It seems on first inspection that the trade unions miscalculated by announcing their concessions on public sector reform before the pay cuts were certain not to have been instituted. By going public, they cannot avoid either complying or suffering serious public disdain.

The ‘concessions’ would have the effect of hugely improving the quality of public service provided to Irish tax-payers, and create incentives to eliminate the culture of mediocrity which has subsisted for so long.

If Taoiseach Brian Cowen miscalculated the manner in which to reveal the inevitability of the public pay cuts, we may yet not see the public sector refrom promised during negotiations. Indeed, it is looking increasingly likely that this will be the outcome. And not getting these reforms through will have a severely negative effect on our quality of life.

The government’s response can likely be explained by risk-aversion. In the current environment, they can’t afford to slip up and saddle the economy with spiraling costs in years to come. Thus, although public sector reform may have delivered substantial savings – enough apparently to close the budget deficit which necessitated the announced pay cuts, some trade unionists facetiously claim – there is substantial risk and uncertainty associated with the degree of saving and efficiency gains. Pay cuts, meanwhile, provide certain savings despite the other certain costs.

Let’s analyse the exact nature of these concessions. The most important reform to my mind relates to promotions, by making them competitive and merit-based rather than due to seniority as previous. Although seemingly innocuous, the current (thoroughly disgraceful) policy has far-reaching effects on the culture in the civil service.

Why do civil servants protect this practice so fervently? Their long-held fondness of seniority-based promotions is probably due to the structure of public pensions, and the degree of representativeness in trade unions. Because your pension is related to your final pay level rather than pay levels over your entire career, civil servants have strong incentives to collude and not compete with each other. In this way, they can maximise their pension with limited effort.

Everyone gets the most overly-generous, guaranteed public pension possible through such collusion. Merit-based promotions would thoroughly upset such an arrangement, and pension reform would threaten entrenched groups of older civil servants. Older workers are those most likely to control trade unions, and they have a lot to lose from revision of either practice.

What are these costs of this promotion policy? They manifest in the uncompetitive, inefficient culture within the civil service. Because promotions are not merit-based, workers don’t have much incentive to prove themselves or try to stand out. Ambition is stifled at an early stage in the individual’s career.

Obviously, there are still talented people who will work well regardless. Many workers are also imported into the civil service through recruitment at a high level, thus bypassing such restrictions. But to the extent that excellence in work requires real effort, this mostly goes unrewarded and will thus be under-produced. The rational response on the individual level is to not go the extra mile, to not do any work over the weekend, to not stay late after work, and so on.

If these organisations were competing in the private market, these practices could not subsist. Either workers would lose their jobs, reform work practices, or the firm would go out of business. But the current public environment manages to avoid all such undesirable outcomes for lazy public workers. They cannot lose their jobs, although public pay levels aren’t lower than private equivalents to reflect this security.

Instead, we are left with public services that either operate under scandalous administration costs (health-care being the primary examples here) or provide low-quality, inefficient service to the consumer at the front-line (any government office being the primary example here).

But is it any wonder that public services are this bad? They have no competitors, and (until recently) enough control over politicians to weather any complaints from tax-payers. Senior civil servants themselves have strong incentives to collude over promotions. That leaves the average public worker no incentive whatsoever to excel in his field. And as we all know, there’s no arguing with incentives.

© The Free Marketeer 2009

Ireland’s police force, an Garda Síochána, are threatening to take action in light of public pay cuts. Although not legal according to the constitution, past examples of disobedience amongst law enforcement in Ireland include the ‘Blue Flu’ of 1998.

The reality is that no government can properly negotiate with a national police force on even footing, as long as no real alternative exists. Could private security provide the answer? By supplanting national law enforcement, maintaining accountability, promoting competition amongst service providers, and ensuring that society cannot be blackmailed by public workers with the threat of chaos.

The ‘Blue Flu’ of 1998 was described as a “black day” by the Garda Commissioner of the time. Despite not being endorsed by any leaders in the Gardaí, low-ranking officers and staff called in sick ubiquitously. The army was called in to defend government buildings, as absenteeism reached 85% in some areas.

The government’s inability to punish the Gardaí for such action, stems from their monopoly power. There is quite simply no alternative to the national force, which creates incentives to collude over pay and conditions. For this reason, public forces are likely to receive better pay and less arduous schedules than the private alternative.

The Wall Street Journal reported during the summer on movements by the city of Oakland in California to replace their public force (dogged in controversy, abuse and lack of public confidence) with a cheaper, private alternative. The savings could be immense for the city, which continues to suffer from a massive budget deficit.

Of course, private security is unlikely to be introduced any time soon in Ireland. It is worth noting though that governments elsewhere are considering new ways of tackling crime, by exploiting the competitive forces that have made our lives so much better elsewhere.

In the mean-time, it is worth questioning the monopoly that the Gardaí have over law enforcement in Ireland. There is no reason to think that traffic regulation, crowd control at public events, and many other functions, require the consideration of a fully-trained Garda.

If specific constituencies were responsible for auctioning contracts to private law enforcement firms, there is strong reason to believe that law enforcement would be far more efficient. What about abuses? It is true that we grant many powers to the Gardaí. But any firm that could not reign in abuses where they developed, would simply not get their contract renewed at the end of their term (say, three years).

Given that bad performance tarnishes the reputation of the entire firm and put everyone’s job in jeopardy, they are more likely to be stamped out and not tacitly tolerated. Also, private firms – with public oversight – are less capable of covering up abuses institutionally.

Competition between service providers would precipitate greater transparency over abuses in any case, and create incentives for firms to find innovative ways of eliminating it. While public law enforcement is based on simple wages, private firms in competition are more likely to create more nuanced payment schemes to alter the behaviour of their employees.

Employees can only block new work-place measures to improve efficiency when they have monopoly power. If many law enforcement firms are competing to provide the service, employees must change with the times, lose their job or remain employed by a firm with no customers.

How exactly does the competitive forces ensure better quality of service? If you’re not doing well in an area, this affects the firm’s reputation nationwide and you lose business. As long as different jurisdictions are renewing contracts at different times, companies must get results today or persuade the public that their program will pay off in the long-term.

Private law enforcement, even in very limited form and for specific purposes, would increase the efficiency of service provision by lowering costs and increasing quality. We have seen the competitive market forces yield results in every other sphere of our lives. Why not traffic regulation, crowd control and dispute resolution? And if they strike, we can take our custom elsewhere.

Republished as “Guardians of the Peace” by the Independent Institute (17th of December, 2009).

© The Free Marketeer 2009

The Irish Times explains why today’s planned public sector strike was cancelled. In the media, there was plenty of discussion over how the public sector workers were going to spend their strike day.

Last week, it was widely reported that there was a mass exodus from the city to places like IKEA. This irked many members of the public, but some felt it was reasonable to use the time productively. Why does the trip to IKEA damage the strikers’ cause?

The public sector strike last week was meant to achieve two things. Firstly, it was supposed to coerce the government to capitulate in the wage cut negotiations, and give into the trade unions’ demands rather than suffer the huge inconvenience of the strike. The threat of future strikes was then obviously ominous enough to force a better deal from the workers’ perspective.

The strike also sends a message to the public. Citizens should be shocked that conditions or pay is so terrible, that workers have no option other than to strike. Indeed, only a work-force that was truly suffering a great injustice would go the bother of forgoing a day’s pay in order to protest their treatment at the hands of the government.

In this sense, the strike is a very potent signal. Members of the public infer injustice from such a bold act, and have sympathy for the workers. But in order to be credible, a signal has to be costly to imitate. Why do you take a marriage proposal as a credible sign of commitment? Because no suitor will be willing to spend thousands on an engagement ring unless he was serious.

If workers who weren’t suffering injustice found it easy to strike because it wasn’t a costly endeavor, people would very soon learn to ignore strikes because they no longer communicated any meaningful information. But they don’t find it easy, which is why strikes are such powerful signals.

What happens when public sector workers go to IKEA on their day off? Suddenly, the day of strike no longer seems such an inconvenience to the workers. In fact, it then becomes something that they might even gain some marginal benefit from. Indeed, the subsequent negotiations is proof that all public sector workers wanted in the first place was unpaid days of leave!

By not spending their entire day protesting outside their places of work, the public sector strikers are undermining their case hugely in the eyes of the public. It is no longer a bold statement of injustice, but just a day off for the lads meant to twist the arm of government.

How did this happen? There is clearly a collective action problem at the heart of the behaviour we’re seeing here. The group interest is served when everyone spends the day striking, but the individual stands to gain by slacking off. There’s no point protesting if everyone else is at IKEA. There’s also no point protesting if everyone else is protesting – they won’t miss you.

The solution? Trade unions need to enforce a binding agreement to spend a full day protesting in the event of future strikes. This maintains the strength of the signal, and will ensure that the strikers don’t lose public support in future. That is, presuming the idea behind the strike wasn’t just a day off for the lads meant to twist the arm of government? We may never know.

© The Free Marketeer 2009

Conventional wisdom holds that Pakistan could become at risk of destabilisation in the event of a US exit from Afghanistan. Indeed, the most persuasive practical case for bolstering troop numbers comes from Stephen Biddle of the Council on Foreign Relations (CFR).

Presumably, empowerment of Islamic fundamentalism in Afghanistan would lead to spill-over effects, and thus empowerment of Islamic fundamentalism in Pakistan. Is it really that simple though?

The government of Pakistan is not foolish. As rational actors, they should have a contingency in case of an American withdrawal from Afghanistan. After all, it has been on the cards for quite some time, and increasing resistance from insurgents over recent months has intensified speculation.

This contingency plan is co-operation with the Taliban, and Pakistan’s history supports this theory. Before the US invasion, Pakistan was a friend to the Taliban (along with Saudi Arabia, and others). Taliban leaders hid in Pakistan after the Soviet invasion, and there are many cultural links between the nations.

In light of the electoral fraud that led to President Hamid Karzai’s reelection, the US has been extremely wary of making any commitments or decisions until it becomes clear whether their Afghani allies have retained any legitimacy post-fraud.

There may be some hope, if President Barack Obama’s administration can put more pressure on Karzai to stamp out corruption and improve governing standards. Frankly, this commentator is not optimistic – If this were possible, it would have happened already over the last 8 years. Instead, things have deteriorated. There is now a strong chance of American forces leaving Afghanistan, which would doom the current government there.

As logic would dictate, there have been consistent murmurings for years that the Intelligence Services in Pakistan (ISI) are funding the Taliban in Afghanistan. It’s not ideologically motivated though. They have just been hedging their bets, in case of an American withdrawal and Taliban victory.

If Pakistan grant support to the Taliban in Afghanistan, they can use this as leverage for influence. This can then be used practically to secure Central Asian trade routes, and more strategically in their cold war against India. They can also place conditions to prevent the inflammation of aspirations amongst Pakistan’s own Pushtun population (which could be inspired by a powerful Pushtun Taliban in control of Afghanistan).

If the US left Afghanistan, this conditional support for the Taliban insurgency from Islamabad could become more explicit. After all, there would be limited US interests in the country at that point – and the US could be persuaded that a Taliban 2.0 with few links to Al-Qaeda poses very little threat to them.

There is evidence this is already happening. A clever Pakistan would have to ensure that a Taliban victory in Afghanistan wouldn’t empower their own Islamist militants. Remember, the Pakistani Taliban is a very separate organisation to that in Afghanistan. As expected, tensions between the two groups have heightened since the increase in attacks against the Pakistani government over the last few years, and they don’t tend to co-operate much.

All other things being equal, the Taliban bound for Kabul would probably have helped their ideological neighbours in the Pakistani Taliban. But they’re not. The current divisions are evidence that the Taliban in Afghanistan can be pragmatic as well as idealistic – and evidence that Pakistan knows exactly what it’s doing.

It’s pretty impressive really, because Pakistan is playing both sides. Even though everyone knows they’re compliant in attacks against the Afghani Taliban, they denounce the US incursions into their territory afterwards – maintaining plausible deniability for when the Americans leave.

Would an American withdrawal from Afghanistan empower the Islamic militants allied against the Pakistan? Luckily, it’s not as simple as that. Ungoverned spaces make fighting insurgency more complicated, but it’s nothing new. The Federally-Administered Tribal Areas (FATA) of Pakistan are already as ungoverned as these groups need.

In fact, allowing the retreat of insurgent forces to safety elsewhere away from conflict, may even allow Pakistani forces to consolidate their power in parts of Waziristan. Meanwhile, Pakistan will gain and employ its leverage over any new Taliban in Afghanistan, as it has done in the past and does so today in limited form.

© The Free Marketeer 2009

The Economist discusses the populist rhetoric from Gordon Brown on the topic of the Tobin Tax, a fee levied by government on any financial transaction. US Treasury Secretary Tim Geithner admits that any such policy would be useless unless adopted world-wide, because trading would simply migrate to unregulated jurisdictions.

Public support for such measures is worrying though, as the Tobin Tax is ineffective in preventing risk-taking in financial markets or harmful asset price bubbles. It would be extremely effective at making markets inefficient though..

The idea behind the Tobin Tax is to reduce speculation on financial markets, which can often be distortionary and lead to bubbles. When these burst and prices return to their long-term real value, the economy can often be left in ruins – as in the Great Depression, Japan’s Lost Decade, and the recent Financial Crisis.

To be sure, the Tobin Tax does deter speculation in the sense that it deters all kinds of financial transactions. But asset price bubbles are driven by the belief that prices are going to rise, often substantially. This policy suffers from classic adverse selection.

Why? The targeted behaviour is the kind most likely to ignore a Tobin Tax. Such a measure is only going to deter sensible trading in efficient markets, where the spread (the difference between the bid and offer prices available in the market) is small and liquidity (the degree to which you can buy and sell without affecting prices) is high. That’s bad for reasons we’ll discuss later.

Let’s start at the beginning of the financial adventure. Investment banks and financial institutions attract capital by promising return to investors. Then by leveraging their assets, a typical investment firm can borrow multiples of their holdings from banks to bet in the markets.

How does the Tobin Tax come into this? Note that your ability to take huge risks through leverage and general financial legerdemain is unaffected by taxing individual transactions. You can adopt a hugely risky position through a handful of trades. Thus, the Tobin Tax doesn’t solve that problem – which most regard as the primary cause of the financial crisis.

Because the Tobin Tax has no means of distinguishing risky and safe firms, it would have to be low enough not to completely destroy highly-liquid markets. Invariably, this means that it will have minimal impact on low-frequency trading for the purposes of achieving highly-leveraged, risky positions.

Similarly, you can still maintain very little risk through frequent high-volume trading. If you’re responsible and understand financial markets very well, that can be very profitable and makes the market more efficient. Indeed, many financial firms specialise solely in types of ‘arbitrage’, riskless profit earned when you buy an asset from one actor and sell it immediately to someone else at a higher price.

What happens once firms are trading in the markets? They then buy and sell risk to each other, according to their ability to hold it while maintaining profit. Depending on what else is in their portfolio, different firms can more easily hold an asset than everyone else.

For example, a risky asset for your friend might suit you very well if it correlates negatively with another asset in your portfolio. Suppose the other asset is a bond belonging to a green technology firm, and you already hold stock in an oil company. When one does badly, the other is more certain to do well either today or tomorrow.

This is known as ‘diversification’. Although perhaps unattractive individually, financial assets look nicer depending on how they’re bundled with others. This efficient bundling of financial assets reduces risks all over the system. When transactions charges like the Tobin Tax preclude such trades, they can actually expose the market to more risk.

Remember the adverse selection problem earlier? The markets most susceptible to the Tobin Tax are the most efficient financial markets, those that operate on incredibly low profit levels for any given transaction. The spread here may be only a few basis points wide (that’s a percent of a percent), so many trades won’t happen in the presence of a Tobin Tax.

Many of the most important markets internationally are efficient and highly liquid (for example, foreign exchange markets). Indeed, that’s why they’re efficient and highly liquid. But when these markets are broad to a stand-still, you reduce the capacity of that market to efficiently allocate risk.

If the precedent of government bail-outs make it necessary to regulate the financial sector, the government should head for the root of the problem. Capital ratios (the amount of money that financial firms need to keep in reserve) may need to be increased, in order to reduce the necessity for massive government intervention. This is the true source of risk, and instability.

Amongst other suggestions, this commentator here suggested progressive capital ratios as a long-term solution to government involvement in banking. It’s worrying that the head of the International Monetary Fund yesterday openly admitted that he will consider the case for the Tobin Tax. Let’s hope it was just a publicity stunt..

© The Free Marketeer 2009

The public sector strikers might as well be protesting against the recession, as though such a beast could be tamed by opprobrium. They seem to be confusing the dire economic circumstances facing the state and public finances, with some discretionary government policy that can be reconsidered.

Quite simply, the government has to cut back on public sector pay, and quite significantly so. According to the Department of Finance, the Irish government has suffered a €26 billion deficit in expenditure over revenue thus far in 2009. Next year, it could be worse.

Government spending rose far too much during the Celtic Tiger years, and at a faster pace than the economy was growing. This was a consequence of unprecedented tax revenue coming into the government coffers. Naturally, Fianna Fáil took advantage of the situation by buying off special interest groups and initiating exciting new ways of wasting tax-payer money. The lack of pressure on public finances resulted in less oversight and today’s bloated civil service.

Meanwhile, the government became reliant on sources of tax revenue that were not permanent. The stamp duty cash cow of the construction boom is gone, and it isn’t coming back. This permanent fall is tax revenue, coupled with increased expenditure, brings us to today’s fiscal disaster.

So now there are cut-backs in government spending across the board. We are faced with the prospect of laying off public workers, and reducing pay to levels commensurate with the private sector. Is that fair?

Absolutely. Public servants have had it too good for too long. During the boom years, there were very little complaints from the civil service – but only because they almost invariably got what they wanted.Collectively, public sector trade unions were capable of exercising sway over the political establishment because they were an organised, politically-engaged group of voters. Job security, high wages and generous defined-benefit pensions were guaranteed. The government was able to give into their demands at minimal imposition on voters who were enjoying the good times, and happy enough to spread the wealth.

But that has all changed. Today’s voters are very much turned on to the difficulties facing the government finances. They are well aware that they will have to pick up the tab unless public pay starts reflecting the reality of our desperate situation. This starkly contrasts with past industrial action by public sector trade unions, and it explains why today’s action is ultimately pointless.

The government knows that public sector workers are going to be discommoded by the public pay cuts necessary to reduce the deficit. Taking a day off work doesn’t communicate their message any more effectively. Meanwhile, tax-payers are starting to look enviously at public sector job security, guaranteed pensions, and extremely generous pay levels. If the recipients of such gifts start earnestly complaining about their awful conditions, it might be the last straw.

Public sector strikes today present the government with very different options and incentives, when compared with the past. In this sense, public sector trade unions may have miscalculated if they think the government can be blackmailed. Today, they have the support of the people.

Recent evidence from the ESRI points to the enormous pay gap between public and private sector workers. Although public servants are providing a public service, they’re certainly not doing it for the public good. In fact, they’re not even giving us a discount. Meanwhile, with unemployment over 13% last month and rising, it’s better than ever to be employed by the state. You’re more difficult to fire, even if you’re no longer productive. Private sector employees enjoy no such privileges.

More importantly, the public have become aware of this and it has become a point of contention in public debate. Since today’s public sector strike imposes costs on voters, the public is likely to lose sympathy for civil servants. Everyone else in the state is suffering pay cuts, increased job insecurity, and firms going out of business. Why shouldn’t public sector workers take some of the burden too? Private sector workers aren’t complaining because this is the reality of our economic situation, and whingeing won’t change that.

But public sector workers are responding to the recession with a complete abrogation of their responsibilities to Ireland’s citizens. But why should they be insulated from the effects of the recession? They can claim that it wasn’t their fault. But the hideous state of public finances is more due to their excessive demands than anything else. They’re at an advantage to begin with, and they government probably won’t do much more than erode it slightly.

Moreover, it’s not my fault either. Nor is it the fault of most tax-payers. Truth be told, most of the people that are suffering during these recessionary times are not guilty of much wrong-doing individually. However, saddling future generations with debt is no more just. Government expenditure needs to fall, and especially unsustainable public sector pay levels. Those workers have been doing pretty well for a while now though, which is why this commentator has least sympathy for them.

© The Free Marketeer 2009

The recession has brought down prices throughout the economy, in response to faltering demand. In Dublin, the most poignant example of this is Spar’s much celebrated €2 hot chicken-fillet roll.

But in the same shop, many prices haven’t fallen as much. Why is this? Like the canary in the coal mine, the €2 hot chicken-fillet roll acts as an indicator in case of recovering consumer spending.

The phenomenon has been pretty common in Dublin over the last few months. Basically, shops advertise particular set sandwiches (say, a BLT roll) at an unusually low price. The principle all remains the same regardless of the sandwich’s contents.

There are some very obvious reasons for such deals to be advertised. They can certainly act to lure consumers into the shop for their lunch – only to see them spend more than they expected on over-priced merchandise elsewhere. This might be a reason for some prices (e.g. chicken-fillet rolls) to fall quicker than others (e.g. cans of soft drink). Consumers use the prices trumpeted outside the store as an indicator of the value for money they expect inside generally.

Why aren’t such deals as prevalent outside of the recession? Probably because firms aren’t as starved of custom. In an economy where fewer people are having their lunch out, competition is fiercer for those who are. Also, shops might be finding that lunch has become a more substantial fraction of their dwindling revenue.

There is also the asymmetry of reduced spending in the economy. In the same way that Tesco offer cheaper, lower-quality food stuffs for consumers on a budget, it pays for shops to have a two-tier price system in these recessionary times. If you’re still flush with cash, have a fancy sandwich at a high price. If you’ve fallen on hard times, we’ll offer you a substantially more limited range at bargain prices. Such ‘price discrimination’ explains why airlines offer business class seats at huge premiums – they are trying to charge each customer the most he is individually willing to pay for the service.

More interestingly, the rate of up-take on these deals might be used as a proxy for the broader recovery of consumer spending. Why? If your income is back to its original level and your job is secure, you are more likely to begin splashing out on frivolous flamboyant sandwiches. At the very least, you are less likely to buy a €2 hot chicken-fillet roll every day of the week.

You see, the management of Spar will have a hard time knowing how to set their prices in a recession. How much of a price reduction is too much? If they try to keep all prices in the store aligned with whatever vague notion they have of the degree of economic recovery, it will be expensive and time-consuming to change prices everywhere. They might also suffer if their prices are not perfectly accurate.

So, instead of changing all their prices, they change a few key popular items which have superior substitutes at higher prices elsewhere in the store. Then they don’t have to worry about when to raise their prices. As consumers start shifting towards more expensive options, the prices will ‘naturally’ align. Customers will consume some combination of cheap and expensive sandwiches, according to their financial situation – The aggregate will be the price they are charged.

But there’s more information to be gleaned. Substitution away from €2 hot chicken-fillet rolls and towards the range of more expensive sandwiches, may communicate a recovery of consumer spending in this specific area. It doesn’t have to be a mass exodus. There would just have to be a noticeable decrease. Critically, if all your prices were low, you’d never notice this increased willingness of consumers to spend – because all you know is that consumers are all willing to buy sandwiches at the current price you’ve chosen (which is the same for all your lunch options).

Once that substitution happens, Spar can then phase out their crazy deals and begin charging less extreme rates for all their lunch options. They want to do this as the earliest possible moment, because increased consumer choice yields higher profits in the long-run. If they do it too early though, consumers won’t be ready and will shop elsewhere.

What is the price of this knowledge to Spar? Well, they’re forcing a lot of people to eat €2 hot chicken-fillet rolls, when they could lower prices elsewhere in the store while maintaining profit. Since this makes consumers less happy than otherwise possible, that affects the store’s bottom line in the short run.

But it might be worth it, because firms will have a strong indicator of when they can adapt their pricing strategy to the reality of the recovering economic situation. Their prices will ‘naturally’ align, as the proportion of consumers willing to pay more gradually shifts away from the €2 hot chicken-fillet roll. Is it fool-proof? Nope. But if sales are increasing at the smoothie bar too, the evidence for economic recovery will begin to mount.

Republished as “The Economics of €2 Spar Hot Chicken-Fillet Rolls” in Trinity News (1st of December, 2009).

© The Free Marketeer 2009

The decision by the Irish government to repeal the reintroduction of fees has been met with joy by students around the country. But ‘free fees’ promotes inefficiency and propogates inequality, by not imposing the true cost of education on students.

Those who criticised the reintroduction of fees claim that students couldn’t afford to pay them, and that access to education would be limited as a result. Unfortunately, inequality in educational opportunity may stem from differing financial conditions – but free fees does nothing to stop this. As long as wealthier families can gain an advantage through spending (either through private tuition or grind schools), they will do so.

In the absence of fees, rich parents just purchase the educational advantage elsewhere. A poor student won’t have to pay fees as the most prestigious universities in the country, true. But only if they manage to overcome their disadvantage and gain admission. Under the status quo, the same inequality subsists in education that free fees sought to eliminate – statistics and anecdotal experience show that access has not significantly improved for the poorest.

But there are state schemes to improve access, I hear you say. If these other programs to increase education amongst the poor are working, why do they require free fees for everyone? After all, there are certainly students who can afford to pay. Meanwhile, the state can simply subsidise fees for the poorest. There’s no need for more involvement than this – just give them vouchers, and income is no longer a limiting factor in access to education. If necessary, there could be a sliding scale. Problem solved.

The truth is that much educational spending under the status quo is highly wasteful. The Cato Institute highlights the problems inherent in trusting the state to decide on matters of education. In China, heads have been rolling as graduates are educated at great expense – only to find themselves jobless and without any way of employing their skills.

But if students are forced to pay for their education directly, they have a strong incentive not to waste educational resources. Since students who choose subjects with low employment opportunities tend to be wealthier, this is a regressive saving. If you want to study philosophy, why is it fair for everyone else to pay for it? There is limited public benefit. Fees mean fewer drop-outs and unproductive graduates, which are waste of tax-payer money.

Instead, students will direct their efforts to subjects that yield the highest return in the employment market. Because they will have to pay back their students loan later, they are more likely to complete courses too. Happily, these kinds of subjects are those that the state is currently begging and bribing young people to study. Why waste the effort when self-interest and the market does this naturally? Fees mean more efficient decision-making by prospective students.

But in the absence of state support, would students under-invest in education because many would find it so hard to get a loan for it? Liquidity constraints may be a problem, although this is not immediately obvious. In the absence of huge state spending on education, there’s a lot more money to go around. But it is true that in the presence of risk aversion and reluctance to take on debt, students may be weary of taking on a loan to pay for their education. After all, what if they don’t end up reaping the rewards in employment or end up dropping out?

In that case, it may prove profitable for universities to offer partial deferred payment to their students. This solves both problems. With the co-operation of the state in enforcement, students could be expected to pay part of their fees after graduation and entry into employment. If you don’t end up getting a job, you might pay slightly less. Since universities are competing for your custom, they will formulate payment plans to make it easier for you to pay them and thus make their programs more attractive. The market strikes again.

There is some moral hazard here, but this can be tempered by only deferring some fees and requiring students to still take on some debt. Unfortunately, the price of discouraging today’s rampant moral hazard is that some risk-averse students will be discouraged from getting an education.

Another problem with ‘free fees’ under the status quo is that top-earners have their training provided by the state. How is it fair to provide free education to (say) doctors expecting to eventually earn €200,000 off the state? If fees are introduced, the prices of these courses could be bid up to reflect their true value to the consumer. Fees mean high-earners will pay for the benefit they receive.

They might also precipitate an increase in the places available. After all, students will demand and pay most for the most valuable training, so universities would want to provide it. Wouldn’t it be wonderful if the Irish education system was churning out enough doctors to satisfy the increasing demand for health-care? This would improve the health system and reduce costs, by eliminating the monopoly power these health professionals currently enjoy. Fees mean no more closed shops, courtesy of government control.

Universities will also start making their investment decisions based on the return to the college and the students. Under the status quo, availability of funds determines the ability of universities to reinvest, and without any modicum of cost-benefit analysis. They are also competing for funding from the state, rather than voters. Fees means responsible capital investment by universities, who will be competing for students.

If students are paying fees by choice (as opposed to having their fees taxed off them by the state), they will critically only seek education in Ireland if it’s really the best option for them. Under the status quo, there is a strong bias through this obligated payment to attend university in Ireland. But if students can choose to take their money with them to another country, universities in Ireland will really have to compete for students with foreign shores. Fees foster competition and improve education standards in Ireland.

Free fees are imposing costs on students, even if they don’t know it. By promoting wasteful decision-making, it means we are spending more money on education than we need to for the lesser benefit. This money could be spent elsewhere. The benefits of free fees is also highly regressive – both in terms of the background enjoyed by many students, and the huge benefits that accrue from education in later income-earning potential. Free fees also promote bad educational standards in Ireland, by putting Irish educational institutions at an unfair advantage in competing for Irish students. They also cause under-investment in education.

Students might celebrate, but the costs of this decision will scar our nation for years. ‘Free fees’ aren’t free. Far from it.

Republished as “Why Free Fees Aren’t Free” in the University Times (25th of November, 2009).

© The Free Marketeer 2009

The Irish Government recently decided to ban fur farming in Ireland. Their justification for this, presumably, stems from concern for animal rights and the cruelty of the practice.

In fact, this measure may end up harming animals – by pushing fur farming out of jurisdictions with responsible and concerned governments, they are forcing fur farming into more permissive and cruel states.

Let’s ignore, for the time being, the injustice of this decision. Consumers clearly demand fur, or else government intervention wouldn’t be necessary. Is it right for a Green government to impose their view of animal rights on the public? This is the simple imposition of green dogma (murdering animals for their fur is wrong) on the minority of people who enjoy to wear it. Meanwhile, the rest of us are too rightfully disconnected from the debate to care.

Even if you do recognise animal rights and believe the state has a duty to enforce them, this measure may not affect anyone really that much. Consider the kind of person who consumes fur and the price thereof -It’s pretty likely this kind of person will just buy fur farmed in another country.

How many fur-lovers are going to be dissuaded because they can’t buy Irish fur (or even, buy it in Ireland)? Not many. Note firstly that the current Irish plans only mention a prohibition on fun-farming. But even if it was more extensive: They are wealthy, and any added costs of importing it are insignificant in comparison to its total cost.

Where are they likely to import it from? Probably, another nation with a government less concerned over the fate of furry animals. Why is this bad? Because consumers are buying the same amount of fur, but that fur is being farmed in a manner even more harmful to animal rights.

If the Irish government were smart, they wouldn’t eject fur-farming from Ireland completely. Instead, they’d insist on regulation to improve the lives of the animals there. Rather than go into too much detail, there are many ways to make the treatment of these animals more humane. But even if you can only make their lives slightly better (e.g. by forcing farmers to kill them in a more humane manner), that’s still better than allowing them to be murdered in a considerably more cruel manner in another country.

When discussing regulation of industry for environmental reasons, we often lament regulating dirty industries – if you force them to jump through too many hoops, they’ll just leave your country and pollute even more in China. This phenomenon, known as ‘carbon leakage’, is just the same as our argument against the banning of fur-farming.

In the case of carbon leakage, governments express a desire for common regulations on carbon emissions. But there is scarce hope of any common ban on fur-farming. So we know fur-farming is happening, just elsewhere and under worse conditions.

The Irish government just gave up a great opportunity to make the lives of those animals better by regulating it. Soon, it will be completely out of their hands. They have exported fur-farming to another country, because regulation would have seemed morally dubious. The animals will suffer for that idealism.

© The Free Marketeer 2009

The New York Times discusses the diversity of revenue streams which support the Taliban in Afghanistan. In recent months, US forces have begun to express doubt over whether a policy to damage the opium trade will really hurt their finances.

Surprisingly, lessons can be learned from Peru’s experience fighting the drug trade and the ‘Shining Path’ guerilla movement in the early 1990s. In that case, the forces aligned against the government drew their power from an unlikely source.

As principal advisor to the President at the time, the economist Hernando de Soto went about creating a system of formalising property rights in Peru. He realised that a major source of income for the Shining Pathwas their ability to enforce these rights, and arbitrate disputes between individuals. But once the government of Peru established the necessary institutions, they were able to do so as well.

It sounds simple, but it’s not. In many developing countries, property rights are extremely informal. The people in a village know who owns what, but not much beyond that. This informality can precipitate disagreements, which a central government can find difficult to settle.

As the government of Peru extended their rule of law around the nation, their people no longer found it necessary to house and support the Shining Path. Since the guerilla group relied on both financial and popular support, they were forced to respect the people’s wishes.

The knock-on effects of this included the elimination of the drug trade. Now they were just working for themselves, the citizens of Peru seemed relatively happy to move onto legal crops. The government gradually gained respect and extended its sphere of control. Meanwhile, lacking their major source of income in the drug trade, the Shining Path were financially crippled and eventually defeated.

The situation sounds very similar to post-conflict situations, such as Afghanistan. In the absence of an effective rule of law, insurgencies supplant government in exchange for a fee – all the while, this anarchy is fueled by drug money.

Could the same lessons be applied in Afghanistan then? The formalisation of property rights and proper enforcement by government could make the Taliban obsolete in the eyes of the many citizens who are currently reliant on them. In a recent visit to Trinity College, Hernando de Soto argued as much.

Indeed, President Hamid Karzai of Afhganistan actually approached the Peruvian economist a few years ago and a joint summit was held with his Ministers at the ‘Institute for Liberty and Democracy’, his think-tank in Peru. As it happens, their plan fell through – despite the positive results experienced in Peru and elsewhere under similar circumstances.

It seems to external observers that the situation is not exactly similar, though. The problem in Afghanistan don’t seem to stem from the absence of property rights, but the absence of government to enforce any order at all.

Consider the American mafias in the 1920s. It didn’t matter if the government respected property rights or not – they were just powerless to stop Al Capone shaking down some poor business owner for protection money. If the government forces in Afghanistan weren’t similarly powerless, everything else could follow quite easily.

But de Soto claims that the political element changes everything. If Al Capone was in charge of the Taliban, we would have a serious problem. But although the Taliban routinely intimidates the citizens of that country, they have to treat their supporters with some degree of respect.

The Taliban needs to maintain some degree of consent and support amongst the populace, or else risk a similar fate to that suffered by Al-Qaeda in Iraq (where a disgruntled population finally turned on them and initiated what became known as the Sunni Rising).

Thus, if the Afghani government formalised property rights and went about enforcing them for citizens, they could eat into the Taliban’s base of support. Remember that much of the nostalgia for the Taliban has its roots in their ability to enforce the rule of law – something which the corrupt government in Kabul has so far systematically failed to do.

Will people be averse to the government’s involvement, preferring the Taliban and the more profitable drug crops? Empirically elsewhere, they seem not to. But de Soto notes the costs associated with the drug trade – the chance that your son might be recruited to the insurgency and killed, the possibility that your daughter might be carried off by some mujahideen. Life is easier when you earn an honest living.

As noted in the article above, the opium trade is not the Taliban’s only source of income. But it is a considerable source, and it’s critically linked to its support amongst the population. This plan seems much better than taking drug crops from the people by force and fostering resentment.

Unfortunately, it relies on the same government which recently rigged an election. If he’s unwilling to respect the democratic rights, how likely is President Hamid Karzai to be bothered about respecting their property rights? More likely, he’ll continue to corruptly and poorly govern in the absence of a credible alternative. What a wasted opportunity.

Republished as “Property Rights, the Simple Solution to the Taliban’s Authority in Afghanistan” in Trinity News (16th of November, 2009).

© The Free Marketeer 2009