Monday 28 February 2011

Power back ..... at last

Got power back this morning but still waiting for water. Having power is a step in the right direction however. At least I can blog again for the first time in nearly a week. I assume there is still a world out there somewhere!!!

Tuesday 22 February 2011

Who Is (More) Rational?

That is the title of a new NBER Working Paper by Syngjoo Choi, Shachar Kariv, Wieland Mueller and Dan Silverman. They use revealed preference theory as a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximise.

Using data from a field experiment they find that there is considerable heterogeneity in subjects' consistency with utility maximisation. In particular high-income and high-education subjects display greater levels of consistency than low-income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. They also note that consistency with utility maximisation is strongly related to wealth.

The abstract for the paper reads:
Revealed preference theory offers a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximize. We conduct a large-scale field experiment that enables us to test subjects' choices for consistency with utility maximization and to combine the experimental data with a wide range of individual socioeconomic information for the subjects. There is considerable heterogeneity in subjects' consistency scores: high-income and high-education subjects display greater levels of consistency than low-income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. We also find that consistency with utility maximization is strongly related to wealth: a standard deviation increase in the consistency score is associated with 15-19 percent more wealth. This result conditions on socioeconomic variables including current income, education, and family structure, and is little changed when we add controls for past income, risk tolerance and the results of a standard personality test used by psychologists.

EconTalk this week

Daron Acemoglu of MIT talks with EconTalk host Russ Roberts about the role income inequality may have played in creating the financial crisis. Raghuram Rajan in his book, Fault Lines, argues that growing income inequality in the last part of the 20th century created a political demand for redistribution and various policy changes. This in turn created the push for higher home ownership rates and led to the distortions of the housing market that in turn led to excessive risk-taking in the financial market. Acemoglu suggests a simpler story where the financial sector through its political influence distorted the rules of the game, benefiting executives in the industry, which in turn led to outsized rewards and ultimate instability in the financial industry. The conversation discusses ways of distinguishing between these two arguments and what might be done to change the incentives of politicians.

Monday 21 February 2011

New blog on the block

I have come across an interesting new blog: markpenningtonlondon. Mark Pennington is Reader in Public Policy and Political Economy, Department of Politics and International Relations, Queen Mary, University of London. He opens his blog with a nice posting on Ronald Coase's essay on "The Market For Goods and the Market For Ideas". Pennington writes,
One of the most interesting but neglected of Coase’s ideas is presented in a brief essay on ‘The Market For Goods and the Market For Ideas’, originally published in the American Economic Review in 1974. In this essay, Coase points out the inconsistency of those who cite ‘imperfect’ and ‘asymmetric information’ as constituting a case for government regulation in markets for private goods and services, while remaining steadfast in their support for free speech in the political market for ideas. For its proponents though the ‘free market in ideas’ is plagued with various ‘imperfections’ – such as deception, misrepresentation and downright lying by politicians and pressure groups, coupled with the ignorance of the general public (i.e. voters), over time free speech and the competition it engenders offers the best prospect of ensuring that good ideas prevail over the bad. Attempts to regulate political speech to ensure that only ‘accurate’ and ‘truthful’ information is presented to the public are doomed to fail. Who would decide what is to count as ‘accurate’ and ‘truthful’, and who would ‘guard the guardians’ of public truth should they seek to abuse their authority?

If the above argument holds in the market for political ideas, however, then it is equally if not more valid in markets for private goods and services. As Coase notes, ‘It is hard to believe that the general public is in a better position to evaluate competing views on economic and social policy than to choose between different kinds of food’. Although consumer goods markets are plagued by imperfect information, misleading advertising and the existence of fraud, competition remains the best protector of consumer interests. Indeed, competition is likely to be more effective in the market for most goods and services because the costs of failing to be adequately informed are more likely to be concentrated on those who actually make bad choices– thus incentivising the critical scrutiny of advertising claims. In the market for ideas by contrast, failure to be adequately informed has externality characteristics – the decision to vote for a bad idea has consequences not only for the individual concerned but for the wider society at large. By making this point, Coase anticipated the argument made by Brennan and Lomasky (Democracy and Decision, Cambridge University Press, 1993) and more recently by Bryan Caplan (The Myth of the Rational Voter, Princeton University Press, 2007) that democratic politics is afflicted with the problem of ‘rational irrationality’ and that the ‘market for ideas’ is more likely to ‘fail’ than is the market for private goods.
The question this raises is, What is the best way of dealing with the inconsistencies that Coase notes? I can't help thinking the answer is to extend the free speech reasoning to the markets for good and services. That is, allow competition in the market for goods and services as well as in the market for ideas. So let us deregulate economic markets so they are as 'free' as the ideas markets. If the government cannot regulate the market for ideas, why do we assume it can regulate markets for goods and services?

Sunday 20 February 2011

Kidney transplantation: the xkcd view

xkcd comic take on kidney transplantation.

Otteson on Adam Smith

Noted Adam Smith scholar James R. Otteson has a new book out on Adam Smith. It is published by Continuum Press, and it is volume sixteen of a twenty-volume series entitled "Major Conservative and Libertarian Thinkers" edited by John Meadowcroft of King's College London. For more on the series see here.

The preface for the book reads:
This book is a part of a series entitled “Major Conservative and Libertarian Thinkers.” The series aims to introduce these thinkers to a wider audience, providing an overview of their lives and works, as well as expert commentary on their enduring significance. Thus Adam Smith begins with a short biography of Smith; it then gives an overview and discussion of his extant works, focusing on his two major publications, the 1759 Theory of Moral Sentiments and the 1776 Wealth of Nations; and it concludes by discussing what Smith got right, what he got wrong, and why he is still worth reading—which he most definitely is. Also included is a bibliography of primary and secondary sources.

A slim volume like this can address only a fraction of the richness of Smith’s work, so it can be only a primer. One principle that has helped guide my selection of topics has been the aim of the book’s series.[1] Thus I have given added weight, where appropriate, to aspects of Smith’s thought that justify, or at least explain, his inclusion in a series about major conservative and libertarian thinkers. Depending on how one defines those terms, there are aspects of Smith’s thought that are conservative and aspects that are libertarian; and there are aspects that are neither.

I also try to make sense of Smith’s writing not only in the small but in the large as well—that is, not only in the details of this or that argument in this or that work, but in the larger aims of Smith’s scholarly corpus. I believe there is a coherence to Smith’s work, and, though I realize a book like this places limits on an attempt to demonstrate a claim like that, I do my best to make it plausible if not ultimately convincing.

In writing the book I have been conscious that for some readers it might serve as their first introduction to Smith, and for others it might serve as their only introduction to him. For a thinker as important as Smith, that makes the stakes for a book like this one high indeed. I have striven to present Smith in a way I believe he himself would have approved: charitably but objectively. No author, however brilliant, got everything right, so the reader will also find in these pages periodic discussion of problems or objections, as well as indications of ongoing scholarly criticism or debate. But I believe that some important aspects of Smith’s contributions endure, and I hope that by the end of this book you are convinced of that as well.

The best way to understand Smith remains, and will always remain, reading his works for oneself. If this book gives you reason to think that you should read Smith, it will have served its primary purpose.

Seven myths about free markets

Stephen Hicks, the executive director of The Center for Ethics and Entrepreneurship, talks with economist David R. Henderson on seven myths about free markets

Tuesday 15 February 2011

EconTalk this week

Tyler Cowen of George Mason University and author of the e-book The Great Stagnation talks with EconTalk host Russ Roberts about the ideas in the book. Cowen argues that in the last four decades, the growth in prosperity for the average family has slowed dramatically in the United States relative to earlier decades and time periods. Cowen argues that this is the result of a natural slowing in innovation and that we expect too much growth relative to what is possible. Cowen expects improvements in the rate of growth in the future when new areas of research yield high returns. The conversation includes a discussion of the implications of Cowen's thesis for politics and public policy.

Monday 14 February 2011

Greens support free expression: sometimes

Homepaddock very correctly writes:
It’s difficult to decide which is more offensive, the decision to prevent Australian Prime Minister Julia Gillard speaking in Parliament or Green Party co-leader Russel Norman’s explanation for doing so:
“The government of the day could invite all sorts of unpleasant people, like (former United States president) George Bush for example they had in Australia, that I think a lot of Members of Parliament would be uncomfortable with and so we thought the best thing was to keep a simple precedent.”
Heaven forbid the delicate ears of our Members of Parliament should be assailed with something which discomforts them!
The whole point of freedom of speech is that it applies to everyone, whether we agree with them or not. If Russell Norman is soooooooooooo sensitive that he can not cope with listening to Julia Gillard that's his problem - why does he just sit outside Parliament while Gillard is speaking - but it's not a basis for curtailing freedom of expression. Norman just ends up looking small minded and petty.

Atlas Shrugged trailer

Opens in U.S. theaters April 15th, 2011.
But when do we see it here?

Sunday 13 February 2011

But will the president listen

to economist N. Gregory Mankiw when he says:
Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.
My guess is no since the president knows that most voters don't see international trade the way economists do. And the president is more worried about voters than economists. Many voters, and not just in the U.S., see competition with China as a big threat to their country. Economists never trier of telling people that trade makes both parties better-off, but to no avail people still see countries as competing.

But we don't compete with other countries, this is a false analogy that comes from thinking that countries are like firms, they're not. As, even, Paul Krugman has said, A Country Is Not a Company. The point is that Coke and Pepsi, for example, do compete, one gains at the others expense, but New Zealand and Australia, for example, don't, their loss is not our gain. International trade is not a zero-sum game. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

Why? Well in the Coke/Pepsi case, Coke gain a lot, in terms of sales and profits, from not having Pepsi to complete with and lose little since Pepsi doesn't buy much , if anything, from Coke. Or Coke from Pepsi. This is not true of the New Zealand/Australia example. We may gain some sells if Australia stopped producing, but we would lose much more. Australia is our biggest export market and if they "went out of business", they would stop importing, and that would hurt us a lot. Also they are suppliers of much of our useful imports and that would stop too, which would hurt us even more.

Countries trade, they don't compete. And thus increased prosperity in Australia - or China - does not come at our -or the U.S.'s - expense.

So women are nicer that men? maybe not .....

This paper, An experimental test of behavior under team production, by Donald Vandegrift and Abdullah Yavas reports on experiments on the behaviour of subjects involved in team production. The abstract reads:
This study reports experiments that examine behavior under team production and a piece rate. In the experiments, participants complete a forecasting task and are rewarded based on the accuracy of their forecasts. In the piece-rate condition, participants are paid based on their own performance, whereas the team-production condition rewards participants based on the average performance of the team. Overall, there is no statistically significant difference in performance between the conditions. However, this result masks important differences in the behavior of men and women across the conditions. Men in the team-production condition increase their performance relative to men in the piece-rate condition. However, this gap in male performances across conditions diminishes over the course of the experiment. In contrast, women in the team-production condition show significantly lower performance than the women in the piece rate. As a consequence of these differences, men in the team-production condition show significantly better performance than women in the team-production condition. We also find evidence that men show stronger performance when they are in teams with a larger variation in skill level.
In other words women free ride more than men. Counterintuitive?

(HT: Organizations and Markets)

Friday 11 February 2011

The law of unintended consequences, another example

Professor Sonia Bhalotra asks Where have all the young girls gone?
The widespread availability of ultrasound scans in India is giving rise to abortions of female foetuses on an unprecedented scale, according to new research by Professor Sonia Bhalotra from the University’s Centre for Market and Public Organisation.
I'm sure that this outcome wasn't the one intended when the technology was developed.
Her (Professor Bhalotra's) study of ‘sex-selective’ abortion in India reveals that nearly half a million girls are aborted each year, which is more than the number of girls born annually in Britain. The practice is concentrated among relatively rich and educated Hindu families. According to Professor Bhalotra, this is consistent with ‘modern’ women being more receptive to new technologies and their wanting to have fewer children. She also suggests that Muslim women may have a stronger abhorrence of abortion.

Before this study, there was considerable anecdotal evidence of girl abortion in India, but no direct records of the practice. Using information on half a million births in India over more than three decades, this research identifies a dramatic decrease in the ratio of girls to boys being born after, and only after, the arrival of ultrasound machines in India.

Prof. Bhalotra speaks to BBC World Service here.

Competition, commissioning and the quality of healthcare: The evidence on Britain’s NHS reforms

Health reform is always a contentious issue and it is proving so in the UK. Britain’s coalition government is proposing significant healthcare reforms, which include promoting greater competition between providers and changing the way that care is commissioned. In this audio from Carol Propper of the Centre for Market and Public Organisation talks to Romesh Vaitilingam about the evidence for some of the claims and counterclaims about the likely impact of the reforms.

See also The Health Bill, the NHS and the facts by Carol Propper.

Thursday 10 February 2011

The art of prediction

or why you shouldn't make predictions - if you needed any more evidence on this point. This quote is from The Economist and considers the future of South and North Korea:
“Obviously, sooner or later the country must be reunited,” wrote Joan Robinson, a Cambridge economist, in 1977, “by absorbing the South into socialism.”
Reality has not been kind to Mrs Robinson. From the same article,
South Korea’s central bank reckons that North Korea’s annual income per person was only $960 in 2009, or about 5% of South Korea’s. (This estimate values the North’s output using South Korea’s prices and its exchange rate against the dollar.) This disparity dwarfs the income gap between the two Germanys on the eve of reunification.

Minimum wages in Nicaragua

The effects of minimum wage are much debated, a debate that generates much heat but little light, at least outside of economics. In a new working paper Tim H. Gindling and Katherine Terrell look at The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua.

In the paper Gindling and Terrell use an individual- and household-level panel data set to study the impact of changes in legal minimum wages on a number of labour market outcomes: a) wages and employment, b) transitions of workers across jobs (in the covered and uncovered sectors) and employment status (unemployment and out of the labor force), and c) transitions into and out of poverty.

Their finding show that changes in the legal minimum wage affect only those workers whose initial wage (before the change in minimum wages) is close to the minimum - a result you would tend to expect. What they find is that increases in the legal minimum wage leads to significant increases in the wages and decreases in employment of private covered sector workers who have wages within 20% of the minimum wage before the change, but have no significant impact on wages in other parts of the distribution. So low wage/productivity workers are affected via increases in unemployment and increases in wages for those who are likely enough to keep their jobs.

Gindling and Terrell's estimates from the employment transition equations suggest that the decrease in covered private sector employment is due to a combination of layoffs and reductions in hiring. Most workers who lose their jobs in the covered private sector as a result of higher legal minimum wages leave the labour force or go into unpaid family work; a smaller proportion find work in the public sector. They find no evidence that these workers become unemployed.

Wednesday 9 February 2011

Doha round: setting a deadline

From comes this interview in which Peter Sutherland talks to Viv Davies about the recently published interim report on ‘The Doha Round: Setting a deadline, defining a final deal’. Sutherland explains why Doha has stalled and presents the case for its immediate completion. He maintains it is crucial that governments now commit to concluding Doha by the end of 2011 or else the round is doomed and all that has been achieved will be lost, with disastrous consequences for world trade. There is also a transcript of the interview available.

Top in the AER

The American Economic Review is the top economics journal in the world. A committee of some very distinguished economists - Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba and Robert M. Solow - have selected the top 20 articles published in the AER over the last 100 years.

Interestingly, interesting to me at least, F. A. Hayek's article "The Use of Knowledge in Society" makes the list. About the article it is said:
The author addresses the fundamental question of the nature of the economic system and, in particular, its role in dealing with resource allocation when a fundamental knowledge base is distributed in small bits among a large population. The knowledge needed includes consumer valuations, production relations, and resource availabilities. In particular, general scientific principles, where expert opinion might be best, are only a small part of the knowledge base. The author argues for the importance of a price system in achieving coordination and efficiency in resource use without implying an impossible aggregation of information in a central place.
Also interesting is the inclusion of Armen Alchian and Harold Demsetz paper. “Production, Information Costs, and Economic Organization.”
What is the special role of the firm in organizing production? The authors argue that it is the ability to measure inputs and their productivity and to allocate hired resources in production involving the cooperation of many inputs. It is this phenomenon that explains why all cooperation of factors does not take place through market-determined contracts. The firm is made to be the residual claimant because that approach creates the appropriate incentives for management. Many implications of this hypothesis are developed.
This is an important paper in the theory of the firm literature, although it has come in for much criticism. But that criticism has lead to the development of new theories of the firm.

Anne Krueger's article on “The Political Economy of the Rent-Seeking Society” also makes the top 20:
Many government policies, such as import licenses in developing nations, create rents for some market participants. While the presence of such rents and the distortions that they create have long been noted, this paper recognized the importance of “rent-seeking behavior” and explored its welfare implications. The paper’s central finding is that competitive rent-seeking increases the welfare costs of policies such as trade restrictions. In the context of import restrictions, this result strengthens the case for the use of tariffs rather than import quotas, since quotas create the possibility of rent-seeking behavior. By identifying the importance of rent-seeking activities and providing a framework for analyzing their welfare costs, this paper expanded the economic analysis of the government’s choice of policy instrument to achieve particular goals. It also helped to launch a voluminous literature on the role of corruption and governance in the process of economic development.

An interesting question is, What does the list signals about what is, and what isn't important in modern economic thinking?

The full list is:
  • Alchian, Armen A., and Harold Demsetz. 1972. “Production, Information Costs, and Economic Organization.”American Economic Review, 62(5): 777–95.
  • Arrow, Kenneth J. 1963. “Uncertainty and the Welfare Economics of Medical Care.” American Economic Review, 53(5): 941–73.
  • Cobb, Charles W., and Paul H. Douglas. 1928. “A Theory of Production.” American Economic Review, 18(1): 139–65.
  • Deaton, Angus S., and John Muellbauer. 1980. “An Almost Ideal Demand System.” American Economic Review, 70(3): 312–26.
  • Diamond, Peter A. 1965. “National Debt in a Neoclassical Growth Model.” American Economic Review, 55(5): 1126–50.
  • Diamond, Peter A., and James A. Mirrlees. 1971. “Optimal Taxation and Public Production I: Production Efficiency.” American Economic Review, 61(1): 8–27 and Diamond, Peter A., and James A. Mirrlees. 1971. “Optimal Taxation and Public Production II: Tax Rules.” American Economic Review, 61(3): 261–78.
  • Dixit, Avinash K., and Joseph E. Stiglitz. 1977. “Monopolistic Competition and Optimum Product Diversity.” American Economic Review, 67(3): 297–308.
  • Friedman, Milton. 1968. “The Role of Monetary Policy.” American Economic Review, 58(1): 1–17.
  • Grossman, Sanford J., and Joseph E. Stiglitz. 1980. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70(3): 393–408.
  • Harris, John R., and Michael P. Todaro. 1970. “Migration, Unemployment and Development: A Two-Sector Analysis.” American Economic Review, 60(1): 126–42.
  • Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519–30.
  • Jorgenson, Dale W. 1963. “Capital Theory and Investment Behavior.” American Economic Review, 53(2): 247–59.
  • Krueger, Anne O. 1974. “The Political Economy of the Rent-Seeking Society.” American Economic Review, 64(3): 291–303.
  • Krugman, Paul. 1980. “Scale Economies, Product Differentiation, and the Pattern of Trade.” American Economic Review, 70(5): 950–59.
  • Kuznets, Simon. 1955. “Economic Growth and Income Inequality.” American Economic Review, 45(1): 1–28.
  • Lucas, Robert E., Jr. 1973. “Some International Evidence on Output-Inflation Tradeoffs.” American Economic Review, 63(3): 326–34.
  • Modigliani, Franco, and Merton H. Miller. 1958. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48(3): 261–97.
  • Mundell, Robert A. 1961. “A Theory of Optimum Currency Areas.” American Economic Review, 51(4): 657–65.
  • Ross, Stephen A. 1973. “The Economic Theory of Agency: The Principal’s Problem.” American Economic Review, 63(2): 134–39.
  • Shiller, Robert J. 1981. “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review, 71(3): 421–36.

Incentives matter: the poor and poor incentives file

The most compelling explanation for the marked shift in the fortunes of the poor is that they continued to respond, as they always had, to the world as they found it, but that we — meaning the not-poor and un-disadvantaged — had changed the rules of their world. Not of our world, just of theirs. The first effect of the new rules was to make it profitable for the poor to behave in the short term in ways that were destructive in the long term. Their second effect was to mask these long-term losses — to subsidize irretrievable mistakes. We tried to provide more for the poor and produced more poor instead. We tried to remove the barriers to escape from poverty, and inadvertently built a trap. - Charles Murray, Losing Ground, p. 9

Tuesday 8 February 2011

Nolan on asset sales

Matt Nolan has an interesting piece on Asset Sales up at the TVHE blog. In his article Matt writes,
In New Zealand at the moment there is definite scope for opening up SOE’s to private sector investment – that is where we are sitting now. However, even given this I cannot go as far as Roger Douglas and say that the price does not matter – in fact, price is THE issue that the government should use when deciding whether to sell assets.
and adds
At the same time the government know that, if it keeps hold of the asset, it expects to make some dividend yield from said asset through time. As a result, the government can price the asset – they can say they would not accept a bid below the discounted expected return from holding the asset.
What I would argue is that the government may  - in some circumstances - want to accept a bid below the discounted expected return from holding the asset. One example as why it could want to do so is given by Anbarci and Karaaslan's idea of An Efficient Privatization Mechanism:
In this paper, we consider the privatization of State-Owned Enterprises (SOEs) that are legal monopolies but not natural monopolies; their markets can be opened to competition once privatization takes place and other competitors can emerge and compete successfully against them in a few years. But until that happens, these privatized SOEs can have a significant level of market power. The currently used “Revenue Maximization (RM)” privatization scheme maximizes the government revenue from privatization but does not provide sufficient incentives for the privatized SOE eiher to charge a price lower than the monopoly price or to improve production efficiency until competition arises. We propose a new scheme to privatize such SOEs. We term this new scheme the “Welfare Maximization (WM)” scheme. The WM scheme practically yields no revenue to the government from the privatization of any such SOE; however, it induces the privatized SOE to charge a competitive price in the absence of any regulation. It also turns out that the WM scheme provides greater incentives for post-privatization process invention (i.e., for post-privatization cost reduction) than RM scheme. (emphasis added)
This is a very specific situation but it helps make the point that just trying to maximise the price received for an asset is not necessarily a good idea. In the above example welfare is maximised while revenue is basically zero. So I would say that the price doesn't matter or at least the price is one of the least important factors in privatisation. The issue when thinking about whether to privatise or not is not price, but productivity. It is more important to get the regulatory environment right so that competition can breakout in the industry than it is to maximise the price for which the asset is sold.

Basically, I guess, I'm arguing we should have lexicographic preferences, with price low on the list.

EconTalk this week

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about a new paradigm for thinking about macroeconomics and the labour market. Kling calls it PSST--patterns of sustainable specialization and trade. Kling rejects the Keynesian approach that emphasizes shortfalls in aggregate demand arguing that the aggregate demand approach masks the underlying complexity of the recalculations that periodically take place in a dynamic economy. Instead, Kling invokes the mutual exploration between entrepreneurs and workers for profitable opportunities that pay well using the workers' skills. This exploration takes time, involves trial and error, and can have false starts because businesses sometimes fail or employees are difficult to find or match with employment opportunities. Kling applies these ideas to the current crisis to explain why labour market recovery is so sluggish and what might policies might improve matters.

Monday 7 February 2011

What use administrators?

Economic Logician over at the Economic Logic blog comments on the problems he has with administrators who insist that he should go around applying for grants.
My administrators do not care about the impact on my research, or my welfare for that matter. They want the overhead. They are begging for money to justify their existence. I already bring lots of money to the college by teaching many, many tuition paying and public funding attracting undergraduates. In fact, from a back of the envelope calculation, my pay should double just for that. I am already subsidizing the administrators, why would they need grant overhead? They need to feed a machinery that deals with those grants. The office of research, which manages the grants, is twenty people strong. And if I hire a research assistant among the graduate students, I have to pay his or her full tuition before anything can be assigned. I cannot hire outside the university. So why would I want to hire anyone?

In some way, the administration wants me to pay for my salary through grants, a salary I have already more than earned with teaching to overflowing classrooms. To be honest, if I were successful in obtaining grants, I would leave the university and keep everything for myself. I would then be able to concentrate on research instead of putting up with all the red tape. But most funding agencies do not accept submissions from independent researchers, so I continue doing my research without grants and try to ignore these administrators. Let them show their self-importance elsewhere.
This is not just a problem at this guy's university. Sadly it's a worldwide issue. One has to ask if the growth in the ratio of administrators to academics seen in universities really has increased the quantity and quality of useful research or has it just resulted in more output of the least publishable unit? Have schemes like PBRF added to the sum total of the useful knowledge of mankind or just lead to the needless death of countless trees to feed the growth in academic journals that no one reads.

Friday 4 February 2011

Wine production

The table below - which comes from an entry by Elliott R. Morss at the Wine and Food Economics blog - provides the total wine production by country for 2008. Note just how little wine New Zealand does produce, but as Morss notes in his article, "New Zealand does well in export markets for how much it produces."

Wine Production
2008 2004-08 2008
Country (milhectltrs.) % Change per hectare
Italy 46,900 -6% 56
France 42,950 -25% 50
Spain 34,850 -19% 30
USA 20,550 2% 50
Argentina 14,680 -5% 65
China 13,005 17% 26
Australia 11,700 -20% 68
Germany 10,400 4% 102
South Africa 9,890 7% 75
Chile 7,860 25% 40
Romania 6,300 2% 31
Portugal 5,400 -28% 22
Greece 3,750 -12% 32
Brazil 3,500 -11% 35
Hungary 3,400 -22% 47
Austria 2,400 -12% 47
Bulgaria 1,800 -8% 19
New Zealand 1,700 43% 49

Italy, France and Spain are the big boys on the block. The size of Chinese production surprised me but Morss points out its mainly for local consumption. The growth in New Zealand's production over the 2004-8 period is pretty amazing and may help explain the current wine glut.

The law of unintended consequences, again

This new NBER working paper by Julie Berry Cullen, Mark C. Long and Randall Reback looks at Jockeying for Position: Strategic High School Choice Under Texas' Top Ten Percent Plan and give a nice example of the law of unintended consequences. The abstract reads:
Beginning in 1998, all students in the state of Texas who graduated in the top ten percent of their high school classes were guaranteed admission to any in-state public higher education institution, including the flagships. While the goal of this policy is to improve college access for disadvantaged and minority students, the use of a school-specific standard to determine eligibility could have unintended consequences. Students may increase their chances of being in the top ten percent by choosing a high school with lower-achieving peers. Our analysis of students’ school transitions between 8th and 10th grade three years before and after the policy change reveals that this incentive influences enrollment choices in the anticipated direction. Among the subset of students with both motive and opportunity for strategic high school choice, as many as 25 percent enroll in a different high school to improve the chances of being in the top ten percent. Strategic students tend to choose the neighborhood high school in lieu of more competitive magnet schools and, regardless of own race, typically displace minority students from the top ten percent pool. The net effect of strategic behavior is to slightly decrease minority students’ representation in the pool. (emphasis added)
Good intentions are not enough, you have to think through the likely effects of your policy. Changing incentives changes behaviour, often with unintended consequences.

Incentives matter: things not to say to the wife file

From Greg Mankiw's blog:
With the tremendous amount of snow we have had lately, my roof has started to develop some ice dams. So a little while ago, I climbed out onto the roof to shovel off as much snow as I could. The conversation as I exited through the window went something like this:

My wife: Be careful.

Me: I will.

My wife: It's slippery out there. I don't want you to fall.

Me: Well, remember that I have a lot of life insurance.

My wife: Ha. Ha.

Me: But I don't have nearly as much disability insurance. So if I do have an accident, make sure the fall kills me.

John Nye on the new institutional economics and economic development

John Nye, speaking last December on the New Institutional Economics and economic development.

(HT: Oo\rganizations and Markets.)

Thursday 3 February 2011

Setting up of Kiwibank

Andrew Cardow, David W.L. Tripe and William R. Wilson, of Massey University, have a working paper on Ideology or Economics: Government Banking in New Zealand. The abstract reads:
We argue that in the short history of New Zealand banking, political experimentation, based at first upon socialist ideology of the 1940’s led to the nationalisation of The Bank of New Zealand (BNZ), followed by a period of neo-liberalism in the 1980’s and early 1990’s in which the bank was privatised. We further argue that the establishment of Kiwibank Ltd (Kiwibank) in New Zealand at the dawn of the 21st Century was a return to the political ideology of the 1940’s. In this article we discuss the nationalisation and subsequent privatisation of the BNZ and draw a parallel between the perceived banking environment as it existed in New Zealand in the 20th Century and as it existed at the establishment of Kiwibank. By way of context setting we also discuss the political environment as it relates to the nationalisation of the Bank of England. We find that in New Zealand political experimentation, not commercial pragmatism was the underlying motivating factor for the state’s involvement in banking. The article contributes to the pool of knowledge regarding the political motivations behind nationalisation and state ownership of banking assets. The article is of interest to economic and political historians as well as those who study New Zealand political party history. Future policy makers could do well to reflect upon the motivations for state ownership of banking assets by asking if their decisions are driven by ideology or economics.
In their discussion of the reasons for the setting up of Kiwibank, Cardow, Tripe and Wilson write,
Thanks to the popular political rhetoric of Jim Anderton, Kiwibank became a reality. It is clear however that the decision to proceed with Kiwibank was a political decision. The business case was considered weak by the independent auditor and by banking commentators. It was the appeal to popular opinion and the image of being a New Zealand bank for New Zealanders that was the turning point. Like the BNZ and BOE nationalisation, the appeal to the ‘people’ was more successful than the appeal to economics.
The rhetoric employed by the main cheerleader Jim Anderton MP would not have been out of place 60 years earlier. Again the spectre of foreign owned banks was used as a rallying cry. Jim Anderton was able to point to the very dominant position that Australian banks held in New Zealand. It would be fair to comment that Australian banking interests controlled the retail banking market in New Zealand at the time. Again Jim Anderton was able to use the rhetoric of a ‘people’s bank’ – the same phrase first used by Nash when campaigning to nationalise the BNZ. Finally Anderton was able to suggest that a state owned bank would be more sympathetic to the plight of ‘ordinary’ new Zealanders than the large Australian owned banks.

As a result of political, and to a certain extent, marketing pressure from the New Zealand Post Office, Kiwibank was established. The new bank grew a presence quickly by utilising the branch network of new Zealand Post retail outlets. In establishing Kiwibank as a state owned bank, the government acted in a politically expedient manner rather than out of economic necessity.
Thus there was no economic necessity for Kiwibank but it was politically expedient and so once again we see politics trumping economics when it comes to policy.

Mises on fractional reserves

It is often argued that Ludwig von Mises was in favour of a 100% reserve requirement for banks. Such a view is put forward in Huerta de Soto's Money, Bank Credit, and Economic Cycles. Now this interpretation is being challenged. Nicolas Cachanosky has a new working paper out on Mises on Fractional Reserves: A Review of Huerta De Soto's Argument. The abstract reads:
The interpretation that Mises preferred banking with a 100% reserve requirement finds strong support in Huerta de Soto’s Money, Bank Credit, and Economic Cycles. This article seeks to review his arguments concluding that it is in fact more feasible to interpret that Mises preferred free banking with fractional reserves to the 100% reserve requirement.

Empirical evidence on privatisation

On it is noted that
[...] the unequivocal findings of economic research are that on average and over time, privately owned businesses outperform publicly owned ones (see here for relevant references). What matters for policy is this general result. Government should not bet against the odds with taxpayers’ money.
In addition to the Phil Barry reference Kerr gives the empirical evidence on privatisation is discussed in William L. Megginson's book, The Financial Economics of Privatisation, Oxford University Press, 2005.
The 87 studies from nontransition economies discussed in this chapter offer at least limited support for the proposition that privatization is associated with improvements in the operating and financial performance of divested firms. Most of these studies offer strong support for this proposition, and only a handful document outright performance declines after privatization. Almost all studies that examine post-privatization changes in output, efficiency, profitability, capital investment spending, and leverage document significant increases in the first four measures and significant declines in leverage.

The studies examined here are far less unanimous regarding the impact of privatization on employment levels in privatized firms. All governments fear that privatization will cause former SOEs to shed workers, and the key question in virtually every case is whether the divested firm's sales will increase enough after privatization to offset the dramatically higher levels of per-worker productivity. Three studies document significant increases in employment [Galal, Jones, Tandon, and Vogelsang (1992); Megginson, Nash, and van Randenborgh (1994); and Boubakri and Cosset (1998)], but most of the remaining studies document significant-sometimes massive- employment declines. These conflicting results could be due to differences in methodology, sample size and make-up, or omitted factors.

However, it is more likely that the studies reflect real differences in post-privatization employment changes between countries and between industries. In other words, there is no "standard" outcome regarding employment changes.

Perhaps the safest conclusion we can assert is that privatization does not automatically mean employment reductions in divested firms, though this will likely occur unless sales can increase fast enough after divestiture to offset very large productivity gains. Since the empirical studies discussed in this chapter generally document performance improvements after privatization, a natural follow-up question is to ask why performance improves. For utilities, the need to introduce competition and an effective regulatory regime emerges as key, but there is no "silver bullet" answer for what makes privatization successful for firms in competitive industries. As we will discuss in the next chapter, a key determinant of performance improvement in transition economies is bringing in new managers after privatization. No study explicitly documents systematic evidence of this occurring in nontransition economies, but Wolfram (1998) and Cragg and Dyck (1999a,b) show that the compensation and pay-performance sensitivity of managers of privatized U.K. firms increases significantly after divestment. Studies that explicitly address the sources of post-privatization performance improvement using data from multiple nontransition economies tend to find stronger efficiency gains for firms in developing countries, in regulated industries, in firms that restructure operations after privatization, and in countries providing greater amounts of shareholder protection.
Another overview of the empirical literature is Sunita Kikeri and John Nellis's An Assessment of Privatization, "The World Bank Research Observer", vol. 19, no. 1 (Spring 2004)
This article takes stock of the empirical evidence and shows that in competitive sectors privatization has been a resounding success in improving firm performance. In infrastructure sectors, privatization improves welfare, a broader and crucial objective, when it is accompanied by proper policy and regulatory frameworks.
Mary M. Shirley and Patrick Walsh write in Public versus Private Ownership: The Current State of the Debate, Working Paper, The World Bank,
Our review found greater ambiguity about ownership in theory than in the empirical literature. In the debate over the effects of competition, theory suggests that ownership may matter and if so, that private firms will outperform SOEs. The empirical studies squarely favor private ownership in competitive markets. Theory’s ambiguity about ownership in monopoly markets seems better justified, since the empirical literature is also less conclusive about the effects of ownership in such markets. Theories that assume a welfare maximizing government suggest that SOEs can correct market failures. In contrast, public choice theories are skeptical of the benevolent government model. Corporate governance theories suggest that even well intentioned governments may not be able to assure that SOE managers do their bidding. The empirical literature favors those skeptical of SOEs as a tool to address market failures. In studies of industrialized countries, where we might expect more developed political markets to motivate greater government concern with welfare maximization or better information and incentives to overcome corporate governance problems, private firms still have an advantage. The private advantage is more pronounced in developing countries, where market failures are more likely.
As to the empirical evidence for New Zealand let me deal with one obvious recent and controversial example: Kiwirail.

In the July 2009 issue of Competition and Regulation Times put out by the New Zealand Institute for the Study of Competition and Regulation (ISCR) the question is asked, Kiwirail: strategic asset or strategic blunder? The article summaries an ISCR research paper "The history and future of rail in New Zealand" by Dave Heatley.

We seem to be nearer the blunder end of the scale than the asset end. The Times article and the research paper argue along similar lines. Heatley opens his Times article by noting that back in 1999 one of the first projects undertaken by the ISCR was a study of the long-term economic performance of New Zealand railways.
Public rail ownership was characterised by declining performance, beginning in the 1920s and culminating in a very poor prognosis in the 1990s. There were signs that since 1993, privatisation had led to improved productivity and profitability; however, the business was still far from achieving financial sustainability. The ISCR report predicted that private-sector ownership would result in better incentives for productivity-enhancing decision making, but in the long run it was unlikely that in its current form the business would be able to generate returns sufficient to cover the costs of the very large sums of capital employed. Given these facts, a rational private owner would likely rationalise services and reduce the scale of the network to the point where it constituted a sustainable long-run business. Revenues freed up from repeated cycles of historic government-funded capital injections and operating subsidies could then be applied to more productive uses, to the wider benefit of the New Zealand economy.
Given that rail is again in the hands of the government it is timely to re-examine the assumption that government ownership will result in superior long-term outcomes for the long suffering taxpayer owners. Heatley writes,
The 2009 analysis reveals little evidence to suggest that overall the economic outlook for rail has improved since 1999. Despite gains in operational productivity, rail's share of the land freight task has declined over the period examined. Profitability has remained poor, suggesting an ongoing lack of competitiveness vis-a-vis other freight modes.
and continues
Rail networks offer benefits from economies of density (increasing use of existing tracks), but not necessarily from economies of size (increasing size of the network).' In a rail network with uneven patterns of use, such as New Zealand's, the economics of density means that the closure of lightly used lines will, in general, improve the overall economic performance of the network.
Importantly Heatley notes that
It proved difficult for private owners to rationalise the size of the network efficiently, due to poorly aligned incentives and political intervention in operational decisions such as exiting from the provision of certain long-distance passenger services.

The retention of land ownership by the Crown at the time of privatisation muted private incentives to rationalise the network as the private operator was unable to access the potential land-sale benefits from closing unprofitable lines. Private-sector owners have been incentivised to persevere with a strategy (originating under public ownership) of retaining otherwise uneconomic lines for their current income-generating potential, but refraining from investing in replacement infrastructure such as sleepers, tracks and bridges.

A return to integrated land, infrastructure and operational ownership resolves the incentive misalignment, enabling its new owners to rationalise network infrastructure efficiently. Yet perversely, extensive recapitalisation has followed re-nationalisation. The government has invested $2.9 billion in rail since 2002, and has committed a further $0.9 billion through to 2013. It is unlikely that the government will earn a reasonable financial return on this investment, as the strong incentives of private owners for ongoing productivity improvements will likely be muted under government ownership, and the scope for political intervention in strategic and operational activities has increased.

The consequences of political intervention are evidenced in the targets set for a modal shift from road to rail freight in the New Zealand Transport Strategy. Any increases in rail freight's share must ultimately come from substitution at the margins away from competing transport modes. Extensive competition from both road and sea freight restrains the ability of rail to set prices. Rail exhibits few apparent cost advantages, even with subsidies from the written-off opportunity cost of capital. So modal shift can only be driven by increasing the level of subsidies in order to lower prices artificially and therefore induce movement of marginal freight away from more efficient road and sea freight. Such shifts will be to the detriment of the overall economic performance of the transport sector and the wider New Zealand economy.

There is little evidence that the real costs of the current government ownership and investment strategy have been adequately assessed in terms of foregone benefits in other taxpayer-funded areas, such as health and education.
After this, an obvious question to ask is, Is there light at the end of the tunnel? Heatley comments,
The 2009 analysis confirms that the issues identified in 1999 still remain, and are unlikely to be addressed by recent changes in governance, ownership and policy direction. Yet rail still remains a viable transport medium for those segments to which it is intrinsically well-suited - long-haul carriage of heavy, bulky freight (coal, logs, manufactured goods, etc.) and high volume urban commuter services. The challenge for rail's new owners is to find a viable subset of the current rail network. Given current and projected freight and passenger types and volumes, it appears a viable subset exists at around 1500-2000 kilometres in length - less than half the present size. Line closures and land sales could fund upgrading of the core network to 21st-century standards.
So, rail makes sense for a small portion of the current network. However I can't see the changes in government policy and public perceptions need for rationalisation of the network coming to pass any time soon. So the taxpayer gets stuck with yet another white elephant

Another question worth asking, as partial privatisation is on the table, is, Why don't mixed ownership firms do as well as fully privately owned firms? Aidan Vinning and Anthony Boardman's "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises", Journal of Law and Economics vol. XXXII (April 1989) concludes 'The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs perform substantially worse than similar PCs [private corporations].' The basic problem is that partial government ownership politicises the firm.

As to the performance of state-owned banks Marcio I,. Nakane and Daniela B.Weintraub and look at Bank privatization and productivity : evidence for Brazil. Their abstract reads:
Over the past decade, the Brazilian banking industry has undergone major and deep transformations with several privatizations of state-owned banks, mergers and acquisitions, closing down of troubled banks, entry by foreign banks, and so on. The purpose of this paper is to evaluate the impacts of these changes in banking on total factor productivity. The authors first obtain measures of bank level productivity by employing the techniques due to Levinsohn and Petrin (2003). They then relate such measures to a set of bank characteristics. Their main results indicate that state-owned banks are less productive than their private peers, and that privatization has increased productivity.
Rafael La Porta, Florencio Lopezde-Silanes and Andrei Shleifer also look at the Government Ownership of Banks. They write
In this paper, we investigate a neglected aspect of financial systems of many countries around the world: government ownership of banks. We assemble data which establish four findings. First, government ownership of banks is large and pervasive around the world. Second, such ownership is particularly significant in countries with low levels of per capita income, underdeveloped financial systems, interventionist and inefficient governments, and poor protection of property rights. Third, government ownership of banks is associated with slower subsequent financial development. Finally, government ownership of banks is associated with lower subsequent growth of per capita income, and in particular with lower growth of productivity rather than slower factor accumulation. This evidence is inconsistent with the optimistic development' theories of government ownership of banks common in the 1960s, but supports the more recent political' theories of the effects of government ownership of firms.
This however has to be the coolest paper ever on the trying to workout if there is a difference between the performance of government-organised production versus privately organised production. Jonathan M. Karpoff, "Public versus Private Initiative in Arctic Exploration: The Effects of Incentives and Organizational Structure", Journal of Political Economy, February 2001, v. 109, iss. 1, pp. 38-78.

Karpoff's paper exploits a very interesting and unique natural experiment to compare the performance of government-organised versus privately organised production. Karpoff studies a comprehensive sample of 35 government-funded expeditions and 57 privately funded expeditions to the Arctic from 1818 to 1909 seeking to locate and navigate a Northwest Passage, discover the North Pole, and make other discoveries in arctic regions. I guess these are the cold hard facts!

He finds that the private expeditions performed better using several measure of performance. Karpoff shows that most major arctic discoveries were made by private expeditions, while most tragedies - in terms of lost ships and lives - were on publicly funded expeditions. Karpoff notes that the public expeditions might have had greater losses because they took greater risks, but then the public expeditions would have had a greater share of discoveries, which did not occur.

Karpoff also estimates regressions explaining outcomes in several ways-crew deaths, ships lost, tonnage of ships lost, incidence of scurvy, level of expedition accomplishment - controlling for exploratory objectives sought, country of origin, the leader's previous arctic experience, or the decade in which the expedition occurred. In essentially every regression, the dummy variable for private expedition is significant, with a sign indicating that the private expedition performed better. Karpoff concludes that the incentives were better aligned in the private expeditions, leading to systematic differences in the ways public and private expeditions were organised. While the uniqueness of the sample limits its generality, Karpoff provides an interesting illustration of the impact of ownership on the performance of an organisation.

While it is true that the effect of changes in ownership on the performance of firms is still debated in some quarters, most of the evidence suggests that firm performance improves when SOEs are privatised. This is a result that should be kept in mind with thinking about the current discussion on the merits of privatisation.

Wednesday 2 February 2011

Taxpayers as "owners"

When discussing privatisation Roger Kerr writes on his blog that
Taxpayers are indeed the true owners of SOEs (and other government assets).
I have to disagree.The taxpayers or the "public" do not own government assets in any meaningful sense of the word "ownership". All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the government or the bureaucracy in control of the asset in question.

The important point here is that without control you don't have ownership. As Oliver Wendell Holmes Jr. put it,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
Clearly the "public" does not have the rights Holmes refers to. The government (or its bureaucracy) has these rights. Following Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", 'Journal of Political Economy', 94:691-719) economist's tend to define the owner of an asset as the one who has residual rights of control over the asset; that is, whoever can determine what is done with the asset: how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Under "public" ownership it isn't the "public" who has the control rights, its the government. The "public" can not determine what use is made of a "public" asset, rather its use is determined by the politicians and managers in command of it. As Madsen Pirie has noted
The term 'public ownership' is a misnomer. The state sector may have the name of the public filled in on the dotted line, but the public do not own it in any meaningful sense of the word. All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the bureaucracy in command of it. Far from being owned by the public, it is owned in effect by the people who administer it. The public actually has more influence, via its choices and purchasing decisions, on private sector businesses than it can ever have over state industries and services. In those cases its influence is diffuse and diluted through the political process.
Just think of any of the SOEs in New Zealand, what control does the "public" have over them? Control rests with either the government or the bureaucracy or the firm's managers. The SOEs "(non)owners" - the taxpayers - have the least say of anyone in their running.

Kerr's comment was in reaction to a letter to the editor in Dominion Post which asked
Why should Kiwi mum and dad investors buy something which we already own?
The obvious answer is because they don't own them. By buying into SOEs they gain not only a share in the future profit stream of the firm but they also gain control rights over the firm and thus they become true owners of the firm.

The economics of revolution

Gerard O'Neill at the Turbulence Ahead blog writes,
Has the price of revolution fallen? Gary North thinks so. In a brilliant analysis of the current situation in Tunisia and Egypt he observes that:
When the cost of political mobilization falls, more is demanded. When people can mobilize thousands of protesters without any centrally directed agency and without any organization that can be infiltrated and subverted, they are in a position to impose enormous political damage on any existing regime, as long as the regime really is corrupt, tyrannical, and hated.
So demand curves do slope downwards, even for revolutions!

Technology has lowered transaction costs so much that we seem to be at the point where revolutions can be a decentralised "market" transaction. There is no need any more for central control or leadership, revolutions have taken on a spontaneous order of their own.

Price controls cause chaos in Ethiopian markets

But is anyone surprised by this news? This is from
Price controls on many staple food items ordered by Ethiopia's government early this month have reduced grocery bills for many low-income families. But now shopkeepers are upset and some basic items are disappearing from store shelves. Economists are concerned about the long-term effect of the government's price-fixing strategy.

Confusion has been the order of the day at shops and markets across the Ethiopian capital this month. The government surprised businesses on January 6, the Ethiopian Christmas Eve, by announcing price caps on such items as meat, bread, rice, sugar, powdered milk and cooking oil.

Prime Minister Meles Zenawi said the caps were a response to price gouging by merchants taking advantage of global price hikes. He vowed to put a stop to what he called "market disorder.”

Consumers respond

The news was seen as a Christmas gift by many cash-strapped consumers, who had seen food prices jump after the government devalued the local currency, the Birr, by 17 percent in September.

In the first days after the price controls went into effect, Shenkut Teshome was among shoppers who rushed to markets to scoop up goods at newly lowered prices. He applauded government intervention as the only way to save impoverished Ethiopians from starvation.

"People are hoping they can buy with their salary a fair material at a fair price," said Shenkut. "[Prices] were exaggerated and people cannot afford to buy with their salary and live at the same time, paying rent, this and that. The main thing is that they have enough food for their children."

The price controls, however, have triggered chaos and tension in the local marketplace. Arguments, even occasional fistfights have been reported between irate shoppers and business operators as price controlled goods, such as cooking oil and oranges, have disappeared from shelves.

One customer at a local shop, who spoke on condition of anonymity, quipped that the net effect of the price controls is that nothing has changed. He said that earlier, goods on the shelves were too expensive to buy. Now the prices are lower, but the goods have disappeared.

Shopkeepers discouraged

Business owners said the past few weeks have been unbearable. Customers are unhappy, some products they bought before the price caps must be sold below cost, and neighborhood government representatives drop by several times a day to check that they are in compliance.

Shopkeepers contacted for this report all said they were afraid to give their names, but one who agreed to speak anonymously said she was ready to give up.

She said, "This is way too much for us. We are small traders. We don’t make much money. We get everything on credit, so when this stock is gone, we are closing up shop."

Government defends

Representatives of Ethiopia’s Trade Ministry did not respond to numerous interview requests for this report. But government officials have been quoted as saying price controls were needed because retailers had raised prices blaming global price increases and the devaluation, although such factors had had no influence on the availability of their products.

In addition, four economists not affiliated with the government, all of whom have previously spoken to VOA on the record, declined to be quoted this time, saying the subject was too sensitive. But all four privately predicted that price fixing would not help in solving Ethiopia’s deep-rooted economic problems.

Temesgen Zewdie, finance chairman of one of Ethiopia’s main opposition parties and a former Member of Parliament, called the price controls a step toward a Communist-style command economy.

In a free market economy, the preferred way of doing this is to increase the supply and increase competition," said Temesgen. "But the government did not do that. Instead they went directly to the producers and retailers, telling them to reduce prices and supply these products. These practices happen in Communist states, not in western democracies."
So let me get this right: the government devalued the local currency and prices went up (entirely predictable), consumers complain about prices increases (entirely predictable), the government puts price controls in place to stop "price gouging" (entirely predictable), goods start disappearing from market shelves (entirely predictable). So, no surprises here; market chaos was predictable.

(HT: Knowledge Problem.)

Radio 4 documentary on the Austrian School

The BBC Radio 4 has produced a documentary on F. A. Hayek and the Austrian school of economics. The programme is Radical Economics: Yo Hayek!

Jamie Whyte looks at the free market Austrian School of F. A. Hayek. The global recession has revived interest in this area of economics, even inspiring an educational rap video.

"Austrian" economists believe that the banking crisis was caused by too much regulation rather than too little. The fact that interest rates are set by central banks rather than the market is at the heart of the problem, they argue. Artificially low interest rates sent out the wrong signals to investors, causing them to borrow to spend on "malinvestments", such as overpriced housing.

Prof Steven Horwitz, St Lawrence University, New York
Prof Larry White, George Mason University, Washington DC
Robert Higgs, Independent Institute, California
Philip Booth, Institute of Economic Affairs
Steve Baker, Conservative MP
John Papola, co-creator Fear the Boom and Bust
Lord Robert Skidelsky, economic historian and biographer of John Maynard Keynes
Tim Congdon, founder, Lombard Street Research

Tuesday 1 February 2011

But why?

Brian Gaynor writes in the New Zealand Herald that,
The Government has to convince the public that these companies will remain majority Crown and New Zealand controlled.
And I ask, But why? All this will do is, ceteris paribus, lower the amount that the government gets for the shares it sells. And then, of course, people will complain about the amount of money raised by the asset sales. 50.1% of a firm is worth a lot more than 49.9% so forcing SOEs to remain Crown owned reduces the return on a sale and the xenophobic requirement for New Zealand control reduces the number of bidders for an SOE and thus again lowers the amount that will be received.

While on the topic of "New Zealand control" of these firms, what happens if a New Zealander buys shares and then moves to, say, the U.S., will they be forced to sell their shares before they are allowed to leave New Zealand? Or what happens if a Canadian living in New Zealand buys shares - will they be allowed to by Gaynor? - and then returns to Canada. Must they sell their shares before leaving to ensure the same amount of "New Zealand control". Both these situation could result in less "New Zealand control", in some sense. When is there too little "New Zealand control"? Or does Gaynor equate "New Zealand control" with "state control"? If "New Zealand control" is "state control" then why worry about what happens to the non-state shares? Why not just sale them to the highest bidder, regardless of where they come from? Why would you want to incentivise "domestic investors"?

Gaynor goes on to make things worse by arguing that we should incentivise "domestic investors"?
Domestic investors should be incentivised to invest in the IPOs, either on their own accounts or through their KiwiSaver schemes. This can be achieved by offering shares at a discount to individual New Zealand investors and KiwiSaver funds.
Which would yet again lower the amount the government would receive for any sale. If "domestic investors" need to be "incentivised to invest" then may be its just because they don't believe that the shares are worth buying. As to KiwiSaver funds being "incentivised to invest" the aim of any such fund is to maximise the return to their investors and if the funds need to be incentivised it means that they too don't believe the investment is one worth making. Handing taxpayer money to these groups to bribe them to invest - this is what Gaynor's idea amounts to - doesn't sound like a optimal policy move. The whole point of a sale is to bring market discipline to these firm, distorting the market with taxpayers money seems an odd way of achieving market discipline.

EconTalk this week

Investigative journalist Brian Deer talks with EconTalk host Russ Roberts about Deer's seven years of reporting and legal issues surrounding the 1998 article in The Lancet claiming that the MMR vaccine causes autism and bowel problems. Deer's dogged pursuit of the truth led to the discovery that the 1998 article was fraudulent and that the lead author had hidden payments he received from lawyers to finance the original study. In this podcast, Deer describes how he uncovered the truth and the legal consequences that followed. The conversation closes with a discussion of the elusiveness of truth in science and medicine.