Christchurch's rental housing crisis can be helped with the stroke of a regulatory pen

Everyone agrees that Christchurch has a rental housing crisis. But we are told that central government can do nothing to help create a rapid solution. Dr John Fountain, senior lecturer in economics at the University of Canterbury, disagrees. In a recent article in The Press Fountain puts forward one way to help deal with the housing crisis.

Simply follow the example of Vancouver, Canada. City planners there have embraced a wide range of initiatives to legalise and encourage secondary suite accommodation in residential areas, to help meet the problem of unaffordable accommodation shortages in this beautiful, but expensive, city.

City planners (or EQC commissioners) can do the same thing here in Christchurch with the stroke of the regulatory pen. Simply remove the existing stifling regulations on family flats and secondary suites in our city plan (keeping all the other good building consent processes already in place).

A secondary suite is a self- contained dwelling unit that has been created "within" a larger principal dwelling.

A unit typically shares the main dwelling's yard, parking area, laundry and storage space, but has its own kitchen, living area, bathroom and entrance.

Generally, no ownership nor subdivision is permitted (although ownership solutions in the form of laneway houses, smaller self contained units or cottages in the back of a residential property, work well in Vancouver).

Almost half of all new residential homes now contain one or more secondary suites, adding to the stock of tens of thousands of such suites in Vancouver.

High rise tenements in marginal regions that become tomorrow's ghettos and today's eyesores, are not wanted in Vancouver. But secondary suites in prime residential areas, like Kitsilano and Commercial Drive, are actively embraced.

The problem for Christchurch is that the current city plan permits small family flats or secondary suites in residential areas, but only under extreme restrictions that effectively negate the viability of having extra self contained accommodation on a property. Not helpful.

Dr Fountain continues,

B&B's are of course completely legal anywhere in Christchurch, with a nominal restriction to no more than four guests, but no B&B is permitted to have a "kitchen" - the trinity of a stove/hobbs with a sink and benchtop.

No one knows how many non-consented secondary suites or B&B's with functioning kitchens that there are in Christchurch. But in the past two years they will all have been put to very good use, illegally of course.

To continue to make secondary suites persona non grata in post quake Christchurch with its serious accommodation shortages is bordering on the insane.

It's really a matter of demand and supply. Give a solo parent or family with small kids, young single professionals, older retirees, or migrant trades persons and their families, a self contained two-bedroom apartment attached to an existing, beautiful home in a pristine residential area close to schools, parks and restaurants/shops and the demand soars. And from Vancouver's experience, so does the supply.

So everybody can gain, if only the regulators would allow it.

Where next? The past, present, and future of classical liberalism

At Cato Unbound there are a series of very interesting essays on the above topic. The lead essay is by Matt Zwolinski and John Tomasi under the title A Bleeding Heart History of Libertarianism

Matt Zwolinski and John Tomasi propose to refocus the libertarian movement. Although they agree that individual property rights are important, they propose to return libertarianism to its nineteenth-century intellectual roots. They argue that the classical liberals valued property rights for different reasons, perhaps, than we in the movement value them now: Property rights were intended to protect the least well-off workers in society. A "neoclassical liberal" would not advocate a welfare state, but would certainly value social justice; his means of attaining it would be through the institutions of property and contract.

The essays in response to Zwolinski and Tomasi are:

In Praise of Bleeding Heart Absolutism by Roderick T. Long

Roderick T. Long criticizes the sharp distinctions drawn by Zwolinski and Tomasi between nineteenth-century classical liberals and the "Unholy Trinity" of Mises, Rand, and Rothbard. He suggests many areas in which the earlier thinkers were not as Zwolinski and Tomasi characterize them, as well as several where Mises, Rand, and Rothbard don't conform either. Long stresses the importance of class analysis in the thought of nineteenth-century classical liberals and points to its resurrection as a key aspect of Rothbard's thought in particular. This, he suggests, points the way toward a "bleeding-heart absolutism" – an ideology critical of every form of state power, yet also prioritizing the moral claims of the poorest in society.

Natural Rights + ? by David D. Friedman

David Friedman argues that the pre-twentieth century classical liberals were motivated not by a concern for the poor per se, but by utilitarian reasoning. The "working poor" were a large majority of society in their time, and authors like Adam Smith must be read in their historical context. Doing so reveals Smith to be a progenitor of Jeremy Bentham, not John Rawls. Utilitarianism brings problems of its own, of course, but it should not be confused with social justice.

and

Let's Reject the Purity Test by Alexander McCobin

Alexander McCobin argues that libertarians often engage in unproductive debates about who or what is "more" libertarian. One thing lost in these debates is that, across the wide sweep of intellectual history, significant libertarian figures have usually felt free to draw from a wide array of justifications and policy approaches. Each was a product of a particular historical era, and there is no reason to find fault with any of them simply on that account. To advance liberty, we should think and write about libertarian principles in terms that unbiased observers will find persuasive today.

There is much in each of these essays to ponder. I have sympathy for Alexander McCobin's point that libertarians engage in unproductive debates about who or what is "more" libertarian. The liberalism of Ludwig von Mises, Ayn Rand, and Murray Rothbard was different to that of, for example, Friedrich Hayek or Milton Friedman. (There is the wonderful story that during one discussion at the first Mont Pelerin Society meeting Mises clashed with other participants who were willing to concede that the government had some role in the redistribution of income. This topic led to some spirited discussions. According to Friedman, Mises walked out, declaring, "You’re all a bunch of socialists." Not many people would ever call the likes of Friedman, Stigler and Hayek socialists!) But this doesn't make one group more "libertarian" than the other. A first move towards a better future for liberalism may be to except that in the past there are different, equally valid, views on what liberalism is and learn from all the different perspectives. Intra-group warfare doesn't help anyone.

See also David Friedman on Bleeding Heart Libertarianism by David Henderson and Bleeding-Heart Libertarianism and Its Critics: Preliminary Mediation by Bryan Caplan. Both postings are at the EconLog blog.

John Bates Clark Medalist

Health economist Amy Finkelstein has been named this year's winner of the John Bates Clark Medal by the American Economics Association.

Her research is focused on health insurance markets. Within this area, she has had three main interrelated lines of research: (a) Tests on the presence of asymmetric information in insurance markets; (b) Structural estimation and analysis of welfare implications of models with asymmetric information; (c) Effects of public intervention in health and long-term care insurance markets.

Reserve Bank intervention in the exchange rate: Is there a point?

From the TVNZ website we learn that,

The New Zealand dollar has been labelled so unjustifiably high that there is now speculation the Reserve Bank could intervene to bring it down.

What exactly does "unjustifiably high" mean? And I can't help but think that Bill English has a point when he says,

Finance Minister Bill English said the Reserve Bank is too small to have much impact.

"They don't have much capacity to change the exchange rate so they've got to be careful how they use that."

Even if the RB can lower the exchange rate, it can't so it forever. At best it could have a temporary effect and you have to ask if that is true then what is the point? Also if they do lower the exchange rate this puts upward pressure on inflation which the RB is there to control. Thus lowering the exchange rate runs counter to the RB's reason for being.

There is also the question of whether our exchange rate is "high" or other countries exchange rates are "low". In particular given the size of the U.S. current account deficit a lower U.S. dollar is to be expected.

Now it maybe argued that we have to lower the exchange rate because our exporters are in trouble. But as I have argued before it is importing that makes us better off and thus why are we so worried about exporting? All seems a bit too mercantilist for me.

Boettke on debt

At the Coordination Problem blog Peter Boettke writes,

I personally think a lot of deficits and debt talk among economists and the public confuses a variety of things --- trade deficits and budget deficits; private debt and public debt; economic principles and political expediency, etc. Budget deficits matter, trade deficits don't; private debt is fundamentally a different issue than public debt; and economic principles should never yield to political expediency, and our job as economic educators within a democratic polity is to communicate clearly those economic principles so that they form the constraint within which politicians pursue what is expedient.

Much of the problem here is that no matter how hard economists try getting politicians to take notice of economic principles is damn near impossible.

As Boettke points out repudiation of debt is actually a possible solution to the current problems with the levels of debt and its effect on growth. But while this may work for public debt the consequences if private debt was forgiven are nearly all bad. The incentives that such a move would give to both borrowers and lenders would lend to a breakdown in the market for debt. In the extreme borrowers would want to borrow without limit and lenders would not want to lend at all. The market would be destroyed. Hardly a great outcome.

Remembering Milton Friedman

Allen R. Sanderson reflects on the contributions of Milton Friedman on the 100th anniversary of his birth in 1912 and the 50th anniversary of the publication of Friedman's classic "Capitalism and Freedom."

The World According to Chairman Friedman

1. Concentrated power is not rendered harmless by the good intentions of those who create it.
2. History suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.
3. The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.
4. With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.
   
5. The free man will ask neither what his country can do for him nor what he can do for his country.
6. The case for prohibiting drugs is exactly as strong and as weak as the case for prohibiting people from overeating.
7. If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.
8. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.

Interesting blog bits

1. Gavin Kennedy has New Thoughts On The Invisible Hand Metaphor

   I have argued for seven years on Lost Legacy against modern interpretations of Adam Smith, which assert, contrary to the evidence in his books, that he ascribed some mystical general quality to his use on only two occasions of the well-known 17th-18th-century metaphor of an invisible hand.

2. Tim Worstall asks Isn't it great that Apple makes everything in China?

   Via The Guardian I find a paper doing the usual bleating about how it's simply just terrible that Apple works the way it does, gets all that grubby manufacturing work done in China. True, this paper is a little more sophisticated than the usual we're all exploiting the Chinee stuff. But then again they do use "Foucaldian" and not as a term of derision so they're not that good.

3. Gary Becker asks Concern About The Decline in Manufacturing in the United States?

   Many other steps can be taken to help the American economy, especially by limiting the growth of entitlements and the federal budget. None of the steps to improve the economy involve favoring manufacturing employment and the manufacturing sector. The call by many for special treatment of manufacturing jobs is basically misguided.

4. The Economic Logician on Bruno Frey: the story that keeps giving
   

   A few weeks ago, I had a post entitled Bruno Frey, the epilogue, thinking that now that the University of Zurich made him a gigantic gift by manipulating the investigation into his behavior and keeping mum, Bruno Frey would have learned to finally shut up. But no, he has still not understood a thing a keeps going on, to the point that was getting daily updates in my email about the latest on him. Let me run a few highlights by you.

5. Michael Giberson asks Do you want to be intellectually honest?

   Some techniques for checking the tendency toward extreme partisanship, which can be a ready source of intellectual errors

6. Tim Worstall asks Innovation is Booming: But Why Can't We See it in GDP?

   The great question at the moment is that we know that we have an industrial revolution going on. The internet in short. This allows us to do new things and also to do old things differently. This is pretty much the definition of innovation and of productivity growth. But we’ve a problem: we cannot actually see this in the figures for economic growth.

7. Peter Klein on The Bizarro World of Professor Sen

   Here is another of those head-scratchers, this one from Amartya Sen, about how neoclassical economics is partly responsible for the financial crisis because neoclassical economists believe that markets work “perfectly”.

8. Alberto Alesina and Daniel Nadler on A tale of two divergences

   The divergence in sovereign spreads across Eurozone members has been the object of much attention. This column looks at divergence across US states and finds that unexpected deficits are correlated with higher state bond yields across all states. This effect is larger for states with left-leaning political systems, suggesting that bond-market participants view political variables as relevant in assessing the risk characteristics of sub-sovereign bonds.

9. Chidem Kurdas on European Austerity in Perspective

   Attempts to rein in government spending necessarily have unpleasant side effects. Thus the Dutch government collapsed amid budget talks to control the deficit. And British national output appears to be shrinking. Keynesians and advocates of the Obama administration’s colossal budget see this as vindication for unrestrained government spending. But in fact what we see in Europe is a very unfortunate consequence of past unrestrained spending.

The government delusion

Matt Nolan at the TVHE blog writes,

Again, I’m hearing increasing talk about managing the economy – specifically, I have people telling me that they don’t think the government is managing growth properly. Now, anyone reading here knows this statement is patently ridiculous – the government is not a management committee, and John Key is not the nations CEO.

The view that a country is just a big company and needs to be run along the same lines is a common misconception. That the PM isn't and shouldn't be thought of as the "nations CEO" is not well understood. As Paul Krugman (yes even he is right about some things!) said A Country Is Not a Company. To see why consider, for example, the basic point that companies compete with each other but New Zealand doesn't compete with other countries. Thinking that countries compete is a just one false analogy that comes from thinking that countries are like companies when they're not. The point is that Coke and Pepsi, for example, do compete, one gains at the others expense, but New Zealand and Australia, for example, don't, their loss is not our gain. International trade is not a zero-sum game. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

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

Countries trade, they don't compete. And thus we don't need a CEO to running NZ Inc because NZ Inc doesn't exist.

As anyone in Christchurch will tell you micro-management by the government isn't a great thing. Christchurch (or anywhere else) isn't a a division of NZ Inc that needs to be controlled by the division manager (Gerry Brownlee?). Growth in Christchurch and the country as a whole will not be the result of management plans implemented by the government and thus far for Christchurch the actions of government seem to be doing more harm than good.

Why women make less than men

In studies from the U.S. to Sweden, pay discrimination can't explain the disparity between what men and women earn. Women earn less because they work fewer hours. Or so writes Kay Hymowitz in the Wall Street Journal.

Ms Hymowitz writes,

First, the Atlantic magazine announced "the end of men." Then a Time cover story in March proclaimed that women are becoming "the richer sex." Now a Pew Research Center report tells us that young women have become more likely than young men to say that a high-paying career is very important to them. Are we really in the midst of what Pew calls a "gender reversal?"

One stubborn fact of the labor market argues against the idea. That is the gender-hours gap, close cousin of the gender-wage gap. Most people have heard that full-time working American women earn only 77 cents for every dollar earned by men. Yet these numbers don't take into account the actual number of hours worked. And it turns out that women work fewer hours than men.

The Labor Department defines full-time as 35 hours a week or more, and the "or more" is far more likely to refer to male workers than to female ones. According to the department, almost 55% of workers logging more than 35 hours a week are men. In 2007, 25% of men working full-time jobs had workweeks of 41 or more hours, compared with 14% of female full-time workers. In other words, the famous gender-wage gap is to a considerable degree a gender-hours gap.

And this just raises the question, Why do women spend less time at work?

The main reason that women spend less time at work than men—and that women are unlikely to be the richer sex—is obvious: children. Today, childless 20-something women do earn more than their male peers. But most are likely to cut back their hours after they have kids, giving men the hours, and income, advantage.

But can't good government mandated family-leave and child-care policies fix all of this? Ms Hymowitz continues,

Sweden and Iceland are frequently held up as models in this regard [generous family-leave and child-care policies], and they do have some of the most extensive paternity and maternity leave and publicly funded child care in the world.

Yet even they also have a persistent hours and wage gap. In both countries, mothers still take more time off than fathers after the baby arrives. When they do go back to work, they're on the job for fewer hours. Iceland's income gap is a yawning 38%—that is, the average women earns only 62 cents to a man's dollar. Even Sweden's 15% gap—though lower than our [U.S.] 33% one—is far from full parity.

In short, if you work less you earn less. For the foreseeable future women will work less and thus earn less than men.

Is price gouging immoral?

That is the question considered in this video from LearnLiberty. The video features Matt Zwolinski, an associate professor of philosophy at the University of San Diego, who has written on the topic of the morality (or otherwise) of price gouging.



Price gouging is usually defined as raising prices on certain kinds of goods, e.g. petrol, to an unfair or excessively high level during an emergency, like an earthquake. In the U.S. price gouging is illegal in 34 states and many people would like to see it made illegal here in New Zealand as well. But Matt Zwolinski asks whether making price gouging illegal really is the best policy option. He uses an simple example to examine the moral status of price gouging.

The following points suggest that price gouging may not be immoral:

• Consumers do not have to buy products for the higher price. If they decide to pay, it is likely because they are getting more from the product then they’re paying.
• If the prices for important goods do not go up, it is likely that scarce resources will not be available for those who need them most.
• For buyers, high prices reduce demand and encourage conservation. People who may need something more are likely to pay more. For sellers, being able to charge higher prices creates a profit incentive to encourage more sellers to bring products to the market.
• The profit motive will increase competition and eventually drive down the price.

Zwolinski then goes on to ask, What alternative institutions would do better? When price gouging is prohibited goods go to whoever shows up first. Even if we assume that price gouging is immoral, it almost certainly should not be illegal. The only reason price gouging occurs is because demand is high and supply is low. Matt Zwolinski argues that even if you think that price gouging is morally wrong, making it illegal doesn’t make sense. It hurts the very people who need our help most.

Transportation pollution before cars

At the Cafe Hayek blog Donald J. Boudreaux reminds us of the pollution problems of the past.

Before the automobile, land transportation by means other than the human foot was chiefly by animal (by horse, mostly). (Before the railroad, which debuted in the early 19th century, the only means of land transportation was the human foot or animal power.) The emissions from horses and other transportation animals were themselves unpleasant and toxic. These emissions also attracted flies and other insects. Flies feasting on the mounds of transportation emissions that fouled city streets would spread bacteria from these emissions directly to humans and onto human food and into human drink.

On rainy days the animal-’engine’ emissions would turn into a filthy slurry, much of which pedestrians tracked into the interiors of businesses and homes. When the weather was dry, the animal-’engine’ emissions would dry, much of it then circulating as dust that polluted the air.

The automobile was the answer to these pollution issues. Not that the automobile dioesn't come with ts own problems, but as Boudreaux notes,

[...] regardless of how toxic, dangerous, and unpleasant automobile emissions are, this toxicity and danger and unpleasantness must be compared with realistic alternatives before any policy-relevant assessments can be made. An unquestionably relevant alternative – at least for judging the course of history – is the state of transportation emissions prior to the advent of the automobile.

Automobiles are our friend. So two cheers for the car!

Fuel economy and safety

This is a bad news, good news story. In a new working paper from the NBER (NBER Working Paper No. 18012, issued in April 2012) Mark R. Jacobsen looks at Fuel Economy and Safety: The Influences of Vehicle Class and Driver Behavior.

Jacobsen starts by making the point that fuel economy standards change the composition of the vehicle fleet, potentially influencing accident safety. He then introduces a model of the vehicle fleet that captures risks across interactions between vehicle types while simultaneously recovering estimates of unobserved driving safety behavior. The model importantly includes the ability to consider the selection of driver types across vehicles. He  applies the model to the present structure of U.S. fuel economy standards and find an adverse effect on safety: Each MPG increment to the standard results in an additional 149 fatalities per year in expectation. That is the bad news.

The good news? Next Jacobsen shows how two alternative regulatory provisions can fully offset the negative safety consequences; minor changes in the regulation produce a robust, near-zero change in accident fatalities while conserving the same quantity of gasoline.

More Coase

From the University of Chicago comes another short video: "How China Became Capitalist: A Conversation Between Ronald H. Coase and Ning Wang".

How China Became Capitalist is the new book by Ronald Coase and Ning Wang, an assistant professor at Arizona State University's School of Politics and Global Studies. It traces the market transformation China has experienced over the past 35 years and argues that China's market transformation flourished without much help from Beijing—contrary to its leadership's claims—but the free flow of ideas has faltered. Until that changes, China will never reach its full potential.

Coase interview

From the University of Chicago comes this short interview with with the 101-year-old Ronald H. Coase, renowned University of Chicago Law School professor and winner of the 1991 Nobel Prize in economics, in which he discusses his approach to economics. In the interview Coase points out why he doesn't like the "Coase Theorem".



Coase's view of the "Coase Theorem" is,

It's not about my work at all. George Stigler, who's a very nice man, wanted to pay me a compliment so he invented the Coase theorem, but he named it Coase theorem, not the Stigler theorem. The reason I don't like it that it's the proposition about the system in which transaction costs are zero. Well that isn't the way the system actually is, therefore, it's a theoretical proposition and I don't like that.

In this video Coase discussing his career path. He never studied economics but become an economist, and a great one at that.

The joys of socialism Venezuelan style

From the New York Times,

By 6:30 a.m., a full hour and a half before the store would open, about two dozen people were already in line. They waited patiently, not for the latest iPhone, but for something far more basic: groceries.

Lining up and waiting for the latest iPhone is one thing, but groceries?

Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition.

Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil.

The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf.

One would think Venezuela is too rich a country to have sort of thing. So what is the problem?

At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find.

and

[...] many economists call it a classic case of a government causing a problem rather than solving it. Prices are set so low, they say, that companies and producers cannot make a profit. So farmers grow less food, manufacturers cut back production and retailers stock less inventory. Moreover, some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.

If you set a price low, one that is below what would be the market clearing equilibrium [supply=demand], the amount supplied is reduced but the amount demanded is increased and the difference is a shortage.

Datanálisis, a polling firm that regularly tracks scarcities, said that powdered milk, a staple here, could not be found in 42 percent of the stores its researchers visited in early March. Liquid milk can be even harder to find.

Other products in short supply last month, according to Datanálisis, included beef, chicken, vegetable oil and sugar. The polling firm also says that the problem is most extreme in the government-subsidized stores that were created to provide affordable food to the poor.

In short ,price controls don't work and can hurt the very people that it is claimed the controls will help.

EconTalk this week

Tyler Cowen of George Mason U. and author of An Economist Gets Lunch, talks with EconTalk host Russ Roberts about food, the economics of food, and his new book. In this wide-ranging conversation, Cowen explains why American food was once a wasteland, the environmental impacts of plastic and buying local, why to stay away from fancy restaurants in the central city, and why he spent a month shopping only at an Asian supermarket while living in Northern Virginia.

Criminals must love the MoH

At Offsetting Behaviour Eric Crampton has some wise words on the recent activities of Kiwi healthists. One interesting point he raises has to do with the MoHs idea of $100 per pack pricing of cigarettes. Eric quotes Des O'Dea, a lecturer in health economics at Otago, on some of the effects of this new pricing proposal

A leading academic says an extreme increase in the price of cigarettes could lead to black market dealing.

Speaking in response to a Ministry of Health discussion to raising the cost of a packet of cigarettes to $100 over the next eight years, Otago University health economics lecturer Des O'Dea said: "We all remember the days of prohibition in the United States and what that did to foster organised crime."

"While I don't think it would be anywhere near the scale of that, we could well see raids on retailers and a black market develop for cigarettes," he said.

It seems that the police and courts don't have enough real crime to deal with, so the MoH want to manufacture new (non)crimes to keep them busy.

Criminal gangs must be loving this idea, it would give them yet another good sources of income. Just like prohibition and the current "war on drugs" a "war on cigarettes" will fail. A tax increase of the size being suggested will only provide the opportunity for criminals to step in and supply cigarettes in a blackmarket. Smokers will still be able to get their smokes, the government misses out on a whole lot of tax, the criminal gangs get rich and we waste a whole lot of money on the police trying to control the illegal trade in cigarettes.

Trying to tax cigarettes to reduce smoke may well work for comparatively low levels of tax, but when you start talking of taxes at the level needed to make a pack of smokes cost $100 you just induce a substitution away from the legal market into the illegal market.

The oil curse: How petroleum wealth shapes the development of nations

In this audio from VoxEU.org Michael Ross talks to Viv Davies about his recent book ‘The Oil Curse: How Petroleum Wealth Shapes the Development of Nations’. They discuss the irony of how those countries with the greatest social and economic deficits are also the most vulnerable to the oil curse and as a result grow less quickly than might be expected given their wealth.

Economic b/s from Michael Fay

From the TVNZ website,

New Zealand will lose around $15 million in earnings every year from the sale of Crafar farms, according to a group opposed to the sale.

and

Sir Michael [Fay] says at the forecast payout of $6.35 a share, the new owners would earn $30 million a year, half of which will go to state-owned enterprise Landcorp for farming the land.

"This transaction with Shanghai Pengxin is a very, very bad investment for New Zealand. It doesn't stack up on any economic basis," said Sir Michael.

"It's hard to see that half of it going overseas constitutes an economic benefit to this country. It's a cost, it's hard to define it as an investment."

Let us assume for a moment that these evil foreigners make a NZ$1 profit which, in an effort to piss-off Michael Fry, they wish to take it back to China. How do they do it? Clearly a New Zealand dollar isn't worth anything in China so the Chinese holder of NZ currency will have to sell their NZ$1 to buy Yuan. But why would anyone want to buy said NZ$1? The only use for a NZ$s is to buy something made in NZ. Thus the buyer of the NZ$s must want it to buy a NZ export of some kind. What is Michael Fry's problem with this? The NZ$1 doesn't go overseas in any meaningful way, it gets spent on New Zealand produced goods and services no matter who gets the profits from the ownership of the farms. If a New Zealander gets the profits they spend them on New Zealand made goods and services, if a foreigners gets the profits they sell the NZ$s to someone who wants to buy New Zealand made goods and services.

In short New Zealand will not lose "around $15 million in earnings every year" if the Crafar farms are sold to the Chinese. For New Zealand's wealth and prosperity, it does not matter where the profits from New Zealand businesses end up. All that matters for the New Zealand economy is that New Zealand remains a place where business transactions take place – irrespective of who owns the business. New Zealand's (real) wealth is the amount of goods and services produced each year, no matter who owns the business that do the producing. What we want is for firms to be owned by whoever will use those resources most efficiency, no matter what their nationality. Any investment that moves resources towards an more efficient use is a good investment for New Zealand, again no matter what the nationality of the investor.

Micheal Fry seems to be trying to trade on the economic ignorance of the general public in an effort directed at xenophobic scaremongering.

Interesting blog bits

And in local news ...

1. Eric Crampton on the Take Over
   
2. Welly gnome asks Christchurch Central Development Unit – Why?

   A good queation. Does the government really know better than the local property owners? Clearly they think they do.

3. Not PC notes that The Grey Ones in Christchurch just got greyer

   And to the “regime uncertainty” already plaguing and delaying would-be investors in Christchurch’s rebuild, he has just added another three months (plus cockups) while this new “unit,” headed up by a bloke pinched from the Canterbury Earthquake Recovery Authority, prepares yet another top-down plan to be imposed on property owners—by planners pinched from the very same council who drew up the earlier plans.

4. Homepaddock argues Chch rebuild gets welcome boost

   A positive spin on what the government is doing.

and in other local news ...

1. Eric Crampton on SkyCity

   Do not believe the "broader benefits" case for building convention centres. Nothing stops hotels near a proposed centre from getting into sponsorship arrangements where they pay for listings in standard convention centre marketing materials to help fund the centre; I find it more likely that the benefits are too small to make it worthwhile than that public goods problems, easily resolved by assurance contract, stop things.

2. At Groping towards Bethlehem they are Betting on a new convention centre

   The deal is in the same category as sports stadia. he theory is that the city gains all kinds of revenue from some big facility, but no single business can get enough of the profits to build the facility. If the city (or state) intervenes, they can fund the facility. They get the increased tax revenue, business is boosted, and everyone gets free ponies and wi-fi. Only, it doesn’t work that way according to people who’ve actually run the numbers. From the outset, it doesn’t really seem like a good use of public resources.

3. Sam Richardson on the Sky City - convention centre deal

   According to this December 2011 story from the New Zealand Herald, international visitor receipts in Auckland were $2b. This would mean that an increase of $85m would be around 4.25% of visitor receipts, which while not large, is not insignificant either. As for jobs, it is highly likely that the 1000 jobs in construction will be sustained during this period rather than created - other work will be moved to accommodate the new centre. This is an opportunity cost that should be considered. The 800 new jobs - this will be very much dependent on whether the new centre generates new business or merely reallocates existing convention business from elsewhere within Auckland. I have no doubt that a new facility would bring in some new business - whether it is enough to justify the cost, that is another matter entirely.

4. Kiwiblog on The Sky City “deal”

   A positive spin on what the government is doing.

Population and economic growth

Don Boudreaux has been writing to the New York Times about population growth and the economy:

Reporting on Nigeria’s growing population, Elisabeth Rosenthal uncritically advances the popular narrative that large populations hamper economic development (“Nigeria Tested by Rapid Rise in Population,” April 15). She supports her point with demographer Peter Ogunjuyigbe’s declaration that “If you don’t take care of population, schools can’t cope, hospitals can’t cope, there’s not enough housing – there’s nothing you can do to have economic development.”

Not so.

Fifty countries today have population densities higher than that of Nigeria. Forty-two (or 84 percent) of these have per-capita incomes higher than that of Nigeria – and in many cases multiple times higher. South Korea, for example, has three times as many people per square mile as does Nigeria, yet South Korea’s per-capita income is more than ten times higher than Nigeria’s.

Nor does rapid growth of population necessarily prevent rapid growth of the economy. Over the past 150 years, California has had an average annual population growth rate of about 3.1 percent. (In some periods it’s been much higher, such as in the 1920s when California’s population grew at an average annual rate of 5.2 percent.) Only in the past 40 years has California’s annual population growth rate fallen below Nigeria’s current annual population growth rate of about 2.27 percent. Yet, obviously, this hefty population growth can hardly be said to have been a drag on California’s economy.

The point is an important one for a country with such a small population as New Zealand. A larger population isn't something to be feared in terms of our economic growth. Agglomeration effects that come with large cities is just one example of how a larger population can if fact help growth.

EconTalk this week

David Autor of MIT talks with EconTalk host Russ Roberts about the Social Security Disability Insurance (SSDI) program. SSDI has grown dramatically in recent years and now costs about $200 billion a year. Autor explains how the program works, why the growth has been so dramatic, and the consequences for the stability of the program in the future. This is an illuminated look at the interaction between politics and economics and reveals an activity of government that is relatively ignored today but will not be able to be ignored in the future.

Pricw gouging or dynamic pricing?

Tim Harford talks to himself about price gouging but makes good sense in doing so.

I don’t think that would have gone down well. Price gouging, don’t you know.

I’d rather think of it as dynamic pricing. I realise people use pejorative terms to describe it, but we’d all be better off if certain products varied in price a bit more.

and

The petrol stations that did raise prices were vilified.

They were, which shows that some people don’t know what’s good for them. The idea of the “just price” has a long history but very little economic basis. There are some theoretically sophisticated stories one can tell explaining why prices tend to stick, but the truth is that in most cases we’d be better off if they moved more. The latest toys wouldn’t all sell out at Christmas, there’d be fewer hosepipe bans, you wouldn’t need a lottery to allocate Olympic event tickets and I’d have been chowing down on an Easter egg last weekend.

Life doesn’t always respect your fancy economic models.

Indeed not, and thank goodness – although the laws of supply and demand are hardly fancy. But the fuss about price gouging really does make us worse off. There are two problems with prices that don’t rise quickly enough in the face of fixed supply and high demand. First, the goods may not reach the people who want them most. Second, even the lucky customers who get the cheap product may lose out because of the non-monetary costs of getting it.

Such as?

Such as queueing for hours to get the latest iPhone or a day pass to Wimbledon, for example. Many, surely, would happily pay a little extra to sidestep these wholly avoidable costs.

Now if we could only get non-economists to see the logic we wouldn't have to worry about stupid laws like anti-price laws or even anti-ticket scalping regulations.

A businessman's life is not a happy one

Or so its seems in India,

(HT: Sam Bowman)

Weirdest use of statistics for the week

Sam Bowman at The Pin Factory Blog gives this example of a dodgy looking (mis)use of statistics:

The overall impression the article gives is how shallow Nudging is as an idea. One example:

A study into the teaching of technical drawing in French schools found that if the subject was called “geometry” boys did better, but if it was called “drawing” girls did equally well or better. Teachers are now being trained to use the appropriate term.

Well, if you say so. I suppose this might be true, but it could just be another of those “correlation equals causation” fallacies that bedevil the social sciences. Statistically, all manner of associations may appear in data surveys, but they don’t necessarily mean that one thing causes the other.

I have to that I have trouble believing that just changing the name of the course really changes the success of girls relative to boys.

Some good news about a good book

A new edition of Steven E. Landsburg's great book "The Armchair Economist" will be available, in the U.S. at least, on May 1. Despite being nearly 20 years old now I still think that "The Armchair Economist" is the best of the popular introductions to economics so I look forward to seeing the new edition.

Vertical integration sometimes looks very strange

This odd sounding example of  vertical integration comes from Peter Klein at the Organizations and Markets blog:

The WSJ reports that Delta Airlines wants to acquire a Pennsylvania oil refinery. The reporters, quoting the ubiquitous “people familiar with the situation,” says that Delta “could save between $20 and $25 a barrel on some of its jet-fuel costs by acquiring the refinery, a big advantage as industry costs now approach $140 a barrel, up 11% so far this year.” But how? No particular economies of integration are mentioned in the article (apparently the WSJ doesn’t consider this an important point). Jet fuel is a standardized commodity, so asset specificity isn’t an issue. Organizational capabilities don’t seem to be relevant. Market power? Price discrimination? I don’t see it. In short, I can’t imagine where these cost savings would come from. Any ideas?

Delta may think that ownership of a refinery would guarantee them supply in times of uncertainty but the market for jet fuel seems to work perfectly well so I don't see why owning a refinery is necessary to ensure supply. What's the bet that the deal won't go though or if ti does it will be reversed quickly?

My garage is famous!

In this video from TVNZ on the scrubfire on the Port Hills here in Christchurch you get to see my garage! It looks like the fire was a lot closer to the house than I thought. You also get to see a few of the neighbours standing around in the street.

TVNZ have more video of the fire here.

Power of the markets

Stanford economics professor John Taylor discusses the "Power of the Market" on CNBC. The discussion is based on Taylor's new book "First Principles: Five Keys to Restoring America's Prosperity".

Not a good idea

From RadioNZ,

Christchurch City Council has voted in favour of buying seven hectares of land in the central business district for a new AMI Stadium.

The decision is part of the draft annual plan for the next financial year and will now now be open for public consultation.

The draft plan includes spending on 10 major council owned facilities damaged in the earthquake on 22 February 2011.

Major earthquake damage has meant the old AMI Stadium cannot be used. A temporary stadium, which could be used for up to four years, opened at Addington in March to host rugby matches.
The proposed new stadium would be on another plot of land and would allow for the building of a 35,000 seat facility that could host test matches.

The council is proposing a 7.47% rates increase for 2012/ 2013, including a 2% increase to pay for the rebuild or repair of council facilities.

Have any of the councillors who voted on this measure actually looked into the economics of building stadiums? The literature is clear that stadiums are not an economic winner, the councillors would only have to look at the problems with the Dunedin stadium to get an ideas of the kinds of issues that building such things can raise. Just how much thought did they put into this vote?

How not to argue against privatisation

From TVNZ,

[Greens co-leader Russel] Norman said the partial-privatisation of state-owned assets will also hurt the Government's books due to the loss of dividends and he again urged the National party to consider a special levy for the rebuild of Christchurch and a capital gains tax to help service debt.

Yes Russell but if sold correctly (in particular you need a competitive sales scheme) the payment the government receives will equal the present value of the future dividend stream, so we don't lose out. The government just gets the money now rather than in the future.

The cost of building

The Dominion Post reports,

The Cubana apartment block in Cuba St [Wellington] was a financial disaster, which shows how difficult it will be to rebuild a lot of earthquake-risk city buildings, says architect and developer Karen Krogh.

and

But the experience left her wondering how Wellington's old earthquake-risk buildings would be rebuilt, who would do it and what it meant, particularly for an old part of the city like Cuba St.

"Who's going to do it?"

Krogh lamented the huge costs of any sort of development, including council reserve contributions, compliance costs and the ticket clipping by all the men in suits - lawyers, consultants, financiers and others - who had to approve everything without adding any value.

"It ends up making it too expensive to do anything.

"People bang on about how all our housing is overpriced, but it is too expensive to do it properly and that's why people build dog boxes. It is a difficult process to think you can redevelop the city in a quality way and redevelop earthquake-prone buildings.

"It's the same problem in Christchurch. The reality is a nightmare. We need to go back to the basics and think what we really need."

The compliance costs and zoning and building regulations and the time to get decisions made all add to the cost of rebuilding, as we are finding out in Christchurch. Rethinking how local government deals with land use, housing and building more generally is a must if we are to lower the cost of accommodation.

Abandon the prohibition on drugs

A lot of time, effort and money is wasted on the enforcement of anti-drug laws. Over at The Pin Factory Blog Tim Worstall makes a simple but important point about why the War on Drugs will be lost:

But the basic construction of the argument is entirely correct: we'll never actually stop drug taking, therefore never stop drug growing or trafficking. And the three of them being illegal is doing far more damage to drug users and also the civil liberties of everyone than that controlled legalisation would cause.

The point is also made in the Worstall posting,

A dialogue on drug markets regulation should address some of the following questions: how can we diminish the violence generated by drug abuse? How can we strengthen public health and social protection systems in order to prevent substance abuse and provide support to drug addicts and their relatives? How can we provide economic and social opportunities to families and communities that benefit economically from drug production and trafficking? Which regulations should be put in place to prevent substance abuse (prohibition of sales to minors, prohibition of advertising in mass media, high selective consumption taxes for drugs etc)?

Thinking about, and acting on, such questions rather than continuing the outright ban we now have in place has the potential to reduce both the social and economic costs of drug use.

EconTalk this week

Richard Burkhauser of Cornell University talks with EconTalk host Russ Roberts about the state of the middle class. Drawing on recently published papers, Burkhauser shows that changes in the standard of living of the middle class and other parts of the income distribution are extremely sensitive to various assumptions about how income is defined as well as whether you look at tax units or households. He shows that under one set of assumptions, there has been no change in median income, but under a different and equally reasonable set of assumptions, median income has grown 36%. Burkhauser explains how different assumptions can lead to such different results and argues that the assumptions that lead to the larger growth figure are more appropriate for capturing what has happened over the last 40 years than those that suggest stagnation.

Abandon the prohibition on marijuana

A lot of time, effort and money is wasted on the enforcement of anti-drug laws. Over at Offsetting Behaviour Eric Crampton comes up with a good first move in the battle against the war on drugs:

Even better, legalize marijuana but regulate it similarly to alcohol and tobacco with restrictions on age of purchase and on permissible sales venues. Set an excise tax to keep the selling price to consumers about where it is now if demand-reduction is government policy. It's not simple to figure out what that tax should be because it's not obvious what production efficiencies could be achieved in a legalized production environment. But back-of-the-envelope numbers suggest excise revenues a bit over $150m (with a very wide confidence interval; I'd be very surprised if it came in at less than $100 million or at more than $300 million). If production costs in a legal environment were $30-$50 per ounce, and if we assume distribution costs roughly on par with production costs, then a legal market would deliver product to consumers at about $100 per ounce; if weed currently sells at about $300 per ounce, then excise and GST could total about $200 per ounce. A 2001 estimate put the black market in marijuana at around $190 million in 2001; if marijuana follows the CPI, that's about 830,000 ounces. At $200/oz in tax, that's about $165m.

What is interesting to a theory of the firm man, is what would happen to the costs of production and the organisational structure of producers if marijuana was legalised. There are reasons to think that cost could come down - e.g. there may be scale economies that could be taken advantage of and/or the costs involved with keeping your crop secret would disappear - or go up, e.g. the costs of labour could rise if current production is based on low wage labour or if competition forces higher quality/higher cost production methods.

One thing that is for sure is that, as with the removal of the prohibition on alcohol, the removal of the prohibition of marijuana would deny criminal enterprises one source of revenue. This would induce changes in the structure and areas of operations of such businesses, as the loss of a market would for any firm.

The public intellectual as economist

Peter Boettke has a new working paper out on The Public Intellectual as Economist: The Case of Henry Hazlitt. It covers the life and ideas of the journalist Henry Hazlitt. The abstract reads,

Henry Hazlitt was a unique public intellectual, who strove to not only to enlighten the general public with his writings, speeches, and appearances on TV and radio, but sought to contribute to the specialized disciplines of economics and philosophy. This paper argues that Hazlitt occupied a unique position in mid-20th century intellectual life in the US as a public intellectual attempting to contribute to scientific economics consisted of not just pointing to his prominent position in the world of journalism – both as a literary critic and more importantly as an economist – but more importantly for our purposes to the attention his written work commanded in the specialized professional journals in economics and philosophy, as well as the active correspondence he engaged in throughout his life.

Hazlitt is best known for this wonderful book Economics in One Lesson. First published in 1946, it is still worth reading today.

How China made its great leap forward

What is most surprising about this article, which is from the Wall Street Journal, is that it is based on the book "How China Became Capitalist", by Ronald Coase and Ning Wang, which is due out this month. The notable thing is that Coase is of course the 101 year old Nobel laureate in economics. If I'm still working and writing books at 101 I will be bloody impressed!

Coase and Wang open their WSJ article by noting

China's post-Mao market transformation is one of the most dramatic and momentous events of our time. It has lifted hundreds of millions out of extreme poverty, freed one fifth of humanity from ideological radicalism, revived one of the oldest civilizations, and inspired all of us to explore the benevolence of the market.

But they then say,

Yet capitalism as currently practiced in China suffers a severe failing: the lack of a marketplace for ideas. China's market transformation flourished at the ground level without much help from Beijing—contrary to its leadership's claims. But the free flow of ideas has faltered. Until that changes, China will never reach its full potential.

and add

In the years to come, China will continue to forge its own path, but it needs to address its lack of a marketplace for ideas if it hopes to continue to prosper. An unrestricted flow of ideas is a precondition for the growth of knowledge, the most critical factor in any innovative and sustainable economy. "Made in China" is now found everywhere in the world. But few Western consumers remember any Chinese brand names. The British Industrial Revolution two centuries ago introduced many new products and created new industries. China's industrial revolution is far less innovative.

The active exchange of thoughts and information also offers an indispensable foundation for social harmony. It is not a panacea; nothing can free us once and for all from ignorance and falsehood. But the free flow of ideas engenders repeated criticism and continuous improvement. It also cultivates respect and tolerance, which are effective antidotes to the bigotry and false doctrines that can threaten the foundation of any society.

One thing that economists note is that cities exhibit "agglomeration effects"; having lots of people close to one another helps create new ideas and helps to find new way to use current ideas. In short, big cities lead to lots of big ideas. China has big cities, huge cities, but if Coase and Wang are to be believed not much in the way of new ideas. So something must be missing, and for China that something may be freedom from state control. Markets in ideas, if not for goods and services, are still largely missing from China due to state regulation. Coase and Wang point out that

When China started reforming itself more than three decades ago, Deng rightly stressed the "emancipation of the mind" as a prerequisite. But that has yet to happen. It's time for China to embrace not just the market, but the marketplace of ideas.

Graduates and drinking

From the Graduate Longitudinal Study New Zealand we learn that when it comes to how often graduates drink alcohol the results are:

11.5%  Never
9.3%  Almost never
11.7%  Less than once a month
10.7%  Once a month
14.4%  Once every two weeks
18.1%  Once a week
17.8%  Two or three times a week
4.4%  Four or five times a week
2.1%  Six or seven times a week
0.1%  Skipped question

How many standard drinks containing alcohol do you have on a typical day when you are drinking?

n = 7676 (88.0%) who indicated that they drink at least some alcohol (i.e., excluding those who indicated that they never drink alcohol) and responded to this item
Mean = 4.1 (SD = 3.6)
Median = 3.0
Mode = 2
Range = 1 – 25+ (those who endorsed 25+ drinks were assigned the lower limit value of 25)
Interquartile range = 2.0 – 5.0

How often do you have six or more standard drinks on one occasion?

n = 7713 (88.5%) who indicated that they drink at least some alcohol (i.e., excluding those who indicated that they never drink alcohol)
25.3% Never
26.4% Once or twice a year
17.6% Less than monthly
17.2% Monthly
13.0% Weekly
0.1% Daily or almost daily
0.3% Skipped question

I shall leave it to BERL to workout the social cost of graduates.

Interesting blog bits

1. John Taylor on Policy Failure and the Great Recession

   "The debate about the causes of the financial crisis and the great recession will continue for many years, and the facts and analysis that Robert Hetzel put forth in his new book The Great Recession: Market Failure or Policy Failure? should now be part of that debate. As I said in my comments for Cambridge University Press, “Hetzel applies his experience as a central banker and his expertise as a monetary economist to make a compelling case for rules rather than discretion, showing that 'monetary disorder' rather than a fundamental 'market disorder' is the cause of poor macroeconomic performance. At the same time, he acknowledges and discusses disagreements among those who argue for rules rather than discretion.”"

2. Art Carden on It's the Final Crisis of Capitalism, Charlie Brown!

   By most standards, the performance of the world economy over the last few years has been anemic. “Is Capitalism in Crisis?” is a question that makes great grist for the mill of serious people with furrowed brows who go on talk shows, but there’s a yawning gap between what we’re experiencing and a “crisis of capitalism.” Even though “worst ___________ since the Great Depression” has made the rounds a few times, the sheer economic cataclysm we would have to suffer in order for average people to return to the standards of living of the 1970s—to say nothing of the Great Depression—would be many times more severe than the Great Recession.

3. Tyler Cowen on What Export-Oriented America Means

   As is well known, America was the world’s leading exporter virtually every year during the latter half of the 20th century, losing that title to Germany only in 2003, and later falling behind China. New circumstances thus prompt the question: Might we someday regain that honor? If so, how will this shape American foreign policy, jobs, education, politics and poverty?

4. Bryan Caplan give an Introduction to Microethics

   When they teach their subject, economists almost always start with microeconomics. Why? Because it's easier to reach clear-cut answers when you start small. Once you know what you're talking about, you can build on it. When economists can't give their macroeconomics strong microfoundations, they worry. Those who skip straight to macro have a serious risk of ending up with a bunch of half-baked floating abstractions. What about ethics?

5. Chidem Kurdas asks Big Bank Breakup or Tea Party?

   The Dallas Fed’s director of research Harvey Rosenblum argues that the new Dodd-Frank regulations are insufficient to deal with the threat posed by too-big-to-fail banks and therefore these need to be broken into smaller entities.

6. Eric Crampton wants you to Overcome your Repugnance

   John McCall is one of those anointed to decide whether things are ethical; the National Ethics Advisory Council, on which he sits, advises the Minister of Health on the ethical implications of things. And he doesn't like organ markets.

7. Welly Gnome on Easter Trading Laws

   Let’s just get this over and done with – repeal the Easter Trading Laws because they inconvenience the majority of society and the fines imposed on naughty retailers who operate their business as they see fit don’t pass muster relative to the cost of enforcement.

SOE decision making

From the TVNZ website,

State-owned MightyRiverPower wasted around $100 million on an unnecessary hunt for natural gas in the last decade, its chief executive Doug Heffernan told the commerce select committee.

He was answering questions from Labour MP David Cunliffe for examples of decisions the company might not have made, had it been partially privatised.

and

Asked to nominate decisions that would have been made differently, Heffernan volunteered the company should not have spent around $100 million searching for natural gas in the mid-2000's, when its subsequent strategy has seen the company concentrate instead on geothermal generation.

"We should have stopped earlier, or not started at all," said Heffernan. "Under private sector disciplines, we would have corrected much faster. From my experience, in a listed company environment, that would not have happened."

I do wonder just how much difference a private stake of 49% would make to the SOE's decision making. After all if the 49% is held by a very large number of small investors they will face huge costs in organising themselves to try and change the way an SOE acts. 51% of the SOE will still be held by a single shareholder, the government, and thus the government will determine the business environment within which the SOE works.

I can't help but think that the statements made by Doug Heffernan are a better argument for full privatisation rather than a partial sell off. Full control by the private sector would be a lot more likely to overcome the kind of issues Heffernan points to.

Why are more bloggers needed?

Previously I asked are More bloggers needed? I argued we need more New Zealand based econ blogs. In the comments to this posting David Friedman wrote,

Why assume that a blogosphere is defined by a realspace nation? Shouldn't NZ economists consider themselves part of the same blogosphere as U.S. economists?

and Tim Worstall writes at his blog,

Hmm.

That the economics blogosphere is as close to a global free market* as we can get shows the need for more local production.

Hmm….

Both these comments make sensible points but I would argue that New Zealand economics blogs are still useful for two reasons:

1. Obviously as the New Zealand economics blogoshee grows so does the world blogosphere. On general economic topics you can take advantage of an enlarged worldwide blogosphere.
2. To a large degree economic policy is country specific and thus if you want discussion of a given country’s economic policy you need a reasonable number of blogs to maintain ongoing conversations. People in Europe or the U.S., for example, have no interest in New Zealand’s economic issues and thus are unlikely to become involved in discussion of such problems. Thus for serious discussion of New Zealand policy issues you need as large as possible New Zealand econ blogosphere.

Also I do wonder just how nationalistic is blog reading? Do national boundaries matter for the blogs we read? How many of your regular reads are outside of New Zealand? Just what does determine the blogs we read?

Firms and exporting

From VoxEU.org comes a column, by Leonardo Iacovone and Beata Javorcik, on Getting ready: Preparation for exporting. It asks, How do firms adapt their products before starting to export? The column argues that firms upgrade their products' quality. An interesting question is Why? Is the exporting market that much more competitive than the domestic market that higher quality is needed to compete? If so, then local customers receive an positive externality when firms move into exporting.

Using data from Mexico, Iacovone and Javorcik show that producers tend to enjoy a price premium on the domestic market relative to other companies producing the same product. This premium appears exactly one year before the product is exported, suggesting producers are getting ready to export.

New NZ econ blog

From Matt Nolan at the TVHE blog I see we have another econ blog coming from New Zealand: Welly Gnome, which is a Vic University undergrad who as entered the world of economics blogging. The "about" section of the blog says

I was previously studying at Canterbury where I took Eric Crampton’s ECON224 in 2009.

God knows what Eric could have done in the course that made him run to Wellington!!! But it must have been awful.

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.