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Milton Friedman became famous for his assessment of inflation as "a purely monetary phenomenon." His view of the economy implied that in any meaningful sense, a consistent increase in the price level is always brought about by an increase in money supply. To be sure, money supply does not include only the bills printed by the central bank but also the media which emerge within the banking sector and which are thus to a large extent endogenous to the level of economic activity. Still, the consensus is that central banks possess all the tools necessary to control inflation, at least in a coarse manner. To be sure, it is possible to imagine a model in which imperfect competition
leads to a generally high level of consumer prices and restricted output
and defending this type of economic theorising is a perfectly respectable
position. But this is not what the people at the Commission are saying.
They claim that inflation now is higher than inflation before because
of a competition failure. To show this, they have not only to demonstrate
that competition in the retail business is "imperfect" (which it most
probably is) but also that the degree of its imperfection increases over
time. And this, I believe, goes against every sensible reflection of our
experience of the past years and decades. Thus, in the end, it is not
the lack of competition in the retail sector which is responsible for
the accelerating inflation but rather the lack of competition in the central
banking business.
Anyone who has been looking in vain for the right dust bag, among ten different brands, or paid a small fortune for six blades that, unfortunately, only would fit version IV, instead of the version III back home, knows this. Men as well as women. After all, cleaning and shaving are daily necessities. But failure? And in that case, whose failure? Maybe mine, as I sadly have to admit that I don't know how to build a four-blade super razor with automatic soap dispenser, or a vacuum cleaner, or a dust bag. However, I'm happy that someone else does. If I still should feel wounded by the price or quality, I could also choose to visit the barber, grow a beard and do the cleaning the same way it was done before the vac was invented. In reality, you can also choose to use a shaving machine or disposable shaving kits, as well as - since a few years back- the fit for all dust bag developed by some of the leading manufacturers, or the bag-less vacuum cleaner. If someone invented a tool that makes coffee, halts spring allergy, does the laundry and creates eternal happiness, I will be most grateful. Until then, I'm not walking around calling my fellow entrepreneurs failures. Some interesting thoughts on this topic can be found here.
The problem does not seem to be in the lack of formal powers of the
Commission to step in to impose fines. The competences of DG-Competition
are many and significant. Rather, the problem is related to the fact that
to risk an open conflict with the French, the Italian or the German government
is too costly for European bureaucrats who might not have lost their political
ambitions in their respective home countries. Thus, unless a fundamental
change occurs in the incentive structure of European civil service, it
is difficult to expect the EC to have teeth. And even imagining such structure
without speaking about whether it is realisable or not is
extremely difficult.
The world may have changed in the last fifty years, but Antitrust did not change as much. See, for example, an article in the latest issue of “The Economist”. An article reports on how “the American way of trust- busting” is being imported to Britain. By the "American way" of trust- busting, the Economist means “a growing awareness that cartels not only raise prices, but also blunt other benefits of robust competition” plus an aim to “punish market riggers with fines and prison” By "imported to Britain", the Economist means a recent investigation of the Office of Fair Trading implying that “supermarket buyers used some of the world’s largest consumer-goods companies as a switchboard to swap information that would help them to coordinate the prices of thousands of products”. In another article, the very same Economist recognizes that “a fiercer business battle would be hard to find than that for the £110 billion ($220 billion) that Britons spend on groceries each year. Over the past decade shoppers have switched from one supermarket to another in their millions, crowning new kings of the trade and deposing its once undisputed lords, whose market shares have been as squishy as overripe tomatoes. The greatest winners have been shoppers themselves: they have more choice than ever, and real food prices in Britain fell by about 7% between 2000 and 2007”. The magazine also admits that “the British grocery market is one of the places you would least expect to find price-fixing. Large supermarkets have little reason to collude in the market as a whole”. Still, in its editorial the Economist comments that the OFT’s investigation suggests that “cartels are not just more prevalent, but also more sophisticated than anyone thought”. “The startling thing about the OFT’s investigation is that it is in branded goods, where coordinating a cartel should be hard”. This sounds to me like: if it is very very implausible, then it should be true. Pure Antitrust, à la Greenspan. I think some other thoughts may have occurred to the writers. If there is evidence of strong competition between British supermarkets, and yet the regulators believes there is also a very well established form of exchange of information in between those very supermarkets, can it mean that, well, perhaps that exchange of information is not a “conspiracy against the public, or in some contrivance to raise prices” resulting from a Smithian meeting of “people of the same trade”? See Pascal Salin’s fascinating essay on cartels as coordinating devices. During the last thirty years, economists basically argued that almost
anything the trust busters assumed about vertical integration and mergers
was, basically, wrong. Perhaps it is time to revisit our common wisdom
on cartels too?
In fact, more than enough money has already been spent on keeping Alitalia in its current sorry state, and from a purely utilitarian viewpoint the doubts expressed by the Commission are justified indeed. However, in this regard our experience with the Commission has not really been encouraging. Formal investigations of cases of state aid are started far too rarely and even scarcer are cases when a conclusive decision is reached. Apparently, controlling influential European governments is more difficult than bullying American companies. The problem does not seem to be in the lack of formal powers of the
Commission to step in and impose fines. The competences of DG-Competition
are many and significant. Rather, the problem is related to the fact that
to risk an open conflict with the French, the Italian or the German government
is too costly for European bureaucrats who might have not lost their political
ambitions in their respective home countries. Thus, unless a fundamental
change occurs in the incentive structure of European civil service, it
is difficult to expect the EC to have teeth. And even imagining such structure
without speaking about whether it is realisable or not is
extremely difficult.
For this reason, no one has been able to stand up openly against the
massive programme of agriculture subsidies run by the European Union.
The modest efforts to start discussions about reform of fiscal matters
within the EU are most often derailed, postponed or they end in a very
vague and uncertain manner. Every excuse is good for not taking the hard
decisions now but only in the distant future. Recently, the Constitutional
Treaty has served as such
an excuse. The long overdue reform of the EU budget has been delayed
again until the Treaty is ratified in Ireland and the UK (Ireland being
an important net benefactor of the CAP). If there is any reform at all,
it will not affect EU expenses until 2014. And by then, there will clearly
be new, more urgent matters to attend to, postponing thus an effective
reform beyond many of our lifespans.
However, Sarkozy is not the exception which makes the rule in European politics. The sad truth is that non-socialist parties will return to power in several places: in England, it looks like Gordon Brown will not succeed in keeping the Tories out of Downing Street any more. In Spain, Jose' Luis Zapatero is building consensus for his opponents. In Italy, after the record of the Prodi's government, the latest elections have gone to Berlusconi again. However perhaps with the exception of the Spaniards this
new wave of right wingers seem well intentioned to stay way from "Thatcherite"
market oriented policies. The gospel of lower taxes, free trade, and competition
is seldom preached in European politics. This brings us back to the very
mission of organizations such as CNE. We are strangers in stranger land.
We face the immense work of changing, little by little, the public opinion
in Europe, towards a more sensible approach towards reforms that are very
much need, just for the sake of keeping Europe alive. The European right
is not quite ready for that. Sarkozy and his likes seem more attracted
either by the micro-managing of daily politics, or by the grandeur of
some newer kind of protectionism. The conservatives often end up being
the party of the state. This is not what Europe needs. We will need conservatives
that are open to the culture of markets and competition, that understand
the value of entrepreneurship and liberty. France will never have a Margaret
Thatcher, and even the best free market think tank ever will not be able
to manufacture one. But it rests with institutions like CNE and intellectuals
such as Jacob Arfwedson, to spread our ideas in a way that will make,
day after day, the Sarkozies of this world less radical, in defending
the status quo.
We should recognise that these gains are likely to be extremely small,
for they are mostly informational and are do not involve any kind of risk
uncertainty (contrary to, e.g., costs of switching currencies across different
European countries and the exchange rate risk which existed prior to the
introduction of the Euro). These rather small benefits should be compared
to the potential cost of harmonisation. Both the French and the Commission
deny that their ultimate goal is a harmonisation of corporate taxes across
the continent. Maybe they are telling the truth but maybe they are not.
Once the tax base is harmonised within the EU, it will extremely easy
to impose a common European corporate income tax. Whether the French government
or the Commission intends to do it now or not is completely immaterial
with regard to the fact that the incentives to do it will be strong. And
in the real world, bad incentives usually matter more than good intentions.
In fact, there are very few markets as strongly regulated as banking. During the last century, political interventionism has been supplanting the free market in banking and finance. First, the states abolished free banking and established public monopolies of currency issuers followed by the expropriation of metals backing the monetary units. Later we had to suffer the legal tender laws, the ascription of lender of last resort attributions to each national central bank and the power of determining interest rates as well as the whole monetary policy to the same monopolies. Finally, the European experiment concentrated these regional monopolies plus the financial supervision of all European commercial, industrial and investment banks in one huge central bank called the European Central Bank instead of forcing them to compete and thus deliver better monetary policies in favor of their consumers, which are all the Eurozone citizens. All of these policies and rules have shaped a sector that looks pretty close to what Karl Marx dreamed of in the The Communist Manifesto: "The Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly."Thus, the current crisis, which I expect to worsen in the coming months, is a crisis of monetary interventionism and what we need in order to avoid this painful situation in the future is more private property, free markets and free competition in the monetary and banking world. feedback permalink
This example offers also a question that libertarians should reflect
upon intensely. Usually, we tend to be sceptical of deals such as this
one. We are very quick to emphasise that a unilateral liberalisation done
a decade ago would have been preferable. This might be true or not but
it misses the fundamental point: that unilateral liberalisation is usually
not a feasible option, given the asymmetry between dispersed benefits
and concentrated costs that it would entail. In such situations, clumsy
bargaining and imperfect intergovernmental deals, overcoming the influence
of pressure groups (or buying them off) might be the best solution that
we can hope for. It does sound depressing but it might still be an accurate
picture of the reality of democratic politics.
If he favors more regulation in international trade, he also seeks less
regulation coming out of Europe. Tremonti's vision is not different from
Sarkozy's. They accept liberalization "internally" but not "internationally".
The problem is that globalization is the main drive towards liberalizations
within the boundaries of nation states. If we didn't have competitive
pressure coming from "barbarians at the gate", why bother changing rules
and rolling back the state? It is no big consolation, though, that free
trade is having tough times also on
the other side of the Atlantic.
In view of the utter failure of the initial ambitions of the Lisbon Agenda, European politicians are now trying to reshape it in way which would stress its social and ecological elements. No more does Europe aspire to be the most dynamic economy in the world. Now, its primary objective is to tackle the climate change and to eliminate "social exclusion." Two years of consecutive growth do not mean that Europe's economic problems
are nonexistent. On the contrary, in spite of encouraging economic performance
in recent years, the unsustainability of the welfare state in face of
demographic changes looms on the horizon. It is striking that the politicians
refuse to face and prefer to live in a world of illusory plans, agendas
and strategies.
More than 20,000 highly-qualified Germans leave their country for Switzerland every year. Apparently, one cannot bear the fact that so many Germans - and not the dumbest of the lot - freely choose to go into exile, attracted by the prospect of lower taxes, higher salaries, and fewer government dictates.Sound familiar? It certainly does to me. And just as Brits prefer destinations like English-speaking Australia and the English-speaking USA, Germans now fancy going to Switzerland, where a local version of German is spoken (among other languages), and which has the further advantage of being right next door. But the damage done by increased tax rates, even if imposed only upon the "very rich", doesn't end there. Not only do those actually earning these highly taxed salaries start to move elsewhere. The same thinking is liable to spread to those who even aspire to such salaries. They too are liable to move. More fundamentally, for every person who is prepared to overcome his natural objections to leaving the place of his birth and to go to the trouble of moving himself, his family and his most treasured belongings to another country, where he will have to learn many new and unsettling ways of doing things, there are dozens more who move to a different country without going to all that bother. They stay put, but move to a different state of mind. Higher taxes make a different country, which everyone must then move to. Over a decade ago now, I wrote a Libertarian Alliance pamphlet which
I am still very proud of entitled The Top Rate of Income Tax Should Be
Cut to Zero (pdf version here)
in which I described all these depressing tendencies, but, me being the
optimist I still sometimes am, in reverse, and in their most extreme and
extremely benign form. Radically cutting taxes on the rich is something
that helps many people besides the rich. But Germany's rulers are contemplating
no such beneficial tax-cutting process to solve the problem of Germans
fleeing to Switzerland. No, their answer is to bully Switzerland into
raising its tax rates also, which Germany's rulers can hope to do because
the entire EU is - that is to say all the rulers of the EU are - lining
up alongside Germany's rulers in that imperialistic project. These people
are happy to impose price competition upon others, but this is not something
they want others doing to them. If they get their way with Switzerland,
they will turn Europe itself into a new, slightly different and slightly
worse country, which we will all have to move to or else move out of. |
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