrance to competition that harms consumer interests than the price discrimination that that the commission is sweating about. In a single market, consumers ought to be able to purchase goods using a card issued in any member country.

Even more puzzling is that this complicated situation is the result of different requirements of copyright laws. The story suggests that part of the settlement will lead to the creation of a single market for music. That is what the Commission should have sought in the first place and left the matter of prices alone.

Choosing Between Income and Purchasing Power

One hears many comments with varying degrees of sophistication about the inevitability of China's economy overtaking that of the US in respect to absolute size. This blogger considers that forecasts in the growth of GDP based on today's rates are bound to be highly inaccurate over the medium to long term. Therefore, I am quite circumspect and consider that the probability of that happening to be slim.

What one hardly hears is the possibility that incomes of residents of the UK will catch up and overtake those of US citizens. Reading this piece from the BBC News site, I was astonished by the claim that that UK incomes will surpass that of US residents. Knowing that the US economy is especially vibrant, the reasons cited for that fact are even more telling. One of the reasons has been that the UK economy has grown consistently since 2001 and the other is the relative weakness of the US dollar.

Surprisingly, while the average income for the UK resident has passed that of the US resident for the first time since the 19th century, the relative openness and competitive nature of the US economy implies that the US resident maintains the higher purchasing power. Sustained growth and intense internal competition appear to be the harbingers of high income and meaningful purchasing power.

Quoting Charlie Munger

"The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register, helps the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms." Charlie Munger, Vice Chairman of Berkshire Hathaway

The above quote is taken from the address by Charlie Munger during the Undergraduate Lecture to students of the University of California (Santa Barbara) on the 3rd October 2003. While the quote itself states how innovations assist the development of business and human progress agood proportion of the 25 page document is a reminder that microeceonomics( I prefer Price Thoery) is far more useful than is often acknowledged and is deserving of a higher profile than macroeceonomics. In addition, it states the very valid point that quantitative analysis added rigour to the discipline of economics but that the complexity of human interaction ensures that the pursuit of certainty is not entirely possible.

However, I categorically reject his view that the endevaour for free trading with China would lead to differential rates of economic growth in China's favour and therefore the ultimate supplantation of the US by China. He assumes that China's growth and domination is a given and that is an assumption that history, together with dispassionate analysis and simple use of an algorithm suggests to be an overstated but unlikely matter. I would bet against him on that.

Is Google taking on Microsoft?

A number of software corporations that tried to frontally compete against Microsoft did not succeed much but that may have as much to do with the latter's business ability than the aggressive tactics that many claim that the largest software firm employs. Still, my understanding of any market is that no corporation can enjoy the extreme dominance that Microsoft does regarding any service without attracting an equally capable firm sooner than later.

An article in the NYT reports here that Google is the latest firm to frontally seek to compete with Microsoft. In itself the story is an interesting case of industry reporting because it exposes the different views that the two companies have about the future of computing in general. the story suggests that Google considers that most work processes will move to the internet and therefore it is considering the placement of applications that may be accessed through that medium. On the other hand, Microsoft does appear to consider the internet as a mechanism for supporting computing services and considers the high regard that Google is reported to place on Cloud Computing as ill-informed.

To my mind, I see in this the possibility of Microsoft's hubris in considering that cloud computing has no chance. It ought to review the intelligent decisions institutions such as universities are taking in moving a host of services onto the internet. secondly, since university campuses constitute the places in which the per capita use of a variety of computer applications does take place, Google's experiment is not as bad as one may think. This does not necessarily imply that most computing services will shift wholesome to the net and into Google's palms but it is possible that a substantial number of them will be efficiently delivered through the web.

In addition, the article exposes one of the distinguishing facts about Google's creative style and that is tied to speedy execution. Because Microsoft has the sustained tendency for the late release of products, it should be less sanguine about facing a corporation whose creative talents operate on a five month cycle. Whichever way the battle goes, all users of software products and services will benefit from the intense competition between two firms with immense reserves of cash and human resources. My guess is that a good proportion of the applications will migrate to the web in the medium term and that some of that will continue to be provided by Microsoft.

China's Measured at Today's Prices

For a country that is growing comparatively fast and very highly populated, the most appropriate measurement of China's Gross Domestic Product remains an unsettled matter for a number of dispassionate economists. News articles in recent years have suggested that that China's GDP has been underestimated and that the economy is therefore substantially larger than official statistics indicate.

Eduardo Porter mentions here, that a crucial weakness in the conventional estimates failed to take account of the price changes in the 1980s makes it clear that the economy in comparative terms is substantially smaller. Comparing against the most updated prices in China shows that the Chinese economy is indeed large but is not as close to other economies whose size is measured with more recent prices. From this situation, it is clear that considering Purchasing Power Parity (PPP) is not an abstraction and ought to be taken into account if meaningful comparison of economies is to be used in public discussion. It is also clear that future demand for energy in China would probably be higher than anticpated to ensure that it maintains the level of expansion as it is still very efficient. On the positive side is that fact that the need for an effeicient alternative to petroleum remains in the comercial intrest of both china and India.

Price Fixing by UK Supermarkets

The Office of Fair Trading of the UK has levied fines totaling £116 million against Sainsbury's and Asda following their admission to having engaged in price fixing for dairy products. Given that these firms have admitted to the charges and opted to settle the matter, one cannot reasonably argue about the size of the fine itself or the punitive nature of that settlement. As this story states, a number of other supermarkets in the UK have not reached an agreement hence investigations will continue against them.

It is noticeable however that the offenses for which the firms are charged occurred between 2002 and 2003. This leads to the thinking that either the OFT is more inclined to act after firms have benefited from the offenses or that timely detection of price fixing is particularly difficult. Given the enormous sums that it raises while levying fines, the OFT should consider the development of a random price tracking algorithm to detect movements in price that suggest price fixing. Put forensic economists to work here because it is seems that price fixing is more prevalent than is immeditely evident.

Why Make Use of the iphone a Nuisance?

Apple has gone from a corporation that designs and makes computers and related software and into other successful electronics products such as the iPod and the iphone. it is while bearing this in mind that I keep wondering why this corporation enters into agreements with mobile phone companies in order to tie the sale of the iPhone to specific networks and thereby restrict their use to networks that the phone manufacturer approves.

This anti-competition device is particularly ill-informed since it effectively compels purchasers of the product to use it on pre-selected networks. This news item on the BBC news site reports on the penalty that users who wish to buy an unlocked phone have to pay. That customers have chosen to pay an 87% "tax" to ensure the retention of the freedom of choice of network should be instructive to the networks but especially to Apple Inc. iphone owners will search for an alternative mechanism to unblock the device and this will happen pretty quickly as has already happened.

Recalling an earlier post here in which Steve Jobs argued against the futility of the DRM, it may make sense for him to review the numbers and the additional costs that is imposed on purchasers through this anti-competitive device. Mr. Jobs knows what the outcome of this unnecessary and expensive imposition will be. My hint: consumers will circumvent it.

Quoting Edward Glaeser

"Over the past 230 years, the definition of economics has changed from topic to method. While economics was originally defined by the task of running a government and then the understanding of formal markets, the field has come to define itself by a scientific approach to human society". Edward Glaeser

Wrong Advise for Africa

Advise to developing countries in particular and to Africans in generall comes at the rate of a dime for a a dozen. In this piece from a South African newspaper is a rather curious set of prescriptions that show only that there's a correct appreciation of the problems of poverty but hardly an understanding of the proper approach to creating growth. Among these is the the obsession with self reliance and the big role for agriculture and use of tariffs for protecting industries.

While I must be cautious because the story may have reported carefully, I can wager that this approach is bound to lead to failure. Given the large informal sector there, it is evident that deliberate effort to increase informality in the economy is just poorly informed. Structural reform of African economies is an imperative and it must lead away from the distorted informal economies towards freer trade. As John Kay states, the insistence on regional and decoupling from the world is equally wrong-headed. Africa's citizens must not miss the glaring lessons of history. Slogan alone do not a high income create.

Rolling Stone Assesses the War on Drugs

Ben Wallace-Wells of Rolling Stone magazine dissects the effects of the War on drugs and laments the great waste of nearly half a trillion US dollars. Essentially, it argues correctly that the war on drugs has little to show for the enormous sums spent, property destroyed and lives consumed. For anyone with a little exposure to dispassionate analysis of both the theory and the examination of the empirical facts, this is not new but is a pointer to what ideologically-driven policy often leads to: disaster and waste of resources.

As if this requires repaet on this blog, I will rehash what is clearly evident from that piece and others. First, the best approach to narcotics use reduction policy should concentrate not on outright ban but on treatment of addicts who consume a disproportionate amount of the drugs. A second lesson is that manufacture, distribution and retail of drugs requires a highly organized corporate structure and is often responsive to changes and effects of the eradication efforts. Disruption of supply simply drives up price in the short term and this creates an incentive for increased supply while wrong theories are used to keep the fight going. Finally, as stated in the book Freakonomics, the gangs make a deliberate calculation about when to confront their competitors and when cooperation is more desirable. There's no reason to work harder at a failed policy.

OFCOM Supports Number Portability

A statement released by the Office of Communications in the UK has made one of the most cogent and reasonable arguments for number portability. Given that phones are now used more widely and reliance on them has grown, the losses that could accrue from change of service providers are a part of the consideration that individuals make. So while this blogger is generally tolerant of very minimal regulation, here is one regulatory measure that has unequivocal support.

The primary reason for my support is that measures to ensure seamless number portability for consumers is great for competition. Transfer of calls to a new network is expected to occur within a couple of hours following a formal communication of change of providers.

Paying for India's Blood Banks

India has recently instituted a plan to restock its blood banks and improve the quality of donations by reducing the proportion of blood that is contaminated with HIV. A report on the iGovernment site describes some of the approaches contained in the plan. Further, the government of India invites private corporations to assist with the safe blood initiative.

This story does not fully state the design of the plan besides emphasis thatblood banks are to be established in 600 districts, I am inclined to think the most cost effective approach. An interesting advantage is India's youthful population who ought then to be encouraged to consider contribution to the blood banks. While this blogger understands that the quality of the supply of blood may also vary by the eligible population, a direct cash payment to the healthy donors would provide an appropriate incentive to ensure that the donors whose contributions expose recipients to the least risks are compensated. That is the assistance that corporate sponsors of the programme should concentrate on as opposed to funding the bureaucracy.

Has Google Heard of Steorn?

In spite of being a regular user of its technology products, I am still unable to define precisely what conventional category of corporations Google would fall in. What I am certain of is that to classify this immensely successful corporation as a provider of search and advertisement services is insufficient. Its interest go to beyond provision of information as evidence of the book digitization project shows and now into deploying the creativity of its human resources towards a search for energy sources that are cheaper than coal-generated power.

An article in the NYT reports that through its philanthropy subsidiary Google is pursuing investments in a number of promising start ups. Knowing that this is a corporation not given to a reckless approach in its business ventures, this search is probably well-considered hence could lead to very high returns.

However, considering the claims by the technology firm Steorn that it had discovered a mechanism for generating free energy, perhaps Google's advisors could consider a review of the ongoing validation of the firm's energy technology. Then again, Google's founders are capable engineers and understand that the claim by Steorn to generate free energy interminably is not only highly improbable but not worth a second look. When this blog first posted here on Steorn, the blogger considered the chances of its success at about 5% and since Google seems not have considered it, then perhaps it ought to be downgraded further. Otherwise, Google has missed the excellent opportunity for the acqusition of a firm that would not only supply the technology to ensure that it not only achieves the goal of renewable energy but limtless and free energy.

Brazil Discovers Oil and Opts for OPEC

Recent Media reports stated that the South American nation of Brazil discovered an appreciable amount of oil deposits within its territory. Estimated at between 5 to 8 billion barrels of crude petroleum and natural gas, this new find is important because it suggests that the peak petroleum supply hypothesis is not the last word yet. However, the reaction of the Brazilian president shows that its approach to this new find is typical of any developing nation that is lucky to discover viable deposits.

As this dated NYT piece by Alexei Barrionuevo confirms, the find has added a bounce to the gait of the Brazilian president and his comments suggest that besides the massive contribution to state revenues, petroleum will be an important factor in its foreign policy goals and public affairs in general. More interestingly, having been a victim of the use of energy fuels as a political weapon, President Lula has unequivocally stated that Brazil will join the OPEC. So much for solidarity among developing nations especially because it is such nations that are most affected by the cartel arrangement. It is commendable however that the commitment to alternative fuels has been retained. Discovery of the Tupi oil field should get Brazil thinking more like Norway and less like the members of that price fixing bunch known as OPEC.

EU Fails Another Audit

Given a choice, I am inclined to favor a smaller as opposed to a large government though this blogger has no strong views about what the ideal size of government should be in the overall. Supra-governments such as the EU seeks to become are therefore an interesting phenomenon for examination.

This news item on the BBC News site documents the significant fact that the financial auditors of the EU have failed to approve and sign the accounts for the 13th consecutive year. It is noteworthy though that the major weakness regarding the accounts is not necessarily related to financial fraud but the failure to adhere to technical requirements. A critical area of failure is the Common Agricultural Policy which is essentially a welfare program for EU farmers. This obviously unsound program is responsible for 40% of the EU expenditure and that suggests where the solution should lead. Scrap the thing and save tax payers the cost of duplicated governments.

Quoting Friedrich von Hayek

" If we are to safeguard the reputation of science, and to prevent the arrogation of knowledge based on a superficial similarity of procedure with that of the physical sciences, much effort will have to be directed toward debunking such arrogations, some of which have by now become the vested interests of established university departments". Friedrich von Hayek on the Occassion of Nobel Prize Lecture on 11 December 1974.

NYMEX and Crude Prices

As petroleum prices have been on an upward trend over the last few weeks, there is understandable panic that this could adversely affect growth in the whole world. No doubt, the rise in the recent days has been more than substantial and it increasingly appears that the US $100 price may be breached during this year. However, the real reasons for the rise in prices are not appreciated widely as this is attributed not only to steady demand from India and China, lack of refining capacity and the effects of the OPEC cartel.

While all these reasons are fairly common, increasingly the idea that speculative behaviour is also a contributor is being mentioned. This means that solutions have come around from price controls within countries, an expansion of refinery capacity and measures to prevent price gouging and into a very bad idea by India's Secretary for petroleum. Mr. Srinavasan is quoted by Heather Timmons of the NYT stating that there should be decisive action to stop trading of crude petroleum on exchanges.

True that speculative action and endeavours to profit from further rises may lead to the rush to buy, it certainly is unimaginative for a person to consider the abolition of a market facility because its price signals are not the right ones. One would imagine that India's brilliant economists would inform the honourable secretary that this is not an effective response. The oil trading facilities as NYMEX merely provide a platform for the revelation of the spot price.

Narcotics Fight Goes Underwater

As if further evidence is really necesary to show that drug control and eradication policy is presently crippled by bad thinking, this report in the LA Times shows that traffickers are using increasingly sophisticated methods to transport drugs north from Colombia. Discovery of the shipyard in which crude submarines were being constructed is an important one for the police. A different interpretation may be that it demonstrates the versatility of traffickers in general hence is not as much a sign of success as demonstration that the fight is moving to the seas.

The success in ensuring the capture of tonnes of drugs that the report means that prices will rise and provide incentives for more production, transportation and sale of narcotics. Essentially therefore, the cat and mouse game persists.

Arbitrage for Models

This blog is certainly not the appropriate place to discuss the profession of modelling. However, news on the BBC News site here shows that even models have began to understand that differences in currency are worthy of consideration while negotiating pay. Gisele Bundchen is reportedly the highest earning model and having opted to negotiate contracts in Euros as opposed to US dollars is in the present circumstances demonstration of sensible economics. It is consistent with rational behaviour in covering future income by pricing in the currency that increases purchasing power. That's a pretty smart model who thinks in the same waves as Warren Buffet.

Further Evidence of Failing Drugs Policy in Afghanistan

Apart from demonstrating ably that state building from scratch can be a particularly difficult task, the state of Afghanistan today may just have the unintended consequence of opening up the discussion on international narcotics policy. At the risk of repetition, this blogger has commented in earlier posts that state that the attempts at the eradication of opium poppy in Afghanistan are ill-informed and bound for failure. Different stories on the International Herald Tribune and BBC news here support that claim in interesting ways. The IHT story states that drug cultivation has not only returned in full force in Balkh province of Afghanistan where it was considered eradicated, but that the farmers have instead opted for cultivation of cannabis. The stated reasons are interesting and relate to price incentives. These are that cannabis is less laborious and more cost-effective to grow in an arid area in addition to a higher yield for acreage. The BBC story states reports that the Senlis Council has taken the initiative to establish an experiment to legalize the cultivation of opium for the production of pharmaceuticals.

Together, these reports are fascinating because the first provides a reminder that the eradication of drug cultivation is increasingly fraught with problems while the other is that a mechanism to get some of those plants to market may be more helpful. I grant that the experiment Senlis Council is worthy of consideration though I suspect that the attempt to limit all production for processing into pharmaceuticals will only establish competition with alternative uses and leakage of drugs to that sub-market would arise over time.

Nevertheless, this shows that substantial steps towards legalization and regulation would be more useful since those simple farmers already understand that their land and labour put together would lead to a very high value product. They would most probably be prepared to pay a tax (which presently is appropriated by the Taliban) than cultivate crops that are obviously less lucrative. Constitutional provisions that bar cultivation will hardly change that reality but will only ensure that the policy is not reviewed appropriately and that poor citizens of that nation will merely see that law as really idiotic.

Quote of the day

"Academics and think-tanks need to be reminded that generating publicity is not a legitimate research objective". John Kay

Warren Buffet Asks to Pay More Income Tax

A story in the Guardian site today quotes Warren Buffet unequivocally stating that he should pay more tax. Reading the piece and having followed Warren Buffet's claims in recent years, he seems genuinely concerned that he presently pays a far lower income tax rate than his employees do. Of the top ten billionaires in the world, I am certain that he is alone not only in commenting on the matter and further that he is intent on giving to philanthropy while being prepared to pay taxes too. He is also unique in not appointing tax planners with the view to reducing his overall tax burden.

As a normative discussion, it is very difficult to reconcile approaches about how to distribute the tax burden and given that fact, perhaps warren Buffet ought to advocate for a reduction of the income tax rates for all his employees to the 17.7% level. This would certainly be far better for them than to merely have Warren Buffet's income tax rate increased.

New Entrants to the Billionaires League

I do not pay much attention to the ubiquitous league tables showing who the highest net worth individuals for any given year are. This is not out of envy as much as the fact that by the time most people have gotten to be placed on that table, often the most interesting entrepreneurial ideas that they espoused are probably going out of date and that the methodology for the comparisons is often unsound. However, reading this slightly hostile piece from Foreign Policy Magazine, I have had to eschew this and take notice of the fact that the man of the moment is the Mexican citizen Carlos Slim Helu who is now assessed as the world's most affluent man.

While his business interests and background is undeniably impressive, the point that I consider relevant is one that stands for most billionaires in countries bereft of robust market systems. This would include the large number of Russian oligarchs, Indian billionaires, African political entrepreneurs and some of the Chinese enterpreneurs. The running thread among most of them is that the state was a direct enabler for the building of their fortunes. Granted, fortunes built from honest enterprise in any part of the world is deserving of respect but I think that given the tendency for having run large monopolies and the proximity to political power that this special category of billionaires wield, perhaps they deserve a list of their own.

Of concern is that the manner of acqusition and extension of fortunes through political connections, ruthless maintenance of monopoly and denial of entry to potential competitors merely erodes the confidence of their fellow citizens in the fairness and strengths of the operation of open markets. The result is that the citizens of these countries are wont to insist on and tolerate heavy regulation of markets.

Hedge Fund Manager Profiled

In a number of early posts here and here, this blogger has wondered about the need to regulate hedge funds in addition to mundane matters such as their contribution to the financial markets and public welfare. In the current issue of the New Yorker magazine, John Cassidy has profiled one of the masters of the hedge fund business. As the story reveals, it is a complex business that matches the high returns with equally high volatility and risks.

Accepting that the story speaks for itself, this blogger's point remains that the high returns come with equally elevated levels of risk. The nature of the business too points to the colorful personalities and high intelligence that is required to make sense of its here. Still, it exposes the fact that guessing markets is risky even for the highly intelligent people men who run them. Governments should let them be.

Walmart Passes the Lead Test

This is a season of attacks aimed at China and retail chains that stock toys because of the earlier discovery that a very popular toy in the US had detectable and harmful traces of lead metal in them. Protectionists took advantage to blame China and justify blocking Chinese imports into the US in particular and other parts of the world.

David Leonhardt writes here that he sought to test for the ubiquity of lead-laden toys by picking them off shelves of the major retailing corporations in the US such as Walmart and others. His results confirm that despite the strident attacks against Walmart, none of the toys picked from its stores failed the test as measured by the permissible levels of lead. This is proof that Walmart is not successful by default and it is careful to observe the regulatory standards.

European Court Scores for Competition

An item from the Guardian site reports the good news that the European Court of Justice has struck down a federal law in Germany that acted as a barrier against a takeover of Volkswagen. I applaud the court for this clearly correct decision because this impediment merely served to keep the local state's power in the firm in addition to serving as a protectionist instrument. As the court argued, this legal requirement limited the movement of capital by hindering acquisition and management control. the related argument that the instrument was necessary to protect the interest of workers and the Lower Saxony region deserved to fail for the reason that it merely gave power to politicians.

As is expected, Porsche may make a formal offer for acquisition and control of the firm but this will now be open to competition by other firms who see value in the open business environment. While I am cautious of large mergers and acquisition because of the poor record throughout the world, the court has opened up Europe to fuller competition in industry and investment and that is all for the good. More competition please!

Thumbs Down to Merida Initiative

It may be in vogue for bloggers to find reasons to characterize the policies espoused by President George Bush as ill-informed. Noting that this blog is not at all about contending on ideological matters and even less so about name calling, I have been drawn to comment on the Merida Initiative carried in this piece by BBC News.

To the extent that I can tell, this is definitely an ill-advised effort to expand and militarize the failed and failing war on drugs. Presidents George Bush and Calderon are both quite enthusiastic about the plan to reduce the amount of cocaine passing through from Mexico into the US. Who needs evidence that the similar effort in Colombia only led to loss of lives without significantly crippling the the so-called drug cartels?

I have commented on several blog posts including this one, under this same label that this is a waste of money. I state again: taxation, legalization and treatment for addicts is the way. I ask how much treatment US$ 1.4 billion over two years would buy and I conclude that it would achieve more than a militarization of the sale of the undesired narcotics. Putting more effort on flawed thinking does not make it work.

Are Markets and Governments Similarly Oppressive?

Joel Waldfogel's article in Slate Magazine compares the ways in which market outcomes are similar to government action where they fail to meet the needs of fringe minorities. This article starts by featuring the recent decision by Nike to manufacture sneakers that are especially designed to fit the feet of native Americans. To the author, the exclusion of 1.5% of the population shows the equivalence of markets and governments.

The comparison may be well-thought of to the extent that majorities often hold the political process hostage in the same manner that the dominant demographics are the unqualified obsession of most firms. However, the comparison breaks down because where government fixes problems, it compels the minority to pay taxes in spite of its concentration on the majority. To that extent therefore the tyranny of the market is bearable because it comes with no compulsion on the fringe minority to pay without providing sneakers in the first instance in addition to the fact that one often has the opportunity to find alternatives. Governments are not always evil but they certainly provide no such choice anywhere. Markets may share some of the objectionable features of governments but save for monopolies, the former is superior in its lack of compulsion.

Paying Tolls at Severn Bridges

This story on BBC news site about the payment methods at the Severn Bridges in Wales strikes one with surprise. As the story states, the bridge is an engineering design and construction marvel but the payment methods are still unbelievably archaic. Pray, given the sophisticated payment mechanisms available in the UK, why would its managers insist on either cash or a prepaid card as the only means of payment for the tolls?

To my mind, payments by electronic means would be preferable both for audit purposes and security especially since the story mentions that the passage is used by millions of vehicles annually. As Mr. Bryan Seaward states, " The bridge may be high tech but the payment methods are stuck in the seventies".

This still does not explain why the inflexible payment system was instituted in the first instance. Perhaps they ought to think of the danger that is involved in transportation of all that cash from the payment booths to the banks as they determine when to amend the laws to allow for electronic payment.

Pascal Lamy Speaks for Liberalization of Services

Depending on who one hears from, the story circulating in low income countries is that the Doha Round of trade negotiations is registering zero progress is because the EU and to a lesser extent the US are unwilling to abolish trade-distorting subsidies to their farmers. As a result, the collection of lower income countries are in turn reluctant to proceed with negotiations in areas such as physical goods and services.

Apart from the fact that this piecemeal approach to trade liberalization is altogether wrong-headed, this approach by the lower income countries is bereft of much logic. It is often fed by the assumption that their is a hierarchy of industries and sectors that are more important than others and that liberalization of agriculture in the Eu and US would be most beneficial.Following this logic, the liberalization of goods and services trade would be concession in exchange.

In this speech, Pascal Lamy states the clear point that the gains from liberalization of international trade in services would far exceed equivalent liberalization in goods. One could not agree more but sensible application of trade theory is not the one thing that most nations are known for. If only they understood and practised the logic of unilateral liberalization!

Quoting Henry Ford

“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large”- Henry Ford as cited by Pascal Lamy

3 Nobel Winners

The Royal Swedish Academy of Sciences has outflanked the bettors again by awarding this year's Sverige Riksbanks Prize in Economic Sciences in memory of Alfred Nobel (aka Nobel prize in economics) to three scholars whose names I did not encounter in the educated guesses about the probable winners. The award is for "having laid the foundations of mechanism design theory". To my mind, this refers to their individual contributions to the development of theories and techniques that apply in trying to design instituions that perform economic roles. The press release here expalins their reasoning in full.

Congratulations to Leonid Hurwicz, Eric Maskin and Roger Myerson.

US Dentists Should Compete

Health professionals throughout the world create the impression that tight regulation of entry into the profession is necessary for the reason that people's health should be cared for by highly trained professionals. Perhaps so, but this article in the NYT shows that good times for dentists is not necesarilly good for those with dental problems. Quite to the contrary, dentists are doing well as measured by income in real terms and number of hours worked (more money for less effort) while the access to dental health care is demonstrably poorer.

Again, the question here is one of a regulated profession that tightly restricts entry ostensibly in the interest of patients and ends up serving fewer at higher costs. as the story states, there's complete resistance to allowing entry for people who with much less qualification to provide care to ensure that fees remain high.

The argument here is not that dentists are compelled to provide care to those who cannot afford their fees or even to work 4000 hours per annum, but that they should not be allowed to restrict competition through arbitrary standards that merely provides a financial boom to them at the cost of public who pay for dental care. No doubt a number of them will still earn a high income in an market with more dentists but that will be without denying patients the opportunity to find alternative care. Any approach towards universal dental care would not work while practitioners of dental medicine control numbers and choose which patients to treat.

Postal Competition Delayed Again

Just a couple of weeks ago, a good proportion of European bureaucrats and citizens l correctly lauded the decision and award against Microsoft for its exercise of power in the operating systems market segment. One would have been excessively naive to assume that the momentum for rolling back monopolies would be definitely maintained. As this short piece in the NYT reports, cowardice has overcome most regulatory agencies which could argue that the maintenance of postal monopolies is not in the public interest and is altogether futile. Why should a $125 billion industry be exempt from competition?

Cardiff Businessmen Ask for Congestion Pricing

Businessmen in the Welsh City of Cardiff are asking for congestion charging to be introduced in the in order to reduce congestion and ensure the refurbishment of the infrastructure to stimulate that economy. This blogger has made psost here applauding the success of the road pricing in London and commented on news of its impending adoption in New York too. What is there to say when the chambers of commerce front-load the idea to city authorities? Either they are good economists or they are well-advised.

An Excess of Medical Exams

This article reviews a study that suggests that the full value of the annual medical exams that US citizens undergo is not established yet. Not surprising is the finding that the insured are more likely to be subjected to such tests and the reason is primarily because payment for the same is guaranteed. The cost of those exams and the fact that up to 20% of all adult citizens of the US take them suggests to this blogger that people are often less likely to questions medical procedures for the reason that the fear of infirmity is exaggerated.

The total cost of the unnecessary procedures that are undertaken show that physicians use the opportunity to extract rents from their patients. As stated in the piece, some medics are unsure whether personal health would be worse without the exams but that uncertainty leads to its provision in excess and for those for whom its adds little value. Perhaps they ought to be confined for the strict areas where the benfits are demonstrated already.

Champagne is Success Itself

The very few readers of this blog must forgive me for the apparent obsession with food for this week. American Magazine's current issue has this pithy but fantastic analysis about the small problem faced by the manufacturers of champagne. There's panic out there among the connoisseurs that there is insufficient champagne to meet growing demand from the world's increasing number of the affluent and status conscious. Whereas the rest see a crisis, I see a successfully marketed product.

A thirty fold increase in demand in China merely shows that the product is becoming rarer and that prices will rise to match that demand. Real markets are at work here. There's no guarantee that the prices will remain high but any substitution that occurs will help to moderate prices and the possibility of exercising market power. Only a successful product should denote success. champagne succeeds today.

Food Debate Starts in Wales

Government intervention into people's lives is reaching a level where it is being tied to objectives that are altogether incompatible. This story on the BBC news site reports that the Welsh government assembly has started a consultation process that intends to address the fact that 56% of Welsh nationals are reportedly obese. The Welsh Food Debate, as it is referred to in the piece seems to be not only misinformed but a real waste of public funds.

Admittedly, an understanding of the so-called obesity epidemic could be sufficiently raised by conducting a nutritional survey and subsequent eductaion to encourage consumption of fruit and other wholesome food. However, I think that the introduction of emotive words such as the "obesity time-bomb" and the rest, is evidence that certain bureaucrats are obsessed with determining choices for Welsh nationals. Getting people to understand where food comes from is not a socially useful objective any more than people understand the components that make up their automobiles or the IPod. The Food Debate is ultimately stretched to a protectionist argument for purchase of local products as if that is really related to the health problem that is used to justify the Food Debate.

My advise: Save the money intended for the road shows and reduce taxation on wholesome food and a place carbon tax to save the environment. The solution ought not to be more complex than the problem.

How About a Carbon Tax?

In addition to having established the Pigou Club, Gregory Mankiw presents in this NYT article the most complete and concise argument for approaching the small matter of global warming. This blogger has mentioned this in a number of posts but nothing beats Prof. Mankiw's command of the applicable principles of economics on the one hand while identifying the trade offs and political mobilization that would be required on the other.

The world is obsessed with half developed and fantastic ideas such as bio-fuels, cap and trade arrangements and fuel economy standards. he exhausts the pros and cons and states that a carbon tax is the most efficient way to approach it. the difficult part is to convince governments to negotiate an international carbon tax regime. petroleum exporters and consumers obsessed with keeping nominal fuel taxes low would be difficult to win over. That though is not the work of the policy wonk and he leaves the rest to the lobby professionals and the politicians to cut the deal.

Drumming Taxes Out of Defaulters

Any person visiting India is most likely to be struck by the size of the country on its own in addition to the stark contrasts among its people, lifestyles and cities. For instance, one often reads about the rising giant's high-tech centers in Bangalore and the huge middle class that amounts to nearly 200 million people living close to an even larger indigent population. In that respect, if the middle class population on its own were to be sliced away, India would qualify as a middle-income country.

An article in the Hindustan Times today illustrates another part of that contrast that is India. It reports the story of the Guntur Municipal Corporation which has chosen to hire drum beaters to shame property tax defaulters. Arriving at the addresses of the defaulters, the sound of drums serve to alert neighbors of the failure of the individuals who appear to pay to avoid both the shame and nuisance that is definitely caused. Who would argue with the approach when the officials claim that it has proved successful?

To my mind, this approach is further illustrative of the fascinating things about India. One is that the creativity applied in private and public affairs is very visible and the second being that labor is pretty cheap because it is still cost-effective to hire drummers and pay them off the cost of the recovered sums. Just amazing!

India Enters into Semiconductor Manufacturing

It is not to be debated that India's economic growth figures have been impressive in recent years. Most therefore assume that absent a major hiccup, this nation is destined to maintain its growth and become an even greater economy. Growth and success are indeed important but they often brew hubris and bad thinking by governments. An example of this is found in this news piece reporting that India's government is about to publish a semi-conductor policy as part of industrial policy.

It is a shame that government's just do not learn about the limits of directed or central planning and the success in one industry such as software and Business Process Outsourcing (BPO) is generating hubris among bureaucrats in India. They appear to be ignoring enormous amounts of literature on the one side and empirical evidence that weighs against designing industrial policy around subsidies under the guise of tax incentives to attract semiconductor manufacturing into India.

Based on my reading of this book by William Lewis, I would bet against the success of most of these firms that intend to start investments in the industry merely to ride on those subsidies. Careful reading of this book would show that the semiconductor industry is not only very highly competitive but that it exhibits the characteristics of common commodities. Further investments in producing semiconductors through subsidies or protection would only transfer public resources to those investors without generating much new value. If the guidelines remain as suggested in the piece, then this would simply be about putting corporations on welfare. the unintended consequence would probably be a glut in chips in the world market. India's Industrial policy planners would be well advised to review the chapter on South Korea.

Quoting Paul Krugman

" Economic analysis is not, or at any rate is not supposed to be, a set of rules to be followed on all occasions; rather, it is supposed to be a way of thinking, something that allows you to craft responses to an ever-changing world". Paul Krugman in The Return of Depression Economics p. 167

State Regulation of Phone Use by Children

An article here states that the State Government of Karnataka in India has announced a ban on the use of mobile phones by children under the age of 16 years. The reason given is that some information has been made available which suggests that such use has adversely affected cognitive abilities of students.

Now, I am deeply skeptical of this populist policy announcement for two main reasons. To start with, a 16 year old in India is unlikely to have sufficient income to acquire a mobile phone without the contribution and approval of ownership by a parent or guardian. Unless guardians are willing to police the youngsters, the enforcement of these regulations will be nigh impossible. The regulation of the use of that gadget should rest entirely with that guardian and all that may be required of public authorities is to ask schools to limit its use during lessons.

Secondly, the supposed studies upon which the prohibition is based make very bold assertions that are most likely exaggerated. Mobile phone use has been examined for the effects claimed and there has never been any reason to justify such draconian rules.

That the purported ban has not been accompanied by real sanctions yet is probably a good thing for there ought to be no sanctions from the state regarding this matter. This story merely illustrates the tendency for regulators to desire to control and regulate matters out of scaring the public with risks that are neither real nor established. So what happens when one gets to 17 years?

Quote of the Day

"The business people whose insights I value mostly think that business is complex, that there are few universal recipes for success, and explain that much of their time is spent gently coaxing the best from people". John Kay

Was Invention of Agriculture a Mistake?

One always encounters the the plausible view expressed everyday that human development was greatly and unequivocally aided by the adoption of agriculture. A large number of history books attribute the initial spurt in human development to the sedentary lifestyle, trade and political organization that the agrarian societies required. This progressive view therefore permeates the history books and entrenches the underlying assumption that settled farming was vastly superior to the hunter-gatherer alternative essentially because it allowed for greater food production and subsequent accumulation of wealth.

An admittedly dated essay by Jared Diamond that I have just encountered while perusing this reading list on Brad DeLong's excellent blog not only questions the logic that the series of changes that together constituted agricultural revolution were part of the human "tale of progress". In the essay, the author states that the story behind the movement towards agriculture and its effects on human society in general has been highly sanitized. I have always been persuaded that the preoccupation with finding nutrition unduly delayed the rise of complex economies but did not imagine that archaeology would get me thinking that the the progressive narrative is highly embellished. To my mind, the essay certainly does not make as compelling an arguement for the fact that agriculture was a mistake as it does with exposing the dimunition of its many costs on individuals and societies.

Quoting Edmund Phelps

Edmund Phelps was awarded the Nobel Prize in Economic Sciences for the year 2006. The citation reads in part, "... for his analysis of the intertemporal tradeoffs in macroeconomic policy". Ralph Atkins of the Financial Times interviewed the laureate and notes that his intellectual search is not over and he comfortably expresses his doubts about the assumptions regarding equilibrium. he attributes the following quote to Prof. Phelps.

” Traditional economics, he explains, sees the world as if it were a plumbing system. “It’s basically rooted in equilibrium – things work out as people expect them to do.” Capitalist reality, however, “is a system of disorder. Entrepreneurs have only the murkiest picture of the future in which they are making their bets, and also there is ambiguity, they don’t know when they push this lever or that lever that the outcome is going to be what they think it is going to be – there is the law of unanticipated consequences. This is not in the economic text books, and my mission, late in my career, is to get it into the text books.”- Edmund Phelps

Betting Against the Neo-Malthusians

It is indeed true that Robert Malthus' "Essay on the Principle of Population" was quite influential for a long time. In spite of the grave failure of its projections and predictions, one comes across people who dust it up and use it in policy discussion every decade or so. An article in the LA Times by Niall Fergusson makes the same claim that world population growth is outstripping food supply.

As a neo-Malthusian, Fergusson admits that the earlier warnings and forecasts were wrong but thinks that the recent rise in the price of cereals and his favourite cheese should lead to the strong conclusion that the theory's predictions will catch up with the world sometime soon. Adding global warming to the mix, he thinks that the world is certainly doomed.

This is typical of believers in those grand and neat theories that favour centralized planning and predict the inexorable failures of open economies. To start with, overall world economic growth was at its highest in decades in the same year that the human being number 6 billion was born last year. So for a theory that has almost always failed to reckon with human ingenuity and increasing rates of innovation in food production and productivity in general, I bet with confidence against the theory's predictions. Dusting up Malthus' essay every decade or so will not make it's predictions come true. Food supply is not going to run out any more than people starve because of a reduction in food supply.

Profiling Prof. Susan Athey

While the conventional view is that the ultimate prize for a professional economist is to receive the Nobel prize in Economic Sciences. A strong alternative view is that the John Bates Clark Medal awarded biennially to an American economist under the age of 40 years is the superior prize. The limitation of the John Bates Clark Medal to US economists ensures that it is an exclusive prize to which an economist has only a moderately-sized window for eligibility. The Nobel Prize on the other hand appears to award a lifetime's work and the recipients are often middle-aged or older professionals. Professional economists in the US are so accomplished and are demonstrably ahead of the rest of the world that winning the John Bates Clark Medal has become a predictor for winning the Nobel subsequently.

Both prizes have been awarded for more than a generation but have never been awarded to professional female economists. This is bound to change now since Prof. Susan Athey was awarded the John Bates Clark Medal for 2007. This blogger has not read much of her work but this summary by Joshua Gans shows that we may do well to place bets on her being the first woman to win the Nobel too. I undertake to summarize her work on industrial economics in the near future because her credentials in economic theory and its applications in empirical economics are extremely solid.

Dispute Shows Limits of WTO Remedies

Settling trade disputes within the World Trade Organization is not an easy matter largely because of the convoluted rules. However, the most amazing thing is the agreed process for enforcement which requires retaliatory protection. Essentially therefore, a nation that has been harmed is allowed to institute trade penalties that reduce the imports of the violating WTO member. Now, this rule is puzzling for it is the result of a political agreement which reflects a very poor understanding of international trade theory. A country that imposes high tariffs or restricts trade with another definitely harms itself because it constrains its own firms from importing products or services. Impliedly therefore, it shows that optimal trade strategy should tend towards free trade hence measures that restrict further trade should not be part of the judgment.

The absurdity of the retaliatory protectionism is impressively in show because of an obscure trade dispute between the US and the Caribbean nations of Antigua and Barbuda. It claims that US restrictions of online gambling by its citizens is effectively an anti-trade measure that harms the complainants where some of the online casinos are based. Gary Rivlin reports here for the NYT on the dispute whose hearings have been concluded with the exception of the award. Compensation for the complainants would involve instituting retaliatory measures in the form of commensurate trade barriers against the US. Now, Antigua does not have the ability to raise trade barriers to the extent of the damages estimated US$ 3.4 billion not only because this would hardly harm the US but also because instituting such measures would be idiotic in the sense that it would harm itself. Mr. Mark Mendel, representing the plaintiff is therefore proposing the equally odd measure of being authorized to violate intellectual property laws with the expectation that the intellectual property producers would nudge the US administration to compensate Antigua and Barbuda.

This is a nice ring of the WTO instituting absurd enforcement measures on the one side together with the US unwisely banning gambling which a small nation is eager to provide to US citizens.

Growing Ireland

Ireland has been a superior performer among European countries in the last few decades and made a remarkable transition from one of the poorest countries in the continent. It is now without doubt quite a competitive economy whose citizens enjoy some of the highest standards of living in Europe and indeed the world. Apart from making proper regulatory reforms and investing in high quality human capital, it has also been mentioned by theorists that the great progress that it made were predicated on achieveing a demographic transition. This transition supposedly reduced the fertility rates hence the degree of dependency in the economy and allowed for emergence of the industrial economy.

Being a small nation both in respect of geography and population, it would be particularly prone to the standing problem of aging societies in Europe where birth rates have fallen precipitously below replacement levels. However, it seems that Ireland has again done well and is figured to be the fastest repopulating small country in the world. Eamon Quinn writes in the NYT here in a story that partly explains the approach. Unsurprisingly, it is based on somewhat flexible immigration policy and natural growth. quoted professionals state that population growth has not only ensured that the population has reached replacement but also that economic growth will be maintained. The lesson for other aging populations in Europe is pretty clear, responsible job-seeking immigrants can add immensely to the performance of an economy. Just watch Ireland.

Paying for Weight Loss

I find it fascinating that there is panic about the fact that citizens of many high-income countries are getting obese and that this translated as a worrying public health problem. Similar to the policy questions around climate change, there is no doubt that the proportion of those defined as clinically overweight and obese has risen over the last three decades. A number of people wrongly blame McDonald's restaurants and other fast foods that have altered conventional eating. A more plausible but partial explanation is the high subsidies for corn farmers that have led to a deluge of cheap corn syrup within the US.

However, the most original attempt at reversing weight loss has come from the Italian town of Varallo, whose mayor has not only direct financial rewards for weight loss. The system of cash incentives would impress any economist as it not only pays the initial $ 67 upon attainment of the ideal weight but will pay out a further US$ 268 for maintaining that ideal weight for five months thereafter. Perhaps informed by the fact that weight loss is comparatively easier than maintenance over the medium-term, the mayor has committed the town to further pay the equivalent of US$ 670 for residents who retain the ideal weight for a year more and thereby reinforce desired behavior. The story does not state it but I am thinking that the 30 upfront applicants may require enhanced payment beyond the first year to keep their ideal weight and also that the number of applicants will definitely rise.

While I am unsure about whether the mayor has conducted a proper cost benefit analysis to determine whether its overweight residents are a burden that justifies this expenditure, he gets full marks for the thought that went into the design of this incentive structure without resorting to undue compulsion. This is a sound experiment and over time, the town may be an example to cities that consider it necessary to encourage residents to loss weight. Off the top of my head, this is far more efficient than paying for a gastric bypass. I hope to visit Varallo and witness this sound experiment in applied economics. Mr. Gianluca Bonnanno should be small town mayor of the year.

Bottled Water and Global Warming

This blogger has posted variously on the value of bottled water compared to tap water in addition to stating that the latter is not only equally safe and often is a far cheaper substitute in most of the Us and other places with secure piped water. The most recent post on the subject stated broadly that the the alignment of the costs ought to ensure that the cost of disposal of plastic bottles used for water should be borne by the consumers.

An elaborate article by Alex Williams in the New York Times shows instead that the argument made by the environmental lobbies that bottled water contributes to global warming is leading to stealthy consumption and avoidance of the product. As if this needs to be stated again, bottled water consumers should save their guilt and use their good nature to campaign for a carbon tax. This would ensure that the externality generated from their consumption of bottled water is paid for in the cost of the product. Guilt is unlikely to lead to a reduction in consumption of a product that has now surpassed coffee and milk in sales within the US. Try a well-designed carbon tax!

Draw Down Patent Monopoly Period

Conventional wisdom justifies the retention of patent protection for pharmaceuticals on the assumption that corporations undertake expensive and high-risk research that should be rewarded by a monopoly to allow for recouping of investment together with a decent return. This view states that in the absence of the 20 year monopoly duration would lead to a reduction in the investment in discovery of new drugs.

Apart from the thinking that the patent period is often arbitrarily decided upon, i have recently become a deep skeptic of this argument. Here's an interesting article in the NYT by Stephanie Saul covering the rising demand for generic drugs following the expiry of the patent period. The piece claims that the monopoly period for a number of blockbuster drugs will lapse in a short while and yet there is no evidence of a new generation of equally useful drugs.

It begs the question whether the monopoly period did not lead to new research and production as is often argued. Industry speakers quoted in the article suggest that the set of diseases now being subjected to research are not as easily amenable to discovery because of the scientific gaps in knowledge about them. That may be true as well but it merely confirms the fact that the monopoly period of 20 years for pharmaceuticals provides no guarantees that drugs will be produced. Instead, it states that pharmaceutical production and research policy should be guided by the intention to make as many drugs as possible available in generic form. Perhaps the place to start is to review patent policy by a drastic reduction of the patent monopoly period.

New Design to Cut Crime?

As the total amount of property that people own increases, so does the probability of loss of that property. These losses could be caused by theft or neglect but still represent a real disadvantage to the affected. The government of the UK is now urging designers to improve the design of items so that the number of thefts and crimes are reduced. This story by BBC News states that this has been encouraged by the reports that improvements in vehicle designs have reduced vehicle thefts by up to 51%. While I admit that I have not reviewed the data, it is pretty clear to me that this may indeed be a hasty generalization.

First, I am curious about the underlying assumptions and the tone of the government in seeking to compel designers to produce goods that meet that criteria especially since the public appears not to demand it yet. The reason here is that if that kind of theft-proof design were really in high demand, then the designers would have produced it without government intervention. Second, it is not clear either that the driving motivation for designers should be deflected from ease of use and enhancing user experience towards ensuring that a third party may not appropriate that good. Thirdly, the need for compliance with a rule that requires theft-proof equipment could raise the costs of equipment and products for those who do not wish to pay for that advantage.

In fairness, the article does not yet suggest that there will be compulsion for designers but I am worried by its tone because it suggests that the prevention of the theft of products should overwhelm other business considerations. To my mind, the potential for loss of valued property is part of the reason that insurance companies to exist and the upfront compulsion of design to reduce theft may not be the best way to spend the additional resources. Personal property is a tenet that i value highly but I must recall that the human element of carelessness explains a great amount of losses that people incur. That is unlikely to be reduced entirely by theft-proof design. The Home Office must be very hopeful that every mobile phone buyer will want to pay more for an improved design.

Another Lesson on Illegal Drugs Policy

Governments world over develop anti-narcotics polices with due regard neither to the lessons of past actions nor the realities of the economics of illegal goods. Fuzzy thinking now is wedded to the idea that terrorist groups are raising money from sale of opium in Afghanistan and that an additional objective of the fight against the Taliban is to eradicate opium cultivation.

As if the lesson was still required, Willem Buiter, a profesor of economics at the LSE, states in the Financial Times why the expenditures on eradication and military response are unjustified. This symbolic show of toughness ought to be saved for the Taliban and not to the farmers seeking a livelihood. he makes the strong case for legalization with taxation to pay for the treatment of users who may have developed a dependency. Otherwise, the continuing ban works to the advantage of the organized crime groups because only they can meet demand.

The area of narcotics policy is an appropriate one for multilateral action and rules. When nations decide that the views supporting a law and order approach to narcotics policy should be reviewed, they will know what to do.The unpleasant truth of decades spent fighting expensive but ill-informed drug wars is out there.

Paying for Pilgrimages

Many nations provide hidden or direct subsidies for activities by arguing that these activities have special value or under the infant industry argument. This article under the Reuters Africa news service states here that the government of Nigeria will scrap all subsidies for religious pilgrimages. Why any government should pay for any adherent to visit a holy site beats me.

Economic theory states that subsidies are almost always inefficient because they lead to the overproduction and consumption of goods or services beyond a level that would be cleared by the market mechanism. For this reason, subsidies lead to unintended consequences while distributing income and constraining the proper use of the money.

So one must support the abolition of the subsidies and stress that their withdrawal ought not to be justified only on grounds of high costs to the treasury. Public money ought not be used to support purely religious activities in a republic. With respect to the future pilgrims, their trips ought to be paid for by the consumer of that undeniably important service. This would allow for the theory of revealed preference to be tested. The pilgrimages must go on but the 25% subsidy should not even have been initiated in the first instance. Good decision by that government.

Carbon Taxes and Bottled Water

This editorial piece in the New York Times today argues the valid case that citizens of the US would be better served by drinking water from the tap as opposed to buying bottled water. It extends the argument by alluding to the environmental cost of bottling several million liters of water when a cheaper and ready substitute is available.

Earlier posts here and here questioned the real value of bottled water especially taking into account the existence of tap water as a substitute. I suspect that this is a lifestyle aspiration in addition to ignorance that makes consumers susceptible to the view that bottled water is safer for consumption. The expenditures in consuming up to 8 glasses per day amount to US$ 1400 against 49 cents for bottled and tap respectively. This is a compelling argument for a person who may need to save that much money. That it is has not led to reductions probably show that there's a stronger motivation informing that choice.

The environmental argument about the contribution of plastic bottles to environmental degradation merely shows that the taxes are not appropriately aligned and bottled water consumers ought to take up the cost of the disposal of the bottles. In addition, were a carbon tax to be instituted, the consumers of bottled water would fully pay for their contribution through their consumption choices.

OFT Fines British Airways for Price Fixing

Competition policy and law is an area of economic regulation that I favor for the reason that fostering competition between firms has obvious advantages for consumers of services. The prevalence and extent of cartel behavior and collusion between firms is sometimes difficult to accurately determine. This is because the ability to undercut co-conspirators in a collusive arrangement is a highly likely event. So the ability of the rest to retaliate is critical in keeping a collusive agreement going.

The BBC news reports here that the Office of Fair Trading levied a fine of up to £121.5m on British Airways following its admission to having colluded to fix fuel surcharge with Virgin Atlantic. I see this as very poor economic reasoning and enforcement of competition policy because Virgin was granted absolute immunity for reporting the collusion. The motivations of Virgin in seeking to collude notwithstanding, the outcome does not make any sense as Virgin registers a financial advantage over its competitor while appearing as the more virtuous firm. The equally guilty tale-teller is pampered.

Should US Doctors Take Pay Cuts?

It is now almost a sure thing that medical insurance coverage will be one of the major campaign issues during the US elections. Most of the candidates that have looked at it carefully are obviously aware that it is much more than dedicating more money to the problem. The uncontested fact is that the US spends a higher proportion of its GDP on medical care than any appropriate comparator within the OECD. In spite of this total expenditure, in certain respects the degree of medical coverage does not match.

Various reasons are readily given for this state of affairs and these include the fact that the design favours insurance corporations which are motivated to exclude many ill people on the one hand and the high prices of prescriptions drugs on the other. One factor that has not been mentioned very little has been the compensation for US medics. Alex Berenson's article in the New York Times argues with data that the compensation of US medics is at least double that of their colleagues in other high-income nations.

Even taking into account the fact that the compensation figures cited are probably based on conversions of prevailing exchange rates, it is likely that they would still be substantially higher were they to be adjusted by Purchasing Power Parity (PPP). I am at a loss as to why Us surgeons and other medical practitioners seem to exercise this degree of market power especially as medical skills are largely transferable across nations. the article states that the way in which compensation is structured moves doctors to recommend expensive procedures that may have cheaper alternatives and this suggests that US patients may be over-medicated already. One would have to look at the regulation of entry into the medical profession as I would expect that to moderate the upward crawl of wages. It appears instead to be distorting it towards the higher paid specializations.

A Case for Legalized Sports Betting

Any all-round sports fan or junkie knows that this week has not been a good one for administrators. Starting with the farce that the Tour De France has become because of suspicion of widespread and systematic doping by race leaders, a top sports professional engaged in an underground dog fighting activity and to the news that an umpire with the National Basketball Association is under investigation for betting on games in the league, sports has provided entertainment of a very different kind.

Understandably therefore, Justin Wolfers a forensic economist says something about the NBa referee. In this article in the New York Times, he states that the existing structures that outrightly ban betting on sports in the the entire US except for the State of Nevada is partly responsible. It is noteworthy that Justin Wolfers, has earlier co-authored a paper that found discernible referee bias in calling fouls within the NBA. this did not please NBA commissioner David Stern but I think this revelation that one referee may be betting on games suggests that there's a bigger problem than Stern can explain away by merely stating that it is quite rare.

Prof. Wolfers does not belabor the point but proceeds to suggest a regulatory approach aimed at vastly improving the situation. In short, he states that the outright ban on gambling is ill-advised and should be reversed to encourage bets that do not provide an incentive for corruption. This favors legalizing bets on the outcomes of matches and driving illegal gamblers towards the legitimate market. He appears to think that retaining a ban on the points differential of games should be retained as this provides part of the motives for umpires and players to act strategically by betting on subtle outcomes that they could influence. Bringing sports betting to the open would be far better than any alternative but betting on the points differentials is far more sophisticated but i see no reason for retaining ban here.

Quoting John Kay

"Today, the improbable belief that opaque financing arrangements can generate returns far in excess of those earned on underlying investments acquires validity only from being generally believed". John Kay

Where Economists Should Start

Many well-educated people have an idea about what investments are and have heard it preached by the talking heads on television and other media about the need to save and invest sufficiently for retirement or to build one's wealth. At the same time, a high proportion of the same people have this accusation against economists (largely true) that the study of dry statistics about inflation and interest rates in particular is neither interesting nor useful to them.

In spite of this, the success of many DIY books on investments and building a sizable fortune, shows that accumulating money and building wealth is a legitimate concern for today's professionals in both low and higher income countries. In the contempt for the subject of economics, these investment hungry professionals forget that inflation is real and that returns must be corrected for inflation for the sake of accuracy.

Writing in the New York Times, David Leonhardt explains what the purported record values of the Dow Jones and illustrates the common misconception and failure to recognize that the value of investment returns ought to be calculated in real terms. One of the reasons financial products advisers fail to emphasize this in sales pitches is because it would reveal that a large number of stocks that people purchase often represent mediocre returns in real terms.

UK Committee Reviews Afghanistan Progress

Over the last few weeks, this blog has had posts here and here covering the faltering war against the Taliban, by arguing that a mixture of the objectives would be detrimental to the primary objective. It appears that to roll together the primary objective of decisively defeating the Taliban and eradication of opium poppy growing is not prudent. This is because the Taliban is the legitimate military enemy, while opium poppy cultivation is a means for extracting livelihoods for a growing number of Afghanistan's farmers.

Paul Wood,reports here that the defense committee of the UK's house of Commons have issued a report that questions that approach too. Point six on that list is profoundly clear: "You can't fight the Taleban and opium at the same time."

It results in an unnecessary diversion that militarizes the war against opium, corruption and loss of public support for NATO forces. Fighting power and technological superiority does not help when the policy is incoherent. Defeat of the Taliban is not only possible but desirable while eradication of opium poppy is not NATO's war.

Melting Indian Coins for Value

Because coins are metallic and durable over time, the value of the metal used to make them exceeds the face value of that coin. As soon as this happens, astute traders begin to collect coins with a view to converting them to metal and make money out of that difference. The material effect of this arbitrage is that the Central Bank and tax payers lose from the fact that the cost of making coins is well above their face value.

I argue that this practice is a carryover from the days when gold or bronze currency reflected the value of the valuable metal from which it was extracted. Small traders in India have noted the measurable differences in the alternative value of Indian coins and are furiously collecting the same, having them melted and making impressive returns on that investment in spite of the fact that it is illegal to do so. As Subhir Bhaumik writes here, the coins are melted down, sent to Bangladesh and converted into razors. The incentive derives from the fact that the difference in the face value of the coin and the total value of the razors is 3500%. In between those boundaries is an opportunity to extract profits after deduction of the costs of melting and transportation across the border into Bangladesh. As the story states, even beggars are sufficiently astute to engage in arbitrage.

It appears that notwithstanding the reduction of the metallic content of the coins at the mint by the government of India, the arbitrage continues and the attempts to flood the market with coins only fuels the trade. The only workable and stable policy option would be to raise the value of the rupee coin closer to 35 Rupees. Otherwise, the economics of it is truly clear and the shortage of the coins will continue.