Consumer surplus of event 2

At Offsetting Behaviour Eric Crampton responds to my post on Consumer surplus of events by arguing that what I am missing is that there could be a market failure preventing the realisation of potential consumer surplus.

First I am yet to be convinced that there really are market failures of this type. There are many ways to get people to pay at least some of – enough of - their CS to have an event put on. Second its not clear to me that even if there is such a market failure the use of a government subsidy is the optimal policy response. Think of the argument for the use of tariffs to deal with problems of infant industries. Back in 1969 Richard Baldwin pointed out that even if some form of government action is need to protection infant industries tariffs were a bad way of providing such protection. He argues that what is needed to handle the problems of infant industries is a much more direct and selective policy measure than import duties. I wonder if a similar case cannot be made here. There has to be a better more direct, selective policy response to whatever market failure is occurring than the use of a subsidy. Is there really no way to address the market failure at its source rather than distort multiple markets via the use of subsidies and the taxes to fund them?

What role can trade policy play in the fight against malaria?

May be an odd sounding question, but at VoxEU.org Lucian Cernat argues for greater coherence between trade, foreign investment, and other malaria-related policy initiatives. In particular, technical assistance should prioritise the removal of "killer tariffs" on mosquito nets. He writes,

At first sight one would argue that trade policy cannot be called upon to contribute directly to this important public-health challenge. Yet, trade policy was seen as one additional tool to fight malaria by African leaders. In April 2000, at the African Summit on Roll Back Malaria in Nigeria, 39 African countries have pledged to remove taxes and tariffs on insecticide-treated nets and other malaria-related preventive materials and drugs (WHO 2003).

This was hailed as a quick and effective contribution that trade policy could make towards the eradication of malaria in Africa. But, more than a decade later, it turns out that quite a few countries severely affected by malaria still maintain tariffs on the importation of mosquito nets and other malaria-fighting products and drugs.

According to the information provided by the Malaria Taxes and Tariffs Advocacy Project (a joint project sponsored by the WHO and Gates Foundation), in August 2010, some 30 countries in Africa still maintained tariffs as high as 20% on ITNs.

Imposing a tariff on a life-saving product can be tantamount to a "killer tariff" for some poor African households who would have to choose between food or other essential products and a more expensive mosquito net.

Over 100 million people are living in malaria-endemic countries that still apply a tariff on mosquito nets. For the top African countries with the highest number of reported malaria cases in 2010, tariffs on mosquito nets are still between 5% and 35% and the mosquito net ownership ratios are very low, except in Gambia. The correlation is not very strong since ownership ratios are in some countries largely determined by (duty) free distribution of mosquito nets by donors and international agencies.

It should be noted that several countries (e.g. Kenya, Uganda, Senegal, Ghana, Nigeria) have taken the right steps and have eliminated tariffs on mosquito nets. Furthermore, countries like Nigeria, Ethiopia, and Madagascar have explicitly created several duty-free tariff lines for products including "mosquito net" in their descriptions (thus avoiding customs classification misunderstanding or abuse). Other countries have announced that, even if tariffs are still officially in place, they would waive the tariffs on mosquito nets.

But, as long as some double-digit tariffs persist, several malaria-endemic countries seem to import negligible amounts of mosquito nets in commercial terms, despite low coverage rates among vulnerable groups.

Another reason for free trade.

Yet another benefit of globalisation:

better management practices in firms.

Peter Klein at Organizations and Markets points us to this new paper:

The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries
Nicholas Bloom, Helena Schweiger, John Van Reenen
NBER Working Paper No. 17231, July 2011
We have conducted the first survey on management practices in transition countries. We found that Central Asian transition countries, such as Uzbekistan and Kazakhstan, have on average very poor management practices. Their average scores are below emerging countries such as Brazil, China and India. In contrast, the central European transition countries such as Poland and Lithuania operate with management practices that are only moderately worse than those of western European countries such as Germany. Since we find these practices are strongly linked to firm performance, this suggests poor management practices may be impeding the development of Central Asian transition countries. We find that competition, multinational ownership, private ownership and human capital are all strongly correlated with better management. This implies that the continued opening of markets to domestic and foreign competition, privatisation of state-owned firms and increased levels of workforce education should promote better management, and ultimately faster economic growth. (Emphasis added)

So more evidence that globalisation can be good for your growth.

Consumer surplus of events

In my recent posting on World cup costs and benefits I made mention of the Ph.D. thesis of Sam Richardson from Massey University. Richardson’s thesis was on "Assessing the economic justification for government involvement in sports facilities and events in New Zealand".

On taking a quick look at the thesis the following comment stood out for me:

The final analytical contribution of this research involves the estimation of consumer surplus benefits from a demand model for representative rugby in Wanganui. The consumer surplus benefits are then compared to the cost of local government involvement in the upgrade of the playing facility to evaluate whether the council’s involvement was economically justified. (Emphasis added.)

What I don’t see is why you would compare consumer surplus (CS) to costs to evaluate the council’s investment.

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

Of course I could just be missing something obvious.

EconTalk this week

Keith Hennessey of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the debt ceiling and the budget process. Hennessey, who worked for Senate Majority Leader Trent Lott on budget issues in the late 1990s, explains the politics of the debt ceiling and the budget process. Using his past experience as a staffer, Hennessey gives those of us on the outside a window into what is actually going on in the hallways, who has power, and how information flows up and down in the chain of constituents, members, party leaders. The conversation closes with Hennessey's best guess of which outcomes of the current negotiations are most likely and why

Interesting blog bits

1. Karyn Scherer writes about Roger Kerr: The happy warrior

   Government indifference, public hostility, even cancer - despite it all, the Business Roundtable's Roger Kerr can't help being an optimist

2. Mark Pennington on What Ha Joon Chang Doesn’t Tell You about ‘Free Market Economics’

   Professor Ha Joon Chang has become something of a hero to those who champion heterodox economic theory and who rail against the supposed intellectual hegemony of ‘neo-liberalism’. In a number of books such as Kicking Away the Ladder Chang sets out to overturn the alleged orthodoxies of mainstream economics by questioning the case for free trade as an appropriate development strategy in poorer countries and more widely making the case for a high regulation/big government agenda. These themes are vividly on display in Chang’s latest best seller 23 Things They Don’t Tell You About Capitalism. Unfortunately, also on display in this book is Chang’s penchant for misrepresenting opponents, the use of straw man analyses and claims to theoretical innovation for what amounts to ‘re-inventing the wheel’.

3. Tim Worstall notes that The Washington Consensus Works

   I know this isn’t what Dani Rodrik is trying to point out in this blog post but it is the lesson that I take away from it

4. Art Carden has a few Thoughts on Liberty and Society

   I spent this week teaching at an Institute for Humane Studies “Liberty and Society” Summer Seminar. The weekend closed with a panel wherein the members of the seminar faculty answered questions about the importance of liberty, strategies for advancing liberty, our worldviews, and so on. Here are a few thoughts based on the questions that jumped out at me.

5. Tony Wrigley on Opening Pandora’s box: A new look at the industrial revolution

   Before the industrial revolution, economists considered output to be fundamentally constrained by the limited supply of land. This column explores how the industrial revolution managed to break free from these shackles. It describes the important innovations that made the industrial revolution an energy revolution.

6. Matt Nolan on Keeping NZ inflation in perspective

   Holy shit. Since I’ve started getting the chance to read opinion pieces again I’ve noticed one extreme theme running through them – a sharp and angry fear of inflationary pressures

7. David Friedman on Austrian Fantasy

   Browsing the web, I came across the following claim by Lew Rockwell:
   
   " Need I note, as this article indirectly indicates, that the whole world is reading Rothbard, but that Friedman is almost a nobody outside of mainstream academic economics?"

8. Eric Crampton on A public responsibility?

   When we have a public health system, and when folks worry about costs others impose through the health system, all kinds of private behaviours have external effects.

9. James Otteson on Stiglitz on Deregulation and the Rich

   Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”
   
   As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.

World cup costs and benfits

Eric Crampton at Offsetting Behaviour notes this piece about Massey University economist Sam Richardson who is taking about the benefits (or otherwise) of the rugby world cup.

Dr Richardson, who researched public spending on major sporting events for his PhD, says the $507m to $700m [in economic benefits] bandied about is a lofty and unrealistic figure.

[...]

“Maybe the Government shouldn’t talk about economic impact,” he says. “I do not think we should be using economic impact as a justification for hosting sporting events. Maybe we should forget the magic figures and focus on the long-term benefits.”

Dr Richardson is sceptical of any argument that suggests we are going to get something tangible out of hosting events. “The bottom line is yes, we are going to bring in visitors, and yes, they will spend money. We also know that the taxpayer will pick up a sizeable chunk of what is expected to be a loss of around $40 million.

[...]

He says research from the United States shows the real figure could be gained by moving the decimal point one place to the left.

“Based on the original figure, this would give us $50.7 million – there is an element of truth to that view,” he says. “But we cannot confidently say it is going to bring in so many dollars. If we are justifying government spending on these numbers, it tends to become a creative accounting exercise.”

Richarson's PhD thesis was done on, "Assessing the economic justification for government involvement in sports facilities and events in New Zealand". Perhaps the takeaway line comes from the abstract, where he writes,

Findings of the research suggest that the economic impact argument for government involvement in the construction of sports facilities and the hosting of internationally oriented events is generally not justified [...]

If only central and local government could understand this point as such an understanding it would save the taxpayers and ratepayers of New Zealand a lot of money.

Contemporary work in Austrian Economics

Contemporary work in Austrian Economics is the title of a new working paper by Anthony J. Evans, Associate Professor of Economics, ESCP Europe. The paper is based on a talk given as “Austrian Economics: Past, Present and Future”, The Adam Smith Institute, St Stephens Club London, September 23rd 2010.

The abstract reads,

This article provides a brief survey of contemporary developments in the Austrian school of economics, signalling that: (i) the amount of Austrian research and the number of Austrian researchers is growing exponentially; (ii) good Austrian economists are not being marginalised by the economics profession; and (iii) there have been significant advances in our understanding of economics made recently. Scholars can embrace the second revival of Austrian economics and look confidently hat the increasing academic credibility of the school.

When discussing Organisational culture & management Evans writes,

Paul Dragos Aligica (2007) uses Misesian notions of human action to explore the role of scenario-building as a tool for decision-making, whilst in Capital in Disequilibrium, Peter Lewin (1999) analyses the subjective nature of capital, how it fits into a firm’s organisational structure, and how capital is evaluated and allocated ina world of disequilibrium. Fred Sautet’s (2000) An Entrepreneurial Theory of the Firm shows how firms flatten their organisation structure to benefit from entrepreneurial alertness, and Charles Koch (2007) creates an Austrian theory of management and shares the results of applying it to the world’s largest private company. Nicolai Foss and Peter Klein’s (forthcoming) book, The Theory of the Firm highlights an exposure to uncertainty and thus resource ownership as the key aspect of entrepreneurship, to develop an entrepreneurial theory of judgment.

This is interesting because I would argue that the Austrian theory of the firm, or theory of organisations in general, is one of the lest developed areas of Austrian economics. The Austrian approach to markets is much more developed than the their approach to the suppliers and demanders (firms and households) within those markets.

Evans ends on a positive note by saying,

Any half-decent economist should be able to quibble with my list, and I’m sure it reflects a bias towards my own research interests and background. I also recognise that I have missed out an even newer generation of Austrian economists. This all serves my point – Austrian scholarship is a spontaneous order and younger academics are constantly pushing out the boundaries of what can be accomplished. They are demonstrating that it is possible for Austrian school economists to take a seat at the top table of the professional debate without compromising their message - it just takes the right attitude and a lot of work. I’ve provided evidence of the remarkable progress that’s been made since the first revival, and will continue to be made. The academic wing of the Austrian school is flourishing, and the future of good economics is Austrian.

Do parents matter? Q&A with Bryan Caplan

Reason's Nick Gillespie interviews Bryan Caplan about Caplan's new book "Selfish Reasons to Have More Kids: Why Being a Great Parent Is Less Work and More Fun Than You Think".

The youth unemployment scandal

Roger Kerr has blogged on the following graph from the recent New Zealand Institute publication "More ladders, fewer snakes: Two proposals to reduce youth disadvantage."

Kerr writes,

But the chart shows that it is New Zealand that stands out with youth unemployment being 45% of total unemployment, the worst outcome in the OECD.

Why are our political parties not talking about this appalling state of affairs? One reason is that many of them are complicit in bringing it about. The abolition of the youth minimum wage, sponsored by the Greens and Labour, is clearly a major contributing factor to the surge in youth unemployment. National in office has declined to reintroduce youth wages. The New Zealand Institute in its report also ducked the issue.

The Economist magazine has also noted that The ratio of youth to adult unemployment worsens. Their graph is

The Economist notes,

In New Zealand, Sweden and Luxembourg, the youth-to-adult unemployment ratio is more than four.

For the data used in the Economist graph the adult unemployment rate as around 5% with the youth rate at over 20%.

Kerr ends by noting that with regard to youth unemployment,

This conspiracy of silence on the subject is an indictment of New Zealand’s seeming inability to face up to grim social realities.

Protectionism rises in response to pessimistic prospects for growth

In the VoxEU.org audio Simon Evenett talks to Viv Davies about the 9th Global Trade Alert report that suggests that G20 governments’ resolve to resist protectionism has faltered since the Seoul G20 Summit. Evenett describes murky protectionism, the impact of the crisis on the BRICs and the least developed countries, and how WTO rules are being circumvented.

Growth and taxes – the evidence

At the IEA blog Patrick Minford takes a look at the ever controversial question of the relationship between taxes and growth. With reference to work done by Minford and Jiang Wang (see Sharper Axes, Lower Taxes) Minfords writes,

Our aim was to construct some simple tests of whether ‘activist’ policies (of government spending on R&D support or on investment subsidies) or ‘incentivist’ policies (reducing the barriers to business entry/exit and also taxes on business people’s incomes) are the cause of growth. We followed the standard practice of gathering data on growth rates of many countries (approximately 100) and many periods (three decades, the 70s, 80s, and 90s); and similarly gathering data on these candidate variables. We then asked whether growth was related to one or to the other, or to neither, using standard tests of statistical significance.

In this sort of study the data you gather is the key ingredient. We treated the gap between home real interest rates and world real interest rates as the measure of investment subsidy: the government can by a variety of interventions, especially exchange controls, keep down the cost of capital (basically because home savers have Hobson’s choice and foreign lenders’ money can be subsidised to keep it low). For R&D subsidies we had measures of how much governments spent on R&D. In some separate work we also looked at education spending and infrastructure, as other activist policies.

For the business tax rate we used two main elements: the rate of general tax (which we set equal to the share of government spending in GDP – this can be thought of as the underlying tax rate that must be levied, whether today or later when compounded by interest payments) and also the loading of costs onto business through restrictions on entry and exit. The first came from the Penn Tables, the second from the World Bank.

The resulting ‘business tax rate’ is an amalgamation of the two.

Results?

When you relate growth to this business tax variable you get a strong negative relationship. When you relate it to the activist measures, in no case do you find any relationship at all. These statements remain true however you ‘control’ for other possible factors driving growth.

This is a case of "so far, so good" for those who think incentives are important for growth. And who doesn't? But in Minford's view there is still work to be done to settle the matter. The problem is that you can get correlations between many variables, apart from measures relating to incentives or teaxes, if you are willing to work hard enough at gathering ‘helpful’ data.

For example, take the case for education or ‘human capital’ as the cause of growth: human capital is hard to measure and with not too much effort one can find a measure that is correlated with growth. The same goes for such things as the level of infrastructure, or R&D. How then to distinguish between these causal theories? Here is an example of the difficulty: do education levels cause growth and then growth cause barriers to business to come down? Or do barriers coming down cause growth and growth then cause there to be more education spending?

In further work we hope to refine these tests. Our basic idea is that you can set out each theory of the economy with its different growth mechanism and explanation of the other ‘factors’. Then you simulate the behaviour of each type of economy and see which comes closest in its simulated behaviour to the behaviour in the data. We are at a fairly early stage in this work. So we must conclude in the time-honoured academic way: ‘more work is needed’!

Of course if more work wasn't needed many academics would be out of a job!

Peer review: not what it once was

At the Organisations and Markets blog Dick Langlois writes,

Glenn Ellison has a paper in the new issue of Economic Inquiry called “Is Peer Review in Decline?” Here’s the abstract.

Over the past decade, there has been a decline in the fraction of papers in top economics journals written by economists from the highest ranked economics departments. This paper documents this fact and uses additional data on publications and citations to assess various potential explanations. Several observations are consistent with the hypothesis that the Internet improves the ability of high profile authors to disseminate their research without going through the traditional peer review process.

The explanation put forward is that this has to do with the relative costs and benefits of the review process. The argument is that the editors of the top field journals, in particular, have been wanting greater revisions more often. Because the costs of the review process are high and the benefits modest for prestigious authors, they increasingly avoid these journals.

So changes in technology, the internet in particular, has altered the relative costs and benefits of peer review for the top researches in such a way that they increasingly avoid it.

Interesting blog bits

1. James Banks, Zoë Oldfield and James P Smith ask Do differences in childhood circumstances explain US-England health differences at older ages?

   How much of our health in adulthood and old age is determined by our childhood? Using decades of data from the US and England, this column shows that the US excess in disease is common throughout the age distribution of the population. Moreover, poor childhood health tends to worsen adult health more in the US.

2. Amanda Goodall asks Physician-leaders and hospital performance: Is there an association?

   Are hospitals better run by former doctors or by specialist managers? This column looks at the top-ranking hospitals in the US and finds that hospital-quality scores are about 25% higher in physician-run hospitals than in the average hospital.

3. Simon J Evenett warns us that Resolve against protectionism weakens since the Seoul G20 Summit.

   Despite the public commitments made at the Seoul G20 summit, this year protectionism has slipped off the work programme of G20 nations. The latest evidence published in the 9th Report of the Global Trade Alert, summarised here, shows that government resolve against protectionism has weakened as global economic prospects have dimmed. The global trading system is not out of the protectionist woods.

4. Tim Worstall on African Free Trade Zone

   For some reason I’ve never really understood a certain sort of person gets all agitated if you suggest that free trade might solve some of Africa’s problems.

5. Matt Nolan comes out In defence of government funded tertiary education

   As a young child I was told repeatedly that education was a right, and that society should pay for it – not just at the primary level, not just at the secondary level, but at the tertiary level as well. Being an argumentative child I disagreed repeatedly.

6. Gavin Kennedy notes that the Repair and Renovation of Adams Smith's Panmure House Approved! (at last)

   It has just been announced (11.30 am this morning!) that the Scottish Government has approved the proposals from Edinburgh Business School (Heriot-Watt University) for the sympathetic renovation of ‘Panmure House’, just off old Edinburgh’s historic Royal Mile, where Adam Smith lived from 1778 up to his death in 1790.

7. Kurt Schuler on Free banking and the historical gold standard

   Over at his recently established blog “Uneasy Money,” David Glasner has a post on “Gold and Ideology.” (He has started fast out of the gate, writing prolifically; I hope he doesn’t burn out, but there’s a lot to write about when the subject is money.) He claims that “the gold standard never managed itself; in its classical period from 1870 till World War I it was under the constant management of the Bank of England with the occasional assistance of the Bank of France and other major banking institutions.” I disagree.

Bruce Caldwell - why economics needs the history of thought

Unfortunately history of thought is a hard sell these days in economics. But if anyone can make the sale Bruce Caldwell can.

John Taylor as anti-keynesian

A Economics One John Taylor writes

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

TEDTalk – Trial, Error and the God Complex

This is a video of a TEDTalk by Tim Harford on Trial, Error and the God Complex

The "Out of Africa" hypothesis, human genetic diversity, and comparative economic development

This is the title of a new NBER working paper by Quamrul Ashraf, Oded Galor. The abstract reads:

This research argues that deep-rooted factors, determined tens of thousands of years ago, had a significant effect on the course of economic development from the dawn of human civilization to the contemporary era. It advances and empirically establishes the hypothesis that, in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity and has had a long-lasting effect on the pattern of comparative economic development that is not captured by geographical, institutional, and cultural factors. In particular, the level of genetic diversity within a society is found to have a hump-shaped effect on development outcomes in both the pre-colonial and the modern era, reflecting the trade-off between the beneficial and the detrimental effects of diversity on productivity. While the intermediate level of genetic diversity prevalent among Asian and European populations has been conducive for development, the high degree of diversity among African populations and the low degree of diversity among Native American populations have been a detrimental force in the development of these regions.

If right, then this research suggests history - in terms of genetic diversity - really does matter!

Important for the Asharf and Galdor argument is that there exists an optimal level of genetic diversity for economic development which reflects the interplay between the conflicting effects of diversity on the development process. The adverse effect pertains to the detrimental impact of diversity on the efficiency of the aggregate production process of an economy. Heterogeneity increases the likelihood of mis-coordination and distrust, reducing cooperation and disrupting the socioeconomic order. Greater population diversity is therefore associated with the social cost of a lower total factor productivity, which inhibits the ability of society to operate efficiently with respect to its production possibility frontier. The beneficial effect of diversity, on the other hand, concerns the positive role of diversity in the expansion of society’s production possibility frontier. A wider spectrum of traits is more likely to be complementary to the development and successful implementation of advanced technological paradigms. Greater heterogeneity therefore fosters the ability of a society to incorporate more sophisticated and efficient modes of production, expanding the economy’s production possibility frontier and conferring the benefits of increased total factor productivity. Higher diversity in a society’s population can therefore have conflicting effects on the level of its total factor productivity. Aggregate productivity is enhanced on the one hand by an increased capacity for technological advancement, while simultaneously diminished on the other by reduced cooperation and efficiency.

May be the Productivity Commission should be researching New Zealand's genetic diversity.

EconTalk this week

John Taylor of Stanford University talks with EconTalk host Russ Roberts about the state of the economy and the prospects for recovery. Taylor argues that the design of the fiscal stimulus was ineffective and monetary policy, so-called quantitative easing, has also failed to improve matters. He argues for a return to fiscal, monetary, and regulatory normalcy as the best hope for economic improvement. The conversation concludes with a discussion of the impact of the current crisis on economics education.

A land tax

TVHE's Matt Nolan has been arguing for a land tax. Why?

A land tax is appealing is that there is a fixed amount of land in New Zealand. As a result, if you tax land the price of land will fall, but the amount of land being used will not change. In contrast, a tax on labour income will lead to some people working less, and a tax on capital will lead to lower levels of investment in New Zealand. This attribute of a land tax means that it is more “efficient” than other taxes, implying that for any given amount of revenue the government wants to raise this tax will do it for a lower cost to the rest of us.

So it is efficient. And economists love efficiency! But is it fair? There are two main questions with regard to fairness, or claims Matt: 1) How can we justify taxing people based on the land that they own? and 2) Is taxing people who own land instead of income fair?

With regard to the first question, there are a few basic government powers that limit the land owners right to absolute control of their land – and one of those is taxation. I would argue that this is akin to stating that society owns land while individuals that hold the land title are in effect given rent-free permanent leases and the right to use the land within certain conditions.

The concept of permanent lease allows for clear property rights so that people have certainty when using the land for their own purposes, such as erecting or renovating buildings, growing crops, or farming animals. But it should also allow for the government to charge rent on the land on behalf of society, which in essence what a land tax would be.

Although this justification for a land tax appears a bit strange at first, it is in fact no different to one of the common justifications for income tax. Society helps individuals to develop their skills and ability to earn income by providing public hospitals, schools, and other infrastructure. A tax on individual labour income can in turn be seen as payment for these services and for the opportunity to develop skills and ultimately earn a greater income. If we accept this justification for income taxes, it would seem reasonable to also apply it to land taxes.

But is it fair to shift the burden of taxation from income to land?

There are winners and losers from any change in tax policy. If we were to introduce a land tax and reduce income taxes, people who hold a significant amount of land would lose out, while young people with their working lives ahead of them would gain. Furthermore, individuals that own land but have variable income year-to-year may suffer from cash-flow issues under a land tax. Finally, following a drop in land prices, financial institutions exposed to lending on land would also suffer loses.

However, changes in wealth as a result of the imposition of a land tax will only happen once. As a result, it would be possible for the government to compensate the immediate losers of the changes through lump-sum payments if it deems the adjustment to the new tax unfair.

For example, if we believe that a land-tax really hurts people who have retired but own their land freehold government could send them a one-off payment to make up for this.

By doing this society gets the gains of a land tax in terms of efficiency without hurting the worst off in society.

Hopefully next week Matt will argue for a poll tax, which is also efficient!

Britain's economic suicide

At the Rational Optimist blog Matt Ridley writes on energy policy in the U.K., and why its wrong.

The future belongs to countries that can get their electricity, heat and fuel supplied as cheaply and reliably as possible. That is the priority, not the carbon fetish.

Ridley opens by noting,

British Gas is putting up the cost of heating and lighting the average home by up to 18 per cent, or about £200 a year. Indignation at its profiteering is understandable. But that can only be a part of the story: the combined profits of the big six energy supply companies amount to less than 1.5 per cent of your energy bill, according to the regulator, Ofgem.

Demand for energy is rising around the world, so what does the U.K. government plan to do. The wrong things of course.

So what does the Government plan to do? This week it publishes a white paper on electricity market reform that will be predicated upon, indeed proud of, pushing up prices even faster. To meet its self-imposed green targets, the Government’s policy is to tax carbon, fix high prices for renewable electricity and load extra costs on to people’s electricity bills — but without showing them as separate items.

This policy is beyond foolish. While you might just get away with driving up energy bills in a boom, to add green stealth taxes on top of supply-driven price increases at a time of economic misery is asking for political trouble.

In the past cheap energy has helped drive productivity increases and increased growth and thus created jobs. But

[...] a dear-energy policy destroys jobs. Not only does it drive energy-intensive business overseas; according to Charles Hendry, the Energy Minister, the average British medium-sized business will face an annual energy bill £247,000 higher by 2020 thanks to the carbon policy. That’s equivalent to almost ten jobs it must lose, or cannot create.

So what are the questions facing the U.K. government,

So the hijacking of energy policy by carbon targets is mad. Far more urgent questions face us than that. How do we replace the one-third of coal-fired stations that will close by 2015? Not by renewables, that’s for sure. How do we replace the capacity of our nuclear power stations, all but one of which will close by 2023? How do we compete with China, where it takes five years, not 15, to build a nuclear power station? How do we compete with America, where companies are now swimming in cheap domestic natural gas, half the price it is over here, thanks to shale gas exploration?

Gas already dominates the British energy market, providing about half of all joules. That dominance will only grow as abundant shale gas joins Russian and Iranian supplies. Given that renewables are an irrelevance in terms of supply, and that coal is being slowly phased out, the key question the Government needs to answer this week is where it wants to fix the price of nuclear electricity to ensure the long-term certainty nuclear investment requires.

Ridley notes the advantages of market liberalisation and the problems of bureaucratic interference, ,

Twenty years ago Britain liberalised its nationalised energy markets, introduced competition and the result was one of the cheapest and fairest regimes in the world. Gradually, the bureaucratic yearning to interfere and pursue ideology gained the upper hand again, especially with Tony Blair’s ludicrous “renewable obligation certificates” (ROCs) whose perverse consequences include the shipping of Californian native forest timber to Drax power station in Yorkshire at consumers’ expense.

Ridley ends by noting the need for energy entrepreneurs,

Yet government has done very little to unleash energy entrepreneurs. We could have started the shale gas revolution here, as we started the fossil fuel revolution itself. We could still start the underground-coal gasification revolution here: according to a Newcastle firm called Five Quarter, huge amounts energy could be extracted from coal seams under the North Sea by partial combustion of the coal to make gas underground. We could push thorium reactors. But starting a business in Britain’s regulated economy and planning system is like swimming in treacle.

A lesson for most countries is the importance of entrepreneurship in energy, and everywhere else in the economy.

Social networks and finding a new job: evidence from Italy

If you lose your job, can you find a new one with a little help from your friends? A new column, by Federico Cingano and Alfonso Rosolia, at VoxEU.org presents evidence that displaced Italian workers with more employable friends and social contacts are unemployed for a shorter period of time. Cingano and Rosolia write,

How relevant are information networks for job search? In a recent paper (Cingano and Rosolia, forthcoming), we exploit a large matched employer-employee dataset covering all employment relationships in two northeastern Italian provinces over 20 years that allows us to assign to each individual at each point in time a specific social network, the one formed by his co-workers up to that point of his career. With this definition, a reasonable proxy for the amount of job-related information in the network is the proportion of employed social contacts at a given moment. We thus focus on workers displaced by firm closures and relate the length of their subsequent unemployment spell to his or her contacts’ employment rate when displacement occurs. Information spillovers are identified by comparing the performances of workers contemporaneously displaced by the same firm, while also controlling for a wide range of individual and group characteristics.

We find that the proportion of employed contacts plays a significant role in shaping re-employment patterns. Increasing the employment rate of contacts by one standard deviation reduces the job-seeker’s unemployment duration by about 10%; this effect is only slightly less than the reduction associated to a one standard deviation increase in own wage at displacement, a proxy of individual ability. Contacts’ employment status plays a stronger role if they recently searched for a job, and thus collected useful and up-to-date information, and if their current employer is closer (spatially and technologically) to the unemployed. We rule out that this evidence reflects a referral mechanism, whereby employed friends and contacts are also more skilled and thus reliable and more successful when recommending a worker to a prospective employer, by showing that proxies of their ability are not related to the displaced duration into unemployment.

Our findings show that job-relevant information generated and disseminated by employed workers through informal channels is a prominent element of a frictional labour market. The employment fall in recessionary periods can thus be quite disruptive, determining a lasting loss of efficiency of the matching between job seekers and firms. Consistently, recent evidence shows that temporary hikes in the number of vacancies relative to unemployment are a persistent feature of post-recession periods when the relationship between vacancies and unemployment is looked at over a longer horizon (Tasci and Lindner 2011). Our findings suggest that this may result from imperfect information about job opportunities rather than from a mismatch between labour demand and supply characteristics. As a consequence, employment-oriented stimulus policies may have had spillover effects in helping restore the information facilitation process that have so far gone unrecognised.

So friends may be good for you in more ways than one.

• Cingano F and A Rosolia (forthcoming), “People I know: job search and social networks”, Journal of Labor Economics.
• Tasci, M. and J. Lindner (2011), “Has the Beveridge curve shifted?, Federal Reserve Bank of Cleveland, Economic Trends. 10 August.

Now here is an idea ........

Wife Sales
There is a new working paper out by Peter T. Leeson, Peter J. Boettke and Jayme S. Lemke, all of George Mason University. The abstract reads:

For over a century English husbands sold their wives at public auctions. We argue that wife sales were indirect Coasean divorce bargains that permitted wives to buy the right to exit marriage from their husbands in a legal environment that denied them the property rights required to buy that right directly. Wife-sale auctions identified "suitors" - men who valued unhappy wives more than their current husbands, who unhappy wives valued more than their current husbands, and who had the property rights required to buy unhappy wives' right to exit marriage from their husbands. These suitors enabled spouses in inefficient marriages to dissolve their marriages where direct Coasean divorce bargains between them were impossible. Wife sales were an efficiency-enhancing institutional response to the unusual constellation of property rights that Industrial Revolution-era English law created. They made husbands, suitors, and wives better off.

See here for a copy of the paper.

Remind me to email Alvin Roth and ask if this is an example of a repugnant market! Clearly it wasn't once. How did the market deal with problems of adverse selection?

What we don't know about free banking

At the Free Banking blog Kurt Schuler has put forward a list of what he thinks are gaps in our current knowledge of free banking. These should give you a few things to think about over Sunday:

Free banking and monetary equilibrium. George Selgin has provided the base on which future inquiry will be built. More remains to be said about the way that bank clearings signal banks to expand, hold constant, or contract credit.

Free banking in comparison to monetary systems. More work using balance sheets, models, or other tools of systematic description for comparing in depth the operational details of various monetary systems, especially in terms of how well they discover and respond to changes in the supply of and demand for savings.

The history of free banking. Much has been done, but much remains to do. As far as I know, nobody has published a book describing in detail a single episode of free banking. (Lawrence H. White’s Free Banking in Britain was a combination of theory, economic history, and history of thought, appropriate to the time because of its pioneering nature, but it was not simply a study of how the Scottish free banking system worked and how it evolved.) Ignacio Briones, a Chilean economist, wrote a good dissertation on Chile’s free banking period of the late 1800s, but he has not published it because he is busy in his current job as coordinator of international financial affairs in the Chilean Ministry of Economy. Moreover, he wrote it while studying in France and it is in French, a language that far fewer economists today read than read English or Spanish. Anders Ögren, a Swedish economist, has written a dissertation, published as a book, on the Swedish monetary system of the 1800s, but if he is to be believed, it was not a free banking system.

Returning to free banking. What are the steps, particularly with respect to financial regulation, that would re-establish free banking with the smoothest transition? Once re-established, are there any measures that would make free banking more politically durable than it proved to be the last time around? I understand that a student at George Mason University is working on issues such as these, advised by Larry White.

Rival monetary standards and free banking. Historically, free banking has been associated with the gold or silver standard. Other standards are conceivable, and have been proposed, such as Milton Friedman’s idea to freeze the existing monetary base or Early Thompson’s idea for a labor standard of value. How do different possible standards compare with respect to their theoretical properties? In the end, consumer choice would determine which was superior. People might choose gold again, in which case we would have to investigate what it is about gold that people find to be so appealing. Or competing standards might coexist without one ever gaining a decisive advantage.

"The Standard" on Brash on CGT

An anonymous Guest Post at The Standard is entitled Don Brash: Hypocrite on CGT. They write,

I see Brash has put out a release headlined: “CGT Reactionary, Ruinous, Retrograde and Wrong – Brash”

Is that the same Brash that put out a booklet when he was reserve bank governor, which said:

The absence of a capital gains tax, and the over-taxation of many types of productive investment (largely because of depreciation allowances based on historical cost), together mean that inflation creates a strong bias in favour of real estate investment and against investment in plant and equipment.

Let me add in more of what goes before the piece quoted by The Standard,

On the other hand, the interaction of inflation with the tax system penalises savers. As an illustration, assume inflation is zero and a saver is receiving 5 percent on his or her money. In that case, he or she pays income tax on that 5 percent. However, if inflation is 5 percent, then interest rates have to be 10 percent to ensure the real interest rate, after inflation, remains at 5 percent. Yet in that situation income tax is paid on the full 10 percent, even though the real interest rate has not increased at all. The real return hasn’t changed, but the tax bill has doubled, so the post-tax return has declined significantly. With inflation, this perverse tax effect penalises interest-bearing savings and investments. I strongly suspect that one of the reasons why we are still paying such high real interest rates in New Zealand is that for much of the seventies and eighties the after-tax-and-inflation return on interest-bearing savings was substantially negative. New Zealanders are still very wary of being caught with fixed-interest savings again.

These biases against fixed-interest investment and in favour of borrowing, the absence of a capital gains tax, and the over-taxation of many types of productive investment (largely because of depreciation allowances based on historical cost), together mean that inflation creates a strong bias in favour of real estate investment and against investment in plant and equipment. Regrettably, real estate investment generally contributes little to increasing the economy’s output. (Emphasis highlights the part of the quote used by The Standard)

So the point Brash was making is that in a world of high inflation the lack of a capital gains tax is just one reason that could result in a basis in favour of real estate investment.

But also note this comment from a 1998 Reserve Banks publication The Real Story – saving and investing now that inflation is under control:

On the flip side, because New Zealand does not have a capital gains tax, when inflation was high capital gains were particularly attractive. With inflation now low, capital gains are much reduced. The lack of a capital gains tax no longer matters so much when people are making investment decisions.

So a capital gains tax may have a place when inflation is high but is not an issue when it is low. Thus the obvious response to The Standard is that as we now we are in a low inflation environment a capital gains tax isn't the issue it was when inflation was higher. Thus is Brash really a hypocrite? Or is has just noticed a drop in inflation and changed his view accordingly?

Comments on Labour's tax policy

As far Labour's recently announced tax framework goes the key policies are

• zero income tax on the first $5,000 of income;
• an increase in the top marginal tax rate to 39% for incomes over $150,000;
• exempting fresh fruit and vegetables from the GST (technically, zero rating them);
• a 15% capital gains tax.

About the best comments I have read on these announcements comes, not surprisingly, from Seamus Hogan at Offsetting Behaviour.

On the $5,000 tax exemption Hogan writes,

In principle, I don't mind the $5,000 tax-free policy. There are fixed costs to working compared to not working, which are not recognised when one has to pay tax from the first dollar earned. I could see a tax-free bracket having a non-trivial effect on decisions on whether to enter the workforce part time or not at all, particularly if the tax-free threshold could be lifted over time. A tax-free bracket is also a much more moral way of ensuring that workers receive a living wage than would be an increase in the minimum wage. I find it difficult to believe, however, that the other policies in the package could make up for the cost of exempting the first $5,000 of income from tax for every taxpayer. This is the unpleasant arithmetic of tax policy: Tax cuts at a particular income level only have an efficiency-relevant impact on the behaviour of those taxpayers whose marginal income is at that level, but they give a tax reduction to anyone whose income is at that level of higher; cuts in tax rates at the lower end, therefore come at a large fiscal cost for a only a small change in reduced disincentives.

On the marginal tax increase Hogan says,

The proposed increase in the top rate is silly. There is such a small proportion of the country’s income earned at those levels that the policy can hardly be expected to bring in a significant amount of revenue, but will surely lead to the usual tax avoidance games. It is hard to escape the conclusion that this is a purely symbolic policy designed to make people with incomes less than $150,000 feel good that those with more income are being taxed more. If so, it is appealing to a rather ugly side of human nature.

As to the fruit and veg tax cut Hogan says,

The zero-rating of fresh fruit and veg might just about be the most appallingly cynical election bribe the country has ever seen. I am not saying that it would be the most costly election-bribe policy enacted; that mantle would have to go to either National Superannuation or interest-free student loans. Rather, I suspect that this policy would have the highest cost relative to benefits, with benefits defined according to a policy’s proponents’ underlying preferences. Consider first the costs of the exemption: of relatively small importance is the lost revenue that will need to be made up elsewhere. More important, is the additional transactions costs in compliance, enforcement, and definitions that the policy would introduce. Much worse, is the erasing of the line in the sand that currently stands between a clean GST and one with messy exceptions; once we start on this slippery slope, there will be no clear line left to defend against creeping exemptions and tweaking of the GST system likely to be proposed in the future. Against this, are two putative benefits. First is the idea that the exemption will make the GST more progressive. I haven’t seen any data on this, but I would extremely surprised if taxing fresh fruit and were not a progressive tax; if one wanted to use the tax system to redistribute from poor to rich, I suspect the proposed exemption would rank second only to high cigarette taxes as a method for achieving that objective. The second supposed benefit is the health benefits from eating more fresh fruit and veg. The trouble is that nutritionists tell us there is no nutritional advantage to fresh over frozen or canned, so unless someone can show some convincing data giving a significant elasticity of demand for fresh fruit and veg that does not result from a substitution away from preserved fruit and veg, we would need to dismiss this benefit as well.

As to comments on the CGT Hogan puts that off for another post. This is sensible given that there are good economic arguments on both the pro and anti sides of the debate. On issues like this the devil is in the details.

Former ACT Leader Rodney Hide comes out against a CGT, He argues at interest.co.nz that a CGT is effectively a double tax on business:

A business generates $100 a year. The going discount rate is 10 percent. The value of the business is $1,000. That’s if there’s no tax.

Introduce a tax of, say, 30 percent, and the business now yields only $70 a year. The business is worth only $700. The tax liability is capitalised into the value of the business.

Now let’s say I buy the business and fix it up. I double its income to $200. In the absence of any tax the business is now worth $2,000 and I can sell the business and pocket a $1,000 capital gain. However, if there’s an income tax of 30 percent the increase in the business’s value is from $700 to $1,400. My capital gain is now only $700.

My gain is not tax free even though I appear to pay no tax on my gain.

That’s because the capital value reflects the extra tax the extra income the business generates.

A capital gains tax of 30 percent reduces my gain from $700 to $490. I am doubly taxed.

Capital gains aren’t tax free and a capital gains tax doubly tax savings and investment.

UK privatisation – proceeds of over £100 billion up for grabs

This is the heading of a post at the IEA blog in which Nigel Hawkins talks the future of privatisation in the U.K. He writes,

In recent decades, the IEA has been in the vanguard of those advocating widespread privatisation.

This stance bore fruit during the 18 years of Conservative Government (1979-97) when large swathes of state-owned businesses were privatised, including telecoms, gas, water, electricity and many forms of transport.

However, as the IEA’s latest publication - Sharper Axes, Lower Taxes - makes clear, the privatisation cupboard is far from being bare.

Indeed, over £100 billion of proceeds could accrue if a renewed programme of privatisation were undertaken.

A substantial part of these putative proceeds arise from the government’s two major bank shareholdings – an 84% stake in Royal Bank of Scotland – the recipient of an unbelievable £45.5 billion of taxpayers’ money – and a 41% stake in Lloyds, which received over £20 billion of public funding.

With the worsening EU financial crisis, shares in both banks are currently weak so immediate action to reduce these stakes is unlikely.

However, when their share prices recover, a progressive selling down of the government’s bank shareholdings should be undertaken.

Aside from these shareholdings, there is a raft of other major businesses that should be transferred to the private sector. Prominent amongst this category are Network Rail, the Royal Mail and Scottish Water.

Furthermore, many smaller state-owned businesses would benefit from the disciplines of the private sector.

Importantly, there remains considerable scope for the government to sell off parts of its vast property estate, which could raise a considerable sum.

In particular, the Ministry of Defence owns an extensive portfolio of land and building assets, some of which are outside its core operations – and could be readily sold off.

Whilst the raising of funds from privatisation is a major benefit of the policy, it is not the only one.

The point I wish to argue here isn't that privatisation shouldn't be carried out, it should, the problem is thinking about privatisation in terms of the money raised. The reasons for privatisation can hold even if you get nothing from the privatisation programme. Talking about maximising the return from privatisation misses the whole point of privatisation which is to improve the efficient and productivity of the economy. If we just worry about how much we will get for the sale of assets then we should sell all of the state assets with the firms being monopolists. But that's unlikely to do much for welfare.

The point to note is that the advantage of privatisation is that it will depoliticise the firm. The aim is to have the greatest possible "distance" between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as possible.

For successful privatisation 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'm arguing we should have lexicographic preferences, with price low on the list. Worrying about whether or not the ‘family silver’ was sold too cheaply misses the point, the price received can only be see as too high or low relative to the market structure the firm finds itself it. Just arguing that a higher price could be obtained with a different market structure is only useful if the new market structure improves welfare.

The problem with Nudge

Over at the Adam Smith Institute blog Tim Worstall writes about The problem with Nudge.

The basic idea is that people aren't all that good at making choices of judging risks: therefore they should be nudged into taking the right decision.

and

There is however a real problem with the whole idea: the things that we get nudged to do will inevitably reflect the prejudices of those setting up the nudges. OK, maybe opt out rather than opt in will increase organ donations, maybe opt out will increase pensions savings. And it's an article of faith in certain circles that more organ donations, more saving for pensions, is a good idea. Maybe they are, maybe they're not (and I could put up decent rejections of both propositions).

However, as Eric Falkenstein points out, the nudges will only be in favour of those things which the groupthink of the limited circle thinking them up already regard as obviously desirable goals.

Take something like irradiating eggs, something almost all scientific people agree is good (kills bacteria, no residual radiation). Why not make them the default eggs? They never would argue for that, because it's contrary to the Luddite-leftists who hate technology but love government.

Why isn't GM the default? Why isn't the presumption that planning permission has been granted? Why, under EU law, must I seek permission to make and sell apricot marmalade (yes, really!)?

The basic idea comes down to if we're all bad at making decisions, and it seems we are, then why should we enshrine in law one set of wrong prejudices rather just letting everyone follow their own?

Seeking asylum: trends and policies in the OECD

From VoxEU.org comes this audio in which Tim Hatton talks to Viv Davies about his new book on asylum policy, which assesses what asylum policies have achieved and argues that policy towards asylum seekers should be based on historical insight, quantitative evidence and a realistic view of the political economy of asylum policy. Hatton presents the case for a fully integrated Europe-wide asylum policy.

For more see Tim Hatton's recent summary of Seeking Asylum: Trends and Policies in the OECD also at VoxEU.org.

"Administrative blight" plagues universities

Who would have guessed?

This news is comes via Mark Perry writing at the Carpe Diem blog. He says,

Inside Higher Ed reports today on a new book "The Fall of the Faculty: The Rise of the All-Administrative University and Why It Matters" (Oxford University Press), by Benjamin Ginsberg, Professor of Political Science at Johns Hopkins University.

Professor Ginsberg "takes stock of what ails higher education and finds a single, unifying cause: the growth of administration." Here are some excerpts of the review:

"Ginsberg bemoans the expansion over the past 30 years of what he calls "administrative blight" as personified by what he characterizes as an army of "deanlets" and "deanlings." By virtue of their sheer number and their managerial rather than academic orientation, Ginsberg argues, these administrators have served to marginalize the faculty in carrying out tasks related to personnel and curriculum that once sat squarely in their domain."

and

"The larger result, he [Ginsberg] argues, is that universities have shifted their resources and attention away from teaching and research in order to feed a cadre of administrators who, he says, do little to advance the central mission of universities and serve chiefly to inflate their own sense of importance by increasing the number of people who report to them."

"Armies of staffers pose a threat by their very existence," he wrote. "They may seem harmless enough at their tiresome meetings but if they fall into the wrong hands, deanlets can become instruments of administrative imperialism and academic destruction."

The review also says,

"Ginsberg lays at administrators’ feet a host of perceived ills: the increased curricular focus on vocational education instead of one grounded in the liberal arts; an emphasis on learning outside the classroom in lieu of core academic disciplines; the transformation of research from an instrument of social good and contributor to human knowledge to an institutional revenue stream; and the limiting of tenure and academic freedom."

But may be the best comment in the review is,

"Generally speaking," he [Ginsberg] writes, "a million-dollar president could be kidnapped by space aliens and it would be weeks or even months before his or her absence from campus was noticed.”

There is an interesting question and answer section with Ginsberg at the bottom of the review. Well worth a read.

The economy can’t grow with debt

A point made by Carmen M. Reinhart and Kenneth S. Rogoff in an article at Bloomberg.

Public debt in advanced countries is reaching levels not seen since the end of World War II and thus asking: Is this level of debt a problem? seems sensible.

Reinhart and Rogoff write,

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP.

and they continue,

Several studies of financial crises show that interest rates seldom indicate problems long in advance. In fact, we should probably be particularly concerned today because a growing share of advanced country debt is held by official creditors whose current willingness to forego short-term returns doesn’t guarantee there will be a captive audience for debt in perpetuity.

Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly. Even though politicians everywhere like to argue that their country will expand its way out of debt, our historical research suggests that growth alone is rarely enough to achieve that with the debt levels we are experiencing today.

And for the big question: At what point does indebtedness become a problem? Reinhart and Rogoff argue,

In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth.

Reinhart and Rogoff's conclusions are based on a data set of public debt covering 44 countries for up to 200 years. The annual data set incorporates more than 3,700 observations spanning a wide range of political and historical circumstances, legal structures and monetary regimes.

They end by saying,

Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 percent of GDP are relatively rare and those exceeding 120 percent are extremely rare [...]. Is it because generations of politicians failed to realize that they could have kept spending without risk? Or, more likely, is it because at some point, even advanced economies hit a ceiling where the pressure of rising borrowing costs forces policy makers to increase tax rates and cut government spending, sometimes precipitously, and sometimes in conjunction with inflation and financial repression (which is also a tax)?

Even absent high interest rates, as Japan highlights, debt overhangs are a hindrance to growth.
The relationship between growth, inflation and debt, no doubt, merits further study; it is a question that cannot be settled with mere rhetoric, no matter how superficially convincing.

In the meantime, historical experience and early examination of new data suggest the need to be cautious about surrendering to “this-time-is-different” syndrome and decreeing that surging government debt isn’t as significant a problem in the present as it was in the past.

Now, just what is New Zealand's level of debt? According to this site New Zealand's public debt: 25.5% of GDP (2010 est.). There is of course the issue of what exactly is being measured here. But while debt is rising this estimate is well below the 90% mark noted above.

For comparison, this webpage ranks countries by public debt as a percentage of GDP, (source: CIA World Factbook - unless otherwise noted, information in this page is accurate as of January 1, 2009, so the figures are a couple of years old.). Japan comes in first at 194.4%, Zimbabwe second at 189.9% and Lebanon is third at 188%. At the other end of the list is Luxembourg at 2.6%. Australia is at 15.2%.

Cartoon of the day

Thanks to Carpe Diem for this one.

Interesting blog bits

1. Peter Klein asks an interesting question: Is the Internet “Transforming” Business?

   In the 1990s and early 2000s there was a huge debate about the impact of information technology on productivity. Robert Solow famously quipped, “You can see the computer age everywhere but in the productivity statistics.”

2. David Henderson Consumer Surplus from the Internet: Remember the Producers

   Tyler Cowen challenges me to engage "with the academic literature" on consumer surplus from the Internet. Fair challenge.

   .
3. Philip Cook and John MacDonald on Public safety through private action
   

   In the US, more people work in private security than in all police forces combined, yet public debate about crime prevention typically looks at the use of public resources to deter, incapacitate, or rehabilitate criminals. This column calls for more discussion of how private action can make policing more effective and reduce the profitability of crime. One such experiment – “business improvement districts” in Los Angeles – has generated remarkable social benefits.

4. Winton Bates asks Should politicians be required to meet competency standards?

   As a discussion starter, Shona suggests that politicians should be required to have a Master of Politics – something like an MBA for politicians. The degree would include practical work and be politically unbiased. It would cover a range of topics including political science, debating and language skills, law, economics and presentation.

5. Art Carden on Price Controls Make A Statement About Society

   The last refuge of the interventionist defeated at every turn by the laws of supply and demand is to say that while his or her program might have unintended consequences, it “makes a statement about the kind of society we live in.” 

6. Carlo Favero asks Is Europe an optimal currency area?

   Is the euro doomed? This column argues that economic differences within Europe, clearly exposed by the current crisis, are reasons to doubt the sustainability of the single currency.

7. Chidem Kurdas on Soros and Open Society in America

   As a young man Soros studied with Popper, who in his 1945 The Open Society correctly identified the defects of socially engineered systems. Hayek was a friend and supporter of Popper. Perhaps Mr. Soros needs to revisit both Hayek and Popper.

8. Roger Kerr on The Treasury's Living Standards Document: New Wine or Old Bottle?

   In May the Treasury published a paper Working Towards Higher Living Standards for New Zealanders. It’s not immediately obvious what’s new in the Treasury’s thinking.

An honest author

Peter Lewin writing at the Organizations and Markets blog

As part of the Routledge series on the Foundations of the Market Economy I wrote a book entitled Capital in Disequilibrium which was published in 1999. It is still available, but it is very expensive ($200) — certainly not worth that price! (Emphasis added.)

But the good news is,

Routledge recently released their copyright to me exclusively and I have just got through revising the book for a second edition to be published very soon by the Mises Institute. I had hoped to have some copies available at the upcoming AOM meetings in San Antonio, but this seems very unlikely now. Still, it will be easily available on their website and an open source version will also be there. The price of the book will be $15 I believe.

From $200 down to $15. Even accounting for lower production costs for the Mises version, a price that is less than 10% of the original means there was some serious price discrimination going on by Routledge. Is the library markets for books really so strong, and the general market so weak, that Routledge could solely aim for the library market and ignore the "general reader"? The general group seems to be the target audience for the Mises Institute.

Cost and benefits of trade

Mark Perry at the Carpe Diem blog writes

From a WSJ article today "China Boosts Lead in Global Exports" about China's exports setting several new records in June:

"China's critics, including members of the U.S. Congress, say an undervalued currency unfairly helps Chinese exporters."

While at Cafe Hayek Don Boudreaux writes,

You report that “China’s critics, including members of the U.S. Congress, say an undervalued currency unfairly helps Chinese exporters” (“China Boosts Lead in Global Exports,” July 11).

Indeed. If Beijing truly is pursuing such a policy, that government is beyond doubt unfairly enriching some people at the expense of others. And the people unfairly enriched do include a few Chinese exporters. Overwhelmingly, though, the beneficiaries are non-Chinese consumers (including Americans) of China’s subsidized exports. In contrast, the people unfairly burdened are exclusively Chinese citizens – both as consumers forced to pay higher prices at home, and as taxpayers forced to fund Beijing’s practice of purchasing U.S. dollars in order to depress the price of the yuan against the dollar.

It is, in fact, obscenely unfair for Beijing to oblige the Chinese people to hand over chunks of their wealth to Americans, even the poorest of whom is far richer than is the typical man or woman in China.

and

Protectionism does reduce U.S. exports. The resulting loss to Americans, though, isn’t the valuable goods and services that Americans don’t ship to foreigners; instead, it’s the valuable goods and services that foreigners don’t ship to Americans.

Consider the U.S. exports that Mr. Norton mentions. Directly or indirectly, South Koreans purchase these exports with South Korean won. Of what use are won to Americans except as currency for purchasing goods and services from South Korea? If South Koreans refuse to pay for exports received from America – or insist on paying for these exports only with Monopoly money – no one would regard Americans’ failure to export to South Korea as a loss to America.

Americans’ losses from protectionist policies are measured exclusively in the value of the imports that those policies prevent us from receiving.

So if China is undervaluing its currency, then long may it continues as we get the benefits and the Chinese pay the costs. And remember the up side of trade is the imports we get, not the exports we have to give up to obtain the imports.

Regime uncertainty in New Zealand

Regime uncertainty is a concept developed by the economic historian Robert Higgs. The idea sets out to capture the uncertainty of investors in their private property rights with regard to their capital, and the income it yields, caused by government action. Put simply if investors don't believe that they will capture the returns to their investment, because of government policy, they will not invest. Uncertainty can be driven by many things ranging from simple tax-rate increases, to the imposition of new kinds of taxes, to outright confiscation of private property. Various kinds of regulation, of, for example, securities markets, product markets, labour markets, can also cause uncertainty for investors. The security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.

Regime uncertainty is an issue I have often thought important for New Zealand. Life under Muldoon being the classic example. Given his use of budgets and mini-budgets and his control of bodies like the Reserve Bank no one was ever sure from one year to the next, or one month to the next, what changes to economic regulations, taxes, subsidies, and import and export controls were likely to occur. This did not make for a great environment for private investment.

Post 1984 things have improved however. But may be not as much as I had thought. In a recent article in the National Business Review, 8 July 2011, Roger Kerr reminded me just how threatened property rights in New Zealand still are. Kerr writes,

And where breaches of property rights and contracts are concerned, the damage to a country’s reputation as a secure place for investment is much greater. New Zealand governments have often been cavalier in this regard. A review of just the last decade or so throws up numerous cases in which property rights were compromised without compensation:

• the cancellation in 2000 of the 1994 West Coast Accord which provided for the sustainable harvesting of rimu. Westco Lagan, which had invested in significant sawmilling business on the basis of this accord, was left out of pocket and uncompensated;
• the National government’s move to partially open up ACC to competition was repealed by its successor, leaving insurers which had raised large amounts of capital to enter the market with no prospects of new business;
• the 2004 Foreshore and Seabed Act which limited the jurisdiction of the Maori Land Court to hear customary rights claims;
• the forced unbundling of the local loop, which allowed Telecom’s competitors the right to place equipment in its roadside cabinets (likened to giving a neighbouring farmer a right to use your milking shed), which shaved some $3 billion off Telecom’s share price.
• the initial proposal to allow public access to private land (with the possibility of stock loss through open gates and biosecurity risks) without the consent of the landowner;
• the operation of the Resource Management Act which can involve major regulatory takings of property (without triggering the compensation provisions of the Public Works Act); and
• the intervention in the bid by a Canadian pension fund for a shareholding in Auckland International Airport, which stymied the bid and cost shareholders some $300 million. The Regulations Review Committee of Parliament upheld a complaint by the Business Roundtable and the Wellington Regional Chamber of Commerce that the intervention was in breach of Standing Orders. This action reverberated around the international investment world.

Regrettably, there is no end in sight to this damaging pattern of behaviour.

Recently the Labour Party has stated that it “reserved the right” if returned to office this year to overhaul both the government’s broadband legislation and government contracts with Telecom. There was no suggestion of negotiation over changes or compensation for losses.

The Business Herald has also reported that Labour may repeal legislation it had previously supported governing leases of Crown land to farmers. Labour is again threatening to reverse any move to open up ACC to competition.

Creating regime uncertainty will do nothing to help with investment in New Zealand and thus with New Zealand's productivity problems and therefore with its economic growth. For the sake of future investment and well-being more needs to be done to make governments, at the very least, acknowledge and justify any incursions they wish to make against property rights and the rule of law.

EconTalk this week

Abhijit Banerjee of MIT talks with EconTalk host Russ Roberts about Banerjee's book (co-authored with Esther Duflo), Poor Economics. The conversation begins with how randomized control trials (a particular kind of social experiment) have been used to measure the effectiveness of various types of aid to the poor. Banerjee goes on to discuss hunger, health, and education--the challenges in each area and what we have learned about what works and what does not. The conversation closes with a discussion of the role of the labor market in the private sector.

An economist's life in not a happy one (updated)

From the Wall Street Journal:

BUENOS AIRES—Argentina's government has filed criminal charges against the managers of an economic consulting firm, escalating its persecution of independent economists.

[...]

The government is charging MyS Consultores with "publishing false information about inflation data" to benefit themselves and their clients. The criminal complaint alleges that MyS's data also lead to speculative behavior in Argentina's bond market.

MyS Managing Partner Rodolfo Santangelo described the charges as "ridiculous" and said the firm's inflation data do not affect financial markets.

Consumer prices rose 9.7% in May from a year ago, according to the national statistics agency, Indec. But virtually all economists say annual inflation surpasses 20%—one of the world's highest rates—angering government officials who dismiss inflation as a problem.

The criminal complaint, initiated by the Commerce Secretariat, is the harshest in a series of legal measures against economists. The credibility of Indec's data has been questioned ever since former President Nestor Kirchner replaced longtime civil servants with political appointees in early 2007.

So far this year, the Secretariat has fined at least nine economic research firms 500,000 pesos ($122,000) each. This week, the Secretariat also slapped a second fine on Orlando J Ferreres & Asociados.

"They fine us for saying how much prices have risen," Mr. Ferreres, director of his eponymous firm, said. "They could seek criminal charges against all of us. We don't know how far they're willing to go."

Mr. Ferreres said the legal actions are part of a strategy to prevent independent economists from publishing potentially negative information during an election year.

Not a good look. Economists, just like anyone else, should be free to comment on issues important to an election, whether or not the government likes what they say. And if the official inflation figures are wrong then the public needs to know this. Especially if inflation is twice what the official figures claim.

This issue also highlights why you want the national statistics agency to be independent of the the government. One thing the government should not be doing is replacing "longtime civil servants with political appointees" just to get the inflation figures to look better.

Update: Tim Worstall asks But *Why* is Argentina Charging Economists? He notes

About a quarter of Argentina’s debt is indexed to inflation.

and comes to the obvious conclusion,

Aha!

The official rate is just under 10%, which is the rate that the bondholders get. The real rate….no, sorry, the rate calculated by those private sector economists which of course may or may not be correct….is over 20%.

This argument over the numbers is worth real money then: possibly worth a bit of oppression of private sector economists in the eyes of the Argentine Government.

Do academic oral historians have the same legal protections as journalists?

No, according to the U.S. Department of Justice. This is from Peter Klein at the Organizations and Markets blog. He writes,

With the filing, the U.S. government has come down firmly on the side of the British government, which is fighting for access to oral history records at Boston College that authorities in the U.K. say relate to criminal investigations of murder, kidnapping and other violent crimes in Northern Ireland. The college has been trying to quash the British requests, arguing that those interviewed as part of an archive on the unrest in Northern Ireland were promised confidentiality during their lifetimes.

This is from Inside Higher Ed via Zachary Schrag, who notes that the DOJ brief 

suggests that the Boston College researchers are mere academics, and seizing information from them should be easier than prying it from reporters “because the Constitution and the courts have long recognized the unique role which news reporters play in our constitutional system. See, e.g., Branzburg, 408 U.S. at 681; New York Times Co. v. Sullivan, 376 U.S. 254, 268-71 (1964). The limited protections afforded news reporters in the context of a grand jury subpoena should be greater than those to be afforded academics engaged in the collection of oral history.”

There are a lot of interesting issues here to do with informed consent, academic freedom, confidentiality, etc. One wonders what effect this could have on oral history if the British government gets the information it wants. Clifford M. Kuhn, a historian at Georgia State University who is also a past president of the Oral History Association, noted that,

"Trust and rapport are at the very core of the oral history enterprise," he said in his brief. As part of the process of "informed consent," interview subjects request certain levels of confidentiality, and researchers approve them. "The reason for this protocol is to foster candor and openness in the interview itself, so as to most fruitfully and fully enhance the historical record."

If researchers can't make such pledges, Kuhn said, they may face "self-censorship during the interview." He added that "if promises made by a repository are not kept to narrators, there might be a damaging ripple effect on potential future oral history interviews and projects."

People respond to incentives, and confidentiality is a big incentive in things like oral history,