Thursday 31 May 2012

Aussie Fairfax journos strike over jobs outsourced to NZ

TVNZ reports that,
Journalists at Fairfax Media will begin the first day of their strike today after voting to leave the job for 36 hours over the outsourcing of 66 editorial production jobs to New Zealand
Will we see the same protests here in New Zealand over the outsourcing of these Australian jobs to New Zealand that we see when New Zealand firms outsource jobs overseas?

If not, why not? If its wrong for New Zealand firms to outsource then is it not just as wrong for jobs to be insourced to New Zealand?

Well said, that man

Economist Dennis Coates writing at the Sports Econmist blog,
As readers of The Sports Economist are well aware, evidence that sports franchises and stadium and arena construction generate large impetus to economic growth and urban development exists only in the minds and reports of consultants to sport franchises and their rent-seeking employers. Subsidies for such activities is especially troubling when city and state budgets are in disarray with service reductions and layoffs of public employees from teachers to police and firefighters.
Subsidies for such things are also very troubling when your city is trying to recover from massive earthquakes. Christchurch City Council please take note.

EconTalk this week

Lawrence H. White of George Mason University and author of The Clash of Economic Ideas talks to EconTalk host Russ Roberts about the economists and their ideas of the past one hundred years. They discuss Keynes and Hayek, monetary policy and the Great Depression, Germany after the Second World War, the economy of India, and the future of monetary policy.

Council asset sales

Over at Offsetting Behaviour Eric Crampton has been taking  More on Council asset sales. In a piece in Christchurch's "Mainland Press" Eric rightly makes the basic point that ownership of an asset should go to whoever uses it more efficiently. He also says,
A fully privatised power lines company would wind up being subject to public monopoly regulations that would mean there's little gain from having it in private as compared to public ownership; private owners then would be willing to pay council just enough for the asset to offset council's loss of dividends.
This may not be true. In a couple of papers, Schmidt (1996a,b), Klaus M. Schmidt developed models of privatization using an incomplete contracts approach. He argues that different allocations of ownership rights lead to different allocations of inside information about the firm, which in turn affect both allocative and productive efficiency. Privatization is seen as a commitment device of the government to credibly threaten to cut back subsidies if costs are high in order to give managers better cost-saving incentives (a "harder budget constraint"). This leads to a gain in productive efficiency. The cost of privatization is that allocative efficiency is distorted. But if the loss in allocative efficiency is less than the gain in productive efficiency than privatisation makes sense. This is true even in the case that Eric considers, that of a natural monopoly.

One point Eric makes that is worth keeping in mind is that selling bonds and selling assets are basically the same.
So there isn't a lot of difference between council's selling some shares in Orion and council's selling some bonds, so long as people are willing to buy debt from council.
In one case there is a loss of future revenue and in the other there is an increase in future repayments. Both are ways of getting money now.
  • Klaus M. Schmidt (1996a.) 'The Costs and Benefits of Privatization: An Incomplete Contracts Approach', Journal of Law, Economics, & Organization, Vol. 12, No.1 (April), 1-24.
  • Klaus M. Schmidt (1996b.) 'Incomplete contracts and privatization', European Economic Review, vol. 40, 569-579.

Sunday 27 May 2012

Will they never get the point?

From Stuff comes this bit of "news":
Several thousand people have gathered in Christchurch this afternoon to protest the demolition of the city's Anglican cathedral.

The protest rally began in Cranmer Square and saw past and present civic leaders, MPs and other high profile Christchurch residents calling on the Anglican Church to immediately halt demolition work on the quake-damaged Cathedral
Listen up people, you don't own the Cathedral and thus you get no say in what happens to it. If you want control rights over the building then buy them .... using YOUR money of course.
Former MP Jim Anderton told the crowd that 100 engineers had confirmed the Cathedral could be saved and restoration should go ahead regardless of the cost. If the city could afford to spend money on a new rugby stadium it could afford to restore the city's most iconic building. (Emphasis added)
Regardless of the cost?! Then you pay the cost Jimbo. Don't try and spend other peoples money on the Cathedral just because you want to save it. You don't have the right to force other people to pay for restoration just because you want it. Use your money. And remember there is an opportunity cost to saving the Cathedral,  money spent on that can not be spent on other more important things, you know like sewage and water systems, housing for the homeless etc. Actually Jim the city can not afford to spend money on either saving the Cathedral or a new rugby stadium. Just look at Dunedin to see the problems a stadium can cause.
"Pause, consult the experts and let the public ... have a say about their Cathedral,'' Crighton said. (Emphasis added)
But, and this is the important point, it ISN'T their Cathedral! Property rights over the building are held by the Anglican Church and not by Anna Crighton and her bunch of wannabe owners. They have no right to try and usurp control over the Cathedral away from its rightful owners, the Anglican Church.

The (im)morality of taxation

Eamonn Butler, from the Adam Smith Institute, discusses the (im)morality of taxation, which he wrote about for the Taxpayers' Alliance's new report, The Single Income Tax.

Coase v. Hayek

Last week in the comments section of a posting at Tim Worstall's blog, Cris Dillow makes a couple of interesting points about the relationship between the work of Coase and that of Hayek.
You say “two” great 20th C economists: who was the other? What’s rather sadder is Coase’s relationship with Hayek. Although they were colleagues at the LSE, they never discussed his essay “The nature of the firm.” This is odd, as it argued that markets were (sometimes) inferior to centrally organized economic activity – a contradiction of Hayek’s thinking.
@ Paul Walker – you’re not sure how they fit together because they don’t. One flatly contradicts the other. The qn is: under which circumstances is Coase right, and under which is Hayek right? If they’d ever discussed this, we might be more enlightened.
My point would be that I'm not so sure that they do contradict each other. On the surface they look like they do. After all the two arguments work at different levels of analysis. Hayek is looking at the difference between a markt order and political central planning, while Coase is concerned with the details of how a market order works.

But in other respects they are asking the same question: what are the limits to the market and the firm? But are their answers compatible?

I take it from what Coase has written that he seems to think they are,
Not to include transaction costs in the theory leaves many aspects of the working of the economic system unexplained, including the emergence of the firm, but much else besides. In fact, a large part of what we think of as economic activity is designed to accomplish what high transaction costs would otherwise prevent or to reduce transaction costs so that individuals can negotiate freely and we can take advantage of that diffused knowledge of which Friedrich Hayek has told us.
Thus Coase's argument seems to me to be that firms are one kind of "individual" that makes use of the knowledge of the particular circumstances of time and place, as Hayek emphasises. Activities and organisations which circumvent or lower high transaction costs make utilising such knowledge possible.

Saturday 26 May 2012

Interesting new website

The Index of Economic Freedom is a new resource that allows users to filter and compare the Economic Freedom Scores of every country in the world. The index derives from the Heritage Foundation economic data tracking of the past decade.

Friday 25 May 2012

Are leading papers in an issue of a journal of better “quality”?

Given my previous posting the above question seems relevant. A new column, by Victor Ginsburgh, at argues that lead articles in academic journals tend to receive more citations than other articles. But does this mean they are any better? Ginsburgh's column suggests that two-thirds of the additional citations that leading papers receive seem to be due to coming first in the journal, while only one-third are because they are genuinely better quality.

Ginsburgh writes
There exists a lively debate among scientists about evaluation methods. Some prefer peer review-based research assessments, while others think that bibliometric citation-based methods should be used as a verifiable mechanism for promotion and distribution of public research funds. Like peer reviews, but for other reasons, citations suffer from several problems. One of them is that they are related to the order in which editors arrange the sequence of papers in each issue of a journal. Research by Smart and Waldfogel (1996), Ayres and Vars (2000), Pinkowitz (2000), and Hudson (2007) finds that leading articles – those at the front of the journal – get more cites than others. This is tested by running regressions of the number of cites on the order in which the paper is placed and on some control variables.

Readers thus seem to believe that the editors of journals are smart enough to pick the ‘best’ paper ready for the coming issue and choose it as a leading paper. They also believe that the paper editors find to be the best is actually the best.

In recent work with co-authors (Coupé et al. 2010), I run an analysis that compares the number of cites conditional on ordering, in two types of publication strategies: random versus selectively ordered ranking of papers. The European Economic Review (EER) provides a natural experiment due to an editorial quirk.

Between 1975 and 1997, the initial of the first author’s surname was used to order papers in some issues; in others it was not so. As long as we are ready to accept that the alphabetical order is random, in the sense that on average it cannot help separate good and bad papers, this can be considered a natural experiment. This allows us to untangle whether leading papers are more cited because they lead or because they are of higher quality.

If in alphabetically ordered issues, leading papers also get more cites than others, then one can wonder whether editors really have a good guess at quality when they use their judgment in ordering. If this were the case, leading papers are more cited because they are leading (and readers expect them to be better) and not because they are of better quality.

To check for consistency, we also compare this with cites to papers in American Economic Review (AER), where, except by chance, the order is never alphabetical.
The empirical results? Ginsburgh writes,
Our results show:
  • Leading papers get marginally more cites in all three types of journals (EER alphabetically ordered, EER non-alphabetically ordered, and AER).
  • As expected, the effect for AER is much larger than for EER.
But the difference in the mean number of cites between AER and EER papers is not very large (5 vs 2 cites). Moreover, for EER the difference in the marginal effect on citations of the first paper is not very different for alphabetical and non-alphabetical issues (1.9 v. 2.8), though a likelihood ratio test shows that the difference is statistically significantly different from zero.
This suggests that the lead article when editors exercise discretion is of better quality, but citation numbers overstate how much better it is. Based on the estimates, two thirds of the effect (1.9/2.8) is the result of going first, while one third only can be attributed to better quality. Note that while there is no difference between first and second paper in AER, for EER cites decrease after the first paper.

Long papers are more cited than short ones, and notes are usually less cited (for AER the difference is quite large). The sequence of annual dummies that represent the year of publication, and thus the age of the paper in 2000, pick up coefficients that are declining in the case of AER: recent papers get less (cumulated) cites. The coefficients show no particular trend for EER. One possible reason may be that the natural decrease of cites for more recent papers is compensated by more cites due to increasing average quality of EER over time.

The ordering by the initial of the name may not be entirely random, since, in economics, names usually appear in alphabetical order. It is thus possible that lead papers in alphabetically ordered issues are more likely to be co-authored. To the extent that such papers get more cites, either because they are of better quality or because of more self-citations, the lead article effect may simply capture the influence of a larger number of co-authors. This was controlled by including the number of authors as a variable. Its effect is positive and highly significant in the case of discretionary ordering, both in EER and AER, but insignificant in alphabetical issues. More importantly, however, the inclusion of this variable, even when highly significant, did not change the sign and significance of the main variable of interest. This thus suggests that the estimated effect is purely a ‘lead article effect’.
Ginsburgh ends by noting,
Our paper was published as a leading paper in issue 61(1) of Oxford Economic Papers. Did the editor want to make a joke? Or did he think it was better than the other papers published in the same issue? If I were you, I wouldn’t believe him.
Personally I have only been the lead article once, and that paper has never been cited!

Thursday 24 May 2012

A revised version

Below is a revised version of my paper "The Past and Present of the Theory of the Firm". The abstract reads,
In this survey we give a short overview of the way in which the theory of the firm has been formulated within the ``mainstream" of economics, both past and present. As to a break point between the periods, 1970 is a convenient, if not entirely accurate, dividing line. The major difference between the theories of the past and the present, as they are conceived of here, is that the focus, in terms of the questions asked in the theory, of the post-1970 literature is markedly different from that of the earlier (neoclassical) mainstream theory. The questions the theory seeks to answer have changed from being about how the firm acts in the market, how it prices its outputs or how it combines its inputs, to questions about the firm's existence, boundaries and internal organisation. That is, there has been a movement away from the theory of the firm being seen as developing a component of price theory, namely issues to do with firm behaviour, to the theory being concerned with the firm as a subject in its own right.
As to the quality of the paper I should warn you that it has been rejected by 7 journals so far, without a single referee's report being deemed necessary, i.e. the journal editors think its crap. This include a rejection from NZEP in less than a week; which has to be some sort of record!!! Thus read at your own risk.

Past and Present of the Theory of the Firm

Wednesday 23 May 2012

When Coase met Keynes

From the EconTalk interview with Ronald Coase:

Roberts: “And how about Keynes? Did you know Keynes?”

Coase: “I can tell you– I was helping when Britain was trying to get a loan from the United States immediately after the war, and I was talking to one of Keynes’s assistants. And Keynes came in the room and walked over to us and the man I was talking to us said, ‘This is Coase, who is helping us with the statistics. I don’t think you know him.’ And Keynes said, ‘No, I don’t.’ And walked off. And that’s my life with Keynes.

Not more mercantilism?!

The NBR tells us about what David Parker has been saying about needing more exports:
Labour says a "bold" increase in exports is needed to lift New Zealand's poor economic performance.
I have pointed out before that Imports good; exports bad.

The NBR also notes,
"New Zealand must increase our exports to reverse our long-term decline," Mr Parker says.

"This is utterly essential to our wealth and incomes. Small, incremental and fiddly change won't be enough. We're going to have to be bold."

He says export growth could not rely on the food and agricultural sectors alone.

Rising unemployment, little jobs growth and wages failing to keep pace with inflation shows the country's financial settings are "out of whack".

He accused the government of failed economic management with stagnant gross domestic product, the country's credit downgrade at the end of last year and a widening current account deficit.
I hope Parker does realize that, roughly, exports equal imports and thus if exports go up imports will also go up and thus the current account may not change much.

The NBR continues,
"Every year that current account deficit is funded by extra borrowing from overseas and the sale of yet more New Zealand assets to overseas owners."
What about the possibility that we don't have a capital account surplus because we have a current account deficit but rather we have a current account deficit because we have a capital account surplus. That is, if overseas people want to invest in New Zealand we we are likely to end up with a current account deficit. There is also the question as to why we should care about "the sale of yet more New Zealand assets to overseas owners". If these owners use the resources more efficiently than a local owner then we want overseas investors to own them.

Tomorrow is budget day


Why this issue?

Why this issue? This is a question I find myself asking about the latest attack on the government's partial privatisation plans by the Greens (and BERL).

When you look at the literature on privatisation you don't see mention of a country's debt position as a major issue. So why have the Green's chosen this issue as the one they want to fight the government's partial privatisation plans on? It seems like a 'second order' sort of an issue, privatisation is going to have little effect on government debt compared to other monetary and fiscal policies the government can put in place. This plan of attack seems especially odd given that there are Good reasons for not liking the partial asset sales programme.

Going back to the early literature on privatisation, summarised in books such as Bos (1991) and Vickers and Yarrow (1988), there is little mention of debt as one of the major driving forces behind privatisation programmes. Bos spends 10 pagers, out of roughly 300, discussing privatisation and the government budget, Vickers and Yarrow say with regard to reducing the public sector borrowing requirement (PSBR) in the U.K.,
A more important difference arose from the Government's objective of reducing the PSBR, because the borrowings of a formerly nationalized firm are no longer part of the PSBR once the firm has entered the private sector. Moreover, as a result ofa curious accounting definition, the proceeds from the sale of state assets directly reduce the PSBR because they are treated as "negative public expenditure"! Unlike sales of gilts (i.e. U.K. Government bonds), sales of shares in privatized companies (i.e. Government equities) are deemed technically not to be borrowings, although in reality there is little difference between the two methods of Government finance. Privatization therefore accorded well with the objective of reducing the PSBR so as to meet the targets that the Government had set itself as part of its medium-term financial strategy for anti-inflationary monetary control.
If you look at results such as the 'neutrality theorems' of privatisation you find that the discussion is about efficiency. These results give conditions under which the private or public ownership of productive assets is irrelevant for the final allocation of resources. The more recent incomplete contracts approach shows that ownership can matter for efficiency of a firm. For example the model of Schmidt (1966) shows that there is a trade-off between allocate efficiency and productive efficiency with regard to privatisation. But in both the early and recent theoretical literature's the argument is about efficiency.

As to the empirical evidence on the subject the emphasis is also on efficiency. The following comes from the summary of chapter 4, ‘Empirical Evidence on Privatization’s Effectiveness in Nontransition Economies’, from William L. Megginson’s book The Financial Economics of Privatization,
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.
So is the Green's plan of attack what it is to avoid having to deal with the established literature on privatisation, given that it offers significant support for privatisation? Or do they really think this is the big issue to do with privatisation? And if so, Why?

One for Eric

From Frederic Sautet at the Coordination Problem blog:
FYI, don't miss the special issue of Public Choice, edited by Charles Rowley and Daniel Houser, on the Intellectual Legacy of Gordon Tullock. It contains serveral papers on the academic career and the diverse contributions of Gordon Tullock to various fields, such as constitutional political economy, bureaucracy, the problem of social cost, bioeconomics, experimental economics, and so on. It's a great way to become acquainted with, or to deepen one's knowledge of Tullock's work. For instance, Denis Mueller has a paper on "Gordon Tullock and Public Choice;" Robert Tollison on "The Economic Theory of Rent Seeking;" and Michael Reksulak and William Shughart II on "What Should Government Do?"
Actually this special issue is for everyone, not just EC.

Tuesday 22 May 2012

Interesting blog bits

BERL on asset sales
  • Eric Crampton on BERL and asset sales
    Recall that I've previously argued that the "but the bond financing cost is lower than the flow of dividends" argument is nonsense because it says the government should borrow to invest in the stock market where stock returns are higher than what the government pays in interest; it ignores that stocks are riskier assets than New Zealand government bonds.
  • Matt Noland on Bleg: BERL’s report on asset sales
    From this news release I can’t make heads or tails of what was really going on in the BERL report on partial asset sales, which is a pity because I would like to read what they put down – and hopefully learn a bit more about what is going on
  • Welly Gnome on Asset Sales, BERL, Green Party
    Today the Green Party used a BERL report commissioned by them as ammunition for an attack on the mixed-market ownership model.
  • Groping towards Bethlehem on Consulting on asset sales
    Let’s not be naive about this. The Green Party didn’t go looking for someone to tell them that the government should sell everything and stick to assigning and protecting property rights. If they had, there are economists who would have obliged.
And let me add some Good reasons for not liking the partial asset sales programme

Good reasons for not liking the partial asset sales programme

We have another BERL Report. This time on the government's partial asset sales programme. See Offsetting Behaivour and Welly Gnome for comments on this report. Given that it was commissioned by the Green Party you will not be surprised to hear that it is very anti the asset sales idea. But the report may have reached the right conclusion, albeit via the wrong reasoning. There are good reasons for not liking the government's partial asset sell off. Here are a few I can think of:
First, selling only 40% of the shares in the companies is unlikely to make an difference to the way the SOEs are run. In particular the sell off will not make the firms anymore efficient since the government will still be the controlling shareholder.

Second, if the government really does want to maximise the income it gets from the sales selling 49% is not a good idea. 51% is worth a lot more than 49%, that is people will pay a premium for control.

Third, selling to "Mums and Dads" will do nothing for the amount of money raised, since Mums and Dads will need a discount to make them buy shares.

Fourth, selling to "Mums and Dads" will do nothing for the efficiency effect of having private owners, since there will be too many "Mums and Dads" for them to be able to coordinate their effects to effect the firm's behaviour.

Fifth, given that each "Mum or Dad" will own only a very small share of any of the firms, they have little incentive to become informed on the firm's activities since they will only capture a very small amount of any improvement in performance they could bring about. This is another reason why performance is unlikely to change.

Sixth, the discipline of bankruptcy or takeover is not greater since the government is still the controlling shareholder and is unlikely to let either of these options happen.
What I don't get is why Labour and the Greens haven't argued along these lines.

These problems could be overcome by a well run competitive auction of 100% of the shares in the SOEs to all buyers, both national and international.

Monday 21 May 2012

EconTalk this week

Now this is super cool!

Nobel Laureate Ronald Coase of the University of Chicago talks with EconTalk host Russ Roberts about his career, the current state of economics, and the Chinese economy. Coase, born in 1910, reflects on his youth, his two great papers, "The Nature of the Firm" and "The Problem of Social Cost". At the end of conversation he discusses his new book on China, How China Became Capitalist (co-authored with Ning Wang), and the future of the Chinese and world economies.

Private returns to public office

A new interesting NBER working paper on Private Returns to Public Office by Raymond Fisman, Florian Schulz and Vikrant Vig is available. The abstract reads:
We study the wealth accumulation of Indian parliamentarians using public disclosures required of all candidates since 2003. Annual asset growth of winners is on average 3 to 6 percentage points higher than runners-up. By performing a within-constituency comparison where both runner-up and winner run in consecutive elections, and by looking at the subsample of very close elections, we rule out a range of alternative explanations for differential earnings of politicians and a relevant control group. The ``winner's premium" comes from parliamentarians holding positions in the Council of Ministers, with asset returns 13 to 29 percentage points higher than non-winners. The benefit of winning is also concentrated among incumbents, because of low asset growth for incumbent non-winners.
This is the type of study you would like to see repeated for many other countries. Just how big is the premium for New Zealand?

Slavery and property rights

Having just come across The Institute for New Economic Thinking Blog I started reading some of the posts there and am more than just a bit puzzled by the following comment
Strong enforcement of property rights is good for economic growth, says the conventional wisdom. The link may not be as clear cut, says Suresh Naidu. He and co-investigator Jeremiah Dittmar are digging through court records and newspaper ads on runaway slaves to come up with a measure of property rights enforcement. The hypothesis is that weak enforcement of property rights in people – slavery that is – discouraged investment in slaves and encouraged investment in manufacturing and infrastructure instead. A new angle on the link between property rights and economic growth – this is new economic thinking.
But if you had strong enforcement of property rights you wouldn't have slavery in the first place. Slavery is after all a rather obvious violation of property rights: the property right that says we own ourselves. Slavery is not, by definition, a voluntary act, ownership in you is taken from you by force, so I can't follow the "logic" of the quote above.

Trade and inequality

A new column at looks at Trade and inequality: From theory to estimation. The column, by Elhanan Helpman, Oleg Itskhoki, Marc Muendler and Stephen Redding, utilises data from Brazil to consider the effects of trade on inequality. The column presents a unique study examining wage inequality in Brazil after trade liberalisation. Starting from a closed economy, the column finds that wage inequality will initially rise as only some firms take advantage of the new opportunities. But as trade costs continue to fall and more firms start to trade, wage inequality peaks and begins to fall back.

A key prediction of the Helpman, Itskhoki and Redding approach is an inverted U-shape relationship between wage inequality and trade openness.
Starting from the closed economy, reductions in trade costs necessarily increase wage inequality. But as trade costs continue to fall, wage inequality reaches a peak and starts to fall back. The intuition for this result stems from the discrete jump in a firm's wages that occurs when a firm enters the export market. When some firms export, while others do not, then the additional revenue generated at exporters is shared with only the workers at exporters so that export-market access contributes to wage inequality. When no firm exports, a small reduction in trade costs increases wage inequality, because it induces some firms to export and raises the wages paid by these exporting firms relative to domestic firms. At the other extreme, when all firms export, a small increase in trade costs raises wage inequality, because it induces some firms to cease exporting and reduces the wages paid by those domestic firms relative to exporting firms.

More young people out of work in city

The Press tells us,
Youth unemployment has soared in Christchurch, despite nearly 9000 young people leaving the city last year.

The Education Ministry has proposed building stronger relationships between schools and tertiary providers to halt the worrying trend, saying the situation can not be allowed to continue.

The number of Cantabrians aged 15 to 24 in employment has dropped by 12,300, the September 2011 Household Labour Force Survey revealed.

The fall comes despite 8700 people in the age bracket leaving the city last year.

The draft Education Renewal document, issued by the ministry, stressed encouraging pupils to explore vocations at school to ease the transition between education and work.

"The period has seen a fall in the youth population, increased disengagement from the labour market and a sharp reduction in the number of young people in employment," it said.

"Industries such as tourism and hospitality that have traditionally employed unskilled labour have been hit hard by the earthquakes and will take years to recover."
This may well be true, but it may not be the only problem. An obvious question to ask is what effect is the minimum wage having on the employment opportunities for young people? Employers are not likely to offer jobs if the cost of employing low skilled workers is too high. If you combine a decrease in demand, even with a decrease in supply, with a wage above equilibrium then an excess supply of labour is not that surprising.

Is prostitution safer when it’s legal?

This is the topic of a debate in The New York Times. The data from New Zealand should be able to speak to this question. Have any of the debaters bothered to look at the situation in New Zealand?
Some say laws against prostitution unfairly victimize women. A Canadian court recently ruled that laws preventing brothels endangered prostitutes by forcing them to work on the streets. And as the recent Secret Service scandal makes clear, in Colombia, prostitution is legal in “tolerance zones.” But in Spain, prostitution is essentially legal, and the nation has become a magnet for sex trafficking. Can legalized prostitution ever be safe and free of exploitation? Or should laws against prostitution remain?

Sunday 20 May 2012

Niall Ferguson on

Over the past few centuries, Western cultures have been very good at creating general prosperity for themselves. Historian Niall Ferguson asks: Why the West, and less so the rest? He suggests half a dozen big ideas from Western culture — call them the 6 killer apps — that promote wealth, stability and innovation. And in this new century, he says, these apps are all shareable.

Saturday 19 May 2012

A question on NZ on Air

Over at the TVHE blog Matt Nolan asks A question about media7:
Now the question I have is this, if the resource is so valuable why aren’t people willing to pay enough for it to be on pay-per-view? Surely, if it is adding such an important view to peoples lives they will be willing to put funds towards it.
For me the question is a little more general, Why is the government involved in funding TV at all? I mean government funding gave us Shortland Street, need I say more.

Eric Crampton argues,
You can make a merit good case for subsidising local content (note that merit good just mean “Nice stuff we think you should watch more of than you’d choose to do on your own, just ’cause we think it’s nice); you can make an external benefits market failure case for subsidising more local news content than would otherwise be provided, and especially in the categories of news programming that would not otherwise be provided (external benefit here works through increased voter knowledge as voting input).
Now I'm not sure how this argument applies to crap like Shortland Street.

As to local news what are the "external benefits"? How does funding stuff no one watches increase "voter knowledge"? Whatever that may be. Are there not better ways to increase "voter knowledge"?

Technological change and the make-or-buy decision

The make-or-buy decision is one of the most studied in the literature on firms. A new working paper, Technological Change and the Make-or-Buy Decision by Ann P. Bartel, Saul Lach and Nachum Sicherman, looks at the effects of technological change on the make-or-buy decision.

The abstract reads,
A central decision faced by firms is whether to make intermediate components internally or to buy them from specialized producers. We argue that firms producing products for which rapid technological change is characteristic will benefit from outsourcing to avoid the risk of not recouping their sunk cost investments when new production technologies appear. This risk is exacerbated when firms produce for low volume internal use, and is mitigated for those firms which sell to larger markets. Hence, products characterized by higher rates of technological change will be more likely to be produced by mass specialized firms to which other firms outsource production. Using a 1990-2002 panel data set on Spanish firms and an exogenous proxy for technological change, we provide causal evidence that technological change increases the likelihood of outsourcing.
Dick Langlois, at the Organizations and Markets blog, argues that the basic story on the effects of technological change is,
[...] when markets are thin and market-supporting institutions weak, technological change, especially systemic change, leads to increased vertical integration, since in such an environment centralized ownership and control may reduce “dynamic” transaction costs; but when markets are thick and market-supporting institutions well developed, technological change leads to vertical disintegration, since in that environment the benefits of specialization and the division of labor outweigh the (now relatively smaller) transaction costs of contracting.
The division of labour is limited by the extent of the market and if you are producing only for your own firm then the "market" is very limited and if technological change makes sunk costs investments worthless then you pay a heavy price. A firm which specialises in producing the good has a greater market for its output and thus can more easily re coup any sunk investments which reduces the dangers of technological change.

The war of the sexes

In this audio from Paul Seabright talks to Viv Davies about his recent book titled "The War of the Sexes: how conflict and cooperation have shaped men and women from pre-history to the present". Seabright explains how game theory can shed light on the complex dynamics that create both conflict and cooperation between the sexes. They discuss the connection between the rise of modern capitalism and the rise of feminism, monogamy and marriage and whether there will ever be sexual equality.

Friday 18 May 2012

Incentives matter: prison file

The Times-Picayune reports on Louisiana's, in the U.S., prison system — and the perverse incentives for sheriffs to keep inmate numbers high.
Louisiana is the world's prison capital. The state imprisons more of its people, per head, than any of its U.S. counterparts. First among Americans means first in the world. Louisiana's incarceration rate is nearly triple Iran's, seven times China's and 10 times Germany's.

The hidden engine behind the state's well-oiled prison machine is cold, hard cash. A majority of Louisiana inmates are housed in for-profit facilities, which must be supplied with a constant influx of human beings or a $182 million industry will go bankrupt.

Several homegrown private prison companies command a slice of the market. But in a uniquely Louisiana twist, most prison entrepreneurs are rural sheriffs, who hold tremendous sway in remote parishes like Madison, Avoyelles, East Carroll and Concordia. A good portion of Louisiana law enforcement is financed with dollars legally skimmed off the top of prison operations.

If the inmate count dips, sheriffs bleed money. Their constituents lose jobs. The prison lobby ensures this does not happen by thwarting nearly every reform that could result in fewer people behind bars.
This is one case where vertical integration is not optimal. By allowing sheriffs to profit from the running of prisons you give them an unwanted incentive to keep prison populations high. An obvious reform would be to stop vertical integration of this type.

Thursday 17 May 2012

Agency problems and slave-run business

Slavery is a very old economic institution. Why it is so long lasting is an interesting question given the obvious problems with it as a form of economic organisation. Adam Smith noted that
[Tlhe work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible.
This highlights the moral hazard (or agency) problems that arise with slavery. For slavery to have been such a long lasting organisational business form these agency problems have to been overcome, at least to a degree.

In a new working paper Agency Problems and Organizational Costs In Slave-Run Business, Barbara Abatino and Giuseppe Dari-Mattiacci look at how such problems were dealt with in ancient Rome. The abstract reads,
We examine the economic organization of slave-run businesses: slaves endowed with certain assets (the peculium). The evidence points predominantly to businesses of small or medium size, suggesting that there must have been some constraints to growth. We identify both agency problems arising within the business organization (governance problems) and agency problems arising between the business organization and its creditors (limited access to finance). We show that, although the praetorian remedies had a remarkable mitigating effect, agency problems operated as a constraint to the expansion of these business organizations, both in terms of individuals involved and in terms of capital invested.
The idea that slavery was inefficient became the standard view in economics following Smith. As Robert Fogel has written in his book "The Slavery Debates, 1952-1990: A Retrospective",
Since a long list of public figures, historians, and economists, dating back to Benjamin Franklin and Adam Smith, had argued that slave labor was quite inefficient, and since this view was in varying degrees embraced by all of the reigning historians, we had little reason to doubt that this was the case.
He goes on to say,
Early in 1968, [Stanley] Engerman and I decided to measure just how much less efficient southern slave agriculture was than the northern system of free family farming. The project seemed straightforward. Economists had for some time been working on the problem of how to compare the relative efficiency of two economies or two sectors of the same economy. In this connection they had devised an index (called "the geometric index of total factor productivity") that was relatively easy to compute. We did not feel that we needed a very precise version of this index. Something that gave us a rough idea of the relative level of the inefficiency of southern agriculture was good enough. For such a task, we thought, the data on agricultural production in the published census of 1860 would do. The whole enterprise could be completed in a few weeks.
The only problem was the result of the enterprise. Their crude index showed that southern slavery based agriculture was 9% more efficient than free northern agriculture. Not what Smith would have thought. And not what Engerman and Fogel thought. So they set about reworking their analysis, only to find that the advantage of slave agriculture rose to 39%. Fogel continues,
Still, the result did not sit well with us and we did not rule out the possibility that we had fallen into some unsuspected analytical trap. Our instincts continued to resist the implications of our findings. How could a system so impoverished in labor skills be efficient? How were the masters and the overseers able to overcome the indisputable sluggishness of the slave labor force, whether this sluggishness was because slaves had been reduced to Sambos, as Stanley Elkins believed, or because of their resistance to exploitation, as Kenneth Stampp argued. How could one account for the peculiar dichotomy under which slave labor apparently was quite efficient in an agricultural setting but by all accounts so inefficient in the city that urban slavery was on the verge of collapse?
The effort to resolve these issues led to Engerman and Fogel's controversial book "Time on the Cross" and the now huge literature that followed.

But the basic point is that if slavery is as efficient as Engerman and Fogel suggest then the moral hazard problems involved with it have to have been overcome to a large degree via institutional and organisational innovation.

Wednesday 16 May 2012

Sin taxes

The National Business Review notes that
Finance Minister Bill English may hike the excise on tobacco and alcohol, and further tighten rules on property investment, to help bridge the $640 million shortfall in his pledge to return to budget surplus in 2015.
"I think we will see some sin taxes rise - alcohol and cigarettes - these sorts of things," said Cameron Bagrie, chief economist at ANZ National.
But we, and the government, should also take note of this point made in The Wages of Sin Taxes by Christopher Snowdon,
Taxing goods which are price inelastic, especially those which are addictive, is far more likely to impoverish consumers than it is to turn them into abstainers. Alcoholics are rarely deterred from drinking by higher prices and there is evidence that tobacco taxes are now so high that further increases will yield diminishing returns. Many studies have concluded that ‘fat taxes’ and ‘soda taxes’ have little or no effect on rates of obesity. Such levies are better seen as stealth taxes than sin taxes.
Sin taxes may be great for generating revenue, but unless huge they achieve little else worthwhile.

Controlling other people's property

As Grossman and Hart pointed out more than 25 years ago ownership is defined in terms of control rights, a point lost, it seems, on some people in Christchurch. If you own a building you have the right to determine whether or not it is demolished.

From The Press:
A last-gasp plea to save Christ Church Cathedral has been rejected by Canterbury Earthquake Recovery Minister Gerry Brownlee.

Campaigners called for government intervention after Anglican leaders rejected a proposal to restore the quake-damaged building.

Brownlee told The Press: "We haven't gone around taking buildings off other people and we are not about to do that with the Anglican Church.
For once I agree with Gerry Brownlee. The Cathedral is owned by the Anglican Church and it is their decision as to what happens to it. Simple.

The Restore Christ Church Cathedral Group has no right to tell the Anglican Church what it can do with its property. But it gets worse,
The Restore Christ Church Cathedral Group had proposed sharing restoration costs between the Anglican diocese, the Christchurch City Council and the Government.
So not only do these people want to usurp the property rights of the Church they also  want the right to tell the Church, the Council and the Government how to spend their money!

Later the article says,
Restore Christ Church Cathedral Group spokesman Mark Belton said the Government needed to intervene to save the building.

"We want to challenge the Government to step in. It is in the national interest to take over this property and fix it," he said.
A translation: we want the government to give us the right to determine what happens to other people's property.

And what the hell is this "It is in the national interest" bit? What is the "national interest" and how is saving this building part of that interest?

Interesting blog bits

  1. Matt Ridley on The economic defeat of tuberculosis
    TB was not cured so much as prevented by better housing conditions
  2. Richard Posner on Homosexual Marriage
    President Obama’s declaration of support for homosexual marriage has focused public attention on the question whether such marriage should be permitted, although so far the response has been rather tepid. It no longer seems a hot issue, though it may heat up in the furnace of a presidential election campaign.
  3. Gary Becker On Homosexual Marriage
    In today’s sexual environment, homosexuality no longer seems exotic or radically unnatural. For this reason, while American anti-discrimination law protects homosexuals from discrimination, acceptance of homosexuals in the workplace and elsewhere would have greatly increased even without legal protection against discrimination. I am not familiar with any studies that assess the causes of the decline in discrimination against homosexuals, but they would show, I believe, that changes in attitudes were more important than legislation.
  4. Justin Wolfers on How Economics Explains The Rising Support for Gay Marriage
    President Obama’s personal evolution toward accepting same-sex marriage has certainly made plenty of headlines. But perhaps the bigger—and untold story—is the evolution of marriage itself, and how the generational shift in how we experience marriage underpins rising toward support for same-sex marriage.
  5. Gavin Kennedy has Some Thoughts for May
    I had occasion last weekend to re-read part of Dugald Stewart’s biographical eulogy to Adam Smith, that Dugald read to two meetings of the Royal Society of Edinburgh in 1793, and which was published in 1795, and thereafter reproduced in most editions of Smith’s Wealth Of Nations published during the 19th century. Stewart’s is a remarkable document of Smith’s life and achievements – Dugald knew Smith well and, through his father, Michael Stewart, who was at Glasgow with Smith, who knew Smith intimately, socially and intellectually from childhood to when he died in 1790. Even today, Dugald’s biographical eulogy deserves close study by Smithian scholars, though this first biography was superseded later by three other major biographies: John Rae’s ‘Life of Adam Smith’, (1895), W. R. Scott’s ‘Adam Smith as Student and Professor’ (1937), and Ian Ross’s ‘The Life of Adam Smith’ (1995, 2nd edition, 2011, Oxford University Press), the definitive biography of Smith.
  6. Not PC on Still no need to panic about global warming
    It sounds like the start of a joke, i.e.:

    Q: What do you get when two economists argue about global warming?
  7. Pietro Alessandrini, Michele Fratianni, Andrew Hughes Hallett and Andrea F Presbitero on The Eurozone crisis: Fiscal fragility, external imbalances, or both?
    Unsustainable debt along Europe’s periphery is bringing the euro to breaking point. But this column argues that this is not simply the result of fiscal ill-discipline. After 2010, the Eurozone crisis went from a fiscal crisis to a balance-of-payments crisis – with different prescriptions for policy.
  8. Philip Booth on The Archbishop of Canterbury and the market economy (part one)
    The Archbishop of Canterbury’s latest foray into the world of political economy does him even less credit than his previous attempts.
  9. Philip Booth on The Archbishop of Canterbury and the market economy (part two)
    In my last blog post, I looked at Archbishop Williams’ use of legal organ sales as an example of the degeneracy of the market economy. The fact that organ sales are not legal is a detail that seems to have escaped his attention.

The public cost of smoking and drinking

From The Pin Factory Blog comes a posting on The Wages of Sin Taxes: The True Cost of Taxing Alcohol, Tobacco and Other "Vices" which includes this point:
The public cost of smoking and drinking

Taxes on cigarettes and alcohol have often been justified by studies that claim to estimate the “social cost” of these vices. These studies include intangible costs borne by individual consumers, such as “emotional distress”, lost years of life, and individual expenditures on cigarettes and alcohol. These are personal costs, not social costs. They also fail to include the economic benefits the alcohol and cigarette industry gives to the UK in terms of employment and government revenue. Most of these studies should be relegated to the bin of junk statistics.

In fact, smokers and heavy drinkers do not cost the state more. Though smokers may cost more during their working lives, but non-smokers require greater expenditure in pensions, nursing care and welfare payments. Chronic diseases associated with old age are far more expensive than the lethal diseases associated with smoking and alcoholism. Smokers and drinkers are not a burden on the state, and the myth of saints subsidising sinners should not be used to justify tax rises.
A common problem with many studies of the costs of alcohol, tobacco et al is that they seem to assume that if it wasn't for the alcohol, smoking or whatever, people would live forever and never cost of the health system anything! If fact non-drinkers, non-smokers etc do die, albeit later than drinkers, smokers etc, and die of things that cost the health system as least as much as the diseases of drinkers and smokers. These non-vice costs need to be incorporated into any study of the costs of "vices". Dying early can save the health (and pension) system money.

Tuesday 15 May 2012

"Means-connected" and not "ends-connected"

Steven Horwitz writes on Hayek’s Tolerant and Pluralistic Liberal Vision.
Here’s the important thing: Once we agree on the rules, we need not agree on the ends to live peacefully with one another. The liberal society is “means-connected” and not “ends-connected.” Markets enable us to disagree peacefully while each pursues his or her own way.

But notice that to sustain this kind of society, we must be willing to tolerate differences with others. We have to recognize that our freedom to achieve our ends comes at the cost of allowing others the same, even if we find those ends distasteful. In the words of FEE’s founder, Leonard Read, we must be willing to accept “anything that’s peaceful.” This is what Hayek means when he says a free society is a “pluralistic society.

Compare this to socialism or fascism. These systems require a single hierarchy of ends; according to the theory, the collective decides which ends will be pursued and which not. When resources are allocated centrally, pursuing our own individual ends is impossible. Our particular ends must be subordinated to the priorities of the State or collective. The result is not the peaceful disagreement and tolerance of the liberal order, but constant fighting over the reins of power in order to achieve one’s ends at the expense of others. We turn the positive-sum game of the market into the zero or negative-sum game of State power.
So no matter what particular ends we seek, we can all use the market process to achieve them. If I want a microeconomics book to read and you want a macro book, we can both achieve our different ends via the market. We do no have to make one decision about what we both will read.

Price discrimination in the housing market

Patrick Bayer, Marcus D. Casey, Fernando Ferreira and Robert McMillan have a new NBER working paper out on the above topic

The abstract reads:
This paper sets out a new research design to test for price discrimination by sellers in the housing market. The design controls carefully for unobserved differences in the quality of neighbourhoods and homes purchased by buyers of each race, using novel panel data from over two million repeat-sales housing transactions in four metropolitan areas. The results indicate that black and Hispanic homebuyers pay premiums of around 3 percent on average across the four cities - differences that are not explained by variation in buyer income, wealth or access to credit. The estimated premiums do not vary significantly with the racial composition of the neighborhood or, most strikingly, the race of the seller. This latter result rules out racial prejudice or animosity on the part of sellers as the primary explanation for the estimated premiums.
So black and Hispanic homebuyers pay premiums of around 3 percent but this isn't due to variation in buyer income, wealth, access to credit or racial prejudice on the part of sellers. We are running out of obvious reasons.

Monday 14 May 2012

EconTalk this week

David Owen, author of The First National Bank of Dad, talks with EconTalk host Russ Roberts about how to educate our children about money and finance. Owen explains how he created his own savings accounts for his kids that gave them an incentive to save and other ways to teach them about postponing gratification, investing, keeping money in perspective and other life lessons. The conversation closes with a discussion of the value of reading to your kids.

What happened during the neolithic revolution?

Daron Acemoglu and James Robinson write,
The archaeologist Bruce Smith in his book The Emergence of Agriculture describes the transition which took place in the Middle East in the following way (page 79):
their inhabitants had clearly shifted to permanent year-round settlements as early as 12,500 years ago and invested considerable labor in constructing houses and storage facilities.

When people established sedentary settlements, their concepts of who owned resources likely became more restrictive as they strengthened their claim on the surrounding countryside, which they viewed more and more as being for their exclusive use. By 12,5000 BP, then, hunting and gathering societies began to adopt a way of life that set the logistic, economic, and organizational groundwork for the emergence of village farming communities…many of the basic elements of social organization essential to village life were already in place before the first experiments with cultivation…
In other words, the existing evidence, in contrast to what is presumed in Diamond’s argument and the conventional wisdom, is that institutional innovation did not follow transition to agriculture, but preceded it. In fact, it was this institutional innovation which allowed the technological changes at the heart of the Neolithic Revolution.

So most likely, the Neolithic Revolution is also not about geography but all about institutions.
What could lead to sedentary settlements and the related institutional developments? Trade?

Haim Ofek writes,
Modern humans stayed anatomically unchanged at least for the past 80,000 years. On the evolutionary level of organization, anatomically fixed things are expected to stay (nearly) fixed in behavior. Our (anatomically) modern ancestors lived up to this rule for the first half, or slightly more, of their tenure on earth. All hell broke loose in the second. The extraordinary changes in the archaeological record starting around 40,000 to 30,000 years ago, and carrying through the height of the last ice age to the onset of the Holocene (some 10,000 years ago), suggest remarkable refinements in behavioral structures unexpected of a morphologically fixed organism. Changes in the record further suggest a remarkable increase in regional and temporal diversity of material structures that up to that point varied little through time and space. The Middle to Upper Paleolithic transition, or the creative explosion as this episode has sometimes been labeled (e.g., Pfeiffer, 1982), is most vividly evident in wall paintings preserved in caves, in portable art, personal ornamentation, and in elaborate burials. More subtle are the sudden refinements in tools, and the rapid expansion into new geographic areas, indeed, into two new continents (Australia and the Americas). Underlying all ofthis is an authentic economic expansion reminiscent of various mercantile and industrial revolutions in recorded history.

The key question, from an evolutionary viewpoint, is how could such remarkable changes take place in functional behavior without apparent change in morphology. One possible explanation ascribes this turn of events to some neurological change that led to an evolution in behavior without an apparent change in anatomical form (e.g., Klein 1992), Alternatively, it has been argued that on this occasion "culturally organized behavior ... revolutionized our evolution in a way that may have been quite independent of genetic change" (Binford 1992).
Developments in trade and innovations in institutions fall into the second of these two categories.

About trade and innovation Matt Ridley writes,
Without trade, innovation just does not happen. Exchange is to technology as sex is to evolution. It stimulates novelty.
Ridley continues,
If you are not self-sufficient, but are working for other people, too, then it pays you to spend some time and effort to improve your technology and it pays you to specialise. Suppose, for example, that Adam lives in a grassy steppe where there are herds of reindeer in winter, but some days' walk away is a coast, where there are fish in summer. He could spend winter hunting, then migrate to the coast to go fishing. But that way he would not only waste time travelling, and probably run a huge risk crossing the territory of another tribe. He would also have to get good at two quite different things.

If, instead, Adam sticks to hunting and then gives some dried meat and reindeer antlers - ideal for fashioning hooks from - to Oz, a coastal fisherman, in exchange for fish, he has achieved the goal of varying his diet in a less tiring or dangerous way. He has also bought an insurance policy. And Oz would be better off, because he could now catch (and spare) more fish. Next Adam realises that instead of giving Oz raw antlers, he can give him pieces of antler already fashioned into hooks. These are easier to transport and fetch a better price in fish. He got the idea when he once went to the trading point and noticed others selling antlers that had already been cut up into easy segments. One day, Oz asks him to make barbed hooks. And Adam suggests that Oz dries or smokes his fish so it lasts longer. Soon Oz brings shells, too, which Adam buys to make jewellery for a young woman he fancies. After a while, depressed by the low price fetched by hooks of even high quality, Adam hits on the idea of tanning some extra hides and bringing those to the trading point, too. Now he finds he is better at making hides than hooks, so he specialises in hides, giving his antlers to somebody from his own tribe in exchange for his hides. And so on, and on and on.

Fanciful, maybe. And no doubt wrong in all sorts of details. But the point is how easy it is to envisage both opportunities for trade among hunter-gatherers - meat for plants, fish for leather, wood for stone, antler for shells - and how easy it is for Stone Age people to discover mutual gains from trade and then to enhance that effect by further specialising and further dividing labour. The extraordinary thing about exchange is that it breeds: the more of it you do, the more of it you can do. And it calls forth innovation.
Is it too fanciful to think that if Adam and Oz are trading regularly and meeting at a given trading point that someone would not settle down at that point and thus become somewhat more sedentary that before?

Ridley goes on to say,
Moreover, some ancient hunter-gatherer societies reached such a pitch of trade and prosperity as to live in dense, sophisticated hierarchical societies with much specialisation. Where the sea produced a rich bounty, it was possible to achieve a density of the kind that normally requires agriculture to support it - complete With chiefs, priests, merchants and conspicuous consumption. The Kwakiutl Americans, living off the salmon runs of the Pacific North West, had family property rights to streams and fishing spots, had enormous buildings richly decorated with sculptures and textiles, and engaged in bizarre rituals of conspicuous consumption such as the giving of rich copper gifts to each other, or the burning of candlefish oil, just for the prestige of being seen to be philanthropic. They also employed slaves. Yet they were strictly speaking hunter-gatherers. The Chumash of the Californian channel islands, well fed on sea food and seal meat, included specialist craftsmen who fashioned beads from abalone shells to use as currency in a sophisticated and long-range canoe trade. Trade with strangers, and the trust that underpins it, was a very early habit of modern human beings.
Thus trade may be part of the answer as to why we see sedentary settlements and the related institutional developments during the Neolithic Revolution.
  • Ofek, Haim (2001). Second Nature: Economic Origins of Human Evolution, Cambridge: Cambridge University Press.
  • Ridley, Matt (2010). The Rational Optimist: How Prosperity Evolves, New York: Harper.

Crime does pay

The Italian Mafia can be seen as one of the largest and most successful businesses in Italy. In one of the latest reports from the Italian Minister of Home Affairs, it has been estimated that revenues from just the informal sector related to the Mafia amount to almost €180 billion. In terms of GDP, revenues from Mafia-related businesses represent almost 12% of the total Italian GDP and are equal to the sum of the GDPs of Estonia, Croatia, Romania, and Slovenia (Ruffolo et al. 2010). To date, the Italian Mafia is the most successful form of organised crime in Europe and comparable to the Chinese, Japanese, Russian, and South American crime organisations in terms of business.
In a column at, Arcangelo Dimico, Alessia Isopi and Ola Olsson look at the Origins of the Sicilian Mafia.

Will they never learn?! (updated)

As has been noted on this blog and all other economics blog in the country the economics of building stadiums suck. Recently I wrote,
I can't help thinking that the obvious lesson from Dunedin [with regard to the Forsyth Barr Stadium] is that if you want to inject economic life into your area don't build a stadium.

I just hope that other city councils learn from the Dunedin experience and don't try building grand new stadiums in their cities. Take note Christchurch!
It now appears no one has taken notice. The Press reports,
Prime Minister John Key has backed the idea of a "world-class covered stadium'' in Christchurch.

The size and design of a long-term replacement for earthquake-hit AMI Stadium has been the subject of much debate in the city.

Six options are on the table, and possibly more, when the consultation period ends.

They range between $40m to $145m with the insurance cheque of $143m factored in.

The cheapest option is a like-for-like rebuild of AMI which would take four years.

The most expensive is $144m, a new 35,000-seat rectangular stadium with a covered playing surface, which would take five years to build.

The Christchurch City Council's draft annual plan, which is open for public feedback, has indicated a preference for an uncovered 35,000-seat stadium on the current site.

However, the council says the option would not rule out "the later addition of a roof structure to make the ground fully covered".
Will they never learn? Lets be clear, everything economists know about the economics of stadiums tells us that stadiums do not help the broader economies of the cities or regions they are in, in fact the evidence available points in the opposite direction. You only have to look at the situation in Dunedin to get the point. Has the government and the city council really missed what is happening there?!

The Press also writes,
Canterbury Rugby Football Union (CRFU) chief executive Hamish Riach said he was "very much in favour" of a covered stadium.
Well if they are so much in favour let them pay for it.

Update: Sam Richardson has more on the Forsyth Barr Stadium in Dunedin. Eric Crampton has noted the Christchurch situation as well.

Sunday 13 May 2012

Another thing (partial) privatisation isn't about

Rob Cameron writes in the New Zealand Herald,
And therein lies New Zealand's problem. The analysis of the Taskforce clearly showed our publicly listed markets lack depth, breadth and, by any standards, are just too small. In Australia just under 80 per cent of the largest 200 companies are listed on the ASX. In New Zealand less than one third of our largest 200 companies are listed.

Measured relative to GDP, the NZX is among the smallest in the developed world. As a ratio of GDP, the market capitalisation of our stock exchange is 0.35. This compares with Australia, at 1.37, Britain at 1.40 and the Nordic countries which vary between 0.85 and 1.30. You have to go searching for former communist countries (such as Hungary) to find ratios as low as ours.

Our sharemarket also exhibits significant "gaps". Sectors such as utilities, which contain a significant number of large and mature companies, are owned by central government or local authorities which choose not to list and make available for public ownership minority interests in these entities. In this respect New Zealand is an "outlier" within the OECD.

A disproportionate share of our large companies are owned by central or local government, and a relatively small number of these companies have minority public ownership, compared to most other OECD countries. This probably contributes to low household participation in our equity market.

The Government's mixed ownership programme has the potential to significantly change this picture. It would increase the size of our stockmarket by more than 20 per cent, significantly improving its depth, attractiveness and effectiveness as an engine of growth. It would provide retail investors with a much-improved choice of good quality investment products.
The New Zealand sharemarket may exhibit significant "gaps" but so what? Filling "gaps" in the sharemarket is another thing privatisation isn't about. It is not the job of government to bolster the sharemarket, that is the job of the those who run the sharemarket.

Let me say again, the debate about privatisation should be in about the efficiency of the economy, not about price or "lost dividends" or the state of the sharemarket. The sharemarket, I'm sure, would do well if the government sold off SOEs as legal monopolies but it's hard to see this as an efficiency or welfare enhancing move. If privatisation helps the sharemarket, great, but this result in a positive externality of privatisation, it is not in and of itself a reason to privatise.

Friday 11 May 2012

Having a clear analytical framework helps ....

even if you don't agree with it.

Thanks to James Zuccollo for this quote from a review of Gray Becker's book Accounting for Tastes by Jon Elster,
If Gary Becker didn’t exist, we would have to invent someone like him. For close to four decades he has been taking economic theory beyond its usual domain of applications, almost single-handedly creating the economics of discrimination, human capital theory, the economics of crime and punishment, and the economic theory of the family.

Although I disagree sharply with much of it, it has raised the level of discussion enormously. Before Becker, most explanations of addiction did not involve choice at all, much less rational choice. By arguing that addiction is a form of rational behavior, Becker offers other scholars the choice between agreeing with him or trying to identify exactly where he goes wrong. Whatever option we take (I’m going to take the second), our understanding of addiction will be sharpened and focused.
Elster makes an important point, having a clear analytical framework helps both those who agree with you and those who don't. It makes it possible for people to workout what exactly it is they agree or disagree with.

Russel Norman on privatisation

From the New Zealand Herald:
The Green Party has crunched numbers it claims show asset sales have already cost the country billions.

Co-Leader Russel Norman has released a table he claimed showed exactly how much revenue New Zealand lost when the Bank of New Zealand, Telecom, and Contact energy were sold by previous governments.

He said the three SOEs were sold for seven billion dollars and since their sale have paid out 21 billion dollars in dividends.

Dr Norman said that was evidence asset sales are folly.
When I see statements like this I do have to ask, How did they get their figures? Are the stated figures in real terms? Are they in present value terms? Do they take into account what the government has done with the money it got from the asset sales? For example if the government use the money to payoff debt then any dividends "lost" would have to be net of any savings in interest on repaid debt. Also are these numbers net of any taxes paid on profits earned?

Also has Russell Norman considered if there has been an increase in dividends paid, which implies greater profits, this could be because the firms are now being better run now than they were under government ownership?

Let me add that arguments like Russell Norman's miss the point. As I have said before, let the debate about privatisation in terms of efficiency not price or "lost dividends".

Thursday 10 May 2012

An alternative to drug prohibition

Christopher Snowdon offers his view of An Alternative to Drug Prohibition at the IEA blog.
Any alternative to drug prohibition must aim to reduce intravenous use, keep drugs out of the hands of children and dampen demand for the most damaging derivatives of crack cocaine, heroin and morphine - all the things that prohibition has singularly failed to achieve. It would restore the right of consenting adults to take stimulants, narcotics, empathogens and hallucinogens for recreational and medical use while reducing drug-related crime to a level that has been unimaginable for much of the last hundred years.

The optimal system would take the narcotics industry out of the hands of criminals, regulate purity and quality, and collect the many billions in taxes that have been lost to the government. This money would then be used to pay for treatment and rehabilitation services for those struggling with addiction, as well as financing the agencies that would enforce licensing regulations and control minors’ access to drugs. These services could be offered at a world-class standard and still leave huge sums left over for governments to spend on other projects. The optimal system would, in other words, be closer to legalisation than decriminalisation.

A pragmatic legal market would allow licensed bars, coffee shops and private members’ clubs to sell opium and cannabis for smoking on the premises. Nightclubs and some bars would be permitted to sell pure MDMA. Pills, powders and tinctures containing amphetamine, cocaine and opium would be available from registered pharmacists with appropriate warnings and directions for use. Specialised licensed shops, equivalent to tobacconists or ‘head shops’, would be permitted to sell cannabis cigarettes, MDMA, smoking opium and hallucinogens for sale off the premises. In all cases, sales would be limited to those over the age of eighteen.

This would not be an entirely free market. Pure heroin and morphine would not be available except under doctor’s prescription for chronic disease, terminal illness and the maintenance of addiction, both under medical supervision and, in the latter case, subject to the patient accepting treatment for addiction. Marijuana would be available on prescription for sufferers of multiple sclerosis, glaucoma and other diseases where science has established proof of efficacy. Crack cocaine, methamphetamine and, perhaps, skunk would not be sold commercially, although it would be fruitless to try to stop individuals manufacturing or growing these drugs privately. THC levels in marijuana could be limited by law in the same way as tar levels are limited in cigarettes.

Regulation would be much tighter than for any other legal product. In the short-term, some variation of the Swedish Bratt System for alcohol might be appropriate, limiting the number of purchases that could be made within a certain period of time and forbidding sales to certain persons. Recovering addicts could enrol in a voluntary self-exclusion scheme based on the system which allows compulsive gamblers to ban themselves from casinos. Local authorities might choose to limit the sale of drugs to premises which do not also sell alcohol, but any regulation must be careful not to be so restrictive as to resurrect the illicit trade.

In the tradition of the bootleggers uniting with the Baptists, the big-time drug dealers can be expected to join the prohibitionists in opposing legalisation. It is quite possible that elements of the criminal underworld will shift their attention to other illegal activities once the narcotics gold mine is closed off to them, but legalisation would also free up enormous police resources to detect real crime. In any case, it is not the responsibility of government to provide lucrative openings for organised criminals.

It is possible that a black market will emerge purveying the most dangerous derivatives, but the illicit drug dealer will find the odds stacked against him in several ways. Under legalisation, even the most punitively taxed substances will cost less than half the price charged under prohibition. Addicts would receive their prescriptions free of charge and the legal availability of high quality opium and opium-containing tinctures should soften the demand for illicit heroin, morphine and methadone. These drugs, along with crack cocaine and skunk, are products of prohibition by virtue of their potency. Recreational users have historically preferred to take these drugs in their more natural, less hazardous forms and, under legalisation, the appeal of the strongest derivatives will be lost, except to the most hardened addict. Although it is highly improbable that these drugs will fall into disuse, especially in the first years of repeal, the availability of other options, combined with a well-financed harm reduction agency, should alleviate the worst of the damage.

Driving under the influence of drugs would continue to be treated as seriously as drunk-driving, and intoxication from drugs (or drink) would not be viewed as a mitigating factor for any criminal offence. Upon repeal, prisoners convicted for the possession of drugs would receive a pardon and be released.
Snowdon's ideas are a step in the right direction. Reducing the costs of the of the pointless "War on Drugs" has got to be put at the centre of drug policy. Criminals are about the only group in society that actually benefit from the current situation.

Stadiums don't pay (updated)

Sam Richardson at Fair Play and Forward Passes continues the sorry story of the Forsyth Barr Stadium in Dunedin. We now know the financial position of the stadium for the first 6 months of its use.
I'm not one of these 'I told you so' people, but this report can't exactly be described as a surprise (although the extent of the losses are perhaps higher than many would have anticipated) as much of the international experience has been the same. They don't make money. Period. If you cover your costs, you are doing very, very well. Let's just hope that the folks in Dunedin can turn it around - although it is difficult to see how, if they don't attract major events that they were banking on. And they must also hope that cornerstone tenants remain financially viable and can contribute their share of the costs. (Emphasis added)
The Southland Times reports,
The flash new Forsyth Barr Stadium has fulfilled the prophecies of doom with a $1.9m projected loss in its first six months announced today and new projections showing a $1.4m loss in the 2012/13 year.
Other centres were facing similar issues to Dunedin. Most had built stadiums to inject economic life into their areas. (Emphasis added)
I can't help thinking that the obvious lesson from Dunedin is that if you want to inject economic life into your area don't build a stadium.

I just hope that other city councils learn from the Dunedin experience and don't try building grand new stadiums in their cities. Take note Christchurch!

Update: Sam Richardson continues his analysis: F-B Stadium - more of the same

Wednesday 9 May 2012

Is this self interest or what!

From Radio New Zealand news
The owner of a Christchurch construction company is calling for a law change to force property developers working in the earthquake-hit city to donate a small percentage of their land for affordable housing.

Falcon Construction director David Reid says there is not enough affordable land in Christchurch to meet the demands of residents displaced from the red zone.
Now what types of businesses stand to gain the most from this kind of law change? Construction companies by any chance? Self interest is all well and good but you could try to be subtle.

Also isn't there something weird about forcing people to donate? If you're forced its not much of a donation.

What incentives does this give property developers? Just what land would they "donate"? And what would it do to the cost of developments on the non-donated land? The cost of the "donated" land would have to be recovered somehow?

Say after me, "efficiency not price"

Over at the TVHE blog James Zuccollo notes that,
Asset sales are in the papers again today:
If New Zealand’s Government were a business, it would have no case to sell stakes in its energy generation firms… Sustento director and economist Raf Manji said. It was admirable for the Government to lower debt, but the numbers around selling stakes in energy firms to do so did not add up, he said.

No more important public good existed than energy, as it was essential to people and businesses, so it was dangerous to raise the firm’s focus on profits.
In response James correctly says, first, that a country is not a large company and shouldn’t be treated as such and secondly that energy isn't a public good.

Let me add a couple of more points. As to Raf's argument that "it was dangerous to raise the firm’s focus on profits" I would say, first that under the SOE Act, SOEs are basically required to maximise profits so there seems little difference on this score between SOEs and private firms; and second, if we really don't want to have energy firms focusing on profits this doesn't imply government ownership since you could just set these firms up as private but not-or-profit firms.

In addition let me make a point I have made before, that the logic behind the sate of state assets is about the efficiency of resource allocation not the price received for the assets. The reasons for privatisation can hold even if you get nothing from the privatisation programme. Talking about maximising the return from privatisation, even if this is to pay off debt, misses the whole point of privatisation which is to improve the efficient and productivity of the economy. If we agree with Raf that energy is essential to people and businesses then its even more important that we get this sector being as efficient as possible and if privatisation helps do this then we should privatise. 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 efficiency, productivity or welfare.

Federal Reserve reform, economists panel (updated)

From C-Span in the U.S.

Economists testify before the House Financial Services Committee’s Subcommittee on Domestic Monetary Policy and Technology on legislative proposals that either reform or suggest abolishing the Federal Reserve System. The economists are Peter Klein, Jeff Herbener, John Taylor, Alice Rivlin and James Galbraith.

Update: the written testimonies can be found here.

Interesting blog bits

  1. Stumbling and Mumbling on The left & shareholder activism
    The resignations of Andrew Moss at Aviva and Sly Bailey at Trinity Mirror suggest that investors are becoming more intolerant of high pay for poor performance. However, I'm not sure if the Left should welcome this new shareholder activism.
  2. The Grumpy Economist on Rajan on the world's troubles
    Raghu Rajan wrote a very thoughtful essay in Foreign Affairs. Though titled "The True Lessons of the Recession" it's really more a grand view of the last 50 years and prospects for growth ahead. The subtitle "The West Can’t Borrow and Spend Its Way to Recovery" is worth repeating.
  3. Len Shackleton Over-hyped Olympics
    I’m also sure I’m not alone in wondering quite why we have needed to spend £9.3 billion (the Public Accounts Committee says over £11 billion) of public money, to use 13,500 military personnel and a selection of anti-missile weaponry to lock down London for several weeks, and to produce massive inconvenience to the general public and businesses in the capital.
  4. Groping towards Bethlehem asks, A French revolution?
    Hollande defeated Sarkozy in this weekend’s presidential election in France. Reporting and commentary is amusingly mixed.
  5. John Taylor on Debate and Evidence on the Weak Recovery
    Last week’s GDP release is yet more evidence that this recovery has been remarkably weak, and has been so from the start—averaging only 2.4 percent in the 11 quarters since the recovery began.
  6. Matt Nolan asks A cut to the OCR, why?
    I see that my workplace came out and said that they expect the official cash rate to be cut in June – by 25 basis points to 2.25%. Unsurprisingly, I agree with the assessment of my colleagues. However, a large number of other economists – whose views I also have a lot of respect for – believe that a cut is not on the cards, at least not yet.
  7. Eric Crampton on Two OCR markets go in...
    Credit Suisse has a 50-81% chance of a cut; iPredict has a 60% chance of no change. Credit Suisse is where the big money plays are tallied; iPredict is more likely to have insiders.
  8. Lynne Kiesling on Green urban infrastructure can save green(backs)
    Some of the best environmental projects also save money. This post at The Atlantic’s Cities blog highlights urban green infrastructure such as permeable pavement projects, including a recent study finding that they can also be economical
  9. Alex Bryson, Giambattista Rossi and Rob Simmons ask Are migrants paid more? Evidence from Italian football
    Are migrants paid more or less than their native colleagues? This column provides a unique insight by looking at data from an industry where there are many foreigners and where their relative quality can be easily measured – professional football in Italy.