The Oxford Review of Economic Policy has a brand-new special issue on the economics of independence. The entire issue seems to be open-access right now, so check it out. (HT: Doug Irwin)

In Scottish news, polls have turned a bit against independence, and betting markets now price a “Yes” at around 22-24%. I will take another look at how this affected capital markets, and what that implies about the economics of independence, a bit later in the week.

Barack Obama announced his new strategy for ISIL on 9/10:

“So tonight, with a new Iraqi government in place, and following consultation with allies abroad and Congress at home, I can announce that America will lead a broad coalition to roll back this terrorist threat.” –

The coalition partners are important because our efforts

“will not involve American combat troops fighting on foreign soil. The counter-terrorism campaign will be waged through a steady, relentless effort to take out ISIL, wherever they exist, using our air power and our support for partners on the ground. This strategy…is one that we have successfully pursued in Yemen and Somalia for years.”

Leaving aside the reference to Yemen and Somalia, let’s consider the coalition of our “partners on the ground.” On September 11, a number of Arab nations joined to sign an agreement to assist in the campaign against ISIL, that included providing humanitarian aid and “as appropriate, joining in the many aspects of a coordinated military campaign.” The “as appropriate” clause might give one pause. As the New York Times explains:

While Arab nations allied with the United States vowed on Thursday to “do their share” to fight ISIS and issued a joint communiqué supporting a broad strategy, the underlying tone was one of reluctance. The government perhaps most eager to join a coalition against ISIS was that of Syria, which Mr. Obama had already ruled out as a partner for what he described as terrorizing its citizens.

Continue Reading »

Airpower is the simple but wrong/naive answer to complex problems. It just doesn’t work as advertised by the airpower enthusiasts.  If you will the ends, you will the means. So those who want to wade back into Iraq or jump into wherever to “degrade and ultimately destroy ISIL” should be honest and note that ground forces are likely to be necessary unless the local partners are stronger than I think they are.  But Americans so want to believe in Santa Claus… I mean immaculate warfare.  

Michael Salla, Robert O’Harrow Jr, and Steven Rich (The Washington Post) have written an interesting series on asset forfeiture (see the teaser “Civil asset forfeitures more than double under Obama,” by Christopher Ingraham on Wonkblog). The basic presumption of asset forfeiture is simple: you are guilty until proven innocent. If you are the target of “stop and seize,” you bear the burden of proving that your assets were not involved in criminal activity. Even if charges are never filed, you may not get your assets back. And due to the Equitable Sharing Program, state and local authorities have strong financial incentives to take asset forfeiture seriously. What could possibly go wrong?


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What can we learn from capital markets about the likely consequences of Scottish independence? A trio of recent polls has shown the “Yes” side to have pulled roughly even with “No.” With momentum on their side, it’s not unthinkable at all that “Yes” will pull it out, resulting in the first secession from a Western democracy since Iceland withdrew from Danish union in 1944. Most American commentators, from Paul Krugman to Tyler Cowen, oppose Scottish independence and forecast economic disaster for the new country. Are they right?

Let’s look at the behavior of capital markets in Britain since these polls’ release to find out. First, let’s set the stage by looking at how betting markets price the probability of Scottish independence. Unfortunately, there are no nice InTrade-style charts for implicit probabilities anymore, at least not that I can access from the United States. From oddschecker.com, I am able to pull odds from different exchanges from the beginning and end of each day. Looking at the markets with most liquidity, it looks as if the odds for independence moved from about 19.5% Friday night to about 25% Saturday night, after the release of the YouGov and Panelbase polls (the Panelbase poll suggested “No” might still have a small lead). On Monday morning the odds stood at about 23.3%. After the release of the TNS poll Monday evening (confirming the dead heat), the odds moved in to 26.0%.

Next, let’s look at the behavior of capital markets over this period. Here is how the pound has fared against the euro:

euros per pound

Not much of a correlation. To be sure, the pound fell against the euro when trading opened Monday morning, following the shock weekend poll from Yougov and the somewhat-reassuring poll from Panelbase, but the TNS poll released late Monday night appears to have had zero effect on the pound, even though it did have a small effect on the betting markets.

Now, the pound has fared a little worse against the dollar, because the euro has also dropped against the dollar. This may reflect that traders believe Scottish independence raises the probability of British exit from the EU. But this would not be a direct cost of Scottish independence, and it would ultimately be up to English, Welsh, and Northern Irish voters whether they want to withdraw from the EU.

What about the stock market?


I’ve got the Dow in there for comparison (in green). So the FTSE fell about 0.3% on opening Monday, then drifted downward throughout the day, finally recovering all that ground except the initial 0.3% drop. On opening Tuesday after the TNS poll, it actually rose. As of this writing is down just about 0.4% from Friday’s close. This looks like a muted response to me.

But what about Scottish-exposed stocks in particular? I took the list of top 25 Scottish companies here and winnowed the list down to those listed as having Scottish ownership and being publicly traded. Nine companies fit that test. I then constructed a weighted average of their share prices at Friday close, Monday open, Monday close, and Tuesday open, the weights being each stock’s market cap according to investing.com. Recall that there were two surprise polls, one over the weekend and one released Monday evening, the former having the greater effect on betting markets.

The Scottish index I created lost 1.7% of its value on opening Monday morning, a noteworthy drop because it happened right away. It’s plausible to attribute this drop to the increased risk of independence. However, today it lost nothing on opening – in fact, it was up 0.1%. Still, the total loss to these nine firms’ market value amounts to about $800 million. The fact that there was no further response of capital markets to the TNS poll, even though betting markets did respond, weakens our confidence somewhat that investors are responding negatively to the prospect of independence, but let us work with the assumption that they are.

What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%. Of course, investors are risk averse, and the very uncertainty of the outcome might be driving a fair proportion of the losses.

A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.

How to sum up? So far Continue Reading »

President Obama’s comments at a press conference in Estonia has attracted quite a bit of heat. The President stated:

“we know that if we are joined by the international community, we can continue to shrink ISIL’s sphere of influence, its effectiveness, its financing, its military capabilities to the point where it is a manageable problem.”

As one talking head proclaimed:

“The president needs to have the same type of resolve that I think we as individuals have when we see and read the truth about what the Islamic State desires, which is a world way beyond Iraq and Syria, and it must be destroyed, each and every one of them needs to be killed and stopped.”

The critique, predictably, has a certain Manichaean feel: ISIL is evil and evil must be destroyed. And with that, the drums of war beat once again.

I have little doubt that ISIL is evil (and yes, I believe in evil) and that some (perhaps all) members of ISIL would be pleased to kill US citizens (the recent beheading videos leave little doubt). But when something is cast as evil and we commit to doing whatever is necessary to destroy it, we run into some obvious problems. Even if evil can be personified in “Jihadi John,” (the nickname given to the ISIL executioner, veiled in black, with a British accent), it cannot be reduced to a single person or a collection of people who can be killed (“each and every one”). Here, I think Hannah Arendt was closer to the truth when she used a different metaphor: “Evil …can overgrow and lay waste the whole world precisely because it spreads like a fungus on the surface.” Given the pervasiveness of evil, a war on evil could prove open ended (kind of like a war on drugs, a war on crime, a war on terror…). Such wars are used repeatedly to expand the role of the state, justify assaults on liberty, and turn a blind eye to the substantial collateral damage.

In this context, the prudent person needs to evaluate the magnitude of the threat and then conduct something of a cost-benefit analysis. What is the most cost-effective means of reducing the capacity of those intent on evil from constituting a serious threat? How can we transform a given threat into “a manageable problem”? Perhaps this analysis will reveal that we don’t need to “follow them to the gates of hell until they are brought to justice,” as Vice President Biden declared Wednesday in New Hampshire?

There are a lot of evil people in the world. Some we kill. Some we incarcerate. Some we incapacitate. Some we rehabilitate. Some we bribe. Some we ignore. Often we pragmatically try a combination of strategies and the combination evolves over time as our understanding grows or circumstances change. Unfortunately, this is an analysis that is particularly difficult to conduct two months before the midterm elections, when a lot of unserious people and neocons are competing for face time in the media.

University of Colorado philosopher Michael Huemer’s book The Problem of Political Authority deservedly made a large splash when it was released last year. The book consists of two parts, the first making the case that states enjoy no moral right to rule and that subjects have no moral duty to obey them, and the second laying out a new case for anarcho-capitalism, a justice system based on competitive, private security agencies and arbitration services.

Huemer’s great strength is his ability to bring together arguments in the literature and add a few of his own to make a compelling case for surprising conclusions. The writing is clear and easy to follow. Huemer relies heavily on commonsense intuitions to make his case. He concedes that commonsense intuitions hold political authority to be real, and that his position against political authority therefore faces a burden of proof, one that he meets. While I don’t think that ethical intuitionism is the One True Moral Methodology, starting with commonsense intuitions has the advantage of making the argument relevant to people working from all sorts of different moral theories, from deontology to consequentialism.

Huemer’s method is to think of things that governments do, and ask if individuals who are not part of the government would be justified in doing them. For instance, governments purport to make drug possession by consenting adults illegal and punish violators of these laws with imprisonment in cages. Would it be justifiable for me to declare X substance illegal and kidnap and confine in my basement those I find in possession of X? If not, why not? Any answer would depend crucially on a persuasive account of political authority.

Huemer goes through various accounts of political authority and carefully and patiently explains where they go astray: consent, democracy, gratitude, good consequences, etc. None of them succeed in showing that people who are part of the government have rights that people who are not part of the government lack. Huemer’s book is certainly the best summation of the case for philosophical anarchism that has yet been written.

Part 2 of the book, on the other hand, is considerably less successful. Continue Reading »


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