ECONOMIC REFORMS AND THE POLITICAL CYCLE

Johnny Munkhammar (link) recently explained the willingness and to implement market-based reforms as a political incentive of re-election. He explains how economic policies based on product market deregulation, pro-growth tax cuts, market liberalization and the reduction in public spending can quickly bring re-election and thus offset the incentive to pursue further reforms and policy innovation The podcast can be launched here.

OBAMANOMICS vs. McCAINOMICS

The Economist has published an interesting article about the economic policy agenda proposed by Democratic candidates. Both, Hillary Clinton and Barack Obama (link) have threatened to pull the United States out of NAFTA unless the agreement is rewritten. Both candidates have proposed higher marginal tax rates that have an enormous negative impact on working hours and labor productivity.

Hillary Clinton has suggested the freezing of interest rates for current borrowers (link). Such a discouraging step would leave behind negative far-reaching consequences on capital markets, including higher interest rates in the future. In "The Audacity of Hope" Barrack Obama is proposing more government interference in the labor market and welfare system. If Obama proposed brilliant ideas that would include the fundamental reform of tax code, free trade agreements with emerging nations, the reform of the social security system, Medicare and Medicaid, he would good opportunities to become a leader, not just a politician.

Protectionist and anti-growth economic policy always resulted in a mirage of lower economic growth (link) and productivity performance as higher tax rates on labor supply, by empirical evidence, discourge savings and investment (link), cause labor shortage (link) and impair productivity growth. The international arena offers a growing number of lessons from other nations in areas such as taxes and welfare reform.

Until now, the U.S election battlefield has not yet brought anything new in terms of hope but it rather brought a diminishing rethorics of redistribution, populism and protectionism on both sides.

WHEN GOVERNMENT ANNOUNCES A STRIKE

In Slovenia, judicial branch of government recently announced a strike, claiming that judges are underpaid and demanding an initial wage increase. The first question to be asked is against whom the judicial branch of government is really demanding a strike? The announcement of the strike is a mark revealing the prevailing corruption in the judicial system, taking place throughtout the process of political transition from socialist system to the system based on market democracy. In Slovenia, generally speaking, private property rights are weakly protected, reflecting slow procedural operations, internal inefficiencies and signs of corruption in Slovenia's judicial system.

Tomaž recently published a beautiful post discussing judicial claims over wage increases:

"The announcement of the strike on behalf of Slovenian Judicial Association is an unusual step, knowing that not all Slovenian judges are not the members of the Slovenian Judicial Association. Even local fireworkers cannot announce a general strike of all fireworkers in Slovenia. That's why, Slovenian Judicial Association does not and cannot have a legitimate right to announce a strike on behalf of all Slovenian judges.

The use of means regarding general strike opens the essential question: against whom shall Slovenian judges announce a strike? From a historical perspective, "strike" has emerged from the individual rather than collective initiative of employees against the employer. By definition, trade unions are workers' associations. Later in the course of time, trade unions launched widespread initiatives as a form of political pressure against government authority as Solidarity did it in Poland in late 1980s."

Source: Tomaž Štih, When Government Announces a Strike (and almost realizes it), Libertarec, January 22, 2008 (link)

DEMOCRACY IN SLOVENIA - A GRAVEYARD SLUT

by Rado PEZDIR

In the fall filled with two national referendas regarding whether Triglav, Slovenia's largest government-owned insurance company should be privatized, and the epilogue of collective bargaining between trade unions and the federation of employers which reminds us on the last sequel of South-American soap-opera, someone could think that Slovenia is a climax of world democracy. It could be thought that this idyllic sub-Alpine landscape is a paradise dreamed by the premise of enlightenment thinkers; a paradise where the wisdom of the citizens tactically paves the road on which society's development takes its own walk. Unfortunately, the reality is completely different and it can be admitted that all sparks of hope for democratization of post-communist society are nothing else but a nostalgic stupidity. In Slovenia, for a long time, the individual does not vote for anything in the elections.

ELECTORAL JUNK

Let's have a look on presidential elections. I think that everyone who wants to explain why we need this junk will face big troubles. Why?

First, in Slovenia, the president has no authorized means of decision-making which would justify the existence of this particular instance. Of course, I assume that institutions are created to have legitimate authorization and not vice-versa.

Second, Slovenia's chaotic institution requires the intersection of legitimacies of democratic institutions, and consequently, there is an inherent probability of institutional conflicts. Mostly because Slovenian policymakers do not actually know which particular legitimacies are ought to be authorized to justify the existence of the institute of the president.

What this means in practical terms, is clearly demonstrated by the latest selection of future governor of the Bank of Slovenia; a situation in which prime minister and the president had an electoral mandate to appoint the governor. At the end, the technical dilemma turned out into an insensible political battle.

Third, some claim that the presidential function is necessary due to its role in representing Slovenia abroad in a remarkable flash. The truth is that the presidential function distorts the other branch of government, the Ministry of Finance, and thus it creates a splash of institutional conflicts. Just think of president Drnovsek's inspirations to solve the Darfur crisis. Was it necessary? At last, if Slovenians want a representative abroad, then gather some money, hire the little boy who knows how to recite the sonnets of William Shakespeare in thirty languages, lock him into the cage, and show him into the international arena. There is no need to waste taxpayers' money.

And at last, a large majority of Slovenians is evinced that the presidential function is necessary because of the need to have a discretionary moral authority such as Plato, Indian gurus, Vatican's cardinal or anti-globalist Joschka Fischer, to morally regulate our lives. Are they serious? Do they suggest voting the highest moral highlight? Excuse me, but this particular construct is a replica of a theocratic state where Ayatollahs are elected and then they submit their opinion on immoral youth and inadequacy of loud music. To exculpate the existence of particular institution with the assistance of an absolute morality is, in a normal democratic state, nothing else but an unrestrained absurdity. In effect, the presidential function is unnecessary and that's why, let's avoid further institutional crash of the splash. My colleague Mićo Mrkaić has thoroughly abstracted the irrelevance of presidential elections in Slovenia: ignorant people need an idol to command from emperor's rooms, the way it was conducted by Kaiser Franz, Maria Theresa, and Josip Broz.

NON-ELECTIONS

The second redundancy is the elections in the State Council this fall. State Council is the remaining creature of fascistic corporate system. Let's summarize how these elections go through. At the end of the mandate, interest groups get together and select a dedicated person who is then authorized to delegate our lives from Ljubljana. Then, the illuminant is sitting in the chamber of State Council by making decisions regarding our everyday lives; without being authorized to do so. How democratically. Suppose that a group of voters proposes a law bill to the parliament and democratically elected parliament passes the bill by a slight margin of votes. In a normal country, this would mean the end of the process, but in Slovenia, the story is going forward. If any of numerous interest groups with representatives in the State Council is not likely to embrace the law bill, it can use the veto and stop the entire process. And then, we're the one who should deal with elections and democratic institutions. The madness such as the undemocratically established body has shown its worth in the initiative of the State Council, suggesting the referendum whether Triglav, the largest asset-holding insurance company in Slovenia, should be privatized or not. Funny; the answer tp the technical question ought to be solved by democratically elected government is proposed by the unelected instance. We already decided to transmit the mandate to solve such a situation to the government, haven't we? I personally think that the State Council exists because a fraction of voters cannot embrace the fact that they're responsible for their lives on their own, while a share of voters would like to regulate the lives of other citizens through the power exercised by the interest groups represented in the fascist-styled State Council.

INTEREST GROUPS CONTROL THE ENTIRE COUNTRY

The fact that interest groups have their own debate luncheons at the expense of taxpayers' money and do whatever they want at any time, is simply a blockade of decisions approved by democratically elected institutions. And even more: it is a blockade that disables the functioning of a democratic system. An ability that interest groups without the approval of taxpayers, are dealing about the way of living that citizens will simply have to embrace and live with it, is coming from the constitutionally approved status of the State Council and collective bargaining. A procedure, in which workers' monthly salary is not determined by his output and productivity, but by the bargaining decisions approved by trade unions; the latter call social justice. As a side-effect, entrepreneurs must give up a fraction of profit due to decisions passed by non-elected institutions, namely trade unions. You're not wrong if you think that such process is a restitution of the situation once common in the Soviet Union. In Soviet Union, wages and salaries had no feedback measures to the output and labor productivity, but instead, salaries were determined collectively subject to central planning. As a matter of fact, what you produce in Slovenia has no effect on your monthly earning but the productivity of labor supply is restricted by the means of collective decisions of trade unions. In addition, there is always no study on how artificially determined salaries affect the economic performance of Slovenian economy. Instead, trade union leaders propagate the ideas that entrepreneurs should give up their own profit. By its means of collective power, trade unions aggressively aim to regulate and flip into the private property of entrepreneurs. It is interesting why trade unions do not invest in particular companies and then give up their profit for the benefit of the labor force. Whether you are asking, when you authorized trade unions to allocate your resources and boost income redistribution, your questioning has no effect since State Council and trade unions collectively make decisions about your lives without a check-up of their proposals in the general elections.

A DEMOCRACY OF WAR MASSACRES

In addition, there are two non-elected representatives in Slovenian parliament approved on the basis of their nationality. What a democracy - a democracy on the basis of Slovenian shame, such as the genocide of Italian, German and Jewish community. Thus, Slovenians have collectively admitted not to aggravate if they have bloody conscience about their own past. Instead, for them it is admirable to have a handicapped democracy which places two non-elected representatives of minorities in the national parliament. If you perceive that as a hang of overdoing, think about suspicious role of those two representatives several times respectively. And if everyone is treated equally, where are the Roma, Serbian and German representatives? Shall we rather dissolve the entire parliament and put in suitable representatives? In case if anyone doesn't know - parliament is a democratic institution whose members are elected on the basis of individual preferences and not on the basis of individual ethical origin. To protect the human rights, there is a judicial system that defends individuals against violations of human rights of all the citizens, including ethnic minorities. It is simply not a seat in the parliament which protects the rights of the minorities.

So if you attend the elections, the impact of your vote will be the same as in the period of socialism - none. That is because of institutional chaos based on Slovenia's constitution. From this point of view, presidential elections are nothing else but a typical junk and wasting of taxpayer's money. In sum, democracy in Slovenia is like a a graveyard slut (also a song sung by Norwegian black-metal band Darkthrone) - it can be bought cheaply by anyone whereas no one cares whether it works or not.

Rado PEZDIR is an economist.

© Copyright 2007 by Rado Pezdir

*An article was translated in English by Rok SPRUK, an economist and the owner of the web log Capitalism & Freedom

NORWAY'S FISCAL TERRORISM

Wall Street Journal investigates recent tax hikes imposed on Norwegian shipping industry by Norway's left leaning socialist government. In particular, Norwegian Minister of finance, Kristin Halvorsen's budget plan suggests the retroactive taxation of reinvested profits. Due to the impact of shipping industry on the competitiveness of the Norwegian economy in a global arena, it is doubtful whether such tax hike are grounded on the basis of detailed analysis.

Perhaps, there is only a quest for higher public spending and Norwegian government is desperately seeking new revenue source to fund a growing public expenditure. In fact, the relationship between equity and efficiency is one out of many trade-off case studies in economic analysis and higher government spending causes distortions and reduces incentives to work, save and invest as marginal tax burden (a portion of the added burden relative to tax burden in a previous period) is a penetrating source of inefficiency since firms and individuals are discouraged from further engagement in productive behavior. And shipping industry is no exception.

The overall effect of imposed taxation will affect the attractiveness of Norwegian shipping centers and, nevertheless, ship owners could reflag the vessel to nearby locations where the tax treatment of shipping industry is more favorable relative to Norwegian jursidiction, and also where created profits are not subject to discretionary taxation.

Here is a part of the abovementioned article:

"Over the past seven years, as the regime took effect, maritime employment in Norway has climbed almost 20% to about 100,000 and the number of ships on order by Norwegian fleets has risen more than threefold — keeping pace with rapid international shipping growth since the turn of the century. That boom has attracted the attention of Norway’s finance minister, Kristin Halvorsen, a member of the country’s Socialist-Left Party. Under her budget plan, all profits reinvested by the industry since 1996 would be subject to a retroactive tax. Many ship owners are considering reflagging their vessels in nearby countries, such as the U.K. and Denmark. Moving could mitigate their future liabilities, but that will be little consolation to firms that remained in Norway over the past decade and invested in their fleets, only to be betrayed by politicians."

Source: Shipping Blues, Wall Street Journal (link)

MARKETS AND CHOICE: THE CASE OF KOSOVO

Once again, Economist offers an excellent analysis about the future status of Kosovo, predicting the effects of choice between the model of full independence and the self-governing status of minimal dependence on Serbia.

Nevertheless, the issues deserves the piece of attention through the prism of economic analysis.

First, assume that Kosovo's long term objective is to seek the course of output growth and good structural environment that could, in turn, boost both: growth and development. As an empirical matter, the correlation between growth and democracy is weakly negative, meaning that the case of full democracy leads to the loss of growth momentum as well as to the widespread increase of bureaucratic and administrative means which deprive the dynamics of growth in a broader perspective.

Second, one of the main engines of prosperity and growth is the country's business and investment environment. Assuming the "catch-up"effects of a country with comparably low GDP per capita, the Kosovo's GDP would streamline the convergence quickly but in a larger sense, the quality of investment environment determines the intensity of investment, since a degree of firm's interest, looking forward to invest in particular segments of the region, would largely depend on the quality of the legal environment, such as the absence of barriers to saving and investment.

The ability to open the enterprise quickly, is also a part of the ability of how quickly job creation could go on. In fact, one of the broadest standpoints on which nearly all economists agree is that job creation is the best way to reduce structural unemployment of a typical post-communist economy in transition. In addition, high quality of the business environment is a thorough indicator of country's openness to trade and investment.

Third, the area in which most of post-communist countries lag is the labor market. In fact, labor is product that is traded in a voluntary agreement between the employee and employer at a certain price called the wage. In this respect, the general equilibrium of labor supply and demand for labor works as in usual cases.

If there is a scare labor supply in concrete area (say IT) compared to derived demand, then the price per unit of labor will go up and so will the employee's return to education and skills derived from labor's human capital. On the other side, if there is an extensive labor supply in concrete area (say sociology) and demand for labor is low, then the return to education will fall, raising the probability of unemployment and causing an incentive to accept the fact of lower return on education in case if labor demand is low in quantity terms.

The price behavior in this exchange partly depends on the willingness of labor supply to embrace lower price than in comparable areas, since an employer is induced and given an opportunity to hire the labor supply at a lower cost than under conditions of high demand and scarce availibility of labor supply.

From labor market aspect, democracy entails a bulk of negative effects that hinder productivity growth and reduce the extent of flexibility of labor market through means of collective bargaining and monopoly power exercised by labor unions. By empirical and practical terms, productivity is the leading engine of growth of standard of living and thus, lower productivity growth correlates with a lower comparable standard of living.

Fourth, the comparison of benefits between multiple option of independence deserves a detailed study and empirical investigation. A macroeconomic quest for this particular choice, is the question of exchange rate risk but this also depends on the ability of the country to have its own independent central bank.

In fact, if the National Bank of Serbia suddenly started to manipulate with exchange rate such as subsidizing the export sector through inflationary policies, and if Kosovo had no central bank, then it could openly feel the negative effects of high inflation. On the other side, if National Bank of Serbia maintains tight anti-inflationary policies, then the absence of costs and risk could benefit Kosovo's economy. But of course, to analyze the effects of multiple options, there must be concrete data to start disseminating and analyzing the effects of political status regarding the future growth and prosperity.

And fifth, as an economist, I think that political mitigation of future status of Kosovo is overhaul. In fact, the systematic efficiency of political status includes the efficiency of institutions protecting the enforcement of private property rights and individual liberties. Nevertheless, individual rights emerge from the private property, i.e. from the ability to manage private property without external interference.

In fact, the question which country advances in economic and structural terms significantly and competitively, does not depend on whether country is fully democratic or not, but on which country is freer than others in terms of taxation, choice and deregulation, enabling faster and higher growth of output and productivity, and thus creating a comparative advantage.

Read also:
Steffen Ganghof, Phillip Genschel: Taxation and Democracy in the EU (link)
Amleto Cattarin: "Hands off my taxes!": a comparative analysis of direct democracy and taxation, NYU Law School (link)
Kosovo, Economic Profile, European Commission (link)
Capitalism & Freedom: Kosovo, European Hong Kong? (link)
The State of Kosovo's Economy; Perspectives and Development, CEEOL Südosteuropa Mitteilungen, Issue no.3/2005 (link)

DEMOCRACY: THE ENEMY OF ITSELF

One of the most strinking thins which can be observed around the world is the misguided connecting of liberty with democracy. Empirically, the effect of full democracy on economic growth is weakly negative.

In political terms, democracy means voting. It means the ability of the voters to elect representatives. There are many dubious side-effects of what is referred to as the "real democracy". In the state of democracy, there are few things that are contradictory to civil, human, political and economic freedom.

Coercion and constraints

1. Coercion. If political leaders are elected democratically through voting, it means that they have a full ability to pursue a particular political philosophy. As Friedrich August von Hayek wrote in The Constitution of Liberty, each extensive political philosophy supposes that the lives of individuals mismanaged by themselves, and thus they should be controlled through any means of coercion and constraint whether it be the taxation of individual income, information-sharing or the government force to agree and respect the disagreeable. Hence, the main determinator in the state of democracy is not the market where wants and goods are compensated by value exchange, but is the majority that casts the demands imposed on political bodies. Depending on the extent of majority rule, the demands will be suited only if they suit the political support over the term. The sum effect of majority rule is thus guided by the sources of political power which is close to the oligarchic rule. Thus, in many particular items, democracy is a self-contradiction governed by the seed of collectivism and by the tyranny of the majority rule as Alexis de Tocqueville wrote brilliantly in his work Democracy in America.

2. Interest groups: to gain support, the political rivals compete on getting votes from particular interest groups such as trade unions and agricultural lobbies to receive private interests on behalf of public good. In the free market, demand and supply are matched and taken as given. The ability to meet the market needs of individuals is determined by the freedom of choice, given the total utility impact. In political market, the ability to meet the needs of voters is determined by the concentration of power in the hands of most influential groups and formations in public whom the priority is given. This is another proof that democracy is perhaps the most notable hidden evidence of discrimination since "everyone-is-treated-equally" is rambled by "you-are-treated-equally-if-you-belong-to-majority".

3. Extensive government: Great Britain was free way before it became democratic. A country can be free and prosperous even without being dichotomously democratic. Singapore has a high degree of economic freedom and is treated as politically hybrid regime. Estonia is among the freest economies in Europe and the world, but its grade in democratic performance is likely marked by the label of flawed democracy. On the other hand, Sweden is known as "full democracy" but its 81,3 percent economically free relative to Hong Kong which is known as the economically freest place in the world.

Democracy - a self-contradiction

Democracy is treated as an untouchable dogma which is supposed to be in the interest of all. Failed and falsified as it is, democracy is neither close to liberty nor minimal state. Classical liberalism is based on the grounds of negative liberty of non-interference as well as on the absence of government coercion. Fundamentally, democracy mischiefs the extent of government coercion. Classical liberal/libertarian pursuit always predicts the individual and political action to reduce (or possibly eliminate) the extent of government coercion while the dogma of democracy takes no notice on the extent of government coercion, but only on the action which is governed by the rule of majority.

Democracy - the slavery of positive liberty

That is why government based on the principle of the minimal state, providing only the fundamental general framework of interaction (the-rule-of-law), functions efficiently and contributes a significant share to the future creation wealth in going for growth and prosperity. Minimal government is the best friend of individual initiative accompanied by the degree of being free to choose, live and create.

Read also:
Denis Bider: Robert J. Barro's Democracy and Growth (link),
Libertarec: Socializem ustvarja vojne (Socialism creates wars) (link)
Libertarec: Zgodba o dveh vased (A tale of two villages) (link)
Greg Mankiw: A question for democrats (link)
Robert Nozick: A tale of the slave (link)

KOSOVO: EUROPEAN HONG KONG?

At Blic Online, I came across the article which predicts the model of autonomous sovereignity of Kosovo based on the status which is similar to Hong Kong.

Under such proposal, Kosovo would be able to join the international organizations such as World Bank and International Monetary Fund. Politically, the status could induce the formation of institutions as well as an independent political decision-making among which there is an ability to form the rule-of-law and slash government intervention. As a partly independent region, Kosovo would probably be able to induce the foundations of economic, personal and political liberty to gain the competitive position in the world and pursue the policies in support of economic growth and capital formation.

Hong Kong, which is entitled as the freest economy in the world, generated significant economic growth and structural advancement among which there had been the enforcement of competitive law and the creation of growth-friendly business environment which attracted a significant inflows of foreign direct investment. As a result of pro-growth economic and structural policy, Hong Kong's income per capita skyrocketed over the past half of the century.

Regardless of the solutions, the creation of autonomous region or an independent state is an opportunity to gain territorialy tax sovereignity in the region with sound property rights, openness to trade and investment, and enviable structural environment which would, in turn, energize economic growth and the pursuit of prosperity through economic, individual and political liberty.

BELARUSSIAN STATE ECONOMICS

At Economy.by, a Belarussian student explains how Belarussian State University's professor lectures economics to third-year students. During the lectures on Economics of enterprise professor Bainev tells the third-year students of economics faculty that Russians are the superior race, saying that:

"...Russians are the superior race, and the rest of the world in whole, and americans and europeans particularly, are the absolute morons and animals. He insists in a tough way on the fact that the market economy - is an absolute evil with which we should promtly fight. He says that we shouldn’t think about ourselves and our relatives, and should act only in the interests of nation and her the very best child - President of Belarus. He adds that the USSR was the best time, when people were absolutely happy. He alleged that we should do everything to reunite three main countires in the world - Ukraine, Belarus and Russia with a strong leader who will control people’s life."

Source: Lectures in BSU, Economy.by (link)

ALAN GREENSPAN'S THE AGE OF TURBULENCE

Here's a new book written by former chairman of the FED, Alan Greenspan (link).

And here is a book review by J. Bradford DeLong published in LA Times (link).

SHOULD BELGIUM BE ABOLISHED?

Sometimes it is right for a country to recognise that its job is done. This is one of the previous headlines in the Economist (link)

The question set in the article "Time to call it a day" is whether Belgium should no longer exist mainly because of the fractions between French-speaking Wallons and Dutch-speaking Flemings. The latest elections thus reflected the revealed political preference of the voters, prefering to vote upon the lines of linguistic roots. In sum, the result was the inability to form the government. The tension heated up as Flemish parliament inevitably considered the declaration of independence. There is a popular quote saying that Belgians have nothing in common except for the king, the football team and some bears. A very delicious chocolate could be added onto that list.

Economically, Brussels could harldy be recognized as a high-tech, free-enterprise powerhouse of Europe. Instead, it gains its strength as a bureaucratic center of Europe, as a city known as a center of government intervention and infamous European-styled central planning and extensive government structure and income redistribution headlined by the European Commission and European Parliament. In spite of the fact that at the end of the World War 2, Belgium was economically far more developed than Ireland, in terms of standard of living as well as in terms of fundamental macroeconomic indicators such as GDP growth and the share of capital formation in the GDP. In 1980, Belgium had a GDP per capita of $9478,99 USD in current prices while Ireland had a GDP per capita of $5746,20 USD. In 2004, after Ireland's supply-side feedback, Ireland's GDP per capita increased five-fold compared to 1980, after inflation adjustment. In contrast, Belgium's GDP increased three-fold between the same period, also after adjusting the GDP per capita with inflation (link).

In the long run, the macroeconomic forecast regarding Belgium is subject to severe structural risk such as ageing population and therefore age-dependency on public retirement schemes and contribution-funded public health care services financed through budget outlays, grabbing a growing portion of the GDP. By 2012, the real GDP growth is estimated to slide down to 0,9 percent (link).

Generally speaking, the splitting-up of Belgium into two separate units could dramatically reduce compliance costs since political decision-making and the ability to fight with long-term demographic pressures originally emerged from labor supply squeeze, and also to fight the disease of onerous government spending and high tax burden. In fact, the benefits of Belgium's abolishment accomplish more openness to individual liberty and the ability to impose the decision-making with fewer painful cost proportions, not just re-assesing the cradle of welfare dependency which has indeed punished the Belgium's international competitiveness compared to high-growing tigers such as Ireland.

Read also:
Libertarec, Time to change Brussels' regime or time to leave (Cas za menjavo rezima v Bruslju ali cas za odhod)