Whom should we blame for the rising prices?
16 MAY 2008 – The European Commission is expected to evaluate the extent to which the current inflationary pressures have been caused by a lack of competition in the retail sector. At the first sight, it might seem that an efficient competition policy will help to keep consumer prices down and will thus contribute to a low level of inflation. Under a more rigorous scrutiny, however, this regulatory agenda of the Commission boils down to an extreme and unjustified hypothesis which is at odds even with what most mainstream economists think about the causes of inflation.

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.
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Failures
13 MAY 2008 – One of the most peculiar concepts in economic theory is market failure. As far as I can grasp it, it means that the famous and infamous invisible hand fails to produce what customers wish for. Two quotidian examples are vacuum cleaner dust bags and razor blades.

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.

Towards a free movement of labour
07 MAY 2008 – I have spent some time on this blog complaining about labour market restrictions imposed on EU newcomers by the old members. Now, it seems that most of these restrictions are going to be removed as the transitory ban is nearing its end. Only Germany and Austria are likely to ask for an extension of the ban, while Belgium, Denmark and the Netherlands will probably drop the restrictions.

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.
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If It's Implausible, Should It Be True?
05 MAY 2008 – Long ago Alan Greenspan declared the world of Antitrust to be like "Alice in Wonderland": "everything seemingly is, yet apparently isn't, simultaneously."

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?
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The Commission's state aid control: All bark, no bite?
30 APR 2008 – The Commission is trying to flex its muscles in the case of the bailout of Italy's Alitalia. The Italian government has offered Alitalia a loan of €300 milion, while emphasising that the loan was made on "on commercial terms." But let us face it: how many bankrupt companies can access state "commercial" loans from the government on the same terms as the flagship national carrier?

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.
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Is CAP here to stay, indefinitely?
22 APR 2008 – Here is a puzzle: It is almost universally recognised that the Common Agricultural Policy is a wasteful way of spending taxpayers' money. Yet no politician has been courageous enough to put an end to it. The explanation for this puzzle lies in the "transitional gains trap." When interest groups derive rents from a particular government policy, they will be willing to fight for this policy and will expend resources up to the expected value of the rent.

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.
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Sarkozy and the Dilemma of the European Right
21 APR 2008 – My colleague Jacob Arfwedson had a terrific piece on Nicholas Sarkozy in The Wall Street Journal . Jacob defines him as "the status quo radical", highighting very well how Sarkozy is far from representing anything truly "new" to France – as the European press keeps portraying him. Now, I understand he is still better than Bayrou (who is as appealing as an Italian 1950s Christian Democrat), but he is as much of a free marketer as I am a tango dancer.

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.
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Against a European tax base
14 APR 2008 – The French government, supported by some members of the European Commission, plans to push forward measures aiming at harmonising the corporate tax base across the EU. Allegedly, a common tax base for firms would simplify things for cross-border businesses and will be helpful to those companies which operate in more than just one country.

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.
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The interventionist crisis: we also need competition in money and banking
10 APR 2008 – There seems to be something odd in the fact that so many people are now blaming free markets and free competition in financial markets for the coming global crisis.

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."

"Open Skies" deal or unilateral liberalisation?
09 APR 2008 – The European Commission and the US government have finally agreed on the terms of the "Open Skies" agreement, which will provide a substantial degree of liberalisation to the air transport markets on both sides of the Atlantic. According to the deal, American carriers will be able to operate flights within the EU and European companies will be able to do the same in the United States. Additionally, a whole number of special regulations will be phased out, eliminating the power of national governments to prohibit foreign carriers which offer "excessively low" prices from operating flights in and out of the country. My take is that this deal is a victory for the free marketers and that it could bring about significant improvements in consumer services.

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.
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Is Italy Moving Toward a New Protectionism?
02 APR 2008 – Romano Prodi's government was far from being market oriented, but Italy may switch toward being a great lobbyist for protectionist measures if the center-right comes back to power: this seems to me a rather depressing situation for my country, looking at the new book by Giulio Tremonti. Mr Tremonti was treasury minister with Berlusconi, for most of the five years the leader of "Forza Italia" spent in government. Tremonti is an outspoken critic of the process of globalization, and advocates tariffs and quotas as to make competition from Chinese businesses "endurable" for Italian ones.

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.
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Same Lisbon Agenda, Different Day
26 MAR 2008 – The Lisbon Agenda is a monument erected to the naïveté of those who believe that centralised economic policy and planning is capable of generating economic growth. Everyone can see now that Europe is not becoming, "by 2010, the most competitive and the most dynamic knowledge-based economy in the world." For this to happen, fiscal burdens would have to be less onerous, European labour markets would have to be more flexible, Europeans would have to work longer, and, to mitigate the effects of demographic changes, they would have to retire later. So far, no politician has been able to tell this to his voters. Instead, we are being assured that the economic objectives have been achieved as we have experienced two consecutive years of positive growth and reduction in unemployment.

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.
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Staying put in another country
24 MAR 2008 – In my previous but one posting here I wrote about one of the most obvious and visible ways in which a country can be seen to be losing its competitive edge, in the form of people very visibly leaving to live somewhere else, equally visibly. I wrote then about clever high earners leaving my own country, Britain. I could equally well have written about Germany, as this piece at Pajamas Media well illustrates.

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.

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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