Taxing teenagers

Tim Harford, at the FT.com website, discusses a plan by the Alistair Darling, the Chancellor of the Exchequer in the UK, to tax teenagers. Harford writes

Darling’s plan – for those who missed it – is to cut income taxes temporarily for all but the most prosperous taxpayers. The apparent windfall is £120 a head. A similar plan is already in place in the US, where a temporary “tax rebate” began to arrive in the bank accounts of a grateful nation about a month ago.

But there is no such thing as a free lunch: since neither the UK nor US governments plans to alter its spending plans, these tax holidays will be funded by government borrowing – borrowing that must eventually be repaid. That will require taxes to go up in the future, or not to fall when they otherwise might.

Harford then asks Who should celebrate?

Not the typical taxpayer, that is for sure. The tax cut makes no difference to her. If she – assume she is British – had wanted an extra £120 right now, she could already have it in her pocket, either by withdrawing it from savings or by borrowing the money. If she did that, of course, she would later have to repay £120 plus interest. But that is exactly what Darling’s successor as chancellor will require of her. To look at it another way, the rational taxpayer should save the £120 windfall now, keeping it to pay the higher taxes that are surely on the horizon.

Harford goes on to put out

Of course, some people should count themselves wealthier after the tax cut. Anyone expecting to die without making a bequest should be pleased: if the Grim Reaper knocks on the door before the taxman does, he can spend the tax rebate now and leave the bill for some other sucker.

Who will be the fall guy? We don’t know for sure, because we can’t say who a future government will tax. But an obvious candidate would be today’s teenagers, very few of whom are paying income tax right now, but most of whom will pay it in the next few years. Their best hope is that their grandparents add the tax windfall to their bequests rather than blowing the money on a weekend in the sun.

The idea that a debt-funded tax cut makes little difference to anybody is called “Ricardian equivalence”, after David Ricardo, one of the founders of modern economics. The equivalence is between government taxes and government borrowing. However government spending is funded, it generates a bill that will fall due sooner or later. Far-sighted taxpayers will immediately take note.

An important point that comes out of Harford's argument is that it is current government spending, not current government taxation, that is the real measure of a government’s size.

A question that you may ponder is what does the empirical literature have to say about whether Ricardian equivalence holds or not. Well, empirical economists are still arguing over it. There is one recent study coauthored by Matthew Shapiro and Joel Slemrod that looked at the 2001 income tax rebates in the US. They concluded that most people either used the tax windfall to pay off their debts or they saved it, thereby leaving more money available to pay future taxes – Ricardian equivalence in action.

Note that the low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand. And thus little stimulus to inflation.

Please discuss .....

Will Wilkinson at the Fly Bottle blog puts two questions up for discussion:

1) Libertarians and many conservatives often talk about lower taxes as a matter of liberty. But a higher tax isn’t more coercive than a lower one. You’re either being coerced or you’re not. A guy who mugs five people with thin wallets is no less guilty of coercion than a guy who mugs five people with thick wallets. The harm from coercion might be greater if more is taken, but there is no more or less coercion. But if you don’t think that the size of the opportunity set is a matter of liberty, then you should not think of lower taxes as a gain in liberty, but just as a reduction in harm. Yet libertarians and conservatives don’t tend to talk this way. Why not?

2) The average citizen of Singapore has fewer politically recognized rights but is freer than the average citizen of India.

Discuss.

New Center for the History of Political Economy

We learn from Peter Klein at the Organizations and Markets blog of a new Center for the History of Political Economy. Klein tells us

Bruce Caldwell is joining Duke University’s HOPE group as founding Director of a new Center for the History of Political Economy. Bruce explains:

The purpose of the Center is to promote and support both research in and the teaching of the history of political economy, broadly defined. Though operating on a somewhat reduced scale next year (AY 2008-2009), we anticipate that once it is up and running it will include an active visitors program for post-docs and more senior fellows, both short and long term; a regular seminar series; and programming, possibly in the summer, aimed at promoting teaching in the field.

Unfortunately there is no web page for the Center as yet. But it's good to see the history of economics being taken seriously.

Moffatt on free trade

Mike Moffatt at About.com: Economics writes that

I am a lot less of a "free trade evangelist" than I was 5 years ago. However, my difficulty with free trade differ greatly from Driskill's [see here for a summary of Driskill's points]. Two major points:

1. There is no such thing as a free trade agreement. As Landsburg has pointed out, a true free-trade agreement could be written on the back of a napkin - "We won't put quotas or tariffs on your products if you won't put quotas or tariffs on our products". But no trade agreement in the history of the world has been like that. Have any economists actually read the Canada - U.S. Free Trade Agreement? The thing runs 230 pages and contains a raft of exemptions and restrictions. I deal with these issues every day (I work for a company that provides international regulatory compliance to the chemical industry) and trade between Canada and the U.S. is hardly free. The term managed trade agreement is more apt. So the big question must be "Is Trade between the U.S. and Canada freer than it was before the agreement?" It may or may not be, the study DID THE CANADA - U.S. FREE TRADE AGREEMENT. AFFECT ECONOMIC INTEGRATION? showed that the agreement had at best a modest impact on the economy of either country.

2. But are tariffs, necessarily, if they are used as a revenue source by the government? That is, how economically damaging are tariffs to the economy relative to other taxes, such as corporate income taxes? It may be the case that raising tariffs and lowering corporate income taxes may be welfare-improving. The biggest drawback to tariffs is that they may be expensive to enforce and collect (I would love to see data on this). Tariffs are a essentially a sales tax (one targeted to foreign products) and in general sales taxes are far more economically efficient than income taxes. I do not know for sure if raising tariffs and lowering income taxes would be welfare-improving (when also taking into account that other countries would likely respond by raising tariffs on your products) but I certainly cannot rule it out. I would love to see a study on this, but I am not aware of any.

Both points are interesting. As to 1. I would say that what economists defend is true free trade, the "back of a napkin" version. So what I think 1. says is we need better written free trade agreements that really do move us towards true free trade. I too would like to see a study on 2. However for a given amount of revenue raised, the general sales tax would be lower, since it covers a greater range of goods, than the tariff. This would mean a lower deadweight loss from each good.

The case for free trade

In a recent posting on his blog, Greg Mankiw points us to an article by Robert Driskill, in which Driskill says

My fellow economists are manning the barricades to defend free trade from a growing public backlash. But with globalization increasingly seen as a threat, our arguments are falling on deaf ears. Maybe it’s time to stop claiming we know what is best for everyone?

Mankiw explains that the essence of the Driskill argument is

Do economists know something, though, that Joe Sixpack doesn’t, and does this knowledge inform their thinking about free trade? What they know that Joe Sixpack doesn’t is a basic but not obvious result from economic analysis: The gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off. Note that economic analysis doesn’t say that these compensations actually take place. In fact, everyday experience shows us they don’t, and economists know that there are practical problems that make it virtually impossible to carry out such redistribution schemes. Why, then, do economists support free trade?...

What if free trade is making a small percentage of the country much better off, but is hurting a much greater percentage (the “Joe Sixpacks”), as some argue is the case? Even if the total gains to the few winners are sufficiently large that they could hypothetically compensate the losers, why would it be obvious that “Americans as a group are net winners”?

In his response Mankiw notes that the arguments of economists in support of free trade have both positive and normative dimensions. Mankiw writes

Some economists take the libertarian view that people should presumptively be allowed to engage in mutually advantageous trades, absent any externalities. Under this view, the restricted-trade equilibrium has no claim to moral superiority--indeed, just the opposite. The fact that some people lose when trade is opened up compared to a restricted-trade status quo is of little moral relevance.

Note that such a view doesn't mean that economists "know what is best for everyone", as Driskill claims, but rather that people know what best for themselves and free trade helps them get it.

Mankiw goes on

Other economists take the utilitarian view that we should use society's resources to maximize total utility of everyone. Because of diminishing marginal utility, income redistribution from the rich to the poor is a key part of the utilitarian's plan. But a progressive tax and transfer system, rather than restricting international trade, is the most effective way of achieving that goal. Once again, the economic gain or loss compared to the restricted-trade equilibrium is no special relevance. Maybe it would be relevant if for some reason a progressive tax/transfer system were infeasible, but that is not at all the case.

As theoretical exercise, we often examine the effects of trade by imagining the economy with and without trade. But the situation without trade is not a philosophically noteworthy benchmark under either libertarian or utilitarian perspectives. The libertarian wants maximum freedom; the utilitarian wants maximum social utility. Neither goal is best served by trade restrictions. The fact that some people lose when trade is opened up has no philosophical significance. (Whether it has political significance is another matter.)

As noted above, Driskill argues that

The gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off. Note that economic analysis doesn’t say that these compensations actually take place.

He then says that compensation can't be made. But does this matter for support of free trade? I assume even Driskill would support free trade if everybody was actually made better off, that is, if the compennsation was actually made. What if the compensation could take place, then should it? Does support for free trade require support for compensation of the losers from trade? In a New York Times article, entitled What to Expect When You’re Free Trading, on the issue of compensation for losers from trade Steven E. Landsburg argued we should not give such compensation. Landburg's basic question is

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to?

His answer, no. Landsburg argues

Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.

Some people suggest, however, that it makes sense to isolate the moral effects of a single new trading opportunity or free trade agreement. Surely we have fellow citizens who are hurt by those agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?

One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

Tim Worstall also argues against compensation. He writes

For the removal of said tariff or other restriction is what is going to cause the loss to those producers. Which means that the imposition of it has been of benefit to those very same producers all the years it has been extant. And what we haven't been seeing all of those years are lump sum transfers from those producers to the consumers to compensate, from the benefits being gained, to cover the losses from not trading.

[...]

I have absolutely no doubt that such things as retraining grants and the rest are a useful political response to peoples' worries over the structural changes brought about by changes in trade restrictions. It's just that I don't see the moral case: they're not been paying us out of the profits they make from the restrictions upon us, so when those restrictions are lifted, why should we pay them?

Another related question is, As a a political matter should we compensate people? If compensation doesn't take place why would those who fear losing out from free trade, at least in the short term, not fight a move towards freer trade? If you want to defuse the very vocal and dangerous anti-free trade movement isn't an attempt at compensation a sensible and justifiable policy? As Jagdish Bhagwati has pointed out trade liberalization can backfire politically

... as workers in import-competing industries are likely to mobilize against the adjustment being imposed on them. Politicians in democratic countries are also unlikely to be impervious to their complaints, especially as those who lose are more likely to vote to punish you than those who win are likely to reward you, an symmetry that seems to be fairly common.

Mankiw goes on to point out that

... the arguments that Professor Driskill uses would also suggest that we economists should not be so hard on the Luddites. After all, there are sometimes losers from technological progress. And the original Luddites were precisely such losers. Yet I doubt that one would find many thoughtful libertarians or utilitarians (or economists of any other stripe) siding with the Luddite cause.

The outcomes of technological change and trade are basically the same, so why should we treat them differently? If we are to be anti-free trade then surely we must also be anti-technology.

Easterly on the Growth Commission

William Easterly has a piece in the Financial Times on the recently released report of the Growth Commission. I have blogged on this report here and here. He opens his article by noting

The report of the World Bank Growth Commission, led by Nobel laureate Michael Spence, was published last week. After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.

This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

He then asks why should we care about the report?

Because this report represents the final collapse of the “development expert” paradigm that has governed the west’s approach to poor countries since the second world war. All this time, we have hoped a small group of elite thinkers can figure out how to raise the growth rate of a whole economy. If there was something for “development experts” to say about attaining high growth, this talented group would have said it.

So, Easterly asks, What went wrong?

Experts help as long as there are useful general principles, such as could be established by comparing low-growth and high-growth countries. The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that “answers” had to be country specific and even period specific. But if each moment in each country is unique, then experts cannot learn from any other experience – so on what basis do they become an “expert”?

The result of this should be to give up on experts, which may seem, on the surface, to spell disaster for development. But no says Easterly

The end of the “development expert” paradigm does not mean the end of hope for development. Development is already gradually ending poverty (global poverty rates have fallen by more than half in the past three decades) – not be- cause of development experts such as those who wrote the World Bank Growth Commission report – but thanks to more freedom for more of the 6.7bn individual development experts alive today.

Easterly's view is that

There are some general principles and they do not require experts. Another Nobel laureate gave the crucial insight a long time ago – the answer is freedom for multitudinous individuals to figure out their own answers. Friedrich Hayek said: “Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realising many of our aims. It is because every individual knows so little and ... because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

(HT: Don Boudreaux at Cafe Hayek)

Sen on the food crisis

In an opinion piece in the New York Times, Amartya Sen, who teaches economics and philosophy at Harvard and received the Nobel Prize in economics in 1998, writes on the current food crisis ... and he's no firend of ethanol. He says

There is also a high-tech version of the tale of two peoples. Agricultural crops like corn and soybeans can be used for making ethanol for motor fuel. So the stomachs of the hungry must also compete with fuel tanks.

Misdirected government policy plays a part here, too. In 2005, the United States Congress began to require widespread use of ethanol in motor fuels. This law combined with a subsidy for this use has created a flourishing corn market in the United States, but has also diverted agricultural resources from food to fuel. This makes it even harder for the hungry stomachs to compete.

Ethanol use does little to prevent global warming and environmental deterioration, and clear-headed policy reforms could be urgently carried out, if American politics would permit it. Ethanol use could be curtailed, rather than being subsidized and enforced.

Sen also makes the point that the crisis is due not to the falling supply of food but increased demand for it,

The global food problem is not being caused by a falling trend in world production, or for that matter in food output per person (this is often asserted without much evidence). It is the result of accelerating demand.

But there are also policy problems,

But the same growth also puts pressure on global food markets — sometimes through increased imports, but also through restrictions or bans on exports to moderate the rise in food prices at home, as has happened recently in countries like India, China, Vietnam and Argentina. Those hit particularly hard have been the poor, especially in Africa.

Sen's answer,

What is most challenging is to find effective policies to deal with the consequences of extremely asymmetric expansion of the global economy. Domestic economic reforms are badly needed in many slow-growth countries, but there is also a big need for more global cooperation and assistance. The first task is to understand the nature of the problem.

(HT: Greg Mankiw)

Food, trade policy to blame for rice crisis

On May 22, Tim Johnson, president and chief executive officer of the California Rice Commission, talked with Bloomberg's "On the Economy" host Tom Keene about how biofuel production and other factors have affected the production and price of rice.

Harsh ... but true.

This is from the New Zealand Herald this morning.

(HT: Not PC)

More on the Commission on Growth and Development

It was noted earlier that the final report from the Commission on Growth and Development has been released. For those of you who can't be bothered to read the whole report, here is a presentation (pdf) from Michael Spence, the Commission's Chair, or you can just watch this video.

Health care in Singapore

The American magazine has a article, by Rowan Callick, on the health care system in Singapore. Commenting on the article Bryan Caplan says

It's not laissez-faire, but it is state intervention with the hands of a surgeon

Why does the system work?

What’s the reason for Singapore’s success? It’s not government spending. The state, using taxes, funds only about one-fourth of Singapore’s total health costs. Individuals and their employers pay for the rest. In fact, the latest figures show that Singapore’s government spends only $381 (all dollars in this article are U.S.) per capita on health—or one-seventh what the U.S. government spends.

Singapore’s system requires individuals to take responsibility for their own health, and for much of their own spending on medical care. As the Health Ministry puts it, “Patients are expected to co-pay part of their medical expenses and to pay more when they demand a higher level of service. At the same time, government subsidies help to keep basic healthcare affordable.”

The reason the system works so well is that it puts decisions in the hands of patients and doctors rather than of government bureaucrats and insurers. The state’s role is to provide a safety net for the few people unable to save enough to pay their way, to subsidize public hospitals, and to fund preventative health campaigns.

There are (moral hazard) problems with any system where a third party pays the bill. Decisions by "patients and doctors" might turn out to be less efficient than the decisions of the "bureaucrats and insurers." To contain the problem, Singapore looks to provide choice but with financial responsibility as well. The Callick article notes

In Singapore’s system, the primary role of government is to require people to save in order to meet medical expenses they don’t expect. While the Singaporean government does regulate prices and services, its hand is nowhere near as heavy as that of governments with extensive nationalized healthcare, such as the United Kingdom or Germany.

Caplan's comment concludes

I prefer medical laissez-faire to the status quo of Singapore. Still, it's worth calling attention to its success. Singapore shows that we can meet populist demands to "take care of everyone" for a fraction of the cost that both Europeans and Americans take for granted.

May be New Zealand could take a few pointers from the way things are done in Singapore.

The Question of Global Warming

The New York Review of Books, Volume 55, Number 10 · June 12, 2008, has a review by Freeman Dyson of the books

• "A Question of Balance: Weighing the Options on Global Warming Policies" by William Nordhaus, Yale University Press, 234 pp., $28.00 and
• "Global Warming: Looking Beyond Kyoto" edited by Ernesto Zedillo, Yale Center for the Study of Globalization/Brookings Institution Press, 237 pp., $26.95 (paper).

The review is a lengthy one but well worth the read. The final few paragraphs read,

All the books that I have seen about the science and economics of global warming, including the two books under review, miss the main point. The main point is religious rather than scientific. There is a worldwide secular religion which we may call environmentalism, holding that we are stewards of the earth, that despoiling the planet with waste products of our luxurious living is a sin, and that the path of righteousness is to live as frugally as possible. The ethics of environmentalism are being taught to children in kindergartens, schools, and colleges all over the world.

Environmentalism has replaced socialism as the leading secular religion. And the ethics of environmentalism are fundamentally sound. Scientists and economists can agree with Buddhist monks and Christian activists that ruthless destruction of natural habitats is evil and careful preservation of birds and butterflies is good. The worldwide community of environmentalists—most of whom are not scientists—holds the moral high ground, and is guiding human societies toward a hopeful future. Environmentalism, as a religion of hope and respect for nature, is here to stay. This is a religion that we can all share, whether or not we believe that global warming is harmful.

Unfortunately, some members of the environmental movement have also adopted as an article of faith the be-lief that global warming is the greatest threat to the ecology of our planet. That is one reason why the arguments about global warming have become bitter and passionate. Much of the public has come to believe that anyone who is skeptical about the dangers of global warming is an enemy of the environment. The skeptics now have the difficult task of convincing the public that the opposite is true. Many of the skeptics are passionate environmentalists. They are horrified to see the obsession with global warming distracting public attention from what they see as more serious and more immediate dangers to the planet, including problems of nuclear weaponry, environmental degradation, and social injustice. Whether they turn out to be right or wrong, their arguments on these issues deserve to be heard.

(HT: Arts and Letters Daily)

Hanson on EconTalk

This week at EconTalk Robin Hanson, of George Mason University, talks with Russ Roberts about the phenomenon of signalling--the ways people spend resources to convey information about ourselves to others. They begin with Hanson revisiting his theory from an earlier podcast that we spend too much on medicine because we need to signal our concern for friends and family. The conversation then moves onto apply Hanson's model of signalling to other areas of human behaviour. This is a wide-ranging discussion covering not just medicine, but real estate transactions, the wooing of a spouse, the role of education in the job market, parenting, the economics of self-deception, and Robin's argument that we spend too much time on admirable activities

Paying the poor to improve their school performance

In a previous post it was mentioned that governments can further the cause of women’s rights by focusing on policies that increase families’ incentives to educate their children. One example of such a policy is subsidies for families who keep their children in school. Over at the Becker-Posner Blog Gray Becker is discussing Paying the Poor to Improve their School Performance while Richard Posner is commenting on Paying Children to Go to School. Their discussion is about the programs being used in Mexico and New York City.

Easterly on there being no secret to development

Bill Easterly tell us there's no secret to development.

(HT: The Bayesian Heresy)

Technological change and women’s rights

In general, women in rich countries enjoy gender equality while those in poor countries suffer substantial discrimination. A recent column at VoxEU.org proposes an explanation for the relationship between economic development and female empowerment that emphasises changes in the incentives males face rather than shifts in moral sentiment. Technological change that raises demand for human capital may give men a stake in women's rights.

The column, "Women's rights: What's in it for men?", by Matthias Doepke and Michèle Tertilt notes that today most rich countries have greater levels of gender equality than poor countries and asks, What, if anything, can development policy do to close the gap in gender equality between rich and poor countries?

The authors point out that

When today’s rich countries were still poor, the state of women’s rights in these countries was just as bleak as it is in the poorest countries today. For example, until the mid-nineteenth century, women in England and the United States lost all their civil rights upon marriage. Husbands had full control over their wives’ property and earnings, only men could obtain a divorce, and married women did not have any rights with respect to their legitimate children.

They go on to say

The situation improved only in the second half of the nineteenth century, when England and the United States started a series of reforms that ultimately led to the modern state of equality before the law. The rapid advance of women’s rights in today’s rich countries suggests that it is not some immutable cultural reason that explains cross-country differences in gender equality, but an interaction of women’s rights with the development process itself.

The column asks the question, Why did men decide to share power with women? The answer that Doepke and Tertilt give is

The main reforms of women’s rights during the nineteenth century reduced the power of husbands within the household. At the beginning of the century, husbands were still patriarchs with full control over their families’ affairs. By 1900, power was shared almost equally (at least according to the letter of the law) between husbands and wives.

At face value, granting rights to women implied a weakening of men’s rights. Yet it was men who put all the reform laws into place. Why? Our argument is that, from a man’s perspective, there is a trade-off between the rights of his own wife and the rights of other men’s wives. More female bargaining power cuts the share of household consumption that husbands can claim for themselves, which men don’t like. But at the same time, women tend to attach more weight to the well-being of children than men do, which implies that more bargaining power for women also means greater investments in their children’s human capital.

Husbands don’t gain directly from their wives having more bargaining power, so ideally men would prefer their own wives to have no rights. But since boosting women’s bargaining power increases human-capital investment in children, men might gain from other women having rights in two ways. First, men are altruistic towards their own children, some of which are daughters. Since men want their daughters to be treated well by their sons-in-law and they want their grandchildren to be well educated, men have a motivation to improve their daughters’ bargaining position. Second, a father prefers his children to find high-quality mates, and therefore stands to gain from building the human capital of his future children-in-law through their mothers.

Doepke and Tertilt then go on to discuss the link between human capital and technological change. Their basic point being that

In England and the United States, we claim, the ultimate cause of the expansion of women’s rights throughout the nineteenth century was technological change that increased the demand for human capital.

Such a demand, in Doepke and Tertilt's view, raised the importance of education and changed the trade-off between the rights of ones own wife and those of other men's wives.

When the return to education increases, finding well-educated spouses for one's children becomes a bigger concern. Similarly, a rising return to education increases fathers’ concern about the rights of their daughters, because the daughters’ marital bargaining power matters for the grandchildren’s education.

Doepke and Tertilt go on to explain that

Our theory suggests that the historical advance of women’s rights in the West wasn’t due to a sudden enlightenment of mankind after millennia of patriarchy. Rather, it was driven by old-fashioned self-interest deriving from men’s concern about their daughters’ welfare and their descendants’ education. [...]

From the perspective of the theory, what matters for the advance of women’s rights is the demand for human capital.

The upside to this is that

If our theory is correct, it implies that men in today’s developing countries can be given a stake in women’s rights. Ultimately, inducing developing countries to improve women’s rights on their own accord may be a more promising strategy than trying to impose gender equality from the outside.

and it is argued that

Governments can further the cause of women’s rights by focusing on policies that increase families’ incentives to educate their children. Examples of such policies include public health programs for children, high-quality public education, and subsidies for families who keep their children in school. These policies can change men’s attitudes toward female empowerment, helping to create a broader coalition in favour of expanding women’s rights.

The global food crisis: political factors

AfricanLiberty.org has created a short video on causes of the current world wide food crisis.

(HT: Cato@Liberty)

Incentives matter: electing judges file

This example comes from Alex Tabarrok at Marginal Revolution. Tabarrok writes

My work on judicial elections shows that elected judges serve their constituents (see also Judge and Jury). In particular, when the defendant is an out-of-state corporation awards are much higher in states that use partisan elections to select their judges than in other states. As one judge put it bluntly:

As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone's else money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me."

Richard Neely (1988), West Virginia Supreme Court of Appeals.

Comments on the budget

The New Zealand Centre for Political Research has a couple of comments on the recent budget. One from Muriel Newman, Election Year Budget Lacks Vision and one from Roger Kerr, Budget 2008: An Admission of Failure.

Incentives matter: US driving file

Alex Tabarrok at Marginal Revolution tells us that Americans are driving less. In fact

11 billion fewer miles were driven this March compared to last March.

Could this have something to do with the higher price of petrol????

The Growth Report

The Commission on Growth and Development has released its final report, The Growth Report: Strategies for Sustained Growth and Inclusive Development. In the press release announcing the report's release Michael Spence, the Commission's Chair and Nobel Laureate in Economics is reported as saying

The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth. Growth can spare people en masse from poverty and drudgery. And with India needing to grow at a fast pace for another 13-15 years to catch up to where China is today, and China having another 600 million people in agriculture yet to move into more productive employment in urban areas, growth will lift many more people out of poverty in the coming decades.

The simple fact growth is the answer to poverty will not go down well with some, in particular many in the environmental movement, in the industrialised world who seem to think of growth as the cause of all the world's problem rather than the answer to them. The Club of Rome types will not be happy.

In its discussion of the recent world wide rise in food prices the report recommends actions including an end to export bans; a review of policies that favour bio-fuels and, if necessary, reversal of such polices. By now it should be obvious that a reversal is necessary. In addition it also suggests more effective safety nets and redistribution mechanisms to protect people vulnerable from sudden shifts in prices and a revitalization of infrastructure investment for agriculture.

Other key conclusions of the Report include:

--That growth is a crucial part of poverty reduction and the improvement of people’s lives. It is impossible for poor countries to lift large populations out of poverty without growth. Equality of opportunity and a focus on individuals and families, gender inequalities, and economic security, however, is critical to maintaining the support for growth oriented policies.

-- That growth is a long-term challenge that requires leadership, persistence, stamina, pragmatism, transparency and the support of the population.

-- That growth requires engagement with the global economy to import knowledge and technology, to access markets, and to generate a strong export sector – critical in the early stages of growth.

-- That growth must be inclusive. The Report highlights the importance of sharing the benefits of globalization, providing access to the underserved, and dealing with issues of gender inclusiveness. It notes the importance of infant and childhood nutrition to avoid long-term impairment in acquiring cognitive and non-cognitive skills, ensuring that they derive greater benefit from the education system and become more effective in the workplace.

-- That resources, especially labour, must be mobile. The Report also recommends a bridging of the divide between the formal and informal labour sectors by allowing export-oriented industries to recruit workers on easier terms than prevail in the formal sector but with the same essential worker protection in the areas of health and safety, working hours and child labour. It highlights the need to better manage the migration challenge and the results of changing demographics.

-- That growth requires high rates of investment, with the Report suggesting that overall public and private sector investment rates of 25 percent of GDP or above are needed.

-- That investment in education and health are particularly important. The Commission also calls for greater research into the measurement of students’ abilities in literacy and numeracy, and increased opportunities for women in the education system.

-- That money spent subsidizing energy consumption in developing countries is often misspent. Better to invest the resources in education and infrastructure. In addition subsidies bias the capital investment in long-lived assets away from energy efficiency and may negatively bias the structural evolution of the economy.

Robert Solow, Nobel Laureate and Commissioner observed that

The evidence in our work pointed to a number of findings: That competition is absolutely essential at every stage of economic development, that access to world markets is very much a lesson for the rich countries as it is for developing countries, and that the more equitable the growth, the more sustainable it’s likely to be. Leadership and governance can only work when it is supported by wide parts of the population.

This does raise the issue of governance within developing countries. Good governance is an important foundation on which development must be built. Economic development requires the creation of sound political and legal institutions – in particular, secure and functional property rights. In many cases the leaders within the developing countries are unwilling to commit to good governance. An obvious example would be Robert Mugabe in Zimbabwe.

As another useful move I would add the opening up of developed countries markets via the removal of trade barriers and subsidies paid to farmers and other groups within these economies. A move towards free trade would, overall, be a big help to developing countries. In addition removal of trade barriers between the developing countries themselves would help.

In a comment on the report Mark Koyama at Oxonomics says

... I take the report as presenting the current consensus on growth and development - something that almost all economists would broadly agree with or at least find it difficult to really disagree with.

Review of "We Won, You Lost. Eat That!"

This is my review of "We Won, You Lost. Eat That!" that appeared in The Press, Christchurch, 24th May 2008, page D11.

Review of ‘We Won, You Lost. Eat That!: A Political History of Tax in New Zealand Since 1840’ by Paul Goldsmith. David Ling, 2008.

In his introduction, Goldsmith points out that, “Tax has always aroused passions.” Unfortunately those passions have generated rather more heat than light. Goldsmith’s book lowers the heat to light ratio. The book, which is more descriptive than analytical, offers a history of taxation in New Zealand from the first customs duties imposed in 1840 up to the present day.

One implication that flows from much of Goldsmith’s narrative is the impossibility of forcing the government to credibly commit to policy, tax or otherwise. No government can bind the hands of those that follow. In 1868 two distillers were allowed to open facing an excise tax which was half that of the customs duty imposed on imported spirits. When it was realised that customs revenues had stagnated, in part because of the success of the local distillers, the excise tax was raised, even though, as Goldsmith notes, a select committee “… agreed that no one would have gone into the business in 1868 if they had known they would only have six years of the protection they had been promised …”. The committee thought however that it wasn’t “a matter of bad faith for the government to alter things.”

Another implication is that convenient politics rather than good economics drives much tax policy. In the 1957 election campaign both National and Labour offered a rebate on income tax. National offered a 25% rebate but with an upper limit of ₤75. Labour offered a ₤100 rebate. In the last week of the campaign Labour’s newspaper, The Standard, put the question to voters in its billboard, ‘DO YOU WANT ₤100 OR NOT?’ They did; Labour won.

A third implication is that incentives matter. Much effort being put into taking advantage of, or trying to stop, tax evasion and avoidance, is one example. High marginal rates of income tax and no capital gains tax leading people to become income poor but asset rich, is another.

But perhaps the main point to come from Goldsmith’s book is that governments are addicted to tax and its an addiction they don’t want to give up. Central government tax as a percentage of GDP was around 5% in 1880, 17% in 1940 and 34% in 2000.

At times in the book a little economics would help. For example, Goldsmith writes that one reason given for a ‘sin tax’ on cigarettes is to “discourage unwanted behaviour”. Economics would ascribe a different motive. Cigarettes are taxed heavily precisely because the tax will not “discourage unwanted behaviour” and will therefore raise large revenues. We are also told that in 1890 the discussion was about the use of taxes to force the breakup of the large land estates. The argument was that these landholdings were not being used productively. But this does raise the question of why these holdings were formed if not to generate the maximum possible income? Why would anyone buy an asset and then deliberately not use it productively? Goldsmith doesn’t explain the reasoning, or evidence, behind the argument. At another point Goldsmith writes that at a time of war there is a risk of inflation if the private sector, government and military complete for resources. He then says that the risk of inflation can be reduced if the government increases tax since the private sector spends less and thus aggregate demand is reduced. But this is only true if the government saves the tax revenues it gains. If it spends them, and history suggests it would, demand will not be reduced and thus the danger of inflation remains.

Overall, the Goldsmith book is an interesting and informative read which has much to offer anyone interested in New Zealand’s political or economic history.

Top 100 public intellectuals

Peter Klein at the Organizations and Markets blog writes that

The current issue of Foreign Policy contains a list of today’s top 100 public intellectuals. Shockingly, none of your esteemed O&M bloggers made the list. Economics, however, is its most represented academic discipline. The list includes ten academic economists, if I counted correctly: Paul Collier (Oxford), Esther Duflo (MIT), William Easterly (NYU), Paul Krugman (Princeton), Steve Levitt (Chicago), Nouriel Roubini (NYU), Jeff Sachs (Columbia), Amartya Sen (Harvard), Michael Spence (Harvard), and Larry Summers (unemployed). Daniel Kahneman, a psychologist whose work has been extremely influential in economics, is also there, along with several think-tank economists or journalist-economists. A few observations:

• No one from management or busisness administration makes the list, though some of these gurus are plausible candidates. Perhaps “influential business thinker” and “public intellectual” are disjoint sets in the minds of people who edit magazines like Foreign Policy.
• Six of the ten are development economists. Only one, Larry Summers, is a macroeconomist. Remember when Keynes, Hayek, Friedman, and Samuelson were household names? Today development is the hot field.
• The list includes one academic sociologist, Slavoj Zizek. Oh, and one pop sociologist, Malcolm Gladwell (don’t blame me, that’s what FP calls him). Robert Putnam, a political scientist often mistaken for a sociologist, gets his props too. More fodder for the orgtheory crew.

What can I say about the fact that no one from management or business administration makes the list ... other than, I'm not surprised. Interesting that only one macroeconomist is there. But I guess that reflects the way the profession has moved over the last 10-20 years. Also interesting to see that Michael Spence is included, he's not a name I would have thought of for such a list.

Why Popcorn Costs So Much at the Movies

Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles
by Richard B. McKenzie

Tyler Cowen tells us

I am a fan of this book and I wrote a blurb for it. It is popular economics but it is more extended microeconomic reasoning than most of the other popular economics books.

(HT: The Bayesian Heresy)

More great thinking from politicians and others

This from a New York Times article on House Judiciary Committee hearings on the price of petrol in the US.

At another point, Ms. Waters [Maxine Waters, Democratic Congresswoman from California] brazenly suggested that perhaps the American oil industry should be nationalized, acknowledging that it was an “extreme step” but one that might be necessary if outsize profits and exorbitant gasoline prices continued.

Now that will help! But our own Prime Minister doesn't trust the oil companies either

But the PM is still wary when it comes to the oil companies.

"I'm a bit suspicious of big companies in the oil field where everything seems to work synchronised rather than have competition...I'm reflecting the suspicion of the ordinary punter," she says.

But bad thinking on petrol price doesn't occur just in the government. This from the consumer.org.nz mediaroom on the 9th May 2008;

In April BP hiked the prices four times (from $1.779 to $1.889). The other four major oil companies usually followed almost immediately, which Consumer NZ says shows a lack of meaningful competition in the market.

Acually no. Even if the market was perfectly competitive prices will still move together. Simultaneous price movements tell you nothing about how competitive a market is. Obviously price movements will be simultaneous in a monopoly, as there is only one firm, but it is also true that prices will move together in a perfectly competitive market as the single market price is determined by supply and demand, not firms, and in an oligopoly, as in the oil case, the market price will move from one Nash equilibrium to another simultaneous. So if we see simultaneous price movements we learn nothing about the nature of competition in the market.

Perhaps politicians and those at the Consumner Magazine should read the Washington Post more (and take Econ101). In a recent article it is noted that

"The basic story that has brought oil from $20 to $130 dollars is that world demand is growing robustly when world supply is not," argued Jeffrey Rubin, chief economist of CIBC World Markets. "As a result, we need ever-higher world oil prices to kill demand in the [industrialized countries], which is exactly what's happening."

While U.S. demand has leveled off, Rubin said, demand in China is growing at a 12 percent rate, more than the 8 percent rate he forecast. While the extra increase in China is probably because of short-term factors, such as the earthquake or hoarding by the government in preparation for the Olympics, Rubin said even the lower rate would keep world demand growing briskly.

But as Thomas Sowell has pointed out the problem with the supply and demand answer is that it isn't emotionally satisfying. As Sowell asks

Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?

He goes on to point out that

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

And all round the world oil companies make great villains.

Inflation and tax cuts

At the visible hand in economics blog they write

The common view I work off when stating that tax cuts increase inflationary pressure is that tax cuts increase “aggregate demand“, which in turn will lead upward pressure on prices, and therefore an upward shift in interest rates.

But why does aggregate demand increase? Why does demand change if I spend a dollar rather than the government spending that dollar?

I guess that the argument is that with a tax cut I get to spend an extra dollar but the government doesn't reduce its spending by a dollar. So the real issue isn't aggregate demand but rather how does the government fund its dollar of spending now that it has given me my dollar back. It can either increase debt by a dollar, but in so far as the world is Ricardian I would see the dollar of extra debt as future tax and thus save my tax cut to pay for the extra tax in the future, or it can expand the money supply but we have an independent central bank so the government shouldn't be able to do this. So why does a tax cut generate inflation?

Another example of the costs of tariffs

Over at Marginal Revoultion, Alex Tabarrok points out that US consumers are suffering because a tariff on imports of coat hangers from China is raising dry cleaning costs. He says that,

The Aplia Econ blog runs the numbers:

Advocates of trade restrictions often argue that protection will save jobs. Since we can observe price and cost increases associated with trade restrictions, we can estimate how much it costs to save each job in a protected industry. According to the NPR story, there are roughly 30,000 dry cleaners in the U.S., and on average, each pays an additional $4,000 per year due to the hanger tariff. This indicates an average annual cost of 30,000 firms x $4,000 per firm = $120 million. According to the U.S. International Trade Commission's report, U.S. employment in wire hanger manufacturing was 564 workers in 2004 and fell to 236 workers by 2006. Let's assume that employment in this sector would have fallen to zero in the absence of the tariff, and that with the tariff, employment will recover to 2004 levels. In other words, assume the tariff "saves" 564 jobs. Dividing the cost of the tariff to U.S. dry cleaners ($120 million year) by the number of jobs saved (564 jobs) indicates that each job saved costs about $212,765 per year. Keep in mind that the typical full-time worker in this sector earns about $30,000 per year. Even if we assume that industry employment doubles, the cost of the tariff is still roughly $120,000 per job.

This exercise clearly shows that US consumers would be better off without the tariff. It would be more efficient to give a $30,000 a year subsidy to each of the 564 workers to do nothing and trade with China. This would make everyone better off than they are in current situation.

In the long run, growth matters

In an article (pdf) in the Otago Daily Times, 23 May 2008, Roger Kerr writes,

“In the long run”, economist John Maynard Keynes said, “we are all dead.”

To which the best reply is, “Yes, but some of us have children.”

A better response would be to point out that "Keynes is now dead and we're stuck with the long run."

The more important point in the article is that it is the long run consequences of economic policy that matter for people,

... it is the long term that matters for increases in material standards of living for most people.

As Paul Krugman has noted

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.)

Productivity underlies economic growth and it is the increases in economic growth that drives increases in the standard of living. It takes time, but growth is the only way we have to improve the standard of living for people. The recent report, The Growth Report: Strategies for Sustained Growth and Inclusive Development, by The Commission on Growth and Development, notes that growth is the way to reduce poverty and increase a country's standard of living. Michael Spence, the Commission Chair and Nobel Laureate in Economics, puts it this way,

The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth.

The basic idea is as true for New Zealand as it is for India, China or Africa. To improve New Zealand's standard of living we need policies that improve productivity and growth. But as Kerr points out in his ODT piece, policies over the term of the Clark government have done little to help improve productivity and growth. Kerr writes,

Inevitably, it has taken a long time for bad policies to take their toll – economic performance does not change quickly, and many of the former policies have been maintained. But eight years down the track we can see that the economy has reverted to a mediocre level of performance.

The clearest indicator of the damage is the slump in productivity growth, which has more than halved from the trend rates of the 1990s. So much for the government's goal of returning living standards to the top half of the OECD.

He goes on to say

As well, households are under pressure from price increases, employment growth is tailing off and outward migration is rising, central and local government spending and regulation is stifling the productive sector, and the current account deficit is large.

The size of the current account deficit is in all probability not that much of a problem. It just tells us that investment in New Zealand is greater than savings in New Zealand.

The major issue that flows from this is, What will we see after the election? The current situation tells us we need a change in policy direction. But as Kerr notes

... it will take time again to change speed and direction. We must hope that whatever government is in office after the election recognises the need to vigorously pursue much higher quality policies.

Indeed. But what we have heard so far from the major parties doesn't leave me with much hope.

Is Austrian Economics Heterodox Economics?

This is the question asked by Peter Boettke at the Austrian Economists blog. Boettke states

I just received this question from a reader who is doing a research project on classifying contemporary schools of economics. The problem is that the question is not as easy to answer as one may think.

And gives the answer

Austrian economics starts from within a heterodox problems situation (heterogenous agents, uncertainty, ignorance, etc.), and they interact within complicated environments (differing tastes, heterogeneous products, market power, etc.), and thus the Austrian answer to how markets work differs considerably from the standard presentation in textbooks, and the non-standard presentation in heterodox writers. Instead, the focus is on how the institutions of property, contract and consent engender market processes of adjustment and adaptation that produce social cooperation under the division of labor.

In other words, the Austrian school is heterodox sociologically, mainline intellectually (tracing back to Adam Smith and David Hume), and mainstream historically (a branch of neoclassicism). But in the contemporary world, the mainstream label makes the least sense, the mainline label is little understood let alone appreciated, and the heterodox label serves a useful sociological function. Though the Austrian school doesn't really fit anywhere easily.

I would argue that the strength of the Austrian School is its view of markets and the way they work to make the most efficient use of the dispersed information held by different people throughout the economy. The weakness I think is their discussion of other institutions, like the firm. But does this add up to heterodox economics? Up until the 1930s the answer would have been no. The mainstream and the Austrians would have been much closer up until this time. Since then have the Austrians grown so far from the mainstream as to become heterodox? It seems doubtful, in many ways they still have more in common with, at least, some areas of the mainstream than with the heterodox. As Boettke himself notes

But many of the main themes in Austrian writers are consistent with arguments presented by classical and neoclassical writers from Adam Smith to J B Say to Milton Friedman.

The trouble with macroeconomics

Arnold Kling is not happy about macroeconomics. At the EconLog blog he is posting on the topic of The Trouble with Macro. He writes,

In my view, macro seriously undermines sound economics. It treats work as scarce and consumer wants as insufficient, which is the opposite of what we teach in micro. Macro treats saving as contractionary and international trade deficits as contractionary, which is contrary to general equilibrium micro. Most people with no economics training intuitively believe that jobs are scarce, that they help the economy when they spend rather than save, and that trade deficits are bad. In general it is the job of economists to explain why those views are fallacies.

He ends by saying,

The combination of IS-LM and AD-AS has so many degrees of freedom that one may tell just-so stories about any conceivable combination of macroeconomic variables. But most economists do not believe that the predictions from macro-econometric models based on those concepts have been sufficiently accurate to validate the models. To me, that suggests a scientific failure.

This post follows an earlier one in which Kling argues for a macro-less economics major. I'm not sure he's wrong. But then I'm a micro-economist. I have often wondered if inflation is the only true macro phenomenon. Micro is about relative prices, rather than the price level. All other macro issues boil down to the working, or not working, of markets. Unemployment is about labour markets, interest rates are about financial markets, economic growth is about the sustained expansion of multiple markets within an economy, GDP is just the sum of activity in multiple markets etc.

Parking games

Over at the Freakonomics blog by Daniel Hamermesh has this to say about university parking, always an important issue,

Many of my colleagues have had parking spots next to our building, but most of that parking lot is being replaced by a new building — so they’ve been exiled to a garage four long blocks away. This annoys me, but using the lot for a building makes sense; the opportunity cost of the land is far too high to waste on parking. I just hope the building has a lot of square footage so that this valuable land is used intensively.

I wonder, though, whether the people who administer this university thought their choices through. The extra 20 minutes (the walks to/from the garage) are a fixed cost of people’s daily commutes. This additional fixed cost gives them a disincentive to come into the office each day, and an incentive to try bunching their appointments, teaching, and office hours on fewer days to spread the fixed costs.

Since they have some freedom over their schedules, henceforth some of them may be working entirely at home more often. They will become a partial tele-commuter thanks to these changed incentives.

The cohesiveness of the university community might be reduced.

Over at the Free Exchange blog they have this to say,

One obvious point is that a parking lot probably wasn't contributing all that much to cohesiveness in the first place. The university clearly intends to place people in the new building, adding to the agglomeration economies of a dense college campus. By having more students and faculty in a central place, the administration increases the value of being in that place, encouraging more people to spend time there.

The other question to ask is just how costly that four block walk is to most professors. It constitutes just one small part of the entire journey; there are time costs to the rest of the drive, as well as the expense of petrol and added vehicle maintenance, and so on. Tele-commuting would allow a professor to avoid all of those costs, so unless the walk adds significantly to the expense of the trip in, behaviour shouldn't change all that much. The faculty who typically drive have already concluded that the cost of the trip is worth the benefit of coming to campus.

I guess some of the faculty may, at the margin, find the value of the walk particularly costly but I would not expect this to deter too many people. Of course having some of the staff stay at home could be a good thing!

Trade games

In a recent opinion piece, The Democrats' Dangerous Trade Games, in the Wall Street Journal C. Fred Bergsten, who is the director of the Peterson Institute for International Economics, said the following about the actions of lawmakers in the US.

Meanwhile, our venerable House of Representatives, in the context of the Colombia agreement, has recklessly changed the rules for congressional action on trade legislation. By rejecting long-settled procedures that prevented congressional sidetracking of trade deals negotiated by presidents, the House has hamstrung U.S. trade policy and created the gravest threat to the global trading system in decades.

By effectively killing "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days, lawmakers in Washington, led by House Speaker Nancy Pelosi, have destroyed the credibility of the U.S. as a reliable negotiating partner.

Later Bergsten writes

The much more profound impact, however, is to remove the U.S. from any significant international trade negotiations for the foreseeable future. Current and former chief trade officials of three of the world's largest trading entities have told me that, since the House action, the U.S. has lost all credibility. In other words, the "time out" proposed for trade policy by one of the major presidential candidates – a central goal of the opponents of globalization – has already been called.

This can not be good news for the rest of the world. Trade negotiations need the support of the world's largest economy if they are to have any serious chance of success. The benefits for all countries, but in particular the poorest countries, of freer trade are huge but are put at risk by the US action. Bergsten notes

The multilateral trade system, including the highly effective dispute settlement mechanism in the World Trade Organization, will erode further and weaken our ability to tear down barriers in China, India and other large emerging markets.

Any form of protectionism by the US will harm both itself and the rest of us.

Home team advantage in sports

Mark Koyama has an interesting post on The Causes of Home Advantage in Team Sports at the Oxonomics blog. Koyama writes

Jimmy Reade and myself have attempt to address the question of home advantage in football in this paper. We find that home advantage in English football has fallen since the 1980s.

He goes on to say

Drawing from Alchian and Demsetz (1972) we argue that players in team games have an incentive to free ride on the contributions of their team-mates. Fans monitor player performance and can single out players they feel are shirking.

How does this relate to the phenomenon of home advantage? We argue that

'Fans as a whole are better able to monitor individual player performance in home games than in away games because a far higher proportion of fans attend home games relative to away games. More specifically, they are better able to measure the effort an individual player exerts in a home game. Therefore average player performance will be higher at home games because shirking is more effectively deterred in home games.'

I hope the Crusaders, and their fans, keep this in mind on Saturday night!

As to the question Why has home advantage declined since the 1980s? Koyama explains

Well, in our argument what happened was television. This enabled supporters to better monitor their team when it played away from home. And this in turn reduced the extent of home advantage.

World competitiveness

The latest World Competitiveness Yearbook is now available. While such rankings do need to be taken, somewhat, with a grain of salt, they do nonetheless contain some useful information. The IMD World Competitiveness Yearbook measures 55 countries, including New Zealand, on the basis of 331 criteria.

The scoreboard for this year has the USA at 1, Singapore at 2 and Hong Kong at 3. New Zealand comes in at 18 just below mainland China, who is at 17. Australia is at 7, Canada is at 8, while Ireland is at 12. Venezuela is last, but to be fair Zimbabwe and North Korea aren't on the list. An interesting point is that there are a series of smaller nations, like Singapore(2), Hong Kong(3), Switzerland(4) and Luxembourg(5), ahead of the larger European countries such as Germany(16), just ahead of China, and the UK (21). In that respect, given its size, the USA is an anomaly. But if smallness is an advantage why isn't New Zealand higher up the rankings? Could it be that recent government policies have be wrong?

(HT: Economic Logic)

Allan Meltzer on EconTalk

On EconTalk this week is Allan Meltzer of Carnegie Mellon University. He talks with Russ Roberts about what the Fed really does and the political pressures facing the Chair of the Fed. He describes and analyzes some fascinating episodes in U.S. monetary history, discusses the advantages and disadvantages of the gold standard and ends the conversation with some insights into recent Fed moves to intervene with investment banks. It makes for an interesting introduction to the political economy of the money supply and central banks.

Scholes and Posner interviews

Myron Scholes, the 1997 winner of the Nobel Prize in economics, talks with Bloomberg's "On the Economy" host Tom Keene about the outlook for the credit crisis, economic modelling and the need for a new system of accounting.

Keene also talks with Richard Posner about his new book, "How Judges Think," the U.S. Supreme Court, and the impact of ethanol production on food supply and prices.

The debate goes on

The debate around the sale of Panmure House, Adam Smith's former Edinburgh home, goes on. At The Debatable Land blog Alex Massie wrties

So, Panmure House, Adam Smith's former Edinburgh home, has been sold. The ASI reports:

Councillors in Edinburgh have approved the sale... to Heriot-Watt University. They chose the £800,000 bid over a higher offer, on the grounds that the University would make the building more accessible to the public. The University plans to restore the house to promote the study of economics.

Hmmm. Wouldn't it have been more appropriate to sell to the highest bidder?

Over at Freedom and Whisky David Farrer replies by noting

Values are subjective. We each have our own unique scale of values and if that weren't so no trade would be possible at all. Let's imagine that I'm in the market for a property. I might be happy to pay £250,000 for a flat in central Edinburgh but another person might well prefer to spend the same amount of money on a sizeable house in rural Fife. And I might be willing to spend a bit extra on a place in Edinburgh simply because it had once been owned by Adam Smith! Others wouldn't. Values aren't limited to monetary considerations.

So I would argue that the City Council hasn't necessarily sold the Smith abode to a low bidder. It all depends on the Council's scale of values and those values can include a keenness for a particular future use of the property. From its point of view the Council has sold to the highest bidder. For once, in this case the Council's scale of values is not unlike mine!

In response to David Farrer, Gavin Kennedy at the Adam Smith's Lost Legacy blog writes

Some commentators to the various Blogs that have remarked about the sale of Panmure House demonstrate their philistine nature by simply demanding that the City of Edinburgh Council sell to the ‘highest bidder’, or demolish Panmure House and turn it into a MacDonalds, or some such atrocity.

I am pleased to see that a Libertarian takes a more intelligent stance.

At Organizations and Markets Peter Klein writes

Some commentators find it ironic that the house’s current owner, Edinburgh’s City Council, is selling to the university rather than accept a higher, competing bid from a private citizen. So much for the free market! But, as a careful reading of Smith reveals, Smith was hardly an advocate for unrestricted laissez-faire, supporting substantial public expenditures on infrastructure and education as well as the legal system and national defense

I find myself in agreement with David Farrer on this.

Incentives matter: local bounties file

Over at Marginal Revolution Alex Tabarrok points out that one outcome of the economic downturn in the US is that the incentive to call the police with a tip has increased, especially in those regions which suffer a larger number of home foreclosures. He quotes an article in the New York Times

For tips that bring results, programs in most places pay $50 to $1,000, with some jurisdictions giving bonuses for help solving the most serious crimes, or an extra “gun bounty” if a weapon is recovered...

“We have people out there that, realistically, this could be their job,” said Sgt. Zachary Self, who answers Crime Stoppers calls for the Macon Police Department.

Consistent ... but biased

Jeffrey D. Sachs's new book "Common Wealth: Economics for a Crowded Planet" has been reviewed in the New York Times. The review end with this

In an age when we don’t need to have lots of children to work the fields, or to compensate for high infant mortality, Sachs argues that it’s both economically rational — and crucial for a future of sustainable growth — for people to reproduce at a rate close to 2.1 children per family. In his acknowledgments, Sachs thanks his three children.

Interesting blog

An interesting blog I have just found is the The American Association of Wine Economists Wine Blog.

One recent posting on the blog is about the obvious problem that EU wine production vastly exceeds demand. The result is that the EU has to buy thousands of liters of wine and distilled into them into alcohol to prevent prices from dropping through the floor. The distillation price support only encourages continued production, waste and expense. It is a mess, but what price support scheme isn't? But reform is in the air. The posting states

A fairly radical plan was introduced a few years ago, one that would have paid farmers to grub up thousands of hectare of vines and introduced market reforms to allow (by deregulating) and to encourage (through supporting programs) European winegrowers to compete more effectively with New World winemakers who are taking their markets.

The package that the Council of Ministers agreed last week is significant even if it is less radical than the original initiative (Decanter magazine called it “watered-down” — never a good thing when you are talking about wine). The program called for subsidies to encourage winegrowers to eliminate up to 175,000 hectares of vines (versus 400,000 hectares in the original proposal), limit chaptalisation (the addition of sugar in the wine-making process) rather than eliminating it, and market-based reforms that encourage and enable winegrowers to compete on world markets (through varietal labeling of wines) rather than hide behind protective barriers.

[...] The program includes money for grubbing up, of course, and deregulation of wine labels, removal of some vine planting restrictions (so marketable grape varieties can replace uneconomic grubbed up varietals), funds for wine promotion abroad, and so forth. Like any EU program, it is a complicated balance of economic reality, fiscal feasibility and political necessity.

The interesting thing about the posting is that it says the ideas being put forward to help the European wine industry transition to the new market environment, where export markets are growing, domestic markets shrinking and competition is fierce, were learned from New Zealand. The posting says

New Zealand today is famous as one of the great success stories in the world wine market. A small nation in an unlikely location, it punches above its weight in the global wine market, holding the title as champion exporter. Not in quantity, obviously, but in price. New Zealand has the highest average export price of any wine producing country.

But such was not the case 25 years ago. New Zealand suffered from a surplus of mediocre wine that could only be sold domestically behind high protective barriers. The industry collapsed with many failed firms from a combination of bad wine and surplus production. The government paid to grub up vines and then opened the market to international competition. Cheap but better wines from Australia flooded in to fill the domestic bulk wine market, leaving New Zealand producers only one choice — make better wine for export. They have done so brilliantly. Their success inspires the EU reforms.

The message ends by noting

It is possible to envision a future where the reforms can work, where the marginal vineyards have gone out of production, where consolidation has increased efficiency and where branded varietals can compete with the world market. (I have even seen some early attempts at EU branded varietals in the discount bins of a local store — more about this in a future posting.) I think it is possible that this vision may be realized — eventually.

But oh, it is such a big jump. The institutions of the small family vineyard and the local wine cooperative seem to me to make these reforms much more difficult. New Zealand’s success will be difficult to repeat.

Korean trade deal?

This news report states that

A free trade deal with Korea would hopefully see the country slash its "horrifically" high tariff rates for New Zealand exports, Prime Minister Helen Clark says.

Korea is sixth largest export market for New Zealand with exports to Korea being worth $1.33 billion in 2007. The report says that the an average agriculture tariff rate is 52 percent. Removal of tariffs that high must have a huge effect on Korean farmers. If they really are as inefficient as that sized tariff would suggest, they will not be able to compete with New Zealand farmers. Depending on how politically powerful farmers in Korea are this could make a trade deal difficult to negotiate.

The report also notes that

Her visit follows hot on the heels of a successful trip to Japan, where Miss Clark this week won agreement to undertake a study on the benefits of a free trade deal.

An expansion of free trade deals is a step in the right direction.

Brazil facts of the day

Tyler Cowen, over at Marginal Revolution, gives us his "Brazil facts of the day".

1. Brazil has become a net creditor nation for the first time in its history.

2. About 15% of the Congress is under formal investigation for crimes, ranging from attempted homicide to money laundering.

3. Since 2005 more than 20 million people have entered "the middle class," defined as a monthly income of $635. The percentage of middle-class Brazilians has grown from 34% to 46%.

3. sounds good, but 2. is somewhat worrying, to say the least. Makes New Zealand look very tame in comparison.

The Economics of Pirate Tolerance

More from Peter T. Leeson on the economics of pirates. This time his paper is on The Invisible Hook: The Economics of Pirate Tolerance (pdf). The abstract reads:

Can criminal profit-seeking generate socially desirable results? This paper investigates this question by examining the economics of pirate tolerance. At a time when British merchant ships treated black slaves as slaves, some pirate ships integrated black bondsmen into their crews as full-fledged, free members. Enlightened notions about equality did not produce pirate tolerance, however. I argue that self-interest seeking in the context of the criminally-determined costs and benefits of pirate slavery was responsible for pirates' progressive racial practices. Analogous to Adam Smith's invisible hand, whereby legitimate persons' self-interest seeking can generate socially desirable outcomes, among pirates there was an "invisible hook," whereby criminal self-interest seeking produced a socially desirable outcome in the form of racial tolerance.

For more on Lesson's studies into the economics of pirates see More on pirates and Governance without government.

(HT: The Austrian Economists).

Zimbabwe: Inflation Hits 355 000 Percent

This report tells us that inflation in Zimbabwe has managed to work its way up to a mere 355,000 percent. The report says

YEAR on year inflation for the month of March surged to 355 000% from the February figure of 165 000% as prices rose on the back of increased money supply to finance the 2008 harmonised elections.

Just stop printing money seems like good advice.

Eighteenth century globalisation

For the economic historians among us, there is an article on VoxEU.org which argues that there was a potential for globalisation as early as the 18th century. Economic globalisation is a political phenomenon. The column presents new evidence on the Anglo-American wheat trade in the eighteenth century and explains how politics, war, and natural disasters thwarted economic integration.

In his article Why globalisation might have started in the eighteenth century, Paul Sharp explains that

Economists say there is globalisation when prices influence each other across continents over relatively short periods of time. Much of the evidence for globalisation at the end of the nineteenth century has come from the impressive growth in trade in foodstuffs – especially grain – in these years. The most important trade was between the United States and Britain, and price evidence demonstrates the integration of these two markets as, for example, a poor harvest in the United States resulted not only in increased prices at home, but also in Britain.

New evidence shows, however, that the grain trade – and specifically trade in wheat – was important as far back as the eighteenth century. Given that this was the case, it follows that it might be possible to find earlier periods of market integration – that is ‘proto-globalisation’.

Sharp goes on to say

The evidence for the early importance of the transatlantic wheat trade comes from two sources. First, statistics survive for the wheat trade between the American colonies and the early years of the United States and Britain. These show the beginnings of intercontinental trade in a bulky product, which at the time was a leading component of consumption in Britain.

Second, lending support to the trade statistics is primary evidence, ranging from presentations, to Parliamentary select committees to the correspondence of individual farmers, which all suggests that contemporaries were aware of the significance of this trade. Indeed, by 1800, the British Board of Trade wrote that ‘America be, or is hereafter to be the granary of Europe’, a role which it only fulfilled at the end of the century.

In fact, when the United States did finally emerge as the major supplier of wheat in the 1860s and 1870s, it appears that contemporaries considered this to be a new development, seemingly unaware of the events of the previous century. Their reason for this mirrors the belief that many hold today that globalisation is a modern phenomenon: the early growth in trade was continuously being knocked off course by ‘extraordinary’ events, such as war, politics and even plagues of insects.

Moreover, the trade was finally closed down altogether by the imposition of prohibitive new Corn Laws after the Napoleonic Wars in 1815. That observers had forgotten the importance of this trade after half a century is similar to commentators now often being unaware of the level of globalisation prior to the First World War.

Sharp continues his story by arguing that

The ultimate proof for eighteenth-century proto-globalisation is that prices of grain in the United States and Britain influenced each other. As far back as the 1770s, when Britain became a net importer of wheat and large volumes started to be imported from the United States, there is evidence that prices on both sides of the Atlantic were moving together.

Later he notes

The co-movement of American and British wheat prices in the eighteenth century suggests a potential for globalisation one hundred years before the so-called “first globalisation.“ What happened?

The reason why globalisation did not take hold in the eighteenth century was that it was continuously being disrupted. It was not the improvements in transportation technology of the nineteenth century that made globalisation possible. It was rather wars, politics and natural disaster that made globalisation impossible prior to this.

The moral of the story seems to be that history has shown that globalisation can reach impressive levels, but the institutional framework supporting it is important and if it collapses, or if natural disaster strikes, then the disintegration of important markets can, and does, occur within a short period of time.