Problems and property rights

David R. Henderson writes on How Property Rights Solve Problems.

Should restaurants allow smoking or not? Should schools teach evolution or intelligent design or both? Should insurance companies cover contraception? Should I be able to take off my shoes in your living room?

The answer to all these questions is that whoever has the property rights in each of the situations gets to decide. Property rights are an simple but effective way of dealing with such problems. Take the smoking question as an example. Henderson writes,

Should a restaurant allow smoking or not? I have no idea. Neither do you. Who does? The restaurant owner. The restaurant owner knows that if he bans smoking, he will get more business from non-smokers and less business from smokers. He also knows that if he doesn't ban smoking, he will get more business from smokers and less from non-smokers. He will make that tradeoff and, if he has no particular interest one way or the other, will likely do so in a way that maximizes his net income from running a restaurant.1

Ah, but what about his employees? Don't they matter? Yes, they do, and the restaurant owner knows that they do and has an incentive to take account of their preferences. If his employees don't like working where there's smoke, he will take account of both the extra wages he must pay to get good employees and the higher turnover of employees. These all factor into his decision. Interestingly, though, when I discussed this issue with a former waitress who doesn't like smoke, she told me that she and her colleagues had preferred, as waiters and waitresses, to work in restaurants that allowed smoking. Why? Because, she said, people who smoked also had a higher probability of drinking alcohol and, therefore, had higher restaurant tabs and paid bigger tips.

In short, whether restaurant owners should allow smoking is not a public-policy problem. It's a totally private issue, and the person who should make the decision is the owner. The only reason it looks like a public-policy problem is that the government has made it one—by increasingly putting its thumb on the scales and dictating non-smoking restaurants.

A nice example of property rights dealing with the smoking issue comes from the University of Chicago,

A true story about two well-known economists is a propos. Robert Barro, an economics professor at Harvard University, who is on many people's short list for a Nobel Prize in economics, hates smoke also. When he was on the economics faculty at the University of Chicago, at a time when smoking was allowed, he had a "No smoking" sign on his office door. But that's not all the sign said. One of Barro's colleagues at the time was Robert Lucas, a brilliant economist who, in 1995, did win the Nobel Prize in economics. Barro treasured his conversations with Lucas. So, the full text of sign was: "No smoking, except for Bob Lucas."

In other words, Bob Barro traded off his intense dislike of cigarette smoke for his intense appreciation of his conversations with Bob Lucas. He made a judgment about how to use his property—his office—based on that tradeoff. 

More on witchcraft and voodoo

From Freakonomics

Here’s something you don’t often hear an economist admit: We have very little idea where the economy will be next year.

Truth be told, our best guesses just aren’t very good. Government forecasts regularly go awry. Private-sector economists and cutting-edge macroeconomic models do even worse.

May be the macro guys should innovate by upgrading from sheep entrails to goat entrails for their forecasting!!!

Can China’s growth lower welfare in developed countries?

This question is asked by Julian di Giovanni, Andrei Levchenko and Jing Zhang in a posting at VoxEU.org. The late Nobel Laureate Paul Samuelson argued that if China's productivity growth accelerates in areas where it does not currently have a comparative advantage – notably the service sector – developed countries may suffer. The VoxEU column presents a multi-country, multi-sector model, and reaches the opposite conclusion: the world, including developed countries, is far better off when China’s growth favours its current comparative disadvantage sectors.

In developed countries, and New Zealand, a common concern is that China's growth will be biased towards sectors in which the developed world currently has a comparative advantage. In a two-country setting, a well-known theoretical result is that a country can experience welfare losses when its trading partner becomes more similar in relative technology. Paul Samuelson brought up this theoretical possibility for the growth of China in particular back in 2004, and thus it is referred to here as the Samuelson conjecture.

A recent study (di Giovanni et al 2012) evaluates this conjecture in a calibrated quantitative model of the world economy. The analysis employs the productivity estimates recently developed by Levchenko and Zhang (2011) for a sample of 19 manufacturing sectors and 75 economies that includes China along with a variety of countries representing all continents and a wide range of income levels and other characteristics. di Giovanni et al embed these productivity estimates within a quantitative multi-country, multi-sector model with a number of realistic features, such as multiple factors of production, an explicit non-traded sector, the full specification of input-output linkages between the sectors, and both inter- and intra-industry trade, among others.

di Giovanni, Levchenko and Zhang write,

To evaluate the importance of China’s sectoral pattern of growth for global welfare, we simulate two counterfactual growth scenarios starting from the present day. In the first, China’s productivity growth rate in each sector is identical, and equal to the average productivity growth we estimate for China between the 1990s and the 2000s, which is 14% (ie an average of 1.32% per annum). In this ‘balanced’ growth scenario, China’s comparative advantage compared with the rest of the world remains unchanged. In the second scenario China’s comparative disadvantage sectors grow disproportionally faster. Specifically, in the ‘unbalanced’ counterfactual China’s relative productivity differences with respect to the world frontier are eliminated, and China’s productivity in every sector becomes a constant ratio of the world frontier. By design, the average productivity in China is the same in the two counterfactuals. What differs is the relative productivities across sectors.

The results are striking. The mean welfare gains (the percentage change in real consumption) from the unbalanced growth in China, 0.42% in our sample of 74 countries, are some 40 times larger than the mean gains in the balanced scenario, which are nearly nil at 0.01%. This pattern holds for every region and broad country group. Importantly, the large majority of countries that become more similar to China in the unbalanced growth scenario -- most prominently the US and the rest of the OECD -- still gain much more from unbalanced growth in China compared to balanced growth.

Thus, when evaluated quantitatively the welfare impact of China’s growth on the rest of the world turns out to be the opposite of what had been conjectured by Samuelson (2004). We develop an explanation for this quantitative result in a simplified multi-country analytical model.

We show that the Samuelson (2004) result, obtained in a two-country, two-good model does not survive in a setting with more than two countries. Greater similarity in China’s relative sectoral technology to that of the United States per se does not necessarily lower welfare in the US. Rather, what drives welfare changes in the US is how (dis)similar China becomes to an appropriately input-and-trade-cost-weighted average productivity of the United States and all other countries serving the US market.

Thus, what matters for global welfare is not China’s similarity to any individual country, but its similarity to the world weighted-average productivity (although the theoretically correct weights will differ from country to country because of trade costs). Closer inspection reveals that China’s current productivity is relatively high in sectors -- such as Wearing Apparel -- that are ‘common’, in the sense that many countries also have high productivity in those sectors. By contrast, China’s comparative disadvantage sectors -- such as Office, Accounting, and Computing Machinery -- are ‘scarce’, in the sense that not many other countries are close to the global productivity frontier in those sectors. This regularity is very strong in the data: the correlation between China’s relative productivity in a sector and the average productivity in that sector in the rest of the world is 0.86. Put another way, China’s pattern of sectoral productivity is actually fairly similar to the world average. Thus, while balanced growth in China keeps it similar to the typical country, unbalanced growth actually makes it more different. Consistent with theory, our quantitative results imply that the rest of the world would find it more valuable for China to experience productivity growth in the scarce sectors -- by a large margin.

• di Giovanni, Julian, Andrei A Levchenko, and Jing Zhang (2012), “The Global Welfare Impact of China: Trade Integration and Technological Change”, IMF Working Paper 12/79.
• Levchenko, Andrei A and Jing Zhang (2011), “The Evolution of Comparative Advantage: Measurement and Welfare Implications,” NBER Working Paper No. 16806.
• Samuelson, Paul A (2004), “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization”, Journal of Economic Perspectives 18(3): 135–46.

EconTalk this week

Eugene White of Rutgers University talks with EconTalk host Russ Roberts about the regulation of banks and financial crises. White argues that most regulation tries to limit the choices of banks to restrain them from making choices that create instability or fragility. A better approach, White argues, is to change the incentives facing bankers so that they would be encouraged to make prudent choices without the need for top-down monitoring. He shows how in the 19th century various regulations and market results encouraged stability and prudence while some regulations made the system more fragile. White discusses the lessons for the current crisis and what might be done to improve the current state of regulation.

Teaching purchasing power parity

Something I know you all want to do! This idea is from Nick Rowe at the Worthwhile Canadian Initiative:

1. I ask the class for a student volunteer. The student has to come from a country I know next to nothing about, and that has its own currency.

2. I ask the student for the name of the currency used in his home country, and he answers (say) "shillings".

3. I then try to guess the exchange rate between the shilling and the Canadian dollar. I don't have a clue. Nor does anyone in the class, except the volunteer. (Any student who is from the same country, or has visited it recently etc., is not allowed to guess).

4. I then ask the volunteer to tell me the price of a dozen eggs (or a cup of coffee, or whatever) in his home country. He tells me.

5. I remind the students that a dozen eggs costs about $2.50 in Canada. We then all have a second attempt to guess the exchange rate. For example, if the student says that a dozen eggs costs 10 shillings back home, I guess that the exchange rate is 4 shillings to one dollar.

6. The student then tells us the exchange rate, and we see how close our second guess is.

It usually works quite well. Because:

1. About half the students figure out PPP by themselves, and can explain it to the other half.

2. They learn that a theory can be false, but still useful. Our second guess using PPP is never exactly right, but it's a lot better than our wild first guesses.

3. They learn the difference between a conditional forecast (the second guess) and an unconditional forecast (the first guess).

4. If our guess based on PPP is wrong (which it always will be, to some extent) I ask the student (rhetorically) why he doesn't buy eggs where they are cheap, load up his suitcase with eggs, and sell them where they are dear, whenever he flies between Canada and home. That teaches students both the equilibrating mechanism behind PPP, and the limitations of PPP in a world with transportation costs and other restrictions on trade.

Interesting blog bits

1. Eric Crampton on Stat of the week.

   The Christchurch Press runs a story by Jason Krupp arguing that tobacco costs the New Zealand public health system $7 billion per year. Just how likely is that number?!

2. Sam Richardson asks Rugby World Cup as a "financial success" - for whom?
   

   Not the New Zealand taxpayer.

3. Rachel Campbell, Kees Koedijk and Meir Statman on Aspirations, wellbeing, risk-aversion, and loss-aversion
   

   Does more money always make you happy? This column argues that financial wellbeing is distinct from income. People with low income can enjoy financial wellbeing as high as people with high incomes as long as their aspirations do not exceed their incomes.

4. Andrea Boltho and Wendy Carlin ask The problems of European monetary union – asymmetric shocks or asymmetric behaviour?
   

   Divergent behaviour from Eurozone countries that have very different economic, social, and political structures is threatening the existence of the single currency. This column argues that the Eurozone is a fragile bureaucratic creation that has hardly ever raised much popular enthusiasm anywhere. If behaviour across the area remains as asymmetric as it has been over the last decade or so, the project could run into even stronger headwinds in the long run.

5. Art Carden explains How Starbucks Made My Friday and Taught Me About Economic Progress
   

   Wow. I think this is one of the coolest things I’ve ever seen: it’s a little green plug/stir stick that fits neatly into the lid of the Venti dark roast I’m enjoying. I think I vaguely recall having seen one before, but I don’t know for certain. This I do know: a seemingly mundane little innovation that few people probably even notice has made my life appreciably better by keeping my coffee hot and by keeping it from spilling. According to the baristas who served me today, a Starbucks employee invented it.

6. Tim Worstall on FLA’s Report on Apple and Foxconn: Little Found and Even Less To Do
   

   So we’ve now had the first installment of the Fair Labour Association’s report on the working conditions at Apple’s supplier Foxconn in China. They’ve found very little that should surprise or concern anyone and there’s even less to do to put matters to rest.

7. Nicolai Foss on Economists, (Hard) Data, and (Soft) Data
   

   Economists have typically been suspicious of data generated by (mail, telephone) surveys and interviews, and have idolized register data. The former are soft and mushy data, the latter are hard and serious ones. I have always been a bit sceptical regarding whether the traditional economist’s suspicion of soft data is really that well-founded;

8. Arnold Kling on Ed Glaeser on Job Creation

   New firms are important for job creation.

Cowen on blogging

The Kauffman Foundation has released this sketchbook featuring Tyler Cowen's thoughts on blogging.

Labour's good intentions led to bad youth unemployment

Or so Eric Crampton tells us in the NBR. Interestingly the picture the NBR use of Eric looks like it was taken in the Staff Club. What does this tell you aboot Eric!!!

More seriously, Eric writes,

Something strange started happening to youth unemployment rates starting around December of 2008.

The global recession had started in earnest, but seemed to be nowhere in New Zealand’s unemployment statistics – at least among adults.

The adult unemployment rate hit 3.3% in 2008’s December quarter; not alarmingly higher than it had been in the prior few years.

But the unemployment rate for 16 and 17 year olds, which had always tracked a fairly predictable but noisy path above the adult unemployment rate, instead took a jump.

Where we might have expected a youth unemployment rate around 14%, it instead touched 20%.

Two quarters later, when adult unemployment rates hit 4.5%, and we would have expected youth unemployment rates around 16%, the youth unemployment rate instead hit 27%.

and

What might have caused youth and adult unemployment outcomes to take such divergent paths? One explanation, and I think the correct one, is the Labour government’s abolition of the differential lower youth minimum wage effective April 2008.

Youth unemployment rates did not spike immediately afterwards, but neither would we have expected them to; employers are not likely to fire youths en masse with a change in the minimum wage, but they are likely to avoid hiring younger and riskier workers when more experienced and similarly-priced alternatives are available. And they’re also likely to stop creating the kinds of jobs that can usefully be done by lower-paid youths.

Demand curves do slope downwards. Eric continues,

It’s always possible that something else caused the change, but it’s not easy to come up with a “something else” that either has the right timing, the right age targeting, or is big enough to plausibly have done the job.

Those who wish to claim that the abolition of the youth minimum wage didn't cause the divergence in unemployment rates have the challenge of coming up with the "something else". There must be some labour economists out there who can raise to the occasion.

How not to argue against partial asset sales

I think there are good economic reasons for arguing against partial sales of SOEs. Full privatisation is a better idea. But what I don't get is why the anti-sale movement never seem to use good arguments. As this example from The Standard show most of their arguments don't stack-up.

Firstly: the Mixed Ownership Model Bill. If we want to stop Asset Sales, as many submissions as possible would be a good start. So click on the link to submit.

Some points you may wish to make in your submission:

• A majority of New Zealanders oppose the partial privatisation of New Zealand’s best state-owned assets;
• It makes no fiscal sense to sell assets earning 18% (capital appreciation and dividends) to pay down debt costing 4%;
• Treasury’s 2012 Budget Policy Statement says that in 2016 the lost dividends from privatisation are $94m greater than the savings in reduced interest payments;
• It is unfair to sell assets that currently belong to all New Zealanders to a small minority who will be able to afford to buy shares;
• Partial privatisation is an inevitable prelude to foreign ownership of a large chunk of our energy companies. That will mean high power prices, dividends flowing overseas, and fewer jobs;
• Individual energy assets, like Manapouri power station, can be sold off under the legislation into full foreign ownership and control;
• The renewable energy sector is growing rapidly internationally. We own the companies that have the critical mass, the expertise, and the capital to take advantage of that growth and create tens of thousands of good green jobs here in New Zealand. Privatisation will end that opportunity.
• Selling the assets is a form of intergenerational theft. One generation will sell the assets that past generations have built up and future generations will not have the fruits of that.
• Power cuts are more common with private energy companies – they are more concerned with profit than continual energy supply.
• Greenhouse gas emissions are likely to rise – privatised companies are incentivised to try and increase our energy use (and their profits). Which will hardly help us keep our commitments.
• Water ownership is in dispute – Maori are filing for customary rights to water. Mighty River may not have full rights to the Waikato River.
• Privatisation will not solve our economic problems.

The first argument isn't a good economic argument against sales, How many New Zealanders really understand the economic issues underlying asset sales? It may be a political argument against sales but that's a different thing. As to the second argument, if some of the returns are capital appreciation, How do we realise these results without a sale of assets? Also we get a lump-sum form the sale which compensates for the loss of dividends. For point 3, again we get a lump sum, which if the asset is sold efficiently, will equal the present value of the dividend stream. Looking at point 4, as I have noted before New Zealanders don't own the assets. Point 5 amounts to xenophobia and to not realising that if ownership goes overseas it is because overseas buyers can utilise the assets more efficiently. Why else would have pay more for them? And why does foreign ownership mean higher prices and fewer job? If prices can be raised and jobs cut then why wouldn't a New Zealand owner do exactly the same thing as a foreign owner? For point 6 see the comments for point 5. As to point 7, Why is this true? Where are these "tens of thousands of good green jobs"? And why would different ownership alter the incentives for companies to create these jobs if there really is an economic justification for such jobs? "Intergenerational theft"?!!! Given a sensible method of sale, the sale price will equal the present value of the future income stream and thus it not clear what future generations will lose. What is the empirical basis for  point 9? How do companies make profits by not selling their product?  Doesn't point 10 contradict point 9? Point 9 seems to say that private power companies will supply less power while point 10 says they will produce more! Both can't be true. What effect will ownership of the power companies have on  point 11? Water ownership will be in dispute no matter who owns the power companies. And as to point 12,, privatisation will not solve all our economic problems, no one policy can, who it could help solve some of our problems by leading to a more efficient use of resources.

Excessive risk-taking by banks

Many people have argued that risk-taking by banks played a critical role in the global crisis and Eurozone crisis. A new eReport released today by CEPR – edited by Mathias Dewatripont and Xavier Freixas – explores the origins of excessive risk-taking by banks. The book comprises four substantial chapters (in addition to the introduction that nicely summarises these four and puts the analysis into a broader context). From a column at VoxEU.org we get the following summaries of the chapters,

• Corporate governance, by Hamid Mehran, Alan Morrison, and Joel Shapiro

In principle, banks do what their managers decide and managers, in turn, are controlled by a board of directors. Excessive risk-taking must therefore involve a breakdown in control, or desire on the part of the board to encourage such activity. For example, strategic decisions by managers may be motived by consideration of their own bonuses, short-term stock price movements, or shareholders’ short-run interests (rather than stakeholders’ long-run ones). This line of reasoning directs attention to the structure of financial institutions’ corporate governance as one source of excessively risky behaviour.

Mehran, Morrison, and Shapiro argue that corporate governance may be especially weak due to the multiplicity of stakeholders (insured and uninsured depositors, the deposit insurance company, bond holders, subordinate debt-holders and hybrid securities holders), and the complexity of banks’ operations. Moreover the moral hazard created by the too-big-to-fail situation may have led boards to encourage risk-taking as they knew that big losses would be paid largely by taxpayers rather than stakeholders. The authors also look at banks’ executive compensation schemes and the composition of boards.

• Procyclicality, by Rafael Repullo and Jesus Saurina

The boom-bust cycles in banking are at least in part caused by the procyclical availability of cheap funding and capital. In boom-times, funding is cheap and easy to get; in bust-times it is dear and scarce. This obviously procyclical nature of bank lending in the years before, during, and after the crisis has produced a consensus that banks should face anticyclical capital buffers to both reduce the size of the next boom and mitigate the damage during the next bust. The authors focus on one aspect of this, namely the question of whether and how much additional capital should be required during excessive credit growth phases, and how these excessive credit growth phases are to be identified. They study how the Basel III regulatory framework proposes to tackle the issue and the extent to which the rules accomplish their objectives.

The Basel III countercyclical provisions require higher capital-to-loan ratios when the credit-to-GDP ratio deviates from its trend. Their analysis, however, shows this works the wrong way for a majority of nations; the deviations are negatively correlated with GDP growth. In short, banks that follow the deviation from trend rule may actually be pursuing a procyclical rather than a countercyclical capital policy. The authors propose a simpler rule – the credit growth rate.

• Disclosure, transparency and market discipline, by Xavier Freixas and Christian Laux

Prior to the crisis, market discipline was thought to be the perfect complement to supervision – channelling funds to sound institutions while penalising excessive risk-takers. The crisis has changed that view; most regulators and academics now see market discipline as a weak force. The authors of this chapter consider various theoretical aspects of how imperfections could gum up the information transmission – the key ingredient of market discipline. In addition to systemic problems, the situation worsens during a crisis because both firms and issuers have incentives to hide bad information.

The market’s main sources of information are firms’ financial reports and credit rating agencies and the authors address a number of reproaches levelled at both. On the financial reporting, the use of fair value analysis has come in for strong criticisms as it caused firms to write down asset falls as the markets collapsed with this leading to eroded capital and heightened uncertainty. The authors however argue that fair value is not much to blame as it only affects banks’ trading portfolios and there is substantial discretion for banks to suspend it if the losses are considered temporary. They are more critical when it comes to credit rating agencies, concluding that these profit-maximising firms are in an institutional setting that inadequately deals with conflicts of interests. They call for more regulation of credit rating agencies to redress this.

• The banking resolution regime, by Xavier Freixas and Mathias Dewatripont

The last chapter addresses systems for taking banks into bankruptcy since beliefs about what happens when all goes wrong do affect risk-taking. If distressed bank are bailed out, risk-taking is never too risky for the bank. Banks are bailed out to avoid the high social costs of such failures. The first objective of regulation is therefore to reduce the cost of bankruptcies; this is the main focus of the last chapter.

Banking resolution, according to the authors, should be thought of as a bargaining game between shareholders and regulators. Shareholders want to maximise the value of their shares while regulatory authorities’ main objective is to preserve financial stability at the lowest possible cost. Given this, time plays against the regulatory authority. The authors thus argue for bankruptcy rules that are specially crafted for the banking sector (and different from those applying to non-financial corporations).

The authors also argue that time is of the essence, even with the perfectly efficient bankruptcy procedure. Banks in distress should be quickly closed or quickly bailed out. The chapter’s examination of banking crises in different countries shows great variety in the procedures followed and conclude that theory has no clear-cut recommendations to offer.

Plainly the design of the bank resolution mechanisms is critical. One proposal is to add a layer of capital to prevent future crises, but the authors defend the possibilities opened by contingent capital (like contingent convertibles and capital insurance). They argue that these types of mechanisms would preserve the best characteristics of debt and therefore limit moral hazard. The authors conclude by considering cross-country resolution and the challenges it implies and discuss the recent changes in the European banking resolution framework.

Contraception and the gender wage gap

From the Freakonomics blog:

The male-female wage gap narrowed considerably during the 1980s and 1990s, thanks to increased educational attainment among women and an influx of women into high-earning fields. Factors such as the Women’s Movement and the 1964 Civil Rights Act are often cited as the drivers of this shift, but economists are also narrowing in on another influence: the Pill. Economists have linked the Pill to “delays in marriage (among college goers) and motherhood, changes in selection into motherhood, increased educational attainment, labor-force participation, and occupational upgrading among college graduates.”

Now in a new NBER working paper Martha J. Bailey, Brad Hershbein and Amalia R. Miller look at The Opt-In Revolution? Contraception and the Gender Gap in Wages:

Decades of research on the U.S. gender gap in wages describes its correlates, but little is known about why women changed their career paths in the 1960s and 1970s. This paper explores the role of “the Pill” in altering women’s human capital investments and its ultimate implications for life-cycle wages. Using state-by-birth-cohort variation in legal access to contraception, we show that younger access to the Pill conferred an 8-percent hourly wage premium by age fifty. Our estimates imply that the Pill can account for 10 percent of the convergence of the gender gap in the 1980s and 30 percent in the 1990s.

The paper's results suggest that the Pill's power to transform childbearing from probabilistic to planned shifted women's career decisions and compensation for decades to come.

Too big to fail

This is from an interesting post by Jerry O’Driscoll at ThinkMarkets:

The issue of banks viewed as too big to fail has been taken up several times on this site. In its Annual Report, the Federal Reserve Bank of Dallas has weighed in on the topic with an essay on “Choosing the Road to Prosperity: Why We Must End Too Big to Fail – Now.”

It is authored by Harvey Rosenblum, the bank’s Director of Research. Since Richard Fisher, the bank’s president, signed off on the annual report, one presumes he endorses the substance of the essay.

It is a very hard-hitting piece, arguing that “the vitality of our capitalist system and the long-run prosperity it produces hang in the balance.” It explains why TBTF is “a perversion of capitalism,” which undermines faith in markets. Rosenblum quotes Allan Meltzer on point: “Capitalism without failure is like religion without sin.”

It is good to see that one of the banks that make up the Federal Reserve system is making the argument for ending TBTF.

More bloggers really are needed

Over at Groping towards Bethlehem the point is made that a blog really becomes a blog when other blogs link to /recognise it. That is, when a blog becomes part of a conversation. But as has been noted before conversations on New Zealand blogs on specialised bits of economic policy, or even more so economic theory, are limited because few of those economists who blog are working in the same area. Thin markets don't help create a blogosphere. The overlap in expertise/interests of Anti-Dismal, Offsetting Behaviour, TVHE, Groping towards Bethlem and Fair Play and Forward Passes is too thin to generate the interplay of ideas and opinions needed to create and sustain ongoing conversions.

In short, we just need more New Zealand economics blogs!

Public Choice - A Primer

There is a new short book out from the IEA on Public Choice - a Primer by Eamonn Butler.

'Market failure' is a term widely used by politicians, journalists and university and A-level economics students and teachers. However, those who use the term often lack any sense of proportion about the ability of government to correct market failures. This arises from the lack of general knowledge - and the lack of coverage in economics syllabuses - of Public Choice economics.

Public Choice economics applies realistic insights about human behaviour to the process of government, and is extremely helpful for all those who have an interest in - or work in - public policy to understand this discipline. If we assumes that at least some of those involved in the political process - whether elected representatives, bureaucrats, regulators, public sector workers or electors - will act in their own self-interest rather than in the general public interest, it should give us much less confidence that the government can 'correct' market failure.

This complex area of economics has been summarised in a very clear primer by Eamonn Butler. The author helps the reader to understand the limits of the government's ability to correct market failure and also explains the implications of public choice economics for the design of systems of government - a topic that is highly relevant in contemporary political debate.

Easterly on Acemoglu and Robinson

Bill Easterly reviews Acemoglu and Robinson new book "Why Nations Fail" in the Wall Street Journal. He writes,

Far too much intellectual firepower regarding the global poor these days focuses on the (small) things Westerners can do to help—obsessing about, say, how much money to spend on mosquito-blocking bed nets to fight malaria. The bigger questions—about why some societies prosper and others don't, about how to improve the lot of an entire impoverished class—are left by default largely to uncritical admirers of China's growth. The arrival of "Why Nations Fail" is thus a hugely welcome event, since economists Daron Acemoglu and James A. Robinson take on the big questions and in doing so present a substantial alternative to the dominant thinking about global poverty.

and

"Why Nations Fail" also offers this crucial insight: Experts cannot engineer prosperity with the right advice to rulers on policies and institutions. Rulers "get it wrong not by mistake or ignorance but on purpose." Change happens only when a broad coalition revolts, forcing the elite to allow more pluralistic political competition (e.g., the Glorious Revolution in England, the Meiji overthrow of Japanese feudalism and Botswana's democratic ouster of British colonizers).

A couple of interesting points that Easterly raises are a challenge to the current methodological fad of randomized controlled experiments in development economics and a methodological objection to the use of comparative historical case studies. He is concerned about "cherry picking" on the one hand, and "ex post rationalization" on the other.

EconTalk this week

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the nature of public debt. One view is that there is no burden of the public debt as long as the purchasers of U.S. debt are fellow Americans. In that case, the argument goes, we owe it to ourselves. Drawing on the work of James Buchanan, particularly his book Public Principles of Public Debt: A Defense and Restatement, Boudreaux argues that there is a burden of the debt and it is borne by future taxpayers. Boudreaux argues that all public expenditures have a cost--the different financing mechanisms simply determine who bears the burden of that cost. Boudreaux discusses the political attractiveness of debt finance because the taxes lie in the future and those who will pay for them may not be clearly identified. The conversation closes with a discussion of the role of expectations in both politics and economics of debt finance.

Should governments regulate monopolies?

In this video from Learn Liberty Lynne Kiesling talks about government regulation of monopolies, essentially laying out Schumpeter’s argument that when entry costs are low, monopolies do not persist because monopoly profit serves as a lure to entice entrepreneurs and innovators to create new value propositions that break down market barriers and definitions.

More bloggers needed?

Eric Crampton makes the point that,

The Economist says America's number one in EconBlogging. Why? They have a blogosphere, where Europe only has blogs. It's the links and the discussion that makes the whole thing worthwhile.

He later notes that,

New Zealand's getting better. Paul Walker and the TVHE team drew me in, and together we dragged in Seamus (occasionally), Bill Kaye-Blake, and now Sam Richardson. Let's hope we can pull a few other folks into the conversation.

One question worth asking is, What percentage of US economists blog as compared to New Zealand economists? I mean does the US have an economics "blogosphere" simply because it has the majority of economists? Even if New Zealand had the same percentage of economists blogging as the US we still wouldn't have an economics blogsphere simply because of the much smaller number of economists here.

In some situations size really does matter.

Eric goes on to say,

How did America make it work? The Economist's R.A.:

How did America's economics blogosphere develop the necessary density? Early buy-in by important economists mattered, but the growth of the community has been more driven, in my opinion, by an aggressive horde of strivers. Economists, journalists, and would-be pundits with less access to traditional outlets (newspapers, conferences, and journals) were attracted by the low barriers to entry of the web. This ready group of writers created sufficient "liquidity" of opinion to drive an effective conversation, the value of which has subsequently pulled in other respected voices.

If buy-in from important economists matters then we are in big trouble as we simply don't have any here. If on the other hand it is the "aggressive horde of strivers" that matters, then we are in trouble again because as noted above our horde is just too small. If Europe can't do it, what chance for NZ?

None of this mean we don't want more economists blogging, more economists can only raise the standard of economic commentary here in New Zealand. The big question is how to get them to take it up. May be having a blog should be a requirement for getting a PhD in econ!!

Hutchison on Smith

The way Adam Smith evaluated the role of government in the economy is often misinterpreted. Recently I came across this comment by Terence Hutchison,

However, The Wealth of Nations was, as Viner emphasised, 'an evaluating and crusading book', which sharply criticised existing society and government, and argued strongly for changes in national policy' (1968, p. 326). Smith was crusading, of course, against the excessive activities of monarchical, aristocratic and highly nationalistic governments, and for a greatly expanding role for the invisible hand.

This view seems to argue for anti-government view of Smith (or at least an anti-government-as-Smith-knew-it view). But Hutchison then adds,

At the same time Smith wanted to retain a wide-ranging economic agenda for government, the precise extent of which had to be decided by empirical, case-by-case studies. He would have rejected fundamentally any conjecture that the invisible hand, or any other system, could produce perfect efficiency for a real-world economy. In his ideas, thought and method, Smith -abhorred the perfection, or extremes, which 'the man of system' sought so eagerly to promote.

Such a case-by-case method of evaluation looks somewhat like a Coaseian comparative institutional analysis approach.

The costs of treating smokers, the obese and the healthy

From an interesting post from LifestyleReviews.

In 2008 the Dutch government looked into the cost of treating people from the age of 20 to death. They had three categories, the healthy, obese and smokers. The results were not what the health gurus were looking for, the paper says:

“Until age 56 annual health expenditure was highest for obese people. At older ages, smokers incurred higher costs. Because of differences in life expectancy, however, lifetime health expenditure was highest among healthy-living people and lowest for smokers. Obese individuals held an intermediate position. Alternative values of epidemiologic parameters and cost definitions did not alter these conclusions.”

The lifetime costs were in Euros:

Healthy: 281,000

Obese: 250,000

Smokers: 220,000

This will make the healthists feel unwell.