Productivity and wages in NZ and Australia

Back when Paul Krugman was still an economist he wrote

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)

In other words productivity increases drive wage increases. Productivity is a measure of how efficiently inputs such as capital and labour are used within the economy to produce outputs of goods and services. The more output we get from a given amount of inputs the more productive we are. Labour productivity reflects improvements in how much output each worker can produce while multifactor productivity reflects increases in output due to improvements in knowledge, technology and innovation. So if New Zealand's government wants to close the gap between wages in New Zealand and wages in Australia, increases in productivity in New Zealand would have to be higher than those in Australia.

In a recent piece published in the Otago Daily Times and, in a slightly different form, in the New Zealand Herald, Roger Kerr notes that

In Australia wages are already some 30 percent higher than in New Zealand, and a comparison of productivity growth trends in the two countries suggests that the gap between the two will widen even further under present policies.

Consider the two graphs, from Kerr's article, below




The publication by Statistics New Zealand of productivity data for the ‘former measured sector’ (which covers most of the business sector and around 63 percent of the economy) allows comparisons with Australia to be made on a like-for-like basis. As the charts above show, for the period 1992-2000 the average annual rates of growth of both labour productivity and multifactor productivity in New Zealand on a point-to-point basis outstripped the comparable growth rates in Australia. This performance by New Zealand was based on the reforms of the post-84 period. But also consider the data for the 2000-7 period. Here the situation is reversed. As Kerr points out, we see

... Australia doing better than New Zealand, even though Australia’s average productivity growth rates have also declined relative to the 1990s. New Zealand’s average labour productivity growth rate has fallen to 1.2%, well below the 3% rate achieved in the earlier period.

Another factor affecting wages is hours worked. Here Kerr notes that

... recent data indicate that full-time employees in Australia work slightly longer average weekly hours than full-time employees in New Zealand.

Thus to catch up with Australia we must work harder and smarter. Kerr closes his article by explaining that

Recent IMF research has concluded that Australia’s superior productivity performance is largely explained by its economic reforms, particularly in the labour and product market areas.

And goes on to say that it is therefore

... mystifying that recent productivity research by the New Zealand Treasury does not focus on the impact of New Zealand’s economic reforms on the productivity improvements of the 1990s, and the impact of policy reversals and increased government spending, taxation and regulation on the much lower productivity growth rates in the current decade.

The issues Kerr raises here are those which the New Zealand government must address if it truly wishes to close the gap between us and Australia.

Free trade with China: flag file

This report tells us that

Police in southern China have discovered a factory manufacturing Free Tibet flags, media reports say. The factory in Guangdong had been completing overseas orders for the flag of the Tibetan government-in-exile.

Even John Minto would have to see the irony in this trade deal!

(HT: Marginal Revolution)

Tax freedom day for New Zealand (updated)

I notice from this New Zealand Business Roundtable press release that tax freedom day (pdf) for this year is today April 29. This is at least as far as the tax burden imposed by central government is concerned. The press release notes

... 29 April is a red letter day because it represents the day in the year when the average New Zealander stops working for the government and starts working for themselves.

“In other words it means that since the beginning of January the average New Zealander has nationally spent one third of the year working for central government.”

Note that the

... calculation of 29 April was based on central government core expenditure, which amounts to 32.4 percent of gross domestic product (GDP) according to the 2008 Budget Policy Statement.

But don't get too happy since

... the core central government spending measure understates the true tax burden because it leaves out or underestimates elements of government spending such as local government outlays. If these are included, total government spending in New Zealand, as measured by the OECD, is projected to be 42.4 percent of GDP in 2008.

On this basis, Tax Freedom Day would fall on 4 June.

But it gets worse since

[t]his broader measure highlights the extent to which New Zealand is a relatively high-taxed country. Compared with New Zealand, Tax Freedom Day on this measure comes a month earlier in Australia and Switzerland (4 May), about three 2 weeks earlier in Ireland (10 May) and Japan (14 May), and more than two weeks earlier in the United States (18 May).

So back to work, the government wants more income from you!

Update: Not PC is Still waiting for Tax Freedom Day.

Economic research to save the world

• Jeffrey S. DeSimone, “Fraternity Membership and Drinking Behavior,” NBER Working Paper No. W13262, July 2007.
• Jay Pil Choi, “Up or Down? A Male Economist’s Manifesto on Toilet Seat Etiquette.” Working Paper, Department of Economics, Michigan State University, 2002.
• Robert Oxoby, “On the Efficiency of AC/DC: Bon Scott versus Brian Johnson,” Economic Inquiry, forthcoming. The abstract reads:

  We use tools from experimental economics to address the age-old debate regarding who was a better singer in the band AC/DC. Our results suggest that (using wealth maximization as a measure of “better”) listening to Brian Johnson (relative to listening to Bon Scott) resulted in “better” outcomes in an ultimatum game. These results may have important implications for settling drunken music debates and environmental design issues in organizations.

(HT: Organizations and Markets)

William Bernstein on EconTalk

The history of trade is the topic of discussion between Russ Roberts and William Bernstein on EconTalk this week. Drawing on the insights from his recent book, A Splendid Exchange: How Trade Shaped the World, Bernstein talks about the magic of spices, how trade in sugar explain why Jews ended up in Manhattan, the real political economy of the Boston Tea Party and the demise of the Corn Laws in England. The discussion closes with the political economy of trade today and the interaction between trade and income inequality.

Incentives matter: anti-Aids file

A report from FT.com tells us that the World Bank backs anti-Aids experiment. The article says

Thousands of people in Africa will be paid to avoid unsafe sex, under a groundbreaking World Bank-backed experiment aimed at halting the spread of Aids.

The $1.8m trial – to be launched this year – will counsel 3,000 men and women aged 15-30 in southern rural Tanzania over three years, paying them on condition that periodic laboratory test results prove they have not contracted sexually transmitted infections.

Its one way to try and get incentives working for you rather than against you.

Freer Trade Could Fill the World's Rice Bowl (updated)

The title of Tyler Cowen's latest piece in New York Times speaks volumes, Freer Trade Could Fill the World's Rice Bowl. Cowen points out that there are a number of reasons for rising food prices but he asks the question, Why adjustment to these prices hasn't been easier. A big problem, he says, is that the world doesn't have enough trade in foodstuffs.

As an example he looks at rice. He writes

Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 percent of the world’s rice production is traded across borders; that’s unusually low for an agricultural commodity.

So when the price goes up — indeed, many varieties of rice have roughly doubled in price since 2007 — this highly segmented market means that the trade in rice doesn’t flow to the places of highest demand.

Cowen goes on to say

The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports in rice-producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt.

The problem here is, of course, the incentives export restrictions give. When export restrictions are placed on any good it sends a message to producers of that good that their output is least profitable precisely when it is needed most. Restricted exports increases the local supply which reduces the local price, which reduces the return for local producers. In the case of rice this means that there is little incentive to plant, harvest or store rice. High prices should give producers the incentive to expand production, which is just what is needed for rice. But if producers can not access those high prices on the world market because of export restrictions, then they don't have the incentive needed. Cowen notes

Restrictions on the rice trade run the risk of making shortages and high prices permanent. Export restrictions treat rice trade and production as a zero- or negative-sum game where one country’s gain comes at the expense of another.

There are few areas in which free trade could do more good, than in the production of food.

Update: Not PC makes the point that When producing becomes illegal, prices go through the roof.

Trade with China and the poor

Awhile back John Minto had a rant in the Christchurch Press on the China free trade deal. My comments on the piece are here. At one point Minto wrote

... it [trade with China] will not improve the standard of living of New Zealanders. In fact, for the many of the most vulnerable it will be disastrous.

Now I learn from Marginal Revolution about a new paper that looks at Inequality and Prices: Does China Benefit the Poor in America? (pdf). The paper argues

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

The emphasis at the end is mine. So the poor in the US do benefit from trade with China, the cost of living of the poor is being held down by trade with China. What we see is that inflation rates for the richest ten percent outpaced inflation rates for the poorest by about 6 percent. This wipes out two thirds of the rise in inequality during these years, and China is responsible for half of that reduction. Inequality is rising because of an education slowdown, see here, but trade helps to keep it lower. So the protectionists would not just make America poorer but also more unequal. Why should it be any different here? But I'm sure John Minto will tell us that it is different here.

Tyler Cowen adds an interesting aside.

Broda and Romalis also find that the poor are more likely than the rich to buy newer goods. Because of the lag in how quickly the CPI tracks new products, the researchers argue that once this "new goods bias" which serves to keep official inflation rates higher than they actually are since newer goods are typically cheaper, is factored out, inequality between the rich and the poor between 1994 and 2005 may not have changed at all.

A reply to Crampton

In a comment on Matt Burgess's posting on National's broadband plan, Crampton raises an interesting point:

I can imagine a second-best argument for a lot of public investment in fibre. Simply put, the government cannot credibly commit to refraining from expropriating the returns to private investment in this area, either via nationalization or regulation of access.

For another example of Crampton's non-credible commitment point consider the public ownership of waterworks in the US. Usually the reasons for public ownership are placed into one of three categories: market failure, regulation problems or transaction cost reasons. An interesting case study of waterworks is offered in the Troesken and Geddes paper "Municipalizing American Waterworks, 1897-1915". This paper provides support for a transaction cost interpretation of municipal acquisition of private waterworks. The incentives facing local government and the private companies are an important factor in the government take over.

The basic Troesken and Geddes story is that municipalities were unable to credibly precommit to not expropriating value from private water companies once (sunk) investments were made. This gave the private firms an incentive to reduce investment in water provision. This rational under investment was then used by local governments as a pretext for municipalising the private water companies.

Now if we accept Crampton's second-best argument that its right and proper (or at least, least bad) for governments to own broadband networks and waterworks, where does it end? The government cannot credibly commit to refraining from expropriating the returns to ANY private investment and following Crampton's (second-best) logic the government owns everything.

But maybe its even worse. What incentives does Crampton's argument give to governments? Consider the waterworks example. If the government wanted, for its own reasons, to take over the private works all it need do is to refuse to credibly precommit to not expropriating value from private water companies and use the resulting rational under investment by private firms as an excuse for municipalising the private companies.

Thus if we accept the Crampton argument, are we not giving the government the tools and incentives to nationalise everything! Would it not be better to try to find ways of giving governments a disincentive to nationalise rather than the incentive to do so? Crampton's whole argument underlines how important property rights are and why governments must forced to respect them.

In fact in the case of New Zealand, wasn't the reason for many of the changes made during the post-84 reforms about trying to restrain government. The Public Finance Act, the Reserve Bank Act, the State Owned Enterprises Act and, more recently, the Regulatory Responsibility Bill can be seen as attempts, all be they imperfect, to do this. As the former Secretary of the New Zealand Treasury Graham Scott has written recently

It is also important to continue the search for more stable and predictable policy frameworks where the role of the state is prescribed and procedures defined for the use of its powers of intervention. Examples are the fiscal responsibility provisions in the Public Finance Act, The Reserve Bank Act, the State Owned Enterprises Act and the Commerce Act. New rules to stabilize the share of the state in the economy and impose a national benefit test on regulatory powers in the manner of the Regulatory Responsibility Bill before the Parliament would also help to establish a sounder basis for economic policy than the haphazard intervention of ministers with short political fuses.

Tying the hands of government, as best we can, seems the best approach to the issue of protecting the returns to private investment. Having well defined and enforced rules as to when and how the state can use its powers of intervention and coercion are needed not just to ensure an efficient and growing economy, but perhaps even more importantly they are needed to protect our individual freedoms from abuse by the state. I fear Crampton's argument is a counsel of despair.

Its tough being dignified and green

An article at the Nature website reports that in Switzerland you are no longer allowed to offend the "dignity of plants". The article reports that

All plant biotechnology grant applications must now include a paragraph explaining the extent to which plant dignity is considered.

There would be a problem if, for example,

... genetic modification caused plants to 'lose their independence' — for example by interfering with their capacity to reproduce.

The article also reports that this statement

... has confused plant geneticists, who point out the contrast with traditional plant-hybridization technologies, for example in roses, which require male sterility, and the commercial development of seedless fruits.

I wonder what being cooked and eaten does for the "dignity of plants"? And how does mowing the lawn affect the dignity of grass?

A more serious issue here is how does such a law affect innovation based on any form of plant biotechnology. Its difficult to see the Swiss having much of a comparative advantage in plant biotechnology based industries with this kind of handicap. What damage could such a law do in an agriculture based economy like New Zealand?

Putting your money where your keyboard is

Greg Mankiw notes that the New York Times thinks textbook prices are "outrageous". Their answer? The nanny state of course. It "calls for reform, including Congressional legislation to regulate various industry practices."

But as Mankiw points out

... the Times is a for-profit company in the business of providing information. If it really thought that some type of information (that is, textbooks) was vastly overpriced, wouldn't the Times view this as a great business opportunity? Instead of merely editorializing, why not enter the market and offer a better product at a lower price? The Times knows how to hire writers, editors, printers, etc. There are no barriers to entry in the textbook market, and the Times starts with a pretty good brand name.

One would think that the reason that the Times isn't in the textbook publishing business is simple, it doesn't view the idea as "an exceptionally profitable business opportunity". But his does run counter to the very idea their editorial is based on.

Why are textbooks such a price? On the cost side, one reason may be the size of the print runs. They will be smaller for textbooks than the runs of, say, a best selling fiction work. Given fixed costs are a large part of total cost, this means average costs will be higher for the textbook. On the demand side, demand may be less elastic for textbooks. If the book is required for a course many students will buy it, almost, at any price. Also publishers may be pricing to market. Given that the US is a high income country, publishers my price discriminate by charging a higher price in the US.

City planners take note

According to this press release (.doc - it has a couple of pages of detail), in a new paper, economic historians Tim Leunig and Nick Crafts look at the fast-growing cities of Victorian Britain and ask what lessons do they have for how we manage today's economy. In particular we are told,

Had well-intentioned planners implemented green belts in 1800, then Britain would not have been able to gain the “agglomeration economies” that so benefited the Victorian economy: we would not have become the workshop of the world.

So too today: high-skill cities such as Oxford and Cambridge have the potential to be a centre of high-wage agglomeration cities, just like Liverpool and Manchester a century ago. But unlike Liverpool and Manchester a century ago, their growth is constrained by highly restrictive planning laws.

So cities matter and having cities that can grow matters. High-wage agglomeration cities need to be able to grow because the productivity of workers is higher when they surrounded by others doing the same thing. Thus you find certain industries concentrating in certain cities. The press release notes that throughout the nineteenth century, productivity, even for manual workers, was higher in bigger cities than in smaller places. This concentration phenomenon is known as 'agglomeration economies'.

So let our cities grow.

Unfortunately paper itself doesn't seem to be available yet.

Economics of happiness 3

Justin Wolfers has another posting on the Freakonoimcs blog on the economics of happiness.

• Here he goes, Delving Into Subjective Well-Being

Links to his earlier postings can be found here and here.

Hamermesh on being green

Daniel Hamermesh, at the Freakonomics blog, considers the The Consequences of Being Green and he says there should be a rule:

before helping the environment in one market, we should be required to think through the impacts on other markets.

In economic terms this means thinking in general equilibrum - multi-market - terms rather than partial equlibrium - single market - terms. He makes the point that saving the environment in one market generates consequences in other markets, and a not always good ones. His example of what happens when you don't think in general equilibrium terms,

Perhaps the best illustration is the misguided effort to generate ethanol from corn by subsidizing farmers to switch to corn production. Fine for gasoline users, and fine in reducing environmental damage from gasoline; but corn uses lots of water (environmental depletion) and, moreover, the subsidies have helped fuel the spurt of inflation in food prices worldwide.

Unintended consequences: heath insurance

There is a new paper out in the Journal of Health Economics by Jonathan Grubera and Kosali Simon on Crowd-out 10 years later: Have recent public insurance expansions crowded out private health insurance?. The abstract reads,

Ten years ago, Cutler and Gruber [Cutler, D., Gruber, J., 1996. Does public health insurance crowdout private insurance? Quarterly Journal of Economics 111, 391–430] suggested that crowd-out might be quite large, but much subsequent research has questioned this conclusion. Our results using improved data and methods clearly show that crowd-out is still significant in the 1996–2002 period. This finding emerges most strongly when we consider family level measures of public insurance eligibility. We also find that recent anti-crowd-out provisions in public expansions may have had the opposite effect, lowering take-up by the uninsured faster than they lower crowd-out of private insurance.

So expanded public insurance entitlements will reduce private insurance coverage. Grubera and Simon results show that, at least for the US, crowd-out is significant. Their estimates suggest that crowd-out is on the order of 60%: private insurance coverage is reduced by 60% as much as public insurance coverage rises when there are public eligibility expansions. Its this substitution of public for private insurance really what was intended when public insurance coverage was expanded? One would think that the idea was to expand actual coverage not just cause a substitution effect.

(HT: Division of Labor)

McDonald's makes the world a cleaner place.

Yes McDonald's really does make the world a cleaner place. This is pointed out to us by Don Boudreaux in his discussion of a recent paper by Adrian E. Tschoegl on McDonald's: "McDonald's -- Much Maligned, But an Engine of Economic Development." Boudreaux quotes Tschoegl as saying:

McDonald’s emphasis on cleanliness, including or especially in restrooms, has led its competitors to upgrade their facilities. Before the first McDonald’s opened up in 1975, restrooms in Hong Kong’s restaurants were notoriously dirty (Watson 1997). Over time, competitors felt compelled to meet McDonald’s cleanliness standards. The same thing appears to be occurring in China (Watson 2000). In Korea, McDonald’s introduced the practice of lining up in an orderly fashion to order food; traditional practice was simply to crowd the counter, with success in ordering accruing to the most aggressive (Watson 2000). In the Philippines, Jollibee mimics McDonald's clean and well-lighted look.

National's broadband plan: a guest blog

This is a guest blog from Matt Burgess. Welcome Matt.

National's plan to spend $1.5 billion building fibre to the homes of 75% New Zealanders has received widespread praise, but I join Not PC and Liberty Scott in condemning the plan. This is Think Big 21st century style.

The objection is not that better broadband is a bad thing. In the 1980s, more electricity was a good thing but Clyde Dam was a disaster. The problem with National's plan is that it's likely to give New Zealanders less broadband at higher cost and lower quality than might otherwise have been achieved, much as Clyde Dam did for electricity.

There are several reasons for this pessimism. The most important is that this is a nationalisation of New Zealand's phone and data access infrastructure, and as such it will crowd out competing investment. No competitor who is or might be considering investment in phone and data access will continue now that its competitor is the New Zealand government. A standard insight from the public choice literature is that governments generally measure success not by profits but by the size of the asset. Making access investment pay is hard enough without a behemoth competitor that is willing to bear unlimited losses for the alleged greater good.

This loss of competition is crucial, for two reasons. First there are many ways to deliver data into homes. Without National's plan, the incumbent Telecom might have faced competition from cable (Telstra-Clear), wireless (Vodafone, Woosh) and satellite, as well as from other promising technologies not yet in commercial use. It is not obvious which mix of technologies is best, and this is where competition is most valuable. National's plan substitutes central planning for the competition that might have otherwise produced an asset of the size, type and cost that would have created the most value for the country. It risks locking New Zealand into the wrong
technologies.

This loss of competition is important for a second reason. Without it, New Zealanders will probably have no alternative provider if delays occur or there are problems with service quality when it is built. And experience strongly suggests that there will be delays and quality problems. Building an access network is technically and, these days, legally challenging. Elected officials are the very last people we want to be ultimately responsible for a project of this magnitude. While these delays are worked through, New Zealand gets inferior broadband.

Another objection is that any government will find it hard to commit to National's plan. National wants to roll out fibre to 75% of homes, but it will be politically difficult to ignore the wave of complaints coming from the other 25% who see fibre rolled out to smaller towns than theirs or to the next block over but not their own. Ultimately, National's plan will see fibre rolled out to Milford Sound, or perhaps satellite bandwidth being purchased on the taxpayers' dime. This will cost much, much more than $1.5 billion.

New Zealand cannot help but be made poorer by this. Afterall, if broadband really is that valuable this network would have been built already. Or would it?

It is possible that this is an investment that is worth the cost to the country, but investment in this asset has been delayed by two government-produced distortions. First, price caps on residential voice and now business and residential data via bitstream and unbundling regimes undermine incentives for investment. It is hard to earn a return that justifies investment if you are forced to share your assets with competitors at a price that does not properly account for risk. A case of regulation begets regulation.

Second, property rights in New Zealand are not strong. A fibre asset is particularly vulnerable to expropriation by governments because it is a sunk, long-lived asset which delivers services which will draw the attention of politicians for the foreseeable future. An investor considering their return on building fibre must consider the likelihood that the rules will be changed on them by an opportunistic government, as has already occurred to investors in Telecom and Auckland Airport.

This is a nationalisation of a large part of NZ's communications access infrastructure. As a nationalisation, I confidently predict it will crowd out all competing investment. It will be late. It will cost much more than $1.5 billion. It will not perform as promised. It will be a political football for the 25% of households who miss out. The government that finally caves to their demands will pay billions more to lay fiber to Milford Sound or buy enough satellite bandwidth. And it stands a good chance of locking New Zealand into the wrong access technology.

Otherwise, a sound plan.

The Economist on food prices

Food policy and food prices are now big news. The Economist magazine has its say on the problem in the lead article in this week's issue. Their, sensible, recommendation - stop government induced policy distortions. The Economist writes:

In general, governments ought to liberalise markets, not intervene in them further. Food is riddled with state intervention at every turn, from subsidies to millers for cheap bread to bribes for farmers to leave land fallow. The upshot of such quotas, subsidies and controls is to dump all the imbalances that in another business might be smoothed out through small adjustments onto the one unregulated part of the food chain: the international market.

For decades, this produced low world prices and disincentives to poor farmers. Now, the opposite is happening. As a result of yet another government distortion—this time subsidies to biofuels in the rich world—prices have gone through the roof. Governments have further exaggerated the problem by imposing export quotas and trade restrictions, raising prices again. In the past, the main argument for liberalising farming was that it would raise food prices and boost returns to farmers. Now that prices have massively overshot, the argument stands for the opposite reason: liberalisation would reduce prices, while leaving farmers with a decent living.

Maybe now politicians in Europe and the US, and other places, will be forced to take action on the distortions that their policies induce. We can only hope.

Free Exchange on food prices

At the Free Exchange blog food prices are under discussion. They write,

Economists continue to explore the roots of the crisis. So far, the list of culprits includes bad weather, export restrictions, growing demand, and biofuel production. That last item has come in for particular scrutiny in America, where government incentives have led to a boom in ethanol production and have helped to tie movements in energy costs to those in food markets.

Another issue noted is the effects on fertilizer production:

And, as Felix Salmon noted yesterday, fertiliser is overwhelmingly produced from natural gas. Mr Salmon quotes Paul Scheckel, who writes:

Fertilizer production is second only to petroleum refining when it comes to industrial use of natural gas in the United States: 97 percent of the fertilizer applied to crops is manufactured from natural gas. With spiking energy costs, fertilizer manufacturers are opting to close their doors and instead sell their natural gas supplies.

So a reduction in fertilizer production. Which just adds to the cost of food production.

Economics of happiness 2

Justin Wolfers has two more posting on the Freakonoimcs blog on the economics of happiness.

• Here he discusses the question, Are Rich People Happier than Poor People?
• Here he discusses the question, Will Raising the Incomes of All Raise the Happiness of All?

Links to his earlier postings can be found here.

Russ Roberts talks to himself

This week on EconTalk, host Russ Roberts talks about the claim that for capitalism to succeed there have to be people at the bottom to do the unpleasant tasks and that the rich thrive because of the suffering of those at the bottom. He critiques the idea that capitalism is a zero sum game where to get ahead, someone has to fall back. He also looks at the evolution of the least pleasant jobs over time and how technology interacts with rising productivity to make the least pleasant jobs more pleasant.

Brands in medieval Europe

In "No Logo" Naomi Klein tries to show how brands have become ubiquitous, not just in media and on the street but even in the schools. Well Klein is well behind the times. According to this research, Brand Names Before the Industrial Revolution, by Gary Richardson brands where big in medieval Europe.

At this time manufacturers sold durable goods to anonymous consumers in distant markets, Richardson argues, by making products with conspicuous characteristics. Examples of these unique, observable traits included cloth of distinctive colours, fabric with unmistakable weaves, and pewter that resonated at a particular pitch.

These attributes identified merchandise because consumers could observe them readily, but counterfeiters could copy them only at great cost, if at all. Conspicuous characteristics fulfilled many of the functions that patents, trademarks, and brand names do today. The words that referred to products with conspicuous characteristics served as brand names in the Middle Ages. Data drawn from an array of industries corroborates this conjecture. The abundance of evidence suggests that conspicuous characteristics played a key role in the expansion of manufacturing before the Industrial Revolution.

More on pirates

Earlier I blogged on the paper by Peter T. Leeson "An-arrgh-chy: The Law and Economics of Pirate Organization", Journal of Political Economy, Volume 115, Number 6, December 2007, which looked at the internal governance institutions for seventeenth and eighteenth-century pirates. Now Lesson has a new working paper out investigating the economics of infamous pirate practices. You can download it here: "Pirational Choice: The Economics of Infamous Pirate Practices." (pdf).

Lesson investigates the profit-maximising strategies of violent criminal organisation by examining the economics of infamous pirate practices. He explores three practices pirates used to reduce the costs and enhance the revenues of their criminal enterprise. First, he looks at pirate flag, Jolly Roger, which pirates used to signal their identity as unconstrained outlaws, enabling them to take prizes without costly conflict. Second, he considers how pirates used heinous torture together with public displays of madness and published advertisement of their fiendishness to establish a fearsome reputation and piratical brand name that prevented costly captive behaviours. Third, he analyses how pirates used artificial impressment to mitigate the increased risk of pirating in the 18th century as a result of English legal innovations. The unique context in which pirates sought profits, not a difference in pirate rationality, explains pirates eccentric and often bizarre behaviour. Pirates infamous practices improved their efficiency "on the account", enhancing the profitability of their criminal enterprise.

(HT: The Austrian Economists)

Boudreaux on Capitalism Day

Don Boudreaux writes on Earth Day, 22 April:

On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich. Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

So, on this Earth Day, I offer you here my essay, inspired by the work of Julian Simon, entitled "Cleaned by Capitalism."

Well worth a read!

Caplan's fun lectures

Bryan Caplan has a "Fun Lectures" webpage. The lectures include:

• The Great Depression
  
• Public Choice and Public Goods
  
• Is Democratic Failure a Myth?
  
• The Economics of Insanity
  
• Political Economy and Happiness
  
• Selfish Reasons to Have More Kids
  

Gains from trade

At the moment the prospects for liberalisation of barriers to international trade and migration seem dim. A question that we should ask is What are the costs to not liberalising? What gains are we forgoing by not liberalising? In an article at VoxEU.org, Kym Anderson and L Alan Winters try to answer this question.

In their article, Now is the time to reduce international trade and migration barriers, Anderson and Winters point out that

[t]he costs of merchandise trade barriers and farm subsidies are very conservatively estimated to be of the order of $300 billion a year. It assumes competition is perfect, which it is not, and that nothing happens to services policies under Doha, which again is too pessimistic. We suggest that if more realistic assumptions are used, estimates of the global cost of protection actually rise from anywhere between $460 billion a year to over $2.5 trillion.

They also look at gains from the movement of labour.

Several recent studies have suggested huge gains even from modest liberalisations in the mobility of labour. For example, an increase in migrants from developing to high-income countries that accumulates to a 3 percent boost in the latter’s labour force (both skilled and unskilled) by 2025 might increase global income by nearly $700 billion a year by 2025. This flow represents a total of 14 million workers and their families coming at the rate of a little over 500,000 extra migrant workers per year. It entails a loss of merely 0.4 percent of the developing countries’ workforce, and even in the developing countries’ skilled category it represents only a 1.7 percent loss of workers. Even if you subtract the cost of moving to the host country for immigrants and the social-welfare benefits they may get when they arrive, the net benefits are sizeable compared with those from freeing up trade in goods.

They also go on to look at the WTO’s Doha round of multilateral trade negotiations. Estimates of the net benefits from a permanent partial reform of goods trade barriers and farm subsidies, and those from expanded migration over the period to 2025, show that

... the net gains from Doha partial trade reform through to 2100 – even if no growth dividend is included – are as much as $11 trillion using a 6% discount rate, or $36 trillion if 3% is used, while those from greater migration to 2025 are $12 trillion or $38 trillion at 6% and 3% discount rates, respectively. Importantly, it is citizens of today’s developing countries who overwhelmingly would reap the lion’s share (around three-quarters in aggregate) of those benefits. If one adds in the potentially large, but less well estimated, effects of liberalisation on economic growth in the decade and a half following the reforms, the benefits are very much larger.

In short, this evidence shows that gradual reductions in wasteful subsidies and trade barriers, including barriers to migration, would yield huge benefits at little economic cost and would at the same time reduce global inequality and poverty. Can this be bad? Then why don't politicians let it happen?

Is history still being taught?

(HT: Reason Magazine)

Inequality trends

In this latest New York Times piece Gregory Mankiw discusses income inequality. He asks, What accounts for rising inequality? His answer is "educational slowdown". He writes,

The best diagnosis so far comes from two of my Harvard colleagues, Claudia Goldin and Lawrence F. Katz, in their forthcoming book “The Race Between Education and Technology” (Harvard University Press). [...] Their bottom line: “the sharp rise in inequality was largely due to an educational slowdown.”

According to Professors Goldin and Katz, for the past century technological progress has been a steady force not only increasing average living standards, but also increasing the demand for skilled workers relative to unskilled workers. Skilled workers are needed to apply and manage new technologies, while less skilled workers are more likely to become obsolete.

For much of the 20th century, however, skill-biased technological change was outpaced by advances in educational attainment. In other words, while technological progress increased the demand for skilled workers, our educational system increased the supply of them even faster. As a result, skilled workers did not benefit disproportionately from economic growth.

But recently things have changed. Over the last several decades, technology has kept up its pace, while educational advancement has slowed down. The numbers are striking. The cohort of workers born in 1950 had an average of 4.67 more years of schooling than the cohort born in 1900, representing an increase of 0.93 year in each decade. By contrast, the cohort born in 1975 had only 0.74 more years of schooling than that born in 1950, an increase of only 0.30 year a decade.

Because growth in the supply of skilled workers has slowed, their wages have grown relative to those of the unskilled. This shows up in the estimates of the financial return to education made by Professors Goldin and Katz. In 1980, each year of college raised a person’s wage by 7.6 percent. In 2005, each year of college yielded an additional 12.9 percent. The rate of return from each year of graduate school has risen even more — from 7.3 to 14.2 percent.

The question here is, Given that more and more people are in some form of post-secondary education why has there been "educational slowdown"? Has demand really increased so much that the education system just can't keep up?

(HT: Greg Mankiw)

Boudreaux on globalisation

Don Boudreaux discusses globalization with Caleb Brown from the Cato Institute in these two Daily Podcasts. The first is available here while the second can be found here.

Economics of defense ... ministers

At Economic Logic they are discussing the appointment, in Spain, of a pacifist as defense minister. Odd?

May be not. As the economic logician points out

Spain has be burned by the Iraq adventure, and clearly it now wants to find a way to commit to a different course. But that is difficult, because once in power a government gets dragged into decisions it would not have taken beforehand, what we call time inconsistency. There are two ways to counteract this: find a commitment device, or appoint a decision-maker who is biased against what you want to prevent. This is why central bank governors are typically biased against against inflation. In this case, we have a pacifist.

I wonder if the Spanish armed forces will fully appreciate the logic!

Economic policy for humans

Those who believe in public choice who tell us that regulation doesn't do what its writes think it will do. Behavioural economists on the other hand tell us that humans aren't rational and thus that carefully crafted regulation can be better than laissez faire. They have a "sophisticated" critique of laissez-faire. But it seems doubtful that "carefully crafted" is ever what regulation is.

Bryan Caplan argues, at EconLog, that the latest piece by behaviourists Thaler and Sunstein, which deals with the mortgage market and the problems borrowers can have dealing with it, provides a perfect illustration of what's wrong with "sophisticated" critiques of laissez-faire. Caplan argues

The problem with behavioral economics is that it's more sophisticated than standard econ, but not nearly sophisticated enough. Thaler and Sunstein may have a more realistic view of borrowers than the average economist, but they have an even less realistic view of the political process.

He makes the point in his book The Myth of the Rational Voter that

Before we emphasize the benefits of government intervention, let us distinguish intervention designed by a well-intentioned economist from intervention that appeals to noneconomists, and reflect that the latter predominate. You do not have to be dogmatic to take a staunchly promarket position. You just have to notice that the "sophisticated" emphasis on the benefits of intervention mistakes theoretical possibility for empirical likelihood.

The theory is thus rather better than the reality. Behaviourists should take note. The Caplan blog posting is Economic Policy for Humans? What Thaler and Sunstein Miss. Worth a look.

The economics of happiness

Justin Wolfers has a series of posting on the Freakonoimcs blog on the economics of happiness.

Here he discusses his research with Betsey Stevenson showing that there is no Easterlin Paradox. The Easterlin Paradox is the juxtaposition of three observations:

1. Within a society, rich people tend to be much happier than poor people.
2. But, rich societies tend not to be happier than poor societies (or not by much).
3. As countries get richer, they do not get happier.

Here he discusses the new evidence that rich countries are happier than poor countries.

Here he discusses the historical evidence on the fact that rich countries are happier than poor ones and how this fact remained hidden in the data for several decades, and .....

there is more to come on how comparisons of rich and poor people also yield a very similar wellbeing-income gradient.

Trade and Wages, Reconsidered

Here I mentioned the papers for the Brookings Papers on Economic Activity: Spring 2008 Conference including the paper "Trade and Wages, Reconsidered" by Paul Krugman. (A draft version is available.) Now The Economist magazine has commented on the Krugman paper. Krugman's conundrum they call it.

The Economist explains that Krugman thinks "It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor. There's a good case that it is big and getting bigger." Krugman offers two reasons why this could be so. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans. His Brooking's paper set out to substantiate these assertions. But as the Economist points out "That proved hard." The Economist writes

Certainly, America's trade patterns have changed. Poor countries' share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America's top-ten trading partners has fallen since 1990. All of which, you might think, would increase the impact of trade on wage inequality.

But by how much? If you simply update the approach used in Mr Krugman's 1995 paper to take into account today's trade patterns, you find that the effect on wages has increased. Josh Bivens, of the Economic Policy Institute, a Washington, DC, think-tank, did just that and found that trade widened wage inequality between skilled and unskilled workers by 6.9% in 2006 and 4.8% in 1995. But even with that increase, trade is still far from being the main cause of wage inequality. Lawrence Katz, a Harvard economist who discussed Mr Krugman's paper at Brookings, estimates that, using Mr Bivens's approach, trade with poor countries can account for about 15% of the growth in the wage gap between skilled and unskilled workers since 1979.

Even this is almost certainly an overstatement. Many imports from China have moved up-market from easy-to-produce products, such as footwear, to more sophisticated goods, such as computers and electronics. As a result, to use economists' jargon, the “factor content” of American imports—in effect, the amount of skilled labour they contain—has not shifted downwards. Mr Katz says factor-based models suggest trade with poor countries explains only 5% of rising income inequality.

Mr Krugman argues that the effect is bigger, but that import statistics are too coarse to capture it. Thanks to the fragmentation of production, Chinese workers are doing the low-skill parts of producing computers. Just because computers from China are classified as skill-intensive in America's imports does not prevent them from hurting less-skilled American workers. Mr Krugman may be right but, as he admits, it is hard to prove.

The Economist notes that Harvard economist Robert Lawrence argues that

... the contours of American inequality sit ill with the idea that trade with poor countries is to blame. Once you measure income properly, the gap between white- and blue-collar workers has not risen that much since the late 1990s when China's global integration accelerated. The wages of the least skilled have improved relative to those in the middle. Some types of inequality have increased, notably the share of income going to the very richest. But there is little sign that wage inequality has behaved as traditional trade theory might suggest.

Two reasons can be offered as to why,

One possibility is that America no longer makes some of the low-skilled, labour-intensive goods that it imports. In those goods there are no domestic workers to lose out to foreign competition. Second, even when America does produce something that is imported from China, it may make it in a different way, with more machinery and only a few high-skilled workers. If imports from China and other poor countries compete with more-skilled American workers, they may displace workers but will not widen wage inequality.

The Economist end their article by saying that while it is possible that globalisation is becoming a bigger cause of wage inequality in the US, given the lack of fine-grained statistics none of the studies available settles the debate. The evidence is just too inconclusive.

(HT: Greg Mankiw)

Cowen-India fact of the day

Tyler Cowen gives us his India fact of the day

Ratio of the estimated number of fake doctors practicing in Delhi, India, to the number of real ones: 1:1

I just don't know what to make of it.

The Freeman

The March 2008 issue of the The Freeman: Ideas on Liberty is available. The full table of contents is here. The features of this issue are:

• Is Fair Trade a Fair Deal? by Gene Callahan
• The Militarization of American Police by Steven Greenhut
• Profit: Not Just a Motive by Steven Horwitz
• Does Governmental Vicarious Liability Make Any Sense? by Ridgway K. Foley, Jr.
• Environmentalists in Outer Space by J. H. Huebert and Walter Block
• Misunderstanding Efficiency by Gary M. Galles

Lots of good reading.

(HT: Austrian Economists)

Kiwi(non)saver (updated)

This article, KiwiSaver costs could result in national savings loss, by Tamsyn Parker in the New Zealand Hearld covers an important point about Kiwisaver. The article states

KiwiSaver has increased the household savings of New Zealanders but the cost of the tax incentives and administration may mean New Zealand as a whole is making a national savings loss, warn economists.

Speaking at the Retirement Policy Symposium, New Zealand Institute of Economic Research economist Trinh Le said much of the money going into KiwiSaver was being reshuffled from other forms of saving, and with the high cost of the taxpayer-funded incentives KiwiSaver was likely to have a neutral or negative effect on our savings level as a nation.

Later the article says

But research undertaken by Le and Waikato University economics professor John Gibson at the end of 2007 suggests only 19 per cent of the total may actually be new savings.

Le said the 19 per cent assessment was at the higher end of what the pair believed was new savings as some of the money people were putting into KiwiSaver should be used to pay off debts like mortgages.

They estimated the lower end to be around 9 per cent - which Le said was not enough to cover the administration and compliance costs of KiwiSaver, let alone the Government's contribution.

This bit about "let alone the Government's contribution" is wrong, what Trinh actually said was "deadweight loss".

The article ends with comments by Michael Cullen,

But Finance Minister Michael Cullen said it was a "heroic" view to say New Zealand did not have a savings problem.

"While there is disagreement on what indicators we should use when quantifying our problem, I have no real doubt that the problem is real and very significant.

How does he know this when the research says otherwise?

"By one measure, our national savings rate ranks 108 out of 130 nations while evidence from Statistics New Zealand is clear that we spend more than we earn."

And my question would be, So what? Having a national savings rate ranking 108 out of 130 is a problem why? What does this ranking tell us? I guess by "we spend more than we earn" he means we have a current account deficit. So why should we worry? This just means people from overseas are investing in New Zealand. Why is investing in New Zealand wrong? The use of overseas savings to finance higher investment in New Zealand means that investment would be higher than it might otherwise have been. New Zealanders benefit as long as that investment is profitable. And what effect would extra savings have on the current account deficit. As I have noted before

Wilkinson and Le note, with regard to research by the NZIER, that

... there is no reliable association between household savings and the balance of payments through time or across the 21 countries for which such statistics are readily available.

They then go on

[t]o illustrate the point by two opposite cases, Canada’s measured household saving ratio dropped from 13 percent of GDP in 1990 to 2 percent in 2007 while the same ratio in the USA fell from 7 percent to minus 1 percent.

Yet Canada’s current account balance ‘improved’ from a deficit of 4 percent of GDP to a surplus of 2 percent whereas the US current account deficit ‘deteriorated’ by 5 percent of GDP.

The graph below is of the household savings rate and the current account balance as a % of GDP for the USA.

The savings rate is falling and the current account deficit is getting bigger.

This graph is of the household savings rate and the current account balance as a % of GDP for Australia.

The savings rate is falling and the current account deficit is roughly constant, at least post-1980.

The savings rate is falling in both countries but the current account balance behaviour is very different. Note also that the introduction of workplace saving schemes like 401k and Super Guarantee didn't help the household savings rate.

So I would say Trinh makes an important point, Kiwisaver just isn't generating much in the way of extra national saving. So even if we do have "a savings problem", Kiwisaver isn't helping. And its not clear that we do have "a savings problem". The implied assumption here is that New Zealand's saving is below optimal but no one has worked out what the "optimal" is for New Zealand! How does Cullen know what the optimal savings rate is? No one else does.

Update: Kiwiblog asks Does KiwiSaver increase savings?. In particular note the comments by VT.

Maybe Money Does Buy Happiness After All

A report in the New York Times suggests that Maybe Money Does Buy Happiness After All. Or is it just more evidence of the ongoing collapse of the Easterlin paradox. A quick summary of the main point of the article,

Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.

But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.

Economic growth can also pay for investments in scientific research that lead to longer, healthier lives. It can allow trips to see relatives not seen in years or places never visited. When you’re richer, you can decide to work less — and spend more time with your friends.

By and large affluence is a pretty good deal.

Harford v. Ariely

Tim Harford and Dan Ariely go One-on-One over at Amazon. The problem:

Dan Ariely's Predictably Irrational and Tim Harford's The Logic of Life, have a pretty basic disagreement. Ariely, says his book jacket, "refutes the common assumption that we behave in fundamentally rational ways," while Harford's book jacket replies, "Under the surface of everyday insanity, life is logical after all." So, underneath it all, are we irrational or rational? (Or is one man's irrationality another's rationality?)

Should be an interesting debate. Worth keeping an eye on.

What has government ever done for us?

Well the Roman government anyway....

Food shortages: think big (updated)

Oxford economist Paul Collier, writing in the Times, argues that when it comes to Food shortages: think big. Collier asks

Why have food prices rocketed?

His answer,

[p]aradoxically, this squeeze on the poorest has come about as a result of the success of globalisation in reducing world poverty. As China develops, helped by its massive exports to our markets, millions of Chinese households have started to eat better. Better means not just more food but more meat, the new luxury. But to produce 1kg of meat takes 6kg of grain. Livestock reared for meat to be consumed in Asia are now eating the grain that would previously have been eaten by the African poor. So what is the remedy?

Here Collier answers,

[t]he best solution to the rise in food prices is not to arrest globalisation. China's long march to prosperity is something to celebrate. The remedy to high food prices is to increase supply.

He argues that the most realistic way to achieve extra output is

... to replicate the Brazilian model of large, technologically sophisticated agro-companies that supply the world market. There are still many areas of the world - including large swaths of Africa - that have good land that could be used far more productively if it were properly managed by large companies. To contain the rise in food prices we need more, globalisation not less.

But, says Collier, while large-scale commercial agriculture is productive it is also, sadly, unromantic. Yes unromantic. In Colliers' view,

[w]e laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them.

May be the rich west can afford them, but Africa cannot. But as Collier points out

...the World Bank and the Department for International Development have orientated their entire efforts on agricultural development to peasant-style production. Africa has less large-scale commercial agriculture than it had 60 years ago. Unfortunately, peasant farming is not well suited to innovation and investment. The result has been that African agriculture has fallen farther and farther behind.

As Zimbabwe shows, African countries can also make problems of their own. Collier goes on

[o]ur longstanding agricultural romanticism has been compounded by our newfound environmental romanticism. In the United States fear of climate change has been manipulated by shrewd interests to produce grotesquely inefficient subsidies to biofuel. Around a third of American grain production has rapidly been diverted into energy production. This demonstrates both the superb responsiveness of the markets to price signals, and the shameful power of subsidy-hunting lobby groups. However, just as livestock are eating the food that would have been consumed by poor Africans, so Americans are running their SUVs on it. One SUV tank of biofuel uses enough grain to feed an African family for a year.

This point about US biofuels is the one made in my previous message, More on food prices. Things go from bad to worse because

[g]overnments in grain-exporting countries, such as Argentina, have swung prices in favour of their consumers and against their farmers by banning or restricting exports. But such tariffs and export bans make investing in commercial-scale food production less attractive, drive up prices further still in the food-importing countries, and discourage farmers from increasing their yields, exacerbating global food shortages.

As I noted here, exports from rice-producing countries, such as India and China, have also been limited to assure adequate supplies at home. This creates a similar problem for rice importing countries as for the grain importing countries. Again, if prices in the rice producing countries don't rise because of the export controls, what incentives do farmers in these places have to expand production?

Collier ends his article by noting that,

[u]nfortunately, trade in agricultural produce has been the main economic activity to have resisted the force of globalisation. The cost of this is now being picked up by the poorest people in the world.

The economics here is simple, but the effects of bad economic policies are deadly.

Update: Johan Norberg comments on The global food crisis.

More on food prices (updated)

James Hamilton at Econbrowser looks at the problem of food prices and asks

How should a well-fed American react when some of the world's poorest citizens in Haiti and Bangladesh riot over the rising price of food?

He writes

To be sure, there are many factors influencing food prices. But to me it's natural to begin with the element that represents a deliberate policy choice on the part of the United States. I refer to America's decision to divert a significant part of our agricultural production for purposes of creating a fuel additive for motor vehicles. USDA Chief Economist Joseph Glauber predicts that 4.1 billion bushels, or 31% of the entire U.S. corn crop, will be devoted to ethanol production for the 2008/09 season.

and goes on the say

But I'm thinking that the profound inefficiencies associated with this particular disposition of resources may also be relevant. As a result of ethanol subsidies and mandates, the dollar value of what we ourselves throw away in order to produce fuel in this fashion could be 50% greater than the value of the fuel itself. In other words, we could have more food for the Haitians, more fuel for us, and still have something left over for your other favorite cause, if we were simply to use our existing resources more wisely.

Hamilton then makes the point

We have adopted this policy not because we want to drive our cars, but because our elected officials perceive a greater reward from generating a windfall for American farmers.

In other words vote buying by politicians has, yet again, lead to a totally inefficient allocation of resources.

Update: Kiwblog comments on the Unintended consequences of the biofuels issue.

Privatization: reviving the momentum

The Adam Smith Institute has released its latest report, Privatization: Reviving the Momentum (pdf). The report recommends that the UK government sell assets including the Royal Mail, Channel 4, BBC Worldwide, Scottish Water, Northern Ireland Water, Glas Cymru, the National Air Traffic Control System, as well as government stakes in British Energy and the Nuclear industry. It argues that such sales could net the exchequer in excess of £20bn. Given the worsening state of the economy and the increasing tightness of the public finances, the report notes that such an inflow of funds would be very welcome.

This is very bad thinking. The point of privatization isn't the amount of money raised for the government-that's just a one-off windfall gain to public finances. In fact some welfare maximising methods of privatisation yield no revenue to the government. Anbaric and Karaaslan (1998) provide one such mechanism.

The benefits of privatisation come, not from the revenue raised, but rather from the longer term efficiency gains that flow from private ownership. The report does go on to make this point. It argues that a new wave of privatizations would deliver significant operational benefits. Previous privatizations have delivered a wide range of improvements, including increased investment, lower prices, greater choice and better service for customers. Megginson (2005) and Nellis (2006) provide useful surveys of privatisation experience worldwide. Nellis, for example, summaries this experience as

The vast majority of economic studies praise privatization's positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Moreover, contrary to popular conception, privatization has not contributed to maldistribution of income or increased poverty - at least in the best-studied Latin American cases. In sum, the technical picture is generally positive.

As to the UK, Parker (2006) says

But as part of the wider restructuring of the economy that occurred in the 1980s, involving tax cuts, public spending caps, trade union reform and the closure of declining industries, it [privatisation] has contributed to reversing the perception of the UK as ‘the sick man of Europe’... privatisation has played an important part in reducing the burden of the state in the UK economy.

The ASI report's author, Nigel Hawkins, notes

Privatization in the UK remains unfinished business. The task for Government, of whatever colour, should be to complete it and to reap the many benefits ....

This is true not just in the UK, it is also true in New Zealand. But we are in the unfortunate position of having the current government opposed to any further privatisation and the leader of the National Party equally opposed. We are told

That in the first term of the National government there will be no state assets that will be sold either partially or fully.

This is unfortunate, to say the least.

• Nejat Anbarcia and Mehmet E. Karaaslan (1998) "An efficient privatization mechanism", Journal of Economic Policy Reform, 2(1) February:73-87.
• William L. Megginson (2005). The Financial Economics of Privatization. New York: Oxford University Press.
• John Nellis (2006) "Privatization—A Summary Assessment", Center for Global Development Working Paper Number 87 March.
• David Parker (2006) "The United kingdom's Privatization Experiment: The Passage of Time Permits a Sober Assessment" in Privatization Experiences in the European Union, edited by Marko Kothenburger, Hans-Werner Sinn and John Whalley, The MIT Press, Cambridge Mass.

Pricing parking space

From the San Francisco Chronicle we learn of an idea to micromanage San Francisco's scarce parking spaces. Congestion pricing applied to parking. The newspaper reports

As SFpark [a pilot project intended to test changes to the way the city manages parking at street meters and in city-owned parking lots] is envisioned, parking rates would be adjusted based on time of day, day of week and duration of stay. People would be able to pay not just with coins, but with credit cards, prepaid debit cards and even by cell phone. If a meter is set to expire, a text message could be sent to the driver. More time could be purchased remotely.

People also would be able to check parking availability before arriving at their destination via the Internet, handheld devices such as BlackBerrys, or cell phone. Sensors would be embedded in the asphalt to keep track of when a parking spot is empty.

Later the article says

Under the program, which will focus on 10 neighborhoods, the city will adjust hourly parking rates based on demand - the price will go up when spaces are scarce and go down when plenty are available.

and

SFpark won't stop at tweaking parking rates. It also will adjust time limits. Drivers, for instance, may be allowed to park for no more than an hour in a particular neighborhood commercial district during the day, when shopkeepers benefit from high turnover, but may be able to park longer at night, so they can linger at a restaurant or catch a show. Hours of meter operation might be expanded.

An interesting idea worth watching to see how it works in practice. For comparison some areas will be designated as so-called control areas; rates and regulations there will remain as they are now. It will interesting to see how the new parking restrictions and prices in a given neighbourhood influence parking in adjacent areas. Will we see more people walking another few blocks if they can spend less for parking? Will they pay a premium if they can park in front of their favourite restaurant or shop? What will be the unintended consequences of the changes?

We would expect to see that pricing this scare resource will lead to a more efficient use of it.

(HT: Greg Mankiw)

Diane Coyle on EconTalk

Diane Coyle talks with EconTalk host Russ Roberts about the ideas in her new book, The Soulful Science: What Economists Really Do and Why it Matters. The discussions starts with the issue of growth--measurement issues and what economists have learned and have yet to learn about why some nations grow faster than others and some don't grow at all. Subsequent topics include happiness research, the politics and economics of inequality, the role of math in economics, and policy areas where economics has made the greatest contribution.

I have read parts of the book and while I'm not sure I agree with everything Coyle says the book is worth a read, and the interview worth a listen.

Food prices (updated) x3

Earlier I blogged on the price of rice in Asia. I now see that Gary Becker is discussing Rising Food Prices and Public Policy. Richard Posner comments on Food Prices and Malthusian Economics.

Update: Michael Giberson at Knowledge Problem comments on Becker and Posner on food prices and the new Neo-Malthusians.

Update 2: At Economic Logic they are posting About the food price crisis. It is noted that

Some governments in developing economies have already taken actions: price controls and export restrictions. Great, exactly what they should not do, attacking the symptoms: prices are high, and local production can be sold at such prices elsewhere and gets exported. But the root of the problem that creates this discontent is the poverty, not the high prices. Thus the answer is some sort of income support.

Why should prices not be prevented to increase? Because this will spur production. As Zimbabwe is dramatically showing currently, price controls dry up the supply. Why should borders be kept open? For the same reason: it encourages production, plus brings income home.

Update 3: Addendum on Rising Food Prices by Gray Becker.

Auckland airport

I have blogged on this earlier, but now its official, the government has blocked the sale of 40% of Auckland International Airport (AIAL) to the Canada Pension Plan Investment Board on the grounds that

"In this case we are not satisfied that the ‘benefit to New Zealand' criterion is met."

What is the "benefit to New Zealand" criteria? How could it ever be met? The newspaper report on the decision notes

Auckland airport shares fell 25 cents, or 11 per cent, to $2.10 in early sharemarket trading.

Auckland airport shareholders had approved the $3.60 a share bid from CPPIB, which would hold voting rights for just 24.9 per cent of Auckland airport's shares.

So the government is stopping people from selling their property at a price they are willing to accept. And they wipe off 11 per cent of the asset's value in doing so. One has to ask how this decision leads to an efficient outcome. Clearly the asset is not owned by those who value it most.

The visible hand in economics may have it right,

Ultimately I can’t help but feel this is the political decision of a government that is scared of being associated with “asset sales” coming into an election year, rather than a decision that has been based on any sound economic reasoning.

The next defender of the market (updated)

Peter Boettke over at The Austrian Economists is Desperately Seeking Ludwig, F. A., and Milton. Boettke is worried, with good reason, that rhetoric of economic statism is yet again on the rise in the US, and other places eg New Zealand, and he fears that the rhetoric will soon be followed by policy action. Boettke argues

Right now the economics profession has not had a clear intellectual leader step forward to challenge the emerging statist hegemony in the wake of our current financial situation. We are in a state of desparately seeking the next Ludwig, F. A., and Milton.

He goes on to ask

Where is the next intellectual figure that will explain the impossibility of socialism, why the worst get on top, and why government policies are counter-productive?

But isn't the answer, all of us. We have the intellectual heritage of von Mises, Hayek and Friedman etal, what greater weapon do we need. We have great ideas and this is a battle to do with ideas, not men. Let us use these ideas ourselves to argue as to why statism is wrong. We can not wait for someone else to do the job for us, it is time for a marginal revolution, we must convince other people one at time.

Update: Not PC points out you have to Speak up, the statists can't hear you!

Resource nationalism

Oil prices have hit record levels on world markets bringing in huge revenues for oil companies. But these high prices are a mixed blessing for private companies. Along with the increased revenues comes "resource nationalism": some governments in oil rich areas deny private companies access to new oil fields and nationalise the fields that the private companies have started to develop.

Sergei Guriev, Anton Kolotilin and Konstantin Sonin explain in an article, High oil prices and the return of “resource nationalism”, on VoxEU.org that

The recent record-breaking spike in oil prices has already claimed a number of casualties. In June 2007, ExxonMobil and ConocoPhillips, both major U.S.-based oil companies, were forced to abandon their multi-billion dollar investments in Venezuela. Some other international majors, including French Total SA, Norwegian Statoil, the UK’s BP, and American Chevron, though not squeezed away, had to concede their controlling interests to the state-run PDVSA company. Neighbouring Bolivia and Ecuador forced international companies to make similar concessions. During the same summer, TNK-BP, a Russian subsidiary of BP, had to sell a major stake in its oil business to the national gas monopoly Gazprom. Before that, in December 2006, Royal Dutch Shell had to sell a 50%-plus-one-share stake in the Sakhalin-2 oil field to Gazprom after the international major was threatened with license withdrawal by a state environmental agency. In August 2007, the government of Kazakhstan also cited environmental violations to suspend Eni’s development of Kashagan, a large oil field.

This raises an important question in the mind of the authors

The issue of forced nationalisations goes back to the most important question in economics: if economists believe in a crucial role of property rights for investment and efficiency, why are the property rights so hard to uphold?

The literature on privatisation (for a survey see Megginson 2005) shows us that switching to private ownership does increase productive efficiency. Thus governments stand to benefit from selling the property rights to the most efficient producer and then taxing the revenues generated. The benefits from private ownership are as large in the oil sector as any other. Due to their economies of scale and better human capital, multinational oil companies are more efficient. Past expropriations of private companies has resulted in losses of output and national income.

Guriev, Kolotilin and Sonin go on to explain

Yet, nationalisations of oil companies do happen. In a recent paper (Guriev et al. 2008), we analyse the determinants of oil nationalisations around the world from1960 to2002 (a total of 73 nationalisations). One immediate observation is that the nationalisation of oil companies took place when oil prices were high (see Figure1). Specifically, most nationalisations took place in the 1970s, when oil prices were at historically high levels. Once the oil price came down in the 1980s and 1990s, nationalisations virtually disappeared and re-emerged only in the last decade when oil prices climbed back to 1970s' levels.
Figure 1. Number of oil expropriations and oil price deviation from long-run trend, 1910-2006 (Source: Guriev et al. 2008)

Up to a point it seems natural that the higher is the price of oil, the more valuable oil assets become and thus the more incentive a government has to expropriate a company. But given the costs of expropriation, it is far from obvious as to why a government would respond to a positive oil price shock with expropriation rather than just with imposing higher taxes. Guriev, Kolotilin and Sonin note

Using taxes contingent on (observable and verifiable) oil prices, the government can preserve oil companies' incentives for investment in new fields and cost-reducing technologies. This straightforward solution, however, relies on the external enforcement of contracts, which is not the case: the government is both an enforcer and a contracting party. Therefore, this contract can only be self-enforced. As BP’s then-CEO recently said, “There is no such thing in the [Petroleum] E[xploration] & P[roduction] business as a contract that is not renegotiated” (Weiner and Click, 2007). The only protection for a private company is the government's desire to benefit from more efficient production in the future and checks and balances that assure that the government in office pursues the long-term national interest.

Guriev et al. (2008) considers a simple theoretical model of a self-enforced contract. Their analysis provides a straightforward prediction:

when current oil prices are high, (inefficient) expropriations may take place in equilibrium. In this case the immediate prize is too valuable relative to future revenues. Therefore, we should expect more expropriations in periods of higher oil prices. Another prediction is that expropriation is more likely when there are fewer checks on the government so that the government cannot commit to not expropriating.

Guriev et al. (2008) then test their predictions on a data set involving all of the expropriations of foreign-owned, oil-producing companies around the world in 1960-2002, using and extending the dataset compiled by Kobrin (1984). They focus on oil as the expropriation of an oil company is a high-profile event and relatively easy to observe and quantify. In addition, oil is a globally traded commodity with a long time series of prices.

[They] show that expropriations are indeed more likely to take place when oil price (controlling for its long-term trend) is high and in countries where political institutions are weak. The results hold for both measures of institutions that we use (constraints on the executive and the level of democracy from the Polity IV dataset). Most importantly, the results hold even if we control for country fixed effects; in other words, in a given country, expropriation is likelier in periods of weakened institutions.

Therefore the Guriev et al. (2008) results are consistent with the notion that high oil prices do induce "resource nationalism," and thus high prices are not as good news for global oil companies as they may at first look.

• Guriev, Sergei, Anton Kolotilin, and Konstantin Sonin (2008). “Determinants of Expropriation in the Oil Sector: A Theory and Evidence from Panel Data.” CEPR Discussion Paper 6755.
• Kobrin, Stephen J. 1984. The Nationalization of Oil Production: 1919-1980. In D. Pearce et al. (eds.) Risk and the Political Economy of Resource Development. New York: St. Martin's Press: 137-164.
• Megginson, William L. 2005. The Financial Economics of Privatization. New York: Oxford University Press.
• Weiner, Robert J. and Click, Reid W., “Political Risk and Real-Asset Values: M&A Evidence.” (January 2007). Available at SSRN: http://ssrn.com/abstract=971147

Update: At the Free Exchange blog they comment on The resource curse, version 2.0. The point is made that

Most unfortunately for the heavy-handed nations, nationalisation and the threat of nationalisation are inefficient, leading to underinvestment in exploration and production. By seizing their oil fields, then, nations reduce the expected take from their resources. The inability to enforce the contract between the government and the private firm robs the government, and the citizenry, of the full value of their oil.