Posted by on June 1, 2014

An intense travel schedule lately has made it difficult to spend time on posts, but has also given me plenty of time for some airplane reading. Here are some of the short takes this has produced:

Republicans Take Note

Bright Blue, a think tank in the UK, has come out with a series of policy proposals to modernize the Conservative Party, among which is the legalization of marijuana. The policy paper was authored by Ian Birrell, a former adviser to Prime Minister David Cameron, and it follows polls in the UK showing a majority in favor of such a move. Among other rationales, Birrell thinks that legalization would sharply increase the party’s appeal among the young and ethnic minorities, two groups, as in America, crucial to the future of conservatism. To quote Birrell, “It is hard to think of another policy with the same potential to challenge popular conceptions of conservatism.”

In an earlier blog about the need for the Republicans to develop policies appealing to the young, women and Hispanics, I stated that even an updated GOP was unlikely ever to become the party of “sex, drugs and rock ‘n’ roll”. It looks like the Conservatives in the UK may have taken this as a challenge.

Unintended Consequences in the EU

The European Union was set up in large part to combat the horrors wrought by extreme nationalist and racist parties during World War II. Fifty six years later, it is precisely these parties that are some of the principal beneficiaries of the EU’s misguided efforts to push beyond its original economic mandate into a broader political role.

Nationalist parties are on the rise in Europe and are becoming increasingly mainstream. The National Front in France, the United Kingdom Independence Party (“UKIP”), the Party for Freedom in the Netherlands, the True Finns and the Danish People’s Party are all examples of growing nationalist parties in the “core” of Europe. Jobbik in Hungary and Golden Dawn in Greece are examples of growth in the periphery.

This trend is also showing up in the heart of the EU, the European Parliament. Elections to this eminently silly body, which functions primarily as a sinecure for second-rate and over-the-hill national politicians, have just taken place. The big winners were the nationalist parties.

These parties are far from uniform in their demands, but there is one thing that they have in common: a hatred of the EU. This is a major source of their electoral appeal, a reality recently displayed in the UK in the televised debates between Nigel Farage, the acerbically anti-EU leader of the UKIP, and Nick Clegg, the leader of the pro-EU Liberal Democrats. The theme of the debate was the UK’s relationship with the EU. Clegg is now fighting for his political life after Farage beat him like a rented mule on TV and at the polls.

David Cameron, Prime Minister of the UK, has toyed with the idea of a referendum on EU membership if the Conservatives win the next General Election in 2015. The idea has brought a deluge of objections from his European partners (and the USA), all of which recognize that there is a solid chance that the UK population would say “no” to the EU if given a chance. This would put huge pressure on other European governments to give their populations the same right, something that they desperately want to avoid. Meanwhile, the disenfranchised voters of Europe register their displeasure by opting for nationalist parties with increasing frequency, particularly in elections, like the recent EU ones, they hold in contempt.

They also stay away from the polling booths in droves. Here are the historical voter participation rates – notice the pattern? I can’t find the overall figures for 2014, but a continuation of the downward trend is guaranteed, with the Slovaks leading the way with a 13% score. Even the “new” Europeans can’t get excited about being part of a club that has countries like Greece as a member.

The EU politicians are their own worst enemies. Even second-rate politicians cannot resist the temptation to meddle, aided by the 33,000 empire builders in the EU bureaucracy. If they continue on this path, they will produce the exact opposite of their desired outcome.

The Unheard Bullet

I think back to all of the financial crises I have witnessed, some up close, during my 30-year career in finance: the savings and loan debacle in the US in the 1980s, the Swedish and Finnish banks in the mid-1990s, the French banks in the mid-1990s, the Russian and Emerging Market crises in the late 1990s, the dot-com crash in the early 2000s, and then the mother of them all, the sub-prime and Lehman crises in 2007 and 2008.

Each of these was different, but each had some common features. Each was preceded by a period of “irrational exuberance”, during which there was a feeling that the key to unlimited and easy wealth had at last been found. Each period of exuberance was justified by a “new paradigm”, a feeling that (to borrow the title of the book from Rogoff and Reinhart) “this time is different”. Each was ended by an unexpected event, often trivial in nature and initially ignored and then trivialized by the authorities. When bubbles burst, as in war, you “never hear the bullet that kills you”.

I was thinking of these things when, in a single day’s reading of the Wall Street Journal, I was informed about two different “unheard bullets” in China. The first was the disappearance of an organizer of gambling junkets to Macau, along with about $1.3 billion of his investors’ money. Macau is huge, much bigger than Las Vegas, and it appeals to a mainland Chinese clientele that a former colleague of mine used to describe as “the guys with the brown teeth and white socks”. Let’s call them the “BTWS” for short.

Now, how did a trip organizer manage to end up with $1.3 billion of investor money? This is the interesting bit. It turns out that, in order to circumvent Chinese currency restrictions, the BTWS need someone to bankroll their efforts with Lady Luck. This is what the junket operators do, raising money from Chinese investors through the simple expedient of promising a higher payout than the local Chinese banks, in this case up to 2.5% per month. You didn’t have to be a Charles Ponzi to figure out which way this was going.

The next is the explosion of “entrusted lending” in China. These loans, made from one company to another and facilitated by a bank intermediary, are the fastest growing part of China’s “shadow banking” system. The objective is to circumvent the government’s restrictions on lending, particularly to sectors – real estate, infrastructure and industries with overcapacity (such as steel) – where the mandarins are trying to put on the brakes. As I have commented before, the bureaucrats are always behind in this cat and mouse game.

As Warren Buffett is fond of saying, “only when the tide goes out do you discover who has been swimming naked”. This revealing moment for China is approaching.

Lemmings Revolt

As I have recently pointed out, the economics of Obamacare are based, in large part, on a willingness of young “invinceables” to sign up to a bad deal for the benefit of the older generation. The demographics of Obamacare are still very sketchy at the moment, but the early results reported by the Wall Street Journal are that the prized 18-34 age group only accounts for about 25% of the sign ups, considerably less than the 40% that some analysts believe is necessary to hold down future insurance rates.

Any economist would have predicated these results, but that doesn’t mean that the Democrats won’t be surprised. The next guaranteed prediction: increasingly coercive measures will be brought to bear on these reluctant rodents.

Metric System

I was recently asked what I would miss about Europe if I moved back to the States. This was a surprisingly hard question to answer. Although Europe doubtlessly has the densest collection of culture and natural and man-made beauty in the world, I can always come back to visit this, while enjoying the extraordinary quality and ease of life in the USA the rest of the time.

But there is something that I would definitely miss being back in America: the metric system. Although regular readers of this blog will note that I have little respect for France, I have to say chapeau (“hat’s off”) to the French for this product. It is only after you have been using the metric system for an extended period of time that you realize how backward America is.

Amazingly, as the second map in this collection shows, America is one out of only three countries in the world that don’t use the metric system. The other two? Liberia and Myanmar (Burma). That’s great company to keep.


I have lately read two articles on the growth of antibiotic resistant “superbugs”. Here is one and here is the other.

This is scary stuff. We have lived so long with effective antibiotics that we forget what life was like before they existed. Before penicillin, a mere scratch could cause a dangerous infection: the first recipient of Alexander Fleming’s miracle drug was on death’s door from an unfortunate encounter with a rose bush. In addition, in the battle to keep antibiotics effective, we are dealing with a particularly wily opponent. With a short reproduction period, bacteria can create and then pass along beneficial mutations rapidly. Even more amazingly, bacteria have the ability to transmit genetic material horizontally, from neighbor to neighbor, thereby accelerating their ability to spread resistance.

The ideal conditions to promote resistant mutation are prolonged exposure to low levels of antibiotic, sufficient to wean out the genetically susceptible individuals before they can reproduce, but inadequate to wipe out the entire population. One would have thought that, with such dangerous consequences and so formidable an adversary, we would have been very careful to avoid these circumstances. But that is not the human way and it certainly is not the American way. Instead, the FDA estimates that 80% of the antibiotic use in America takes place on farms, where small amounts of antibiotics are mixed with feed to promote animal growth. Studies carried out since the 1970s have shown that this leads to antibiotic-resistant bacteria in the animals, which then move to the farmers and the general population. For this reason, the use of antibiotics to promote livestock growth has been banned in the EU since the late 1990s, whereas the FDA has only recently announced a policy to phase out their use.

I cannot think of a better case study than this of a variety of the economic concepts used in this blog. The first is negative externalities, since the farmers who use antibiotics benefit from the accelerated growth of their stock, without bearing the huge cost associated with the promotion of resistant bacteria. The second is regulatory capture, since only a regulator such as the FDA, which is notoriously beholden to the food and pharmaceutical industries, would have allowed this to continue for as long as it has.

People who believe that governmental regulation is the universal cure all, take note: If the FDA, one of the oldest and best established regulators, cannot stop flagrant stupidities such as this, then what chance does regulation have in other spheres?


Governments tend to be good at things that require the mobilization of vast resources, such as war and flying men to the moon. But this also means that, when they screw up, they usually do so on a gargantuan scale.

Take the case of dietary recommendations. Since the 1970s, the US government has been erroneously promoting the idea that fat consumption promotes heart disease. As a recent article in the Wall Street Journal points out, this has worked: fat consumption is down by 11%. However, as anyone who has ever looked at the ingredients list for a “low-fat” product knows, consumers have reacted to this restriction by increasing the consumption of sugar and other carbohydrates, which are up by at least 25% since the 1970s. Only now is the government starting to acknowledge that the true dietary culprit behind the explosion of obesity, diabetes, heart disease and other chronic illnesses is not fat, but sugar.

I shudder to think of how much death and suffering has been caused by people following the misguided advice of their beneficent government over the last 40 years. One thing is for sure: no private sector actor could have had anywhere near the same negative impact. And the solution to the resulting health crisis offered by many is, of course, more government. It must be great to work in an industry that can create its own demand.

Roger Barris, London

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Posted in: Economics, Policy, Politics

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