Singapore, Hong Kong & Federalism

This past week I have been in Singapore and Hong Kong. They are not perfectly liberal societies by any means. Singapore executes those that traffic drugs but as consolation will let you buy a beer at the corner Seven-11. In Hong Kong you are forced to inhale awful air and the place smells of burnt rubber, they really needs to do something about the pollution (although perhaps it’s blowing in from China and the options are limited). Both places let you ride a push bike without a helmet. 

Both of them are very open places in terms of trade and immigration and have very low income taxes (I’ll forgive Singapore it’s 100% tax on cars) and a very favourable overall tax environment for investors. And their labour laws seem much saner than ours. It does not take long to figure out why these places have open economies. They are both city states and excluding imports would mean poverty and misery. Likewise for being unfriendly towards investors. Think how people in Sydney would fare if Sydney tried to restrict the importation of food. I doubt there is any particularily liberal mentality within the mindset of politicians in Singapore or Hong Kong, just political incentives that are different and run of the mill pragmatism. It does suggest to me that if you believe in liberty then smaller nation states are probably a really good idea. If Sydney ceceded from Australia I’m pretty sure it would be a better place.

I’ve also been thinking about federalism more lately. I’ve decided it isn’t such a great idea. In theory a federalist system with a minimalist central government providing freedom of movement and trade between the constituent states, and perhaps a common currency, is a nice ideal but in practice it is never sustainable. The incentives built into a federalist system are to move power to the centre. It happens in every federalist system in the world with Switzerland being perhaps the only example which would allow a credible counter argument. Certainly the USA and Australia have seen a steady march towards centralisation of power over their history. The EU is edging down that path but the centre of that federalist system is thankfully still nice and weak by comparison. Rather than this tendancy towards centralisation being a product of flawed political thinking I believe it is a somewhat inevitable consequence of federalism. The political incentives within a federalist system are to keep the size of state taxes low. So the cental government is where the statists do their work. And so it flows that tax powers will be centralised within a federalist system. About the only way I could see a federalist system being sustainable classical liberal model is if central government was constitutionally prohibited from levying taxes and the barrier to any constitutional amendement was very high. The EU comes very close to such a system, but as can be seen with the proposed debt bailout of Greece, governments are frequently happy to simply ignore constitutions (or in this case treaty agreements).  A more solid constitution arrangement would need some mechanism by which citizens could seek personal legal remedy if the government breaches the letter of the agreement. For instance if individual German taxpayers could sue their government for significant punitive damages in the event that Germay bails out Greece then perhaps the system of financial discipline could be defended. Likewise any constitutional attempt to limit central tax powers needs some legal remedy which individual citizens can deploy.

All this implies I can imagine a federalist system that works long term. However in practice even my imagined system is probably too optimistic. It is better to abolish federations and have smaller nations. Abolishing Australia seems like a good place to start. Unfortunately our constitution prohibits it.

Price Fixing and Credit

Most people with a reasonable grasp of economics understand the basic issues associated with price fixing. Fix the price of bananas and there will be either a glut of bananas (if you fix too high) or a shortage of bananas (if you fix too low). Alternatively with a less fungible product you might get a shift in quality instead of quantity. So for instance if the price of cars is fixed too low then you might get a decline in quality rather than a shortage, although probably in practice you would get a bit of both (or maybe a lot of both). Free Market types generally agree that you shouldn’t fix prices but rather you should allow the market price to signal to consumers and producers the relative scarcity of a given good for a given quality. Behaviour can then adjust accordingly.

Of course there is more than one way to fix a price. Generally price fixing is achieved by laws and regulations. However what if the price of bananas was fixed high by governments going to market and buying bananas to force the price up? We have seen such interventions previously with governments buying wheat to ensure that the price of wheat wouldn’t fall below some benchmark. Gluts would follow but the government would own the excess and perhaps dump it at sea. And in fact given that they would be leading the market on price it would be the best quality grain that got dumped at sea.

Now what if the latter form of price fixing was applied to a more esoteric market such as the credit markets. What if the price of credit (ie the rate of interest) was fixed using some market intervention in the way that the price of grain has at times been fixed by market intervention. Perhaps a commitee of wise officials would meet every few months and decide the right price for credit and then use some form of market intervention to fix the price. Would we see gluts and shortages? Would we see a shift in quality away from what might be natural or optimal. For instance if the price was fixed low for a long time is it possible that we would see both a shortage of credit and a decline in the quality of credit. Or do such laws of economics only apply to wheat, bananas and cars? And is a freely adjusting price signal only relevant to those that consume or produce the likes of wheat, bananas and cars?

British Deflation – 1800s

Too often it is claimed that economic growth is inflationary. The following chart should shatter that myth (but probably won’t). During the 1800s when the British economy expanded massively the price level actually halved.

The Bank Notes Act of 1910

Some recent discussion here on the ALS blog has centred around the issue of private currency, fractional reserve banking (FRB) and the historical role of gold within monetary systems. Whilst some of the associated questions will no doubt get rehashed again and again I would like to focus this article on what I think is the key obstacle to freedom when it comes to the question of private currency.

Currency comes in a multitude of forms. Some alternate categorisations that we might apply to currencies are:-

- Privately issued or Government issued.
- Fiat or Promisory
- Tangible or Electronic
- Paper or metallic

Circulating Legal Tender Gold Coins

Gold coins (ie coins made mostly of gold metal) that are legal tender in Australia are certainly available. The image to the left shows a recent issue of legal tender gold coin from the Royal Australian Mint. However the legal tender value assigned to such coins ensures that they will never circulate (as opposed to being hoarded in collections).

The coin shown has a legal tender value of A$200. The Royal Australian Mint retails this coin for A$650. And with 0.5 troy ounces of gold in the coin it has a market value of around A$403 at todays gold price. The relative orientation of these three numbers is most significant.

Price stability and commodities

Over the fold is a price chart that I made a few years ago. In it I have charted the US dollar price of gold (shown in red) and of oil (shown in blue) with both prices normalised so that in both instances the price is 100 unit in the base year (1955). They are shown on a log scale so that relative volatility during different eras is more easily compared.

Observations, notes and comments:-

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