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to be placed on that table, often the most interesting entrepreneurial ideas that they espoused are probably going out of date and that the methodology for the comparisons is often unsound.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