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.