Parallels between school rules, financial crisis and the cocaine market

There is a strong tendency for authorities, when confronted with a problem, to opt for a quick-fix: banning whatever it is in question.  Banning is an artificial, cosmetic solution which does not tackle the root cause.  Hence, it tends to yield ineffective and often counter-productive outcomes.

In response to unhealthy eating habits in the playground, my school banished the ice-cream van (which sold lots of unhealthy snacks) from the school grounds.  The school correctly identified the problem: teenagers forming bad habits.  However, their response was wrong: it created a shadow market of schoolboys who sold the snacks at exorbitant mark-ups.  Thus, banning the ice-cream van did not solve the issue and furthermore, meant that students were paying 80p for a doughnut that would normally cost 20p.

Parallels can be seen with the cocaine market.  The consumption of cocaine is prohibited.  Yet that has not solved the core problem: drug misuse.  A black market has emerged where consumption of Class A drugs are still plentiful and drug users are susceptible to exploitation.

The parallel extends to the causes of the financial crisis: the bubble in the US sub-prime housing market.  In an attempt to deal with the growing inequality, the Clinton and Bush administration decided to expand homeownership.  By giving access to cheap credit to those who hitherto could not, they were fulfilling the American Dream.  However, when interest raises rose and sub-prime homeowners defaulted, a financial crisis was triggered as inter-bank lending froze up because no one knew who held the toxic assets.

These examples illustrate that when authorities respond to a problem with an artificial, cosmetic solution, it is not effective.  Its appeal is because it yields immediate benefits.  In practice, it does not tackle the root cause (and hence, the problem persists) and it often creates undesirable, unintended consequences.

Tackling "too big to fail" banks

Banks that are too important to fail can bring a global economy to its knees.  If financial institutions are too big to fail, then disastrous incentives are created: banks are encouraged to take excessive risks.  Why?  Well, if the risk pays off, the benefits are privatised (the bank profits) but if they fail, the costs are socialised (through bailouts from the taxpayer).  Hence, banks are not subject to market discipline - moral hazard is created.

There are several ways to tackle this "too big to fail" problem.  First, banks that have too large a market share can be forced to sell off some of its branches.  Second, the retail and investment arms can be ringfenced.  Third, (as is currently deficient in the USA) a strong safety net for individuals can be created.  This will enable governments to allow organisations to fail without allowing individuals to.  Firms should be allowed to fail, but not individuals.

However, these solutions bring its own problems.  The first solution assumes that market share is the problem with banks that are too big to fail - often this is not the case.  Market share may be a unwise barometer for breaking up banks since the problem may take other forms - for example, the level of exposure other firms and individuals have to that bank.  The second solution, suggested by the Vickers Report, may not tackle the too important to fail problem: for example, if Barclays Capital was about to fail, no sensible government would allow it to do so in light of the level of employment and pension funds it holds.  The third solution assumes that creating a strong safety net equates to not allowing an individual to fail.  However, perhaps it is precisely that that means an individual is failed - they are unemployed.

ECB intervention is necessary

Eurozone leaders need to take bold, decisive action to quell market fears.  Their lack of effective action is fuelling a run from the assets of weaker economies.  The longer Angela Merkel et al are indecisive, the scale of action that will be eventually required will keep on rising.  Even the election in Spain that delivered a thumping mandate for the People's Party who are firmly committed to austerity and reform did not slow the country's rise in borrowing costs.  Their yields on ten-year bonds are above 6.5%.  A similar story can be painted in Italy: the appointment of technocrat, Mario Monti has not seen much success with bond yields either.  Borrowing costs also rose notably in Belgium and France.  Germany, the country of "safe assets", only managed to sell 60% of ten-year Bunds at auction.

The problem is that Eurozone leaders are pursuing the wrong strategy.  They are talking about long-term strategies to reform the Euro: greater fiscal integregation and increased fiscal governance.  However, these policies do not have enough immediate effect.  The ECB is their best bet for quelling fears.  It needs to step in as the lender of last resort and offer unlimited liquidity to banks and pursue large-scale bond buying.  This will calm the markets and investors will be more confident buying sovereign debt from the peripheral economies.  This increased demand for bonds will reduce the bond yields.  Germany needs to overcome its inflation memories of the 1930s and overcome domestic political opposition regarding constitutional issues - because the consequences of not doing so are far too great: the break up of the Euro.

Is redistributive taxation just?

Redistributive taxation can be used to reduce the economic inequality in society.  To understand if this is a just policy, we need to consider why inequality exists in the first place.  If those that are successful in society are successful due to their hard work and effort, then redistribution may be unjust.  The well-off deserve what they have.  If, on the other hand, they are rich because they were favoured by the natural lottery (perhaps being born talented or into a wealthy family), then perhaps redistribution is just - because fair equal opportunities do not exist.  The status quo can be seen as arbitrary and therefore, can be legitimately altered.

On the other hand, there is a morality argument to be made against redistribution.  According to Kant, individuals should not treat others as a means to their own end - but as an end in itself.  Thus, redistribution at the expense of the well-off for others may not be morally sound.

However, perhaps this question - whether redistribution is just - can only be answered if we know inequality is just.  Inequality may well be justified for several reasons.  According to Rawls and his Difference Principle, inequality is justified if it maximises the position of the wost-off (principle of maximin).  What matters is their absolute position - the size of the pie they have, not their relative shares.  Furthermore, Nozick would claim that claiming justice is about the distribution of resources is nor here or there.  What matters, according to Nozick, is whether people's property rights have been respected.  If these two justifications for inequality hold, then it follows that redistribution is unjust. 

Do we have duty to do what is morally good?

We do not necessarily have a duty to do what is morally good.  A morally good action may require an individual to make a sacrifice on his part - for example, give some of his income to charity.  It is morally good precisely because it is not a duty - an individual goes beyond his duty.  If it were his duty, then the action would not be morally good.  It would simply be a requirement of him.

To understand this, we can use a simple example - should I give £10 to a homeless man on the street?  If I were not to give it, my inaction would not be morally bad.  It is morally neutral.  For the action to be morally bad, I would have to cause the homeless individual a direct, first-order harm.  If, on the other hand, I stole £10 from the man, then it would be morally bad since I have caused direct harm.

Is greater income equality desirable?

You earn £150,000 a week.  I earn £200 a week.  Why such a gulf?  You, by virtue of being the beneficiary of the natural lottery of genetics, are a world-class footballer.  If some income inequality is caused by those who succeed because they are the ones who are the most talented, then this is unfair.  A natural lottery, because of its sheer arbitary nature, should not decide who becomes the most prosperous in society.  Greater income equality is necessary to minimise nature's crapshoot.

This argument is severely weakened because it assumes that individuals have no bearing on how well they do in life.  Yes, a world-class footballer may have been talented to begin with - but the reason he made it to the top ahead of the thousands of other equally talented footballers who did not is because he worked hard.  We cannot deny that hard work has led to the success of many high earners.  Thus, although talent may be seen as a necessary condition to become a footballer - it is not sufficient (it requires hard work, too).

So, greater income equality may not be desirable in terms of fairness.  But, it may be desirable from a macroeconomic outlook.  By redistributing income from the richest to the poorest, we may be able to stimulate large economic growth.  Lower income groups tend to have a higher marginal propensity to spend.  This extra consumption in the economy will increase aggregate demand, and hence, stimulate economic growth.

In terms of maximising the overall happiness of society, greater income equality may be the path too.  As you earn more and more, the marginal utility of income diminishes.  If I give £10 to Bill Gates, his overall happiness will not be increased much (if anything).  But if I gave that £10 to a homeless child, his happiness is drastically improved - he can have a hot dinner that evening.

There is also a political case for greater income equality.  Democracies are intended to give each person an equal opportunity to influence the governing of their country.  Income inequality vitiates this democratic goal - those who are richer are able to "buy influence."  We have seen this illustrated by numerous scandals - the 'Cash for Honours' scandal to name one.  High income earners also exert disproportionate influence in another indirect way: the rich can afford an expensive private education which gives them the best employment prospects.  They then become the elite of that country - and run the country that way.  Income equality would remove this dent in so-called democracies.

Buy British? Or not...

In the late 1960s, the 'I'm Backing Britain' campaign was launched - a campaign to encourage British consumers to buy British goods and services.  The campaign was well-received: Union Jacks sprung up all over the place, newspapers were enthusiastic and even the government lent its support.

With the British economy in the doldrums, there have been calls to 'buy British.'  The argument goes like this: buy British because the manufacturing sector is in dire need of a boost and people are losing their jobs.  But, should we really be promoting economic nationalism?

My first objection is on ethical grounds.  Yes, the British economy may be struggling - but so too are other economies.  In all likelihood, a farmer in Brazil is probably suffering more than his equivalent in Britain.  So, if we are 'buying British' to support struggling farmers, then perhaps it would make more sense to 'buy Brazilian' to support struggling Brazilian farmers.

Some may claim that our first and foremost duty is towards our own citizens.  I ask - on what grounds?  I certainly agree that a government has a duty to help its citizens - that's how global governance functions - each government helps its own people.  But this duty does not extend to consumers.  Consumers should buy their goods blind of what country it is produced in.

Even if you do not accept this line of thinking, then there is an economic case for not 'buying British.'  If David Cameron proclaims that British consumers should buy British goods, how are other countries likely to react?  They will naturally retaliate with a similar response - 'buy our goods not theirs.'  Since the British economy relies on international trade, it shows that a 'buy British' campaign can be counter-productive.

A managed democracy

Russia only pays lip-service to democracy.  Elections exist, but few doubt the outcome.  Political opposition exist, but most realise that only shambolic opposition is allowed a platform - real, credible opposition is suppressed.

Mr Putin has been pulling the strings behind the scene while Medvedev has been President.  In March, Putin will be relected for a further six years in office.  Russia is set to have 22 years of Vladimir Putin.  It's safe to say that Russia is a managed democracy. 

The new scramble for Africa

The prospects for growth in Africa are promising.  Mozambique has grown 8% in the last decade; Africa grew by 4.7% in 2010; and the World Bank has increased its growth forecast for sub-Saharan Africa to 5.3%.

The Chinese are capitalising on these economic opportunities.  China is now South Africa's largest trading partner.  It has invested heavily across Africa: from deals to import coal from Mozambique and oil from Nigeria to building roads and railways in Lesotho.

Not only will these investments boost the natural resource industries but it will have large spin-off effects.  The infrastructure the Chinese are building will facilitate economic growth in all industries.  The Chinese may look to manufacture goods in Africa as Chinese labour costs begin to rise.

However, China must realise that their role is not limited to making sound business decisions.  They should not be propping up rogue regimes like Zimbabwe by doing business with them.  China need to recognise its international duty to promote good government - their investment in vicious regimes should be conditioned on improvements in government conduct.

Don't give aid to dictatorships - it's immoral

It is commonplace to hear the argument that not giving aid to dictatorships is immoral.  The argument goes: by not giving aid, you are the hurting the people you are trying to help.  It is counterproductive and probably makes the people hate the West (if they don't already, with state propaganda).

However, using a utilitarian calculus, denying aid may the moral action.  Suppose the West gave £100 of aid to the Burmese Junta.  £20 worth of aid may have reached the people (and if it did, it would probably be falsely labelled "from the Burmese Junta"!)  But, the other £80 would be used to further oppress the people: buying more arms and funding state brutality.  Thus, giving aid to dictatorships can hurt the people more than they gain.

Good politics, bad economics: homeownership

The financial crisis was triggered by a crisis in the sub-prime mortgage market in the USA.  When interest rates rose, many homeowners who were unable to meet their increased repayments defaulted.  This led to banks having to write off billions.  Confidence and lending evaporated and a crisis began.

The reason for increased homeownership in the USA can be understood through political motives (in terms of getting votes).  In an attempt to tackle the rising inequality in America, politicians faced several options.  They could improve the failing education sector - but this was the hard option that would not breed instant results.  They could increase taxation and redistribution - but this would be politically unpopular.  Therefore, they were left with their option, the one with the least political resistance - cheap credit.

Cheap credit seemed like the panacea.  It would push up house prices creating a positive wealth effect.  Households, feeling richer, would consume more.  It would create jobs in the real estate and housing construction.  And, best of all, the costs lay in the future.  This was a politician's perfect scenario: cheap credit would yield large, instant and widely distributed benefits.

Unfortunately, the expansion of cheap credit would soon catch up with us.  Household debt became untenable.  A prime example where good politics can make bad economics...

A word of caution: The Vickers report

The Independent Commission on Banking (ICB) was set up to investigate how to prevent another big financial crisis like 2008 in which governments have to bailout failing banks.  RBS and Lloyds were both rightly regarded as "too big to fail" and were partly bought up by the taxpayer.

The ICB proposes that the retail arm of banks being ringfenced from their other operations; and that banks hold significantly more capital to be able to absorb its own losses.  Ring-fencing will provide greater security for retail depositors - they know that their money cannot be used to bail out reckless investment banking decisions.

However, forcing UK lenders to hold more equity than international competitors will harm British competitiveness.  New regulations need to be made multi-laterally if they are not to be counter-productive.

The real problem still remains: banks are too important to fail.  Until this issue is dealt with, the chances of another big financial crisis is high.

Weak UK growth

The UK economy has begun to recover: since the first quarter of 2011, in which GDP growth contracted by 0.1%, the UK economy has seen positive growth in output.

However, this recovery is weak.  Growth has remained stagnant; GDP only increased by 0.2% in the second quarter of 2011.  This is lower than the rate of growth, 0.5%, recorded in the first quarter of 2011.  The most significant negative contribution came from the production industries which decreased by 1.4%.

The ONS has attributed this weak growth to the weather.  In the first quarter, it was the snow and cold weather that decreased our productivity.  In the second quarter, it was the sunshine – extra holidays, including for the Royal Wedding.  If not for this, say the ONS, growth would have been 0.5% stronger.

Other reasons include:

• Weak consumer confidence – anticipation of weak growth leads to consumers saving their extra income.
• Fragile world economy – the continuing euro zone sovereign debt crisis and the USA’s credit downgrade may have further damaged consumer confidence.
• Government spending cuts – in an attempt to rebalance the economy, the Coalition government have reduced public spending.  The other components have not yet made up for this fall in government spending.

 There are various policy responses that could be adopted to stimulate growth:

• Maintain 0.5% bank rate – on September 8, the MPC voted to keep bank rate at this historic low.  A hike in interest rates may further weaken growth by discouraging business investment.
• Plan B – perhaps the government needs to rethink its aggressive public spending cuts.  The calls of “too soon, too quickly” may be vindicated.  Keynesians would argue for the government to meet the shortfall in private demand.  However, the government would claim that the cuts are actually necessary for a recovery – if the UK does not take control of its debt, then we could lose our credit rating causing interest rates to rocket – and thus, jeopardising the recovery.
• Quantitative easing – currently at £200bn, this could be further pursued in an attempt to boost liquidity in the economy.  However, this is probably unwise with inflation at 4.4%.

The morality of utilitarianism

According to Jeremy Bentham, morality must be judged on its end consequences.  Whatever brings about the greatest happiness for the greatest number is the moral thing to do.

This consequentialist take on morality poses a major problem.  'Act utilitarianism' potentially allows for a severe infringement of human rights.  Take bullying for example: if one child is bullied by five children, then according to a utilitarian principle, this may be justified.  The happiness five children gain from bullying may be greater than the misery caused for the one child that is bullied.

Gang rape is another example.  Strictly speaking, 'act utilitarianism' would say that gang rape is morally justified if it brings about greater happiness to the gang than the pain caused to the victim.

In response to this criticism, utilitarianism presents a better alternative - 'rule utilitarianism'.  This view on morality uses the greatest utility principle but has certain rules that must never be violated.  Thus, rule utilitarianism protects fundamental human rights where act utilitarianism does not.

4 years for incitement

In the aftermath of the England riots, British courts have been handing out tough custodial sentences to the rioters.  Two men were jailed for four years for inciting riots (albeit to no avail) on Facebook.  Offences that were committed during the riots, under normal circumstances, would only warrant community service orders.

The courts have got this wrong.  In the interests of justice, they need to be consistent with their sentencing.  Although I do not disapprove of harsher sentencing per se, I disapprove of harsher sentencing as a knee-jerk reaction to public anger.  The rule of law must be upheld - it must be applied equally and fairly.  Thus, the punishment should be the same for every person regardless of when the crime was committed.  Just because the offence was committed during the riots does not warrant a harsher sentence than if it were not.

There is a public appetite for harsher sentences - but there is also a public appetite for fairness and consistency.  The courts must heed this duty.

Squandering a blessing

The rich Western world faces difficult economic times.  The USA's credit rating has been downgraded and the future of the Euro has been called into question.  In these hard times, politicians often succumb to voter pressures.  We have seen this with Angela Merkel in Germany - who perhaps does not take the required action to stem to Euro-zone crisis due to the hostility of German voters to any such expansion of the bailout fund or Eurozone wide bond guarantees.

Now, political pressures seem to be cursing our immigration policy.  In tough times, voters rightly express their concerns about jobs in short supply.  However, politicians too often pander to voters' fears rather than allaying them.  People need to be reminded that immigration is counter-cyclical.  In a recession, many would-be immigrants do not want to come.  America has seen a sharp decline in Mexican immigrants and the same can be said for immigration generally in Europe.  Despite this, rich countries have been taking steps to discourage immigration over the past year.    The Danish, French and Italian have scrapped the Schengen passport-free zone and reintroduced border controls.  Australia and Canada have cut back on work permits.  The UK has imposed a migration cap for non-EU migrants.  Many other countries including Spain and Japan have created a "pay as you go" scheme which pays migrants to go home.

These measures are squandering a blessing.  Migrants are more flexible and willing to work than the current workforce and thus, can boost the country's productivity and encourage innovation.  By imposing more and more limits of their arrival, migrants are increasingly going to the East.  There is competition for migrants from China and the Middle East.  The rich world's restrictive measures reacting to voter's fears are myopic - migrants are the harbingers of long-term economic growth.

The unintended economic consequence of the one-child policy

China's controversial one-child policy has been criticised on many levels.  Amongst them, it has been blamed for an increased number of abortions, infanticide rates and the resulting gender imbalances.

But it can also be criticised for keeping Chinese household consumption at alarmingly low levels.  China has a huge domestic market yet the country is reliant on export-led growth.  Many families have a high propensity to save their extra income earned, rather than spend it.  This is because they cannot rely on the traditional old-age safety net - their children.  With one child supporting both parents (and potentially, both grandparents), this traditional method of financial support is no longer feasible.  Thus, parents choose to save their money for their old age.

China needs to improve its social security system.  This can bolster household spending - which is desperately needed - their low domestic consumption makes the country excessively reliant on foreign demand.  But even if they do successfully reform their social security system, it will take decadeds to have an effect.  For China's citizens, saving has become a habit - and old habits die hard.  It will prove difficult to change consumer habits - the Chinese have been trained to too prudent about spending.

What does the Hayekian have to offer?

Keynes once said that he wanted economists to be like dentists: competent and useful.  If you had a toothache, which dentist would you rather see - Dr Keynes who gives you some painkillers or Dr Hayek who just shakes his head and tells you that it's your fault for eating too many sweets?

I was at a talk recently at the LSE headlined by Robert Skidelsky on "Keynes vs Hayek".  I was particularly entised by this argument that Hayekians cannot offer any practical solution once a country is in recession.  Hayek would merely that say we shouldn't start another one.

This cannot be right.  If we let the free market run its own course, the toll will be far too high.  Recessions have a huge human impact - unemployment breeds so much more misery than we can possibly fathom.  If the UK government had let Lloyds and RBS fail, thousands would have lost their jobs and lives would have been destroyed.  This is far too important for any preservation of free market economic principles or a moral hazard argument.

Angela Merkel's big dilemma

Crisis summit after crisis summit - and still Europe's political leaders have yet to meaningfully calm the markets.  Perhaps their strong words and handful of measures mollified investors for a few weeks or days, but that's as far as it goes.

The European Financial Stability Facility (EFSF) needs to be expanded - many cite the figure at 1 trillion Euros.  The solution also requires more bond-buying by the European Central Bank.  Investors are even hoping for mutually guaranteed Eurobonds.

Europe's leaders have not provided this so far.  The big problem they face in solving this economic crisis is a political one.  Most governments do not have a mandate from voters to implement such drastic measures.  German voters, in particular, are very hostile towards further bail-outs and fiscal transfers to weaker euro-zone countries.  This is opposed on two grounds.  Firstly, put simply, they are not prepared to make such a sacrifice for profilgate countries.  Secondly, the solution constitutes a step towards greater political union - stronger countries providing support for the weaker ones.

To tie Angela Merkel's hand further is her coaltion partners.  They are reluctant to expand the EFST's powers and let it buy up government debt.  Further, Germany's constitutional court may rule that euro-zone bailouts are illegal.

The political leaders of Europe are admittedly in a difficult situation.  But the choice is clear.  They need to explain to the electorate that the sacrifices they have to make are a necessary evil.  The alternative is worse - even more economic turmoil and possibly even the split of the EU.

Should rioters lose their benefits?

The England riots led to several deaths, destroyed many more livelihoods and created fear in our communities.  Even leaving aside the economic cost as a result of the looting and fires, England has been left shaken.

Therefore, we have every right to be angry who those who rioted.  But disqualifying them from social security benefits would be a knee-jerk reaction (as the 200,000 who have signed the Parliamentary e-petition wish to see.)  It is unnecessary to take action beyond the remit of the judicial system.  Our justice system should deal with these thugs - that is its proper role and we should leave it to serve justice.  Besides, the courts have been serving harsh sentences in the aftermath of the rioting - consider the case of two young people sentenced to four years for attempting (but failing) to orchestrate rioting via Facebook.

Removing convicted rioters benefits is perhaps akin to taking the role of serving justice into our own hands.  We would dissaprove of a vigilante going out and attacking convicted rioters.  The same principle should apply to removing their benefits.  The rioters will receive their proper punishment through the courts - we should not act more than that.  In a time when emotions are running high, we should not react in a disproportionate manner.

 The e-petition raises an inconsistency.  Convicted rioters would loose their benefits but a convicted rapist would not?  This highlights that this petition is a knee-jerk reaction.

Besides, it may actually prove to be counter-productive to us.  If it is the case (we must be careful not to generalise here) that a rioter is on benefits, then disqualification can make the situation worse.  The rioter consequently has even less stake in their society - and even more reason to cause trouble.

Broken Britain - literally.

I was a helpless onlooker as I saw thugs smash in the windows of my local Natwest bank on East Ham High Street.  On the other side of the road, Barclays bank had been broken into - its computers dragged out on the pavement outside.   Further down the road, Argos was being ransacked - through the side entrance, dozens of people excitedly skipped into the stock room to emerge a few seconds later clasping onto their new possessions.  At one point, a young person emerged from the store with a trolley brimming with goods - he was met with cheering and laughter.  These scenes were repeated across London and other major cities.

David Cameron is wrong to label the England riots as "criminality, pure and simple."  Although the riots were not overtly political, they were fuelled by social and political causes.  As the riots ensued, we heard people ask why the rioters would harm their own community.  Well, the answer is, too many people don't feel part of that community.  They see themselves as separate and different to their community.  There is no sense of belonging or duty.  Thus, they have no qualms about looting and smashing windows - they have no stake in their local community.

Death to capital punishment

I was struck by the story of Rais Bhuyian - a man who was blinded by Mark Stroman, who shot him (and killed his two friends) in the aftermath of 9/11.  Rais has been campaigning for a reprieve for the murderer who is set to be executed today.

I think he has a strong case.  Capital punishment is morally wrong - since when does two wrongs make a right?  The death penalty belongs in the last century.  We have moved on from our ancestors' barbaric principles of an eye for an eye and tooth for a tooth.  This is merely vengenance, not justice.

Of course, that is not to say our criminals should not be punished.  The alternative is to toughen up sentencing laws and ensure that they are not given parole after a measley 10 years or so.  This will serve the purpose of justice and what's more, serve as a detterrent.  I know that many of the proponents of capital punishment promote it on the grounds that it serves to reduce crime in the long-run.  This argument is at best unproved. The type of criminal that receives the death penalty will be serial murderers, rapists and terrorists, for example.  These types of people are psychopaths - they are evidently not rational nor stable beings.  Thus, a death penalty will not necessarily affect them.  Instead, it would only deter criminals who commit pettier crime - and I'm sure even the most ardent believers of the death penalty do not sanction killing Jim who steals from the sweet shop.  In this sense, therefore, capital punishment is ineffective.

So it's morally wrong and ineffective.  To make matters worse, there is chance that innocent people will be killed.  Our justice system is, and always will be, fallible.  Mistakes and miscarriages of justices will happen.  If the wrongly convicted criminal is serving a sentence in prison, they can be released if new evidence came to light.  If the the wrongly convicted criminal is in a grave, they cannot be brought back life - no, as advanced as our technology is, we have not got that far (yet?)  Any system that has the potential kill innocent people is a risk too far.  Death to capital punishment.

Under arrest

The police force is set to hit its lowest numbers since 2002 - 34,000 jobs will be lost, under government austerity measures.

This is a step backwards.  The state has a duty to protect its citizens.  With crime and especially, the fear of crime at alarmingly high levels, cutting police numbers compromises their duty to do so.  People deserve a strong police presence on their streets.  This reassures them - primarily because it acts as a deterrent but also because it sends the message that the government recognize that crime is a real issue and are taking active steps to combat it.

Inevitably, due to our unsustainable debt levels, the government needs to reduce public spending.  However, compromising our safety is not the way to achieve this. 

No showboating please, Parliament

Rupert Murdoch, after initially declining Parliament's request to attend the Commons Select Committee on Culture, Media and sport, has accepted the invitation.

Next Tuesday (when the Murdochs and Rebekah Brooks are scheduled to give evidence) is an opportunity for Parliament to showcase themselves as an effective body that aims to throw light on this hacking scandal - not to show off.  Amidst huge public outrage and anger, it would be easy enough for MPs on the select committee to grandstand and look to ridicule the Murdochs.  Instead, they must show voters that Parliament works - by asking questions designed to further the investigation - and not merely humiliate the Murdochs as an end in itself.

Indeed, it is a chance for Parliament to vindicate itself: when the chief executive of Kraft refused to attend a  Parliamentary select committee, she argued that she would be met with "ill-founded allegations and insults."  On Tuesday, Parliament can show these claims were wrong.

If you have nothing to hide, you have nothing to fear

British people are said to be the most watched people in the world.  There are nearly 3 million CCTV cameras monitoring the UK.

Many human rights groups oppose what seems like an all-seeing State on the grounds of privacy.  They claim that individuals have a fundamental right to a private life.

Needless to say, this is true.  But, it is also true that they have the right to be safe when they make that journey home every night from work.  Rights can be seen as relative, as opposed to absolute.  Thus, when they conflict (as is evident with CCTVs), we must weigh them up.  I for one would rather be watched every step of the way on my journey home than be mugged.

Perhaps some would claim that this argument is redundant - CCTVs do not necessarily reduce crime.  Well, of course, CCTV cameras do not eradicate crime - but it does undeniably act as a deterrant for many would-be criminals.   The prospect of having your face pop up crystal clear on a police officer's computer is, I am sure, not one a criminal relishes.

In a perfect world, yes, the right to privacy would always be preserved.  But, unfortunately, we do not live in a perfect world.  There are criminals who want to steal our wallets, rob our homes and terrorise our country.  Our right to safety does mean that our privacy must be curtailed to some extent for the greater good.

The third great crisis of trust

First, it was the banks.  Then it was our MPs.  Now, it is the turn of the media.

Recent phone-hacking revelations, which has led to the closure of the News of the World, are very unsettling.  It would probably be wrong to see the actions of the individuals concerned as acting in a vacuum.  The scandal perhaps exposes the culture that led to it.  In an attempt by journalists to find the most exclusive stories, amidst the fierce competition in the media, they have overstepped the mark - and broken the law.

The media plays an integral role in our democracy.  Its role in scrutiny is certainly welcome.  They criticise government actions and expose our elected representatives when they behave illegitimately.  Unfortunately, for some, they have confused "scrutiny" with invading privacy for no reasonable justification and frankly, breaking the law.

Peaches and Lemons

Akerlof, Stiglitz and Spence jointly won a Nobel Prize in 2001 for their insights on asymmetric information.  They used the market for second-hand cars to illustrate the problem of when a buyer knows more than a seller: quality uncertainty.

There are two types of second-hand cars; the good, functioning cars (peaches) and the bad, defect-ridden cars (lemons).  However, the market for peaches and lemons are not separate.  Consumers cannot distinguish between the two for many reasons - they cannot access all the hidden mechanical parts, they are not car experts or they do not know the history of the vehicle.  Thus, they will only find out whether it is a peach or lemon after the purchase - which of course, is too late.

Therefore, the buyer’s best guess is the average quality.  The owner is only willing to pay what the average known quality of the car is.  This leads to a market failure - an information asymmetry has led to adverse selection.  The peaches, as a reaction to the lower price, will be unwilling or forced to leave the market.  Once the peaches start to withdraw, the proportion of lemons increase.  Thus, the likelihood of a consumer buying a lemon increases - yes, adverse selection in all its glory.

The problem here is that sellers, especially lemons, have a financial incentive to pass of their cars as “good”.  This introduces an element of risk for the consumer who risks overpaying at an unfair price for a lemon.  To coin the economic principle of Gresham’s Law, the bad cars drive the good cars out of the market - literally.

To overcome this problem, the information gap needs to be reduced.  To compensate for the lack of expertise, on the consumer’s behalf, an independent third party can be introduced to reveal the quality of the car.  Peaches can be given rubberstamp to indicate that they have been inspected and are road-worthy.
It may be impractical for every car dealer to attain this certified status in terms of the efficiency of the market.  In this case, both parties can agree a warranty - an assurance by the car dealer to the consumer that the car is functioning.  If this proves to be untrue, the consumer may seek compensation.

In the age of technology, the wonders of the internet can be harnessed.  Consumers can review their second-hand cars and car dealers to inform potential future consumers.  Thus, car dealers have an incentive to maintain their reputation - something which lemons cannot rely on.  This will solve the problem of adverse selection.  Nevertheless, this is practically tricky.  The nature of dodgy car dealers, the lemons, are that they are small dealers and elusive.  They only sell a few cars and keep moving location.  As a result of this and the fact that they are unofficial renders this internet based solution largely ineffective against this particular type of car dealer.

Democracy is right - invasion is wrong

Democracy is right but invasion to install democracy in authoritarian regimes are wrong.

Invasions are idealistic.  In a hypothetical situation, the plan would be to send a military force to country X to firstly, topple the regime and then secondly, oversee the introduction of free and fair elections.  Both these hurdles are insurmountable.  The first aim is difficult: regimes under Gaddafi and Mugabe are well-planted.  After possibly decades in power, the regime often command the loyalty of the army and are able to put a bloody resistance.  Even if the leader is removed, no doubt his cronies will replace him.

The second aim is even more difficult (if you manage to even get to that stage): removing an authoritarian regime by force creates a power vacuum.  If the authoritarian regime has been in power for decades (as is often the case), the country has no experience of democracy.  Political parties are non-existent and there are few established leaders.  The result? Civil war.  Competing factions emerge giving rise to insurgency, and guess what, more bloodshed.  This is a lose-lose situation; democracy is not effectively installed and lives are lost.  Even if democracy were installed, is it really worth the cost of thousands of lost lives?

Reforming the license fee

The BBC license fee is the closest thing we have to a regressive poll tax – used to line the pockets of Graham Norton, Dara O Briain and Anne Robinson.

The BBC criminalises the low-paid – by taking those who do not pay the license fee to court.  The opportunity cost for a single mother, earning the minimum wage, to pay the licence fee is to spend less on buying her children books to read, or food to put on the table.  It is clear to see where her priorities lie (and rightly so.)  Thus, it is immoral for the BBC to then proceed to prosecute such a person.

My second problem with the license fee is that it puts this state-run monopoly in a uniquely privileged position.  They are able to retain the stars of entertainment world and keep them away from the likes of ITV and Channel 4, who rely on advertising revenues.  In the recession that has just gone by (I hope!) revenues from advertising fell.  As a result, those channels that rely on this market-based approach were harmed, but not the BBC.  This is unfairly privileged position to be in.  Other channels are unable to compete and attract the talent they want.

However, perhaps the state does have a role to play in broadcasting.  If the BBC are to ‘inform, educate and inform’ (as promised in its Charter), then it requires a constant revenue flow to fund The Graham Norton Show and Planet Earth – the programmes we love to watch.  Therefore, its privileged position can be seen as an unavoidable, unintended consequence of achieving this aim – it is a necessary evil if the public want high-quality programmes.  However, funding the BBC through the general taxation system may be a better solution.  It would be progressive (well, that’s only if you agree that our current taxation system actually is progressive) and hence, fairer.  Those on incomes less than 16k per annum (approximately the threshold for the Working Tax Credit) should not pay.

In the name of quality, the BBC license can be justifiably raised – we all benefit from a broadcasting service free of cheap, copycat programmes.  However, this rise should not be at the expense of those on low-incomes – the funding system itself needs to be reformed.

The BBC has frozen any increase in the license fee (currently at £145.50) for the next six years; which is a 16% real cut in their funding.  This does not go far enough.  The BBC need to provide a high quality programmes like the Graham Norton Show (arguably) but not at the expense of the single mother struggling to bring up her kids.

"Bad driving the good out of the market"

Akerlof, Stiglitz and Spence jointly won a Nobel Prize in 2001 for their insights on asymmetric information.  They used the market for second-hand cars to illustrate the problem of when a buyer knows more than a seller: quality uncertainty.

There are two types of second-hand cars; the good, functioning cars (peaches) and the bad, defect-ridden cars (lemons).  However, the market for peaches and lemons are not separate.  Consumers cannot distinguish between the two for many reasons - they cannot access all the hidden mechanical parts, they are not car experts or they do not know the history of the vehicle.  Thus, they will only find out whether it is a peach or lemon after the purchase - which of course, is too late.

Therefore, the buyer's best guess is the average quality.  The owner is only willing to pay what the average known quality of the car is.  This leads to a market failure - an information asymmetry has led to adverse selection.  The peaches, as a reaction to the lower price, will be unwilling or forced to leave the market.  Once the peaches start to withdraw, the proportion of lemons increase.  Thus, the likelihood of a consumer buying a lemon increases - yes, adverse selection in all its glory.

The problem here is that sellers, especially lemons, have a financial incentive to pass of their cars as "good".  This introduces an element of risk for the consumer who risks overpaying at an unfair price for a lemon.  To coin the economic principle of Gresham's Law, the bad cars drive the good cars out of the market - literally.

To overcome this problem, the information gap needs to be reduced.  To compensate for the lack of expertise, on the consumer's behalf, an independent third party can be introduced to reveal the quality of the car.  Peaches can be given rubberstamp to indicate that they have been inspected and are road-worthy.

It may be impractical for every car dealer to attain this certified status in terms of the efficiency of the market.  In this case, both parties can agree a warranty - an assurance by the car dealer to the consumer that the car is functioning.  If this proves to be untrue, the consumer may seek compensation.

In the age of technology, the wonders of the internet can be harnessed.  Consumers can review their second-hand cars and car dealers to inform potential future consumers.  Thus, car dealers have an incentive to maintain their reputation - something which lemons cannot rely on.  This will solve the problem of adverse selection.  Nevertheless, this is practically tricky.  The nature of dodgy car dealers, the lemons, are that they are small dealers and elusive.  They only sell a few cars and keep moving location.  As a result of this and the fact that they are unofficial renders this internet based solution largely ineffective against this particular type of car dealer.

Inequality matters: the rich getting richer

Inequality is rising.  The Gini coefficient (the most common yardstick for measuring inequality, where 0 means everyone has the same income and 1 means one person has all the income) has gone up in many countries.  Since the 1980s, the US has seen an increase from 0.34 to 0.38.  China increased from under 0.3 to over 0.4.

Some people claim this should not be seen as a bad thing.  It may just mean that the wealthier are getting wealthier not the poor getting poorer.  In the 1990s the incomes of the richest fifth in the USA increased by 27% whilst the incomes of the poorest fifth increased at a slower rate of just 10%.

However, there is increasing evidence to show that even this form of increasing inequality makes the poorer worse off, even though they may not actually be in material terms.  It has psychological and mental effects.  The principle of ostentatious consumption is that your satisfaction from consuming a good does not come from itself but from others seeing you with the good.  The value of wearing a Rolex watch comes largely from the feeling when others see you with it, not due to the intrinsic merit of the watch to tell the time better than a plastic one from Argos.   In a similar fashion, people want to be not just rich - but richer than your neighbour.  It is this sense of status that can affect stress levels and health.

Therefore, when others are becoming richer - something that you want to have - can have negative health implications for the poor, even if they are not becoming poorer.
--------
*This is the view argued in "The Spirit Level" by Richard Wilkinson and Kate Pickett in 2009.

Parliament versus ECHR

Jack Straw and David Davis announced yesterday that they were joining forces to oppose the move to enfranchise prisoners.  It comes after a ruling by the European Court of Human Rights that killers like John Hirst could not be legally denied the right to vote in prison.

The opposition from some Tory backbenchers, possibly up to 40 rebels, is unjustified.  They oppose the reversal of the blanket ban on prisoner's voting rights, not because of the merits of their case but in order to make a political statement.  They see this as a tussle of authority between the British Parliament and the European Convention of Human Rights (ECHR).  According to Jack Straw, this debate is the perfect opportunity for the government to "strengthen [their] hand for dealing with Strasbourg."

No, this should not be seen as a political tussle.  This is a debate about human rights - and our policy on prisoner's voting rights should be decided on that basis, not used as a means for standing up to ECHR power.  That is an entirely legitimate concern but its place lies in a separate debate.

FPTP: A broken system.

Let there be no confusion: alternative vote is not the panacea to our democratic deficiencies.  It is, however, a step forward.  A step forward for democratic legitimacy; a step forward for empowering the electorate; and a step forward for fairer votes.

My case for backing the Yes Campaign on May 5^th is not because I see the alternative vote as the best electoral system but because I think the first-past-the-post system is a broken one.

I believe the cornerstone to any functioning democracy is one that has the support of its people.  But when we have MPs, like in Norwich South, who are elected without the consent of a majority of voters, it means the MP cannot claim to be representative of her constituents.  We need a system that promotes MPs to appeal to larger section of the population.  If voters can express their support in a more detailed manner through ordered preferences then we will achieve this.

On the other extreme, first-past-the-post produces a landslide effect nationally.  It is entirely disproportionate.  The case of Hampstead & Kilburn exemplifies this:  Glenda Jackson, the Labour candidate won a plurality of just 43 votes.  When this scenario is replicated across the country, we have a composition of Parliament that is unreflective of the electorate’s wishes.  In 2005, Labour received 35% of the vote, yet, due to the discrepancy between votes cast and winning seats, won a disproportionate 55% of seats.

What’s the problem with this, I hear?  It delivers a strong, effective government – surely this is a good thing.  Quite the contrary.  It delivers an unaccountable, dominant government – an ‘elective dictatorship’, as Lord Hailsham once said.  The strong majority of a government in Parliament, created by the current electoral system, creates an all-powerful executive.  In Tony Blair’s first two terms, Labour were never defeated on any bill.  Under Margaret Thatcher, the Conservatives were only defeated once.

This is worrying.  Not just because there is a severe lack of accountability but also dangerous on practical grounds.  Dominant executives mean the country is more susceptible to wrong, unpopular decisions.  Here I cite the Iraq war, draconian control orders on terror suspects and the Poll Tax.  Under first-past-the-post, governments have and will continue to make serious errors of judgements.  Why?  Because our flawed electoral system lets them do so.

Britain prides itself as a pluralist democracy.  This is not entirely true.  The sheer number of political parties is not enough.  They must have a reasonable chance of entering Parliament, especially when they have sufficient support to do so.  The question begs – why are UKIP, who received 0.6% of the vote in 2010, not represented in Parliament?  The electoral system, that’s why.  We need to “break the mould” of the two-party system.

If we are to enhance our democracy in terms of legitimacy, accountability and representation, then we must vote Yes in May.  First-past-the-post is a broken system.  Can we fix it? Yes we can!*

*Apologies to Bob the Builder

Bashing the Bankers: UK vs USA

As has been the case in the last few days (in light of speculations on RBS bonuses), bashing the bankers has become very popular pastime amongst politicians, the media and the public in the UK.

The furore caused over banker's bonuses is higher in the UK than all other countries (apart from Ireland who do so understandably.)

Why does it not cause as much anger in the US?  The effects of the financial crisis and subsequent recession was greater in the US in terms of unemployment and homelessness.

The distinction comes when we look at the top investment banks in the two countries.  In the US, Goldman Sachs and Morgan Stanley are not major retail banks.  On the other hand, in the UK the top investment banks also have a strong presence on high streets across the country - HSBC, RBS, Barclays.

This presence means the banks have a direct relationship with millions in the UK.  The relationship is not often a very good one - a failed loan request or bills on overdrafts.

No wonder the British public lock horns with the self-proclaimed masters of the universe.

A sad day for justice

The assassination of Pakistan's Punjab governor Salman Taseer, the most high profile since the death of Benazir Bhutto in 2007, represents a sad day for justice.

He was murdered by his bodyguard - because of the governor's openly liberal stance. Recently, he pleaded for a pardon for Asia Bibi, a Christian women sentenced to death for allegedly insulting the Prophet Muhammad. It is his liberal views on blasphemy laws that angered radicals, and ultimately, led to his death.

Mr Taseer's state funeral this morning marks a sad day for Pakistan. It highlights that a radical minority can hold the country to ransom. The country is not a pluralist society. Speaking out for tolerance is not tolerated - and in Mr Taseer's case, he paid with his life.

His death may create further instability in Pakistan. At the weekend, one of coalition of the Pakistan People's Party walked out. Political unrest is rife.

A new country in Africa?

When the borders for Africa were drawn up they disregarded the situation on the ground - in terms of ethnicity, religion and culture. This has caused problems ever since. After decades of war and unrest, south Sudan will vote next week on a referendum to secede from the north.

Nearly 4 million voters are registered. For the south to gain independence, a turnout of 60% of registered voters is required. Bashir, Sudan's Prime Minister, reassured the public that he will respect the outcome of the referendum.

The case for seccession is strong. Sudan, the largest country in Africa, has been plagued by violence and unrest for decades. It is said that the government ruling in Khartoum discriminate against the non-Muslims (largely Christians and traditional religions) in the south. Therefore, a government in Juba, the capital of south Sudan, will create a better society for those in the south.

However, the case against independence may be stronger. The south have very little experience of governing itself. The land area of south Sudan is bigger than France and Germany combined. With a population of 7 million, shoddy infrastructure and shocking living standards, is a south Sudan really a practical solution?

Perhaps this will only be a short-term impediment. An independent south may perhaps be the catalyst to reverse their fate. It is reassuring that Bashir has promised to help the south more after the referendum, whatever the outcome. Juba will need it.