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Blog  2ou42oij

Blurring the lines

Sexism is a pernicious undercurrent in our society that is exacerbated by the fact that significant amounts of such sexist behaviour are either not observed as such or are somehow deemed acceptable (or at least more acceptable than an equivalent racial slur).

One only has to look at 'Everday Sexism' on Twitter to see the countless examples of such flagrant sexism. The most recent high-profile case of the latter is John Inverdale's ill-thought out remark on this year's Wimbledon champion, Bartoli.  The BBC issued a short written apology for a sexist remark that arguably warranted further disciplinary action.

As abhorrent as sexism is, however, there is a tendency in some circles to use the term too loosely.  The Guardian claimed that Holly Willoughby's question to Andy Murray, about whether he would now propose to Kim Sears given that he had now won Wimbledon, was a sexist question.  They claimed that since one has nothing to do with the other, asking such a question was evidently sexist.

This is wrong on two levels.  Firstly, winning Wimbledon could easily have implications for whether the winner then goes on to get married.  Achieving a career goal, or reaching a milestone in one's career, is often seen as heralding an appropriate time to tie the knot.  Holly Willoughby's question is thus nothing to do with sexism - her question is founded on an entirely legitimate basis and would equally have been asked to a female winner.  Secondly, even if 'one has nothing to do with the other', it is a misguided logical leap to then claim that this means the question is sexist.  It is a baseless claim to suggest that a question about Murray's private life has sexist motivations.  Given the adulation and adoration that surrounds Britain's hero, Andy Murray, it would be more sensible to conclude that the question was asked because the British are naturally interested in his private life.

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.