There’s nothing puzzling about Britain’s stagnation Part A

Economists are perplexed to find that today, in a first in any postwar recession, productivity is not recovering

British economists are tearing their hair out over the so-called ‘productivity puzzle’ - the fact that, for the first time in any postwar recession, productivity in Britain has not recovered reasonably quickly after the initial downturn. But it isn’t a puzzle at all, and in truth points to deep structural problems in the British economy, argues Phil Mullan in this important new essay 

by Phil Mullan

The productivity puzzle

Productivity growth is the best guide to a country’s future prosperity. As a measure of economic output relative to employed labour time, productivity gives an indication of how much wealth can be created for society to live on. Productivity’s capacity to grow, therefore, underpins durably improving living standards. In Britain especially, though not uniquely within Europe, productivity growth since the financial crisis of 2008 has been extremely weak – in fact, in Britain’s case, it has remained a couple of per cent below its pre-recession peak.

This has caught many economists by surprise, prompting a significant amount of debate over why this has happened and how long it might endure. While the initial fall of productivity during the recession was in line with everyone’s expectations, there hasn’t been a subsequent recovery in productivity. Instead, productivity has remained low and pretty static. This has become known as the British productivity puzzle (1).

It is perceived as a ‘puzzle’ because normally after a recession, productivity recovers reasonably quickly. Economists traditionally attribute recovery to ‘cyclical’ reasons. Another way of viewing the ‘cyclical’ behaviour of productivity is that it is the statistical expression of two real-economy measures – output and employment. These two tend to move at different speeds during the different stages of the business cycle. Output in a recession usually declines much faster than businesses reduce their headcount, and the measure of productivity therefore falls: less output relative to workers.

Then, when the recession ends and output begins to grow again, the reverse effect is supposed to kick in: the output recovery makes better use of under-used employees before employment picks up again, creating a cyclical boost to productivity: more output relative to workers. This effect is reinforced as output often expands more quickly than employers recruit.

An important point about such ‘cyclical’ shifts is that they do not reflect the impact of the long-term driver of productivity growth: namely, productive capital investment. It is such investment that generates and spreads the innovation and the advances in technology and techniques that make people at work more productive. In contrast to ‘cyclical’ changes, we can call this type of investment ‘structural’ in its impact on productivity.

The big problem with the productivity puzzle discussion is that it assumes that what we are experiencing is primarily some form of business cycle (even if some highlight more than others its unusual and distinct origins in the West’s financial crash from 2007). But in fact, we should be looking deeper into our economic troubles rather than presuming that they are cyclical. Britain’s economic problems – and those of the rest of the Western world – are structural, and this accounts for the poor state of British productivity we see today. A long period of underinvestment in innovation, technology, capital equipment and infrastructure manifest themselves in low productivity. There is no ‘puzzle’ about the absence of a productivity recovery, because there is not a high productivity level to which the economy can recover. Structural British productivity is low. The only ‘puzzle’ is why productivity seemed to be so strong in the pre-2008 period.

Taliban seen waltzing in Tehran

Omar’s blue-eyed boys surface above the radar

By M K Bhadrakumar

The equation between Tehran and the Taliban has always been a matter of speculation. There has been  this notion that the Taliban subscribe to the Wahhabi faith and are virulently anti-Shi’ite and, therefore, they will be on hostile terms till eternity with Iran. But this was never really the case. 

At any rate, the Taliban comprise many factions and it all depends on who one is referring to. As for Iranian intelligence, they’d sup with the devil if need be in the national security interests. 

Conceivably, below-the-radar contacts have been kept up by the Iranians with the Taliban through the past decade. Neither side publicized it, though. Therefore, what happened last week isn’t  earthshaking  – that Tehran has hosted a Taliban delegation. But the stunning part is that the Iranian side publicized it first, on Saturday (here).   

The Taliban confirmed the information earlier today. Presumably, Mullah Omar decided to come clean. It now appears that many a Taliban delegation would have visited Iran from time to time. It also transpires that  Pakistani intelligence was in the loop all along.  

What is of interest is that Iran hosted the Taliban representatives based in Qatar. They are Omar’s blue-eyed boys. This does raise some serious issues. 

After having enjoyed such lavish Qatari hospitality — according to Rod Norland of New York Times (here)  –  it is highly unlikely that the Taliban kept the Emir in Doha in the dark and simply sneaked out to catch a flight to Tehran. 

No, Sir, it doesn’t need much ingenuity to comprehend that the Qataris okayed the trip of the 4 key Taliban reps.Now comes the most intriguing part: If the Qatari Emir knew, would he have kept the matter hidden from the Big Boss in Washington? Impossible, inconceivable, implausible, improbable, incogitable, incredible. You may choose the appropriate word.

Risk and reward

Why the Fed Can't Stop Fueling The Shadow Bank Kiting Machine

by Bill Frezza

Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Traditional commercial banks essentially create money through a well understood and time honored pyramiding of loans. Depositors who understand that their deposits are thereby placed at risk choose their banks accordingly.

Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Failure occurs when depositors come to believe that their bank has lent out too much manufactured money to too many dodgy borrowers and may not be able to cover depositors’ withdrawals. When this happens, depositors rush to reclaim their money while there is still some left, leading to the bank’s collapse.

Under free market capitalism, banks compete along a spectrum of risk and reward.Conservative banks offer a higher degree of safety by maintaining larger reserves, thereby manufacturing and lending out less money. Through word and deed they let depositors know that they lend to only the most creditworthy borrowers, who generally must post valuable collateral. These banks remain profitable because they successfully attract prudent depositors willing to accept lower rates of interest.

Banks of a more speculative bent offer a lower degree of safety, maintaining smaller reserves to create and lend out more money. Seeking higher returns, they often lend to less creditworthy borrowers who may put up poor quality collateral or none at all. These banks attract risk-taking depositors looking for a higher rate of interest. They can be very profitable during periods of economic expansion but often fall into distress during economic downturns.

Periodic bank failures remind depositors of the connection between risk and reward. When caveat emptor rules, smart depositors who pay attention make money and dumb depositors who don't lose theirs.

Because the latter outcome is intolerable in a democracy, we have government-provided deposit insurance and other taxpayer-financed backstops that shield most depositors from the risk of loss. In theory banks pay premiums to fund this insurance. In practice these premiums are not risk-based. Banks are not penalized for making riskier loans, in turn often leaving the premiums too low to finance payouts. This creates a huge moral hazard, as it frees depositors to seek the highest return without regard for safety.

Worse, it removes conservative banks’ competitive advantage. Under a government-guaranteed deposit insurance regime, conservative bankers who want to stay in business must take on more risk in order to pay the higher interest rates necessary to attract depositors. This often sets off a race to the bottom, which results in periodic banking crises.

After each of these crises, politicians promise taxpayers that it will never happen again. And each time it does, the government creates a new set of labyrinthine regulations that attempt to mimic the business judgment of conservative bankers. Minimum reserve requirements are established, which normally become the maximum as there is little advantage in exceeding them. And both depositors and the bankers themselves become complacent about the banks’ investments because it is so easy to privatize gains and socialize losses.

And Just In Case Abenomics Fails...

Japan Mulls a Preemptive Strike Capability

By J. Michael Cole

Finding itself in an increasingly complex and hostile security environment, Japan has taken the first steps towards developing a pre-emptive first-strike capability. This is a controversial move in a region that remains wary of a potential return to Japanese militarism.

Just a few years ago, the idea that the Japan Self-Defense Forces (JSDF) would be given the ability to conduct operations that go beyond “self defense” would have sounded ludicrous, not to mention that offensive capabilities would have contravened a longstanding interpretation of Japan’s pacifist constitution.

But North Korea’s continuing belligerence and pursuit of nuclear weapons and ballistic missiles, as well as China’s growing assertiveness and sovereignty claims, both appear to be changing Tokyo’s calculations. Another factor that is now making such ruminations possible is the U.S. “pivot” to Asia, which – though more in the concept stage than an actual policy – has manifested itself more tangibly through Washington’swillingness to reassess the role of JSDF in regional security. The budgetary constraints with which the U.S. military must now conjugate have made burden-sharing all but inevitable. One outcome is Washington is accepting a more muscular defense posture for Japan.

Just a few months ago in the wake of North Korea’s third nuclear test, Japan’s defense chief, Itsunori Onodera, said in an interview with Reuters that his country had “the right to develop the ability to make a pre-emptive strike against an imminent attack”, though he added that it had no plans to do so for the time being. Debate on such matters is not new, and usually occurs following a missile or nuclear test by the DPRK. But under Japanese Prime Minister Shinzo Abe, the government has shown itself much more willing to stretch interpretations of the constitution, if not to revise it altogether.

Less than three months after Onodera’s interview, reports emerged that Tokyo was working on a new defense policy framework that, at its core, made provisions for the development of a first-strike capability. Liberal Democratic Party (LDP) legislator and head of the LDP’s National Defense Division, Yasuhide Nakayama, made the recommendations and said that Pyongyang’s nuclear program and the Chinese intrusions in the disputed East China Sea waters had created an atmosphere where people in Japan felt “extreme anxiety about national security.”

Erdogan risks the 'must go' path

Erdogan may be playing with fire

By Pepe Escobar 
Is this the Turkish Spring? No, at least not yet. Is Turkish Prime Minister Recep Tayyip Erdogan the new Mubarak? No, at least not yet. 
History keeps warning us it takes just a spark to light a political bonfire. The recent spark in Istanbul was provided by a small group of very young environmentalists organizing a peaceful sit-in, Occupy-style, in Taksim Square to protest the planned destruction of one of the city center's few remaining public green spaces, Gezi park. 
Gezi park's destruction follows a globally tested neoliberalism racket; it will be replaced by a simulacrum - in this case a replica of the Ottoman Artillery Barracks - housing, what else, yet another shopping mall. It's crucial to note that the mayor of Istanbul, also from the ruling Justice and Development Party (AKP), owns a retail chain that will make a killing out of the mall. And the man holding the contract for this "redevelopment" is no less than Erdogan's son-in-law. 
Predictably harsh police repression led to the protesters being joined by top cadres from Turkey's main opposition party, the Republican People's Party (CHP). And sooner rather than later, the Taksim Square green theme morphed into a Tahrir square-style "Down with the dictator". 
By Saturday, Taksim Square was crammed with tens of thousands of people; a multitude had walked across the Bosphorus Bridge from the Asian side of Istanbul, banging pots and pans Argentina 2002 cacerolazo-style, openly trampling the law against pedestrians crossing the bridge. Police duly upgraded the repression to water cannons, pepper spray and tear gas. 
The behavior of a mostly cowed Turkish broadcast media was predictably appalling - perhaps not surprising when 76 journalists are in jail accused of supporting "terror" and other unspecified "crimes". This may also be interpreted as a reflection of US and North Atlantic Treaty Organization hold over a precious ally - as in "OK, smash a few skulls, but don't kill anybody".
Print media at least exhibited some redeeming features. Hurriyet - a newspaper that used to exercise its critical faculties - recovered some of its dignity by printing headlines such as "Erdogan no longer almighty". Zaman - which is part of the network of the moderate Islamist Gulen movement - showed how worried it is with Erdogan and the AKP's overwhelming power, with editorials condemning his "excessive" behavior and supporting the protesters. 

Japan : It's Not A Bet If You Can't Win

Abe and Horuda have wagered the bet of all bets, but the house (the global economy) never loses

By Raul Ilargi

The reactions to the $314 billion, 7.3% plunge in the Nikkei last week were, let's say, for the best part amusing. The army of experts and analysts stood at the ready to name the external factors that made it happen (by the way, that army seems to have grown a hundredfold or so over the past 5 years, or is that just me? So where's the added quality?). Some blamed it on something Bernanke did or did not say, some on the Dow's drop (0.5%?!) the day before, and others on weakish China's manufacturing numbers. Very few addressed Japan's own internal issues. But that's still where Japan's problem lies, and what can and will lead to more of that volatility.

One thing should be clear: The Bank of Japan is not pumping money into the economy, it's pumping credit into the banking system. They are not the same thing. To tackle deflation, PM Abe and BoJ chief need to increase the velocity of money, and quite dramatically too. Those out there who didn't know it already are now also being forced to consider that no central bank in the world controls the velocity of money, even if most will continue to deny it.

Limitless credit for the banking system will not achieve the stated goal of a 2% rise in overall prices. Not unless the feet on the ground start moving, and spending. But the feet on the ground don't actually have any more money than they had before, during the deflation decade(s), so why should they start spending now? Or does anyone believe the Japanese will start borrowing in huge numbers? After all those years of deflation? Deflation scares people into a deep freeze, and it takes a long time to defrost them. Abe would have much more chance of success if he handed out money to the people than he does with his present policy of handing it to banks, but that's sacrilege.

What seems to have gotten lost in translation very rapidly is the appreciation of how big the gamble is that Japan is taking. And even more how desperate it is. Abenomics is a bet on perception, the perception that Abe and Horuda have control over - virtually - all aspects of all possible outcomes. They do not. As a matter of fact, they have pushed themselves, and their people, into a "doomed if you do, damned if you don't" quandary.

The economics of the 'Turkish Spring'

Erdogan's spending spree has left Turks with a horrendous hangover

By Spengler 

Pitched battles between anti-government demonstrators and Turkish police over several days at Istanbul's Taksim Square constitute a national uprising against Recep Tayyip Erdogan's incipient Islamist dictatorship. As of this writing on June 2, tens of thousands of regime opponents are in control of the heart of Istanbul while police have withdrawn. The economic distress of Turkish households is an important factor in the country's political upheaval. 

News media have already dubbed the demonstrations a "Turkish Spring". That is a turnabout, for the "Turkish model" was touted two years ago as the solution to the economic and social problems of the failing police states of Arab nationalism. Erdogan's supposedly moderate Islamism and dynamic economic management supposedly offered a way out for Egypt and other failed economies of the Middle East. 

Erdogan had declared himself a "servant of Sharia" during his 1994 mayoral campaign in Istanbul, but most Western observers chose to take the would-be Turkish dictator at his subsequent word that he would respect the secular character of the Turkish state. 

It was never to be. Erdogan did not preside over an economic miracle - contrary to the credulous estimates of many Western observes - but arranged, rather the usual sort of Third World credit bubble, which has left Turkish consumers to tighten their belts in response to a devastating debt burden. "Economic troubles will dominate the political agenda, and Erdogan's claim to leadership of the Islamic world - let alone his own country - will look far less credible," I warned in this space April 23 (see Turkey's ticking debt time-bomb, Asia Times Online), just before Moody's assigned Turkey an investment-grade rating, perhaps the poorest judgment by the rating agency since it put a "Aaa" stamp on securities backed by subprime mortgages. 

Turkey's problems can't really be compared to the 2011 revolts in Muslim North Africa, to be sure: the country's economy will keep functioning, although far below the expectations of ordinary Turks, and its political system is robust. But the anti-government demonstrations denote a turning point in the fortunes of Turkish Islamism. 

The demonstrators' anger, to be sure, centers on Erdogan's creeping dictatorship: the gradual imposition of Islamic law in a Turkish state founded on secular principles, the jailing of hundreds of regime opponents, and the assimilation of enormous economic power into corrupt monopolies controlled by Erdogan's party. Leaked US diplomatic cables claimed in 2010 that Erdogan amassed a huge personal fortune through bribery during his term and commissions on the sale of Turkish assets to foreign investors. [1] Kemal Kilicdaroglu, leader of the secular opposition party CHP, compared Erdogan to Hitler. 

Average Swede to Repay Mortgage in 140 Years

Sweden Housing Crash Coming Up

By Mike "Mish" Shedlock

Swedish repay their mortgages so slowly that it will take 140 years on average, according to the IMF. 

The International Monetary Fund lamented Friday that Swedish households pay their mortgages so slowly that they are planning to do an average of 140 years.

"Financial stability is [...] reinforced by a steady reduction in repayment schedules - that exceed an average of 140 years," the IMF said in a statement after a mission in Sweden.

This statistic was revealed in March by a government agency, the inspection of the financial sector. It covers loans considered relatively safe, those where the real estate buyer had an initial contribution equal to or greater than 25% of the value of the property and pay the higher monthly interest alone.

According to the Washington-based institution, the Swedish real estate market is a major risk to the economy, along with the eurozone crisis.

"With household debt rising beyond 1.7 times disposable income, a sudden and significant drop in property prices could have an effect on consumption and banks, raising unemployment and further reduce the inflation, and increased the number of non-performing loans and financing costs for banks, "said the IMF.

Why bother paying anything at all? Yet think of the consequences of underwater mortgages on the banking system when an estate does not have enough money to repay loans. A housing bust will have enormous consequences in such a setup.

Wave of Unrest Spreads Across Turkey

Crackdown on Protest in Istanbul Park Sparks Nationwide Demonstrations Against Government Policies

By By JOE PARKINSON, AYLA ALBAYRAK and EMRE PEKER

An unexpected eruption of often-violent civil unrest swept across Turkey over the weekend, the culmination of a simmering clash over social policy between Prime Minister Recep Tayyip Erdogan and a broadening coalition of Turks that threatens the political stability of a key U.S. ally.

The demonstrations mushroomed after a police attack Friday on a small protest against government plans to replace a park in central Istanbul with a housing complex and shopping mall. After two days of clashes around the park and the adjacent Taksim Square, police withdrew Saturday afternoon, leaving protesters to occupy the area

Fueled by social-media images of the showdown, protests ricocheted around Turkey, and by the end of the weekend, hundreds of people had been injured and almost 2,000 detained in demonstrations that spread to half of Turkey's 81 provinces, according to the government.

Mr. Erdogan has won election three times, emboldening him to take a tougher line on everything from alcohol consumption to the media. The Turkish leader hit back over the weekend at critics who increasingly paint him as an autocrat, labeling the protesters "a minority."

"If you can call someone who is a servant of the country a dictator, then it leaves me speechless," he said in a televised speech. "I have no aim other than serving the nation." Mr. Erdogan and his ruling AKP party retain strong public support, and on Saturday he said he could summon five times as many people to the streets as the protesters.

While the protests are unlikely to herald the fall of Mr. Erdogan's government, they represent by far the biggest challenge to his 10-year rule.

The protests also lay bare the challenges Ankara faces as it tries to serve as a model for new Islamist governments in the region seeking to emulate the electoral success of Mr. Erdogan's Islamist-rooted Justice and Development Party. Analysts said the impact could also shift politics in Turkey, an important U.S. ally in a region convulsed by uprisings and political turbulence.

"What we've seen this weekend is a watershed event in Turkey and there's no going back for the people who have taken part," said Sinan Ulgen, chairman of the Center for Economic and Foreign Policy Studies, a research group in Istanbul. "Even if Mr. Erdogan doesn't want to change, we will see more mass protests if his government doesn't listen to this constituency, because these people now realize their power,"

'Frau Europa' becomes 'Frau Deutschland' again

A Setback for the EU’s Centralization Faction

By Pater Tenebrarum 

A German election is drawing close and it is evident in many small things that are happening lately. The latest is that Mrs. Merkel is now apparently distancing herself from her erstwhile demands to create a 'fiscal union' and give the eurocracy in Brussels more powers. Incidentally, her change of heart comes shortly after her summit with France's president Hollande, which indicates that the latter has probably let her know that France is none too happy with the idea either. Since this means that the drive toward more centralization will be slowed down, we take it as good news. 

“German Chancellor Angela Merkel has come out against handing the European Commission more powers, in the clearest sign yet that she is reining in her ambitions to create a "fiscal union" in which euro members cede control of their budgets to Brussels.

The comments, made in an interview with weekly Der Spiegel, come days after Merkel held talks with President Francois Hollande in Paris and the two unveiled joint proposals for the future shape of the euro area, including the creation of a permanent president of the Eurogroup forum of finance ministers.

Merkel spoke out strongly in favour of closer fiscal integration last year, but France and some other euro members have deep doubts about ceding sovereignty — a step which would require politically sensitive changes to the EU treaty — and Berlin appears to have realized that this resistance is too great to overcome for now.

With a German election looming in September and a new anti-euro party threatening to eat into support for her conservative bloc, Merkel may also be adjusting her message for voters at home, many of whom are leery about ceding national powers.

"I see no need in the next few years to give up more powers to the Commission in Brussels," Merkel said in the interview, adding that she agreed with Hollande on EU member states cooperating more on economic issues.

"We are thinking for example of the labour and pension markets but also of tax and social policy. Economic policy coordination in Europe is far too weak, it must be strengthened and this is rather different to giving more competences to Brussels," she said.” 

She still talks about the alleged need for 'more policy coordination', but luckily handing more powers to the bureaucrats in Brussels seems to be off the table for now. It will be interesting to see how the bureaucratic caste ensconced in Brussels will react to these news.  

What If Stimulus Is Self-Defeating?

The more stimulus is applied in today's global economies, the faster it will hit a wall

By Raul Ilargi

It's sort of funny to see a wider - though still faint - recognition developing in the financial world that perhaps it's true that the more stimulus is applied in today's global economies, the faster it will hit a wall. Some may finally even begin to see one or more inbuilt mechanisms at work. I personally think it all harks back to what I've long said, that stimulus by governments and central banks may have a function in certain economic cycles, but that applying it without across the board and thorough debt restructuring is a borderline criminal and useless use (and waste) of present and future taxpayer money. Still, we all know by now what will happen when stimulus starts to stutter: ever more will be blindly thrown at that wall.

News that Japan's main pension fund will increasingly be allowed to move from bonds into - domestic - stocks was received as a piece of real good news this week, after the Nikkei lost some 15% in a few days time. It's still up over 30% for the year though, and that should have all of us wondering, especially the fund managers - and its beneficiaries-: What are the chances that the fund's move into stocks coincides with the Nikkei having surpassed its top? That the increased purchases may perhaps lift it for a few days, but the downward move is in regardless? It's hard not to chuckle a little when you see that the Tokyo government and the fund want to execute the move because bond yields are so low, and at the same time they announce it, those yields triple.

Pensions funds - and non-financial institutions in general - (tend to) always lag behind developments. Needless to say, being always behind can be a very expensive quality to have. Millions of ageing Japanese may not be terribly happy if their pension money is moved into the stock market and it retraces it gains right back to where it came from, for a 30% loss.

And the desperate game of Abenomics will have repercussions throughout the world. Not just in emerging markets, South Africa, Brazil, Thailand et al, that already see a lot of damage from investment banks, who float freely on cheap profits from various QEs, recalibrating their Abezombie money away from emerging economies. No, Abenomics will hit the US and Europe even harder. Because, as our roving reporter VK phrased it: "JGBs are the base of the pyramid in the global bond markets. Risk is priced in JGBs. So Abenomics has destabilized the base of the pyramid in global bond markets. Risk is being repriced accordingly."

Japan is the world's largest creditor. A little over a year ago, Bloomberg wrote :

Investments abroad grew 3.3% to 582 trillion yen ($7.3 trillion) in 2011, rising for the third year, the Finance Ministry said in Tokyo today. Currency gains cut the value of existing holdings but encouraged increased investment abroad. Foreign investors increased Japanese assets by an extra 17 trillion, leaving the net creditor position of the country little changed at 253 trillion yen ($3.25 trillion), the world’s largest, the data showed.

The strange rebirth of liberal England

British politics and the young

Young Britons have turned liberal, both socially and economically. Politicians need to get on their side

The Economist

For the past 170 years The Economist has consistently advocated free trade, punctured government bloat and argued for the protection of individual liberties. It has also been consistently disappointed. Irksomely, political parties tend to plump either for economic liberalism or for social liberalism. Sometimes a small party boldly tries to combine the two—and is rewarded by becoming even smaller. In the United States our creed is so misunderstood that people associate liberalism with big government, when it advocates the opposite.

Yet now Britain, The Economist’s home, the land of Adam Smith (on lead guitar), John Stuart Mill (bass) and William Gladstone (vocals), there is reason for hope. Young Britons have turned strikingly liberal, in a classical sense (see article).

They are relaxed, almost to the point of ennui, about other people’s sexual preferences, drug habits and skin colour. Although, like older Britons, they do not think much of mass immigration, they are tired of politicians banging on about it. As for the row over gay marriage, soon to trouble the House of Lords, they can hardly see the problem.

The young want Leviathan to butt out of their pay cheques as well as their bedrooms. Compared with their elders, they are welfare cynics. Almost 70% of the pre-war generation, and 61% of baby-boomers, believe that the creation of the welfare state is one of Britain’s proudest achievements. Under 30% of those born after 1979 agree. The young are deficit-reduction hawks. They worry about global warming, but still generally lean towards Mill’s minimal “nightwatchman state” when it comes to letting business get on with it: they are relaxed about the growth of giant supermarkets, for example.

It’s only Locke ‘n’ roll, but I like it

This is not just the young being the young. Rather, it is a generational change. In 1987 Britons aged between 18 and 34 were less likely than all other age groups to agree with the proposition that benefit cuts would encourage people to stand on their own two feet: now the young are more hard-hearted than most. They are also more socially liberal than were previous generations at the same stage of life.

Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State

A mandate that is off the rails

By George Will

Texting while driving is dangerous, especially if you are driving a train. A commuter train engineer was texting on Sept. 12, 2008, near Los Angeles, when he missed a stop signal and crashed into a freight train. Twenty-five people died.

Congress supposedly is incapable of acting quickly, and we are supposed to regret this. In 2008, however, Congress acted with dispatch. We should regret that it did. Herewith another lesson about the costs of the regulatory state, especially when it is excited, eager to make a gesture and propelled by an uninformed consensus.

On Jan. 6, 2005, nine people had been killed in Graniteville, S.C., by chlorine gas leaking from a derailed freight train, but Congress did not spring into action. In 2008, however, California’s 53-person congressional delegation was 12 percent of the House and 24 percent of a House majority. So in less than a month after the commuter train collision, Congress, with scant opposition from railroads, and without meaningful cost-benefit analyses, passed legislation requiring most railroads to implement, by 2015, positive train control (PTC), a technology to stop trains by overriding some human mistakes.

So far, railroads have spent more than $2.7 billion on a system estimated to cost $10 billion to $14 billion — plus perhaps $1 billion in annual maintenance. PTC has not been installed, partly because it is not sufficiently developed. CSX Corp., which includes railroads among its assets, says the railroad industry is the nation’s most capital-intensive — and the $11 billion combined capital investments of all U.S. railroads in 2010 were approximately equal to the cost of PTC. The 2015 mandate will not be met.

The Federal Railroad Administration estimates that were PTC to be installed on thousands of locomotives and tens of thousands of miles of track, it would prevent perhaps 2 percent of the approximately 2,000 collisions and derailments, preventing seven deaths and 22 injuries annually. But because a dollar spent on X cannot be spent on Y, the PTC mandate must mean the sacrifice of other investments crucial to railroad safety (and efficiency).

Japan's Easy Money Tsunami

The more things change, the more they stay the same

by David Howden

The Bank of Japan has just embarked on one of the most inflationary policies ever undertaken. Pledging to inject $1.4 trillion dollars into the economy over the next two years, the policy is aimed at generating price inflation of 2% and further depreciating the Yen. The idea is to fight “deflation” and increase exports.

The end result of this policy will be an assuredly larger balance sheet at the Bank of Japan (projected to nearly double to $2.9 trillion). Despite being lower than it was 25 years ago, the Japanese Stock Index has increased by 70% since November of last year. However happy people have been about higher stock prices, eventually the economic effects will be harmful; indeed the recent stock price crashes foreshadow still more troubles to come.

In my own contribution to Guido Hülsmann’s recent edited book The Theory of Money and Fiduciary Media, I take a critical look at these exact policies – expansions of the money supply aimed at stimulating output by way of manipulating the exchange rate. At the 100-year anniversary of the publication of Ludwig von Mises’ The Theory of Money and Credit, we can see that Mises had already grappled with the issues of currency depreciation in a manner superior to modern monetary economics. Furthermore, with the refinement of his business cycle theory in his book Human Action, we find that Mises also outlined the detrimental effects of such expansionary monetary policies.

The exchange rate determines the price a foreigner will have to pay for a domestically produced good. Increases in the money supply will generate inflationary price pressures that will in turn increase prices. This leads to a higher exchange rate, which means it takes more domestic currency to purchase a unit of foreign currency. This makes it cheaper for foreigners to buy our goods so exports increase. Conclusion: countries can stimulate exports and increase the number of jobs in export industries by inflating their money supply.

Unfortunately, this is not the end of the story.

Towards the end of poverty

The world’s next great leap forward

Nearly 1 billion people have been taken out of extreme poverty in 20 years. The world should aim to do the same again

The Economist

In his inaugural address in 1949 Harry Truman said that “more than half the people in the world are living in conditions approaching misery. For the first time in history, humanity possesses the knowledge and skill to relieve the suffering of those people.” It has taken much longer than Truman hoped, but the world has lately been making extraordinary progress in lifting people out of extreme poverty. Between 1990 and 2010, their number fell by half as a share of the total population in developing countries, from 43% to 21%—a reduction of almost 1 billion people.

Now the world has a serious chance to redeem Truman’s pledge to lift the least fortunate. Of the 7 billion people alive on the planet, 1.1 billion subsist below the internationally accepted extreme-poverty line of $1.25 a day. Starting this week and continuing over the next year or so, the UN’s usual Who’s Who of politicians and officials from governments and international agencies will meet to draw up a new list of targets to replace the Millennium Development Goals (MDGs), which were set in September 2000 and expire in 2015. Governments should adopt as their main new goal the aim of reducing by another billion the number of people in extreme poverty by 2030.

Take a bow, capitalism

Nobody in the developed world comes remotely close to the poverty level that $1.25 a day represents. America’s poverty line is $63 a day for a family of four. In the richer parts of the emerging world $4 a day is the poverty barrier. But poverty’s scourge is fiercest below $1.25 (the average of the 15 poorest countries’ own poverty lines, measured in 2005 dollars and adjusted for differences in purchasing power): people below that level live lives that are poor, nasty, brutish and short. They lack not just education, health care, proper clothing and shelter—which most people in most of the world take for granted—but even enough food for physical and mental health. Raising people above that level of wretchedness is not a sufficient ambition for a prosperous planet, but it is a necessary one.

Classical Liberalism’s Impossible Dream

The Emperor is naked

By Robert Higgs

I can understand why someone might embrace classical liberalism. I did so myself more than forty years ago. People become classical liberals for two main reasons, which are interrelated: first, because they come to understand that free markets “work” better than government-controlled economic systems in providing prosperity and domestic peace; second, because people come to believe that they may justifiably claim (along more or less Lockean lines) rights to life, liberty, and property. These two reasons are interrelated because the Lockean rights provide the foundation required for free markets to exist and operate properly.

Like Locke, classical liberals recognize that some persons may violate others’ rights to life, liberty, and property and that some means of defending these rights adequately must be employed. On this basis they accept government (as we know it), but only with the proviso that the government must be limited to protecting people against force and fraud that would unjustly deprive them of life, liberty, and property. They believe that government (as we know it) can perform these functions, whereas private individuals without such government would be at the mercy of predators and hence that their lives would be, as Hobbes supposed, solitary, poor, nasty, brutish, and short. Nobody wants that.

So, to repeat, I can understand why someone might become a classical liberal. However, as the years have passed, I have had increasing difficulty in understanding why someone would remain a classical liberal, rather than making the further move to embrace genuine self-government in place of the classical liberal’s objective, “limited government.” My difficulty arises not so much from a dissatisfaction with government’s being charged with protecting the citizens from force and fraud, but from a growing conviction that government (as we know it) does not, on balance, actually carry out these tasks and, worse, that it does not even try to carry them out except in a desultory and insincere way—indeed, as a ruse.

A nightmare vision of the welfarist trap

Benefits is a timely reminder that left-wingers weren't always such big fans of welfarism

by Neil Davenport 

Among a broad spectrum of British left-wingers, the welfare state is treated as the most sacred institution in British society. Unemployment benefit, child benefit, incapacity benefits, housing benefit… all are held up as paragons of a left-inspired virtue. Nothing agitates left-leaning commentators more than Lib-Con proposals to slash welfare payments. Apparently the poor, the plebs and ‘the vulnerable’ could not cope without the army of welfare professionals providing them with support and sustenance.

Yet this hagiographical account of the welfare state is a fairly new turn on the left. Left-wingers weren’t always so taken with welfarism. It seems that the more the left’s faith in ordinary people’s capacity to sort their lives out has declined, the more it has endowed the state with extraordinary qualities, virtues and powers.

Back in the 1970s and 80s, some radical sociologists deplored the expansion of welfarism, viewing it as an extension of bureaucratic control over the citizenry. Sociology texts asked, ‘Who benefits from benefits?’, and the answer was often: the establishment and those at the top of the class system. Following Marx’s point that very early systems of welfare were a ‘disguised form of alms’, radical sociologists argued that welfare simply ‘bought off’ the lower orders and encouraged them to identify with and respect state structures.

In the 1980s, many a crusty anarchist would point out the inconsistency among some left-wingers of being anti-state while simultaneously claiming welfare benefits. In promoting the idea that the state was ‘neutral’, and that it might possibly be coaxed to improve poor people’s lives further, welfarism actively discouraged political independence of the state and its offshoots.

It was this radical tension - of being politically opposed to the state while advocating economic dependence on it - that was explored in Zoe Fairbairns’ dystopian feminist novel, Benefits. Written in the febrile political atmosphere of late-1970s Britain, Benefits is about a future state’s sinister attempts to control women’s fertility, and to encourage responsible parenting, through the introduction of a universal ‘wages for housework’ benefit.

Although rarely out of print since it first appeared in 1979, Benefits has recently been re-issued, with a new introduction by Fairbairns, for the e-reader age. It is now being marketed as a political attack on ‘anti-welfarist Tories’, yet as Fairbairns points out, anyone who views Benefits as simplistically ‘anti-Thatcherite’ is missing its key point: that welfare benefits can become a weapon of social engineering and control. On top of critiquing aspects of welfarism, Benefits lays into radical feminism’s self-defeating slogan, ‘The personal is political’, while passionately championing women’s liberation and equal rights - feminism’s one-time aims.