Green Growth: thoughts from experts

31/08/2012 § Leave a comment

The NZARES conference is on at the moment. I was there yesterday, enjoying sunny Nelson and the good company of ag and resource economists. The theme this year is ‘Green Growth: Logical Possibility or Oxymoron?’ Most of the papers focused on some aspect of the interaction between agriculture and the environment: measuring impacts, framing or describing impacts (framing farming, if you will), building models, and, of course, valuing impacts.

There is a lot of useful thinking going on in this area. Two of the ideas that struck me:

  • Social licence to farm: this was an idea discussed by a few speakers. Because farmers create impacts beyond the farm gate, they rely on a social licence to operate. In turn, the licence relies on the rest of society having some understanding of farming and trust in farmers to make ‘the right’ decision, however that is defined. When a few farmers produce impacts that are frowned upon (and telegenic), that trust is eroded and the licence is under threat. Farms as SMEs (small and medium enterprises) are possibly more closely scrutinised than other businesses; their licence seems to be more contingent. There’s a research idea right there — any graduate students out there interested?
  • Balancing trade-offs: we are, inevitably, talking about having more of something and less of another. How do we communicate this issue? Economists probably think more about trade-offs than most people, but as a result we think the idea is less remarkable. Even the language can be a problem. ‘Trading off’ highlights the underlying equivalence or commensurability, even for things considered inviolate. ‘Balancing’ is a nicer term, but in practice still means figuring out how much X we’ll give up for more Y. This discussion also moves us from averages to marginals, again where economists feel comfortable but other people might not.

I suggest having a look at the programme and reading some of the papers once they are posted on AgEcon Search. Alternatively, the authors will no doubt provide a copy if you contact them.

The Randian free lunch

29/08/2012 § 3 Comments

With the selection of Paul Ryan, the writings and philosophy of Ayn Rand are getting exposure like they haven’t had in years. At least not since her most famous disciple, Alan Greenspan, declared he might have been mistaken. That’s caused me to think more about her than I have for decades.

Like many people, I read Rand as a teenager. My sister lent me Atlas Shrugged with some excitement. As it turned out, I was inoculated from Rand’s charms in a peculiar way. I had already read Voltaire and Swift, Camus and Sartre. Compared to them, Rand was clumsy. I can understand the appeal of political novels. You can invent a world that is just so. Your characters are reasonably and naturally pushed into situations that justify your philosophy. But they must, to my mind, at least be passably novelistic. Rand failed on that criterion. And if she couldn’t explain her philosophy with a certain versimilitude, then it couldn’t be useful in the world.

Now, I’m finding lots of commentary on her — what she said, how she lived, whom she influenced. Her work is based on a central notion of man versus society (one of the three main literary conflicts according to my 10th grade English class). The individual must stand strong against the pressures of society, live by his rules, etc.

This leads to my economic criticism. One of the key useful ideas from economics is that there is no free lunch. If there’s a benefit, if there’s an impact, if there’s a capacity, then it came from something. And that something needs to be paid for.

Rand’s individual standing alone clearly has the capacity to fend for himself and the ability to communicate. He did not invent these skills; he did not birth himself fully capable. Those capabilities are the product of that individual and the others around him — family, community, society. They are also the result of a history, both technological and cultural.

Language is, to me, the best and most basic example of the impossibility of Rand’s vision. An individual does not have a language. Language is a cooperative creation, one with a history and community of participants. If an individual wants to communicate thoughts — about parasites on the social order or the importance of the gold standard or other Randian notion — he has to have a language. That language pre-dated him and exists without him. He depends on it, and cannot create it himself.

Rand wants her heroes to be not just self-sufficient but self-produced. Rand’s ability to criticise society depends, ironically, on society’s creations. People have had to use and develop language, and then teach it to her hero. Cultures have maintained expressions and cadences, which the hero exploits. Authors have created new word combinations, which the hero expropriates.

Rand wants, amongst other things, communication without society. She wants to use the communication without paying for it. She wants, at root, a free lunch.

Climate change and the individual

28/08/2012 § 6 Comments

Due to the initiative and effort of Eric Crampton, there is now an economics blog on Sciblogs. It’s called The Dismal Science and will pull posts from several excellent New Zealand economics blogs. Thanks, Eric, and yay us.

Front and centre is methodological individualism. This doctrine/position/approach wasn’t particularly emphasised in my early tertiary education, but I hear more and more reference to it.

It has interesting and Darwinian implications for climate change. For example, the Kapiti Coast has just informed residents of low-lying areas that their properties will be under water if the sea level rises.

I’ve seen similar maps for several areas in the lower North Island — Kapiti, Wellington, the Hutt Valley. They are informative, but they are also just a question of physics and maths. If your house is 1 metre above sea level and the sea rises 2 metres, given that 1 < 2, it should be pretty easy to work out the consequences. It gets complicated, of course, with more precise measurements and predictions, and accounting, too, for storm surges and so on. But the essence is that water seeks its own level and some numbers are smaller than bigger numbers.

For that reason, the reaction of one affected resident was curious:

The sea-risk report is ‘just another thing to bamboozle residents’, say Elizabeth and Terence O’Brien, from Raumati.

These individuals have decided that the report isn’t about preparing and planning and informing, it is about ‘bamboozling’. The nice thing about methodological individualism is that we can work with that. There is no need to argue, cajole, or convince. I can look at low-lying beachfront property and wonder how long it will last; they can see it as a great investment opportunity. We can both be pleased in the present with our accurate foresight. Then, in the future, we will individually bear the consequences of our beliefs and choices.

Obviously, the whole topic of climate change is more complex. But, in the end, individuals need to make decisions about their own circumstances, using the information and theories they think are most germane. And that’s pretty interesting to study.

Capitalist conspiracies?

27/08/2012 § 3 Comments

An article over the weekend reported the following:

      If you think smoking doesn’t cause lung cancer, HIV doesn’t cause Aids or Nasa faked the Moon landing, you are also more likely to support free market economics and be sceptical about climate change.

The fabulous Stats Chat picked up on the article and discussed the implications from the POV of probability theory. Thomas Lumley beat me to the punch:

I think free market economics correlates with the conspiracy theories in this survey for three main reasons.  The first is that most of the conspiracy theories on the list are conspiracies by or with governments, so believers should support anything that reduces the power of governments.  The second is that, economists, like statisticians, are professionally required to think up holes in arguments, and so suffer from reflexive contrarianism as an occupational hazard. And finally, when it comes to giving excuses for not wanting to do anything about climate change, what “free-market economics” and “IPCC plot” have in common is that they sound better than “I don’t care what happens to the world over the next century”.

A conspiracy theory is all about (a) power and (b) ‘truth’. The theory explains that someone with power wants to control the situation. They want to keep us from knowing what’s really going on, or destroy a challenger, or consolidate their power. That is, there is a motivation for the conspiracy; otherwise, why bother going to the trouble? Whether you are talking about ‘Paul is dead’, the international banking cabal, the assassinations of Marilyn Monroe and Vince Foster, Area 51, or WTC7, the key motivation is power.

Against this power, the conspiracy theory wields the truth. The believer sees specific patterns and congruences that are arcane but visible to those who ‘know’. This truth does two things. It holds out the possibility of an alternative world: if only the truth were widely acknowledged, then existing power relationships would be reversed. It is, if you wish, the dream of Carnival. Secondly, it provides an explanation for why the world isn’t as it should naturally be. The conspiracy is preventing the world from achieving its rightful equilibrium. If only people had understood the real meaning in Abbey Road, we would not have had Wings.

I agree with Lumley that if a person tends to believe conspiracy theories, they would tend to believe economic theories that suggest powerful people are preventing the market from operating properly. Since they already think that the world is not as it should be, then those beliefs would spill over into the economic sphere.

But two further things come to mind. First, what are their other economic beliefs? In the US, at least, they have quite a list of potential beliefs/theories from which to choose. How common are these? There’s some distance between thinking that the government has put too many regulations on businesses and consumers because politics gets in the way of sane economic policy, and thinking that Bernanke is the Rothschilds’ lapdog.

The second thing is more of a worry. How do other people, those who don’t believe the conspiracy theories, see free-market economic? The mixed economy model — some public, some private — has been extraordinarily successful, compared to the alternatives. That’s not to say it doesn’t have its problems. But in terms of widespread prosperity, heath, and welfare, it sure beats feudalism, various forms of totalitarianism, hunting and gathering — pretty much everything else. A key element of the mixed economy is voluntary transactions based on market prices, or, y’know, free market economics. What do most people think about price-setting and willingness to pay? And how does that spill into thoughts about labour markets, asset sales, and property prices?

Do they believe that supply and demand forces affect prices and quantities (subject, of course, to all the usual caveats)? Do they think that people respond sensibly to incentives? What do they think about allocation of scarce resources?

Maybe we shouldn’t be so worried about the economic opinions of a few conspiracy theorists; maybe it’s the economics of the majority that we should be studying.

Male success strategies

24/08/2012 § Leave a comment

With an increasing part of my work involving simulation modelling (I have a paper with Chris Schilling at the upcoming NZARES Conference), I’ve been paying more attention to the complexity/evolution literature. Origin of Wealth (Beinhocker, 2007) was a good introduction, but I’ve also just been browsing the lit and the web to pick up bits and pieces.

Then, the National Review publishes this mash letter. The American Prospect takes it down from a political perspective, but I can’t help thinking of it in evolutionary terms. Well, they started it, with their ‘conventional biological wisdom’. I don’t care about the candidates; I’m more interested in why this journo would write such a piece. I mean, admiring that someone is an alpha-male-ne-plus-ultra is, to me, the equivalent of admitting defeat. You’re admitting, ‘hey, he’s bigger and stronger than I am, and he’s going to get all the food and mates and I’m cool with that.’

That got me thinking about this journo’s own evolutionary strategy — what’s his angle? Searching around, I stumbled across this fabulous summary of male strategies from the lab of Dr Barry Sinervo at UC Santa Cruz. I ended up on the Wikipedia page for the common side-blotched lizard, which has a rock-paper-scissors arrangement. It has three kinds of males; each one has a strategy that dominates one other and is dominated by the third. The three types can be distinguished by their throat colours, leading Wikipedia to explain the strategies:

[They] can be summarized as “orange beats blue, blue beats yellow, and yellow beats orange”.

According to Dr Sinervo and Wikipedia, the proportions of lizard types are relatively steady over time, suggesting that each strategy is effective.

This takes me back to Kevin Williamson at the National Review. Maybe he’s got a strategy for survival, after all. He’s pumping up the big, testerone-laden orange-throated lizard, talking smack about the blue lizard. All the while, he’s got his own strategy: sneak in while no one’s paying attention.

You’ve got to watch out for those yellow lizards.

Shuffling sideways

24/08/2012 § Leave a comment

I’ve been working through the economic news from around the world this morning. Bloomberg says that Europe is still contracting, although perhaps a bit less than before. Indicators for both services and manufacturing are in the negative zone, just moving around a bit. The same article tells us that China is slowing down and the United States is moving sideways. The Washington Post reports much the same information, adding that the eurozone numbers mean Europe is ‘firmly in recession’, and that China’s economic policy will be on autopilot until the Party Congress in October. I’d add that US policy is also likely to be on autopilot until November: Congress will try to stymie the President and the Federal Reserve will want to avoid appearing political.

The policy news out of the eurozone was better, as TVHE explained a couple of days ago, and then the news this morning is contradictory and strange. Matt Nolan focuses on the ‘we won’t tell anyone’ aspect of the story. I keyed into comments in this Reuters article, in which a European bank economist explained the folly. I guess I assumed that, if someone can clearly explain the problem in a news article, the ECB can understand that it might not be good policy.

With all this, I was trying to think of what the country-by-country analysis meant for the world economy. I went back to the World Bank statistics just to refresh my memory of the relative sizes of these countries’ economies. As a service to readers, I’ve put them in pie charts:

These are just reminders that the big countries are big — a few countries comprise most of the world’s GDP. They all seem to be shuffling sideways at the moment. Given that the US and China are at points in their political cycles when economic policy is flat, that shuffling looks set to continue through the end of the year. The contradictory yet strangely hopeful signals out of Europe suggest a muddling through there. The Eurozone chart also suggests that Greece isn’t as important as it is made out to be, but Italy and Spain could be worries.

For New Zealand, well, the latest NZIER column (pdf) probably has it about right (and not just because they sign my paychecks): ‘stagnant’, ‘sideways’, ‘anaemic’, ‘flat’, ‘weak’, etc.

Happy, happy, joy, joy.

Headline of the day

23/08/2012 § Leave a comment

Best headline of the day, the week, and possibly the month:

Coke to crack into Aussie beer market

Or maybe I’m just an easily amused product of the 1980s.

This stuff matters

22/08/2012 § 11 Comments

I’ve been turning over in my head a recent comment from James Zuccollo about the discussion on this blog, TVHE, and Offsetting. Regarding the tone some of us economists have taken with physical scientists, he asked, does this have to be a gladiatorial encounter?

My answer is, this stuff matters.

First, this stuff matters in a narrow sense. We have competitive funding for research in New Zealand. Economists try to get funding — oh, let’s own this, I try to get funding — and we find ourselves having to explain economics to engineers, psychologists, sociologists, geographers, etc. And time and again, economics research isn’t quite important enough to be funded. Since it is a zero-sum game — if you get funded then I don’t — it is a fight.

Secondly, this stuff matters in a much broader sense. An important reason for doing economics is to understand how to maximise welfare. We can argue about efficiency versus equity, individualism versus collectivism, narrow versus broad definitions of welfare, the role of externalities, and the impact of cognitive heuristics and biases. But still, we are trying to make the world a better place.

The role of applied microeconomics — my little corner of the world — is even more focused on this goal than other areas, such as econometrics or theoretical economics. We are looking at how people and businesses are directly and indirectly affected by policies and decisions. One of the things I keep finding is how little we really know. We keep making policies and decisions and hope they are the right ones, but we don’t really know.

Let’s take a clear example, one of Eric Crampton’s bugbears: alcohol policy. The Government is discussing instituting a minimum price regime in order to curb harm from drinking. Importantly, a minimum price will make it more expensive for anyone who wants to buy cheaper alcohol. Why might people want cheap alcohol? Well, maybe they drink a lot of it, ‘too much’ by some standard. Maybe they have decided that a little ethanol is nice, but don’t want to spend too much on it. But maybe, just maybe, they are poor. They like a drink or two at the end of the day, just like richer people. Wine at $15 a bottle doesn’t fit the budget, but chateau cardboard tastes just fine and does the trick.

What we know from economic theory is that putting up the price of cask wine has both a price and an income effect. The price effect means that people buy less of it. The income effect means that they buy less of everything else, including heating, medicine, fruit, and all those things that are considered ‘healthy’.

To continue in catechism form:

Q: How much less healthy stuff do people buy?
A: We don’t know.

Q: What’s the net impact on health?
A: We don’t know.

Q: Why don’t we know?
A: The research hasn’t been done.

Q: Why hasn’t the research been done?
A: Because no one has funded it.

Q: Why hasn’t anyone funded it?
A: Because it lost the competition for scarce research funding.

So, to recap: real people are going to have their health and wellbeing directly affected by policy, but we don’t know how much and haven’t bothered to find out. We will possibly make the world worse, all because the social science research — the economic research — hasn’t been funded.

So yeah, it is a fight. Because this stuff really does matter.

Micro and macro of Christchurch recovery

21/08/2012 § 3 Comments

Someone mentioned to me yesterday that macroeconomic policy has relied on the promise of the Christchurch rebuild for nearly two years. My colleague Shamubeel Eaqub, ever the realist, called it the ‘one crutch’ recovery, and suggests that it will be slow. I suggested a while back that it was crucial to the overall economy. Since we counted on the rebuild and it has been slow, New Zealand has flatlined.

Now that we have a better picture of what the recovery will entail — 10 years, maybe more, of on-going work — the $20 billion or so rebuilding cost doesn’t seem as much of an economic stimulus. Given the national economy of around $200 billion per year, it’s only about a 1% increase.

Of course, that’s only if and when it gets spent. That’s where the micro picture is important. The $20 billion is going to be spent by people in houses and businesses arranging for the work to get done. If they can’t or won’t make the decisions, the money will just sit there. Eaqub has talked about businesses holding off on capital investments, waiting for signals that it is worth investing. I’m more familiar with the residential rebuild.

By coincidence, we also made arrangements yesterday to postpone the repairs on our house. Timing is everything, as they say. We couldn’t get the sign-off from EQC in time to get the builder to repair the house in time for a new tenant. So, we just cancelled the repairs for the moment. Better to get new tenants in and sort out the paperwork on someone else’s schedule.

On the other hand, that’s $80,000 to $100,000 (possibly more) that won’t get done this year. From what I hear, our situation is not unusual.

And so we wait…

Photo credit.

Thoughts on the rate of return on capital

20/08/2012 § 2 Comments

I’ve found myself wondering what the average rate of return on capital really is. Some of the numbers that get tossed around are an 8% average stock market return over the long term, a 15% to 20% risky rate of return for capital invested in a business, and an 8% to 10% rate of return for business generally (which is the basis for the country’s discount rate).

When I look at specific examples, though, that’s not what I see. Just for starters, the S&P 500 still hasn’t moved past its intraday high in 2000, over 12 years ago. Maybe a dollar-cost-averaging strategy would have helped, but this guy did the maths and found merely that it just reduced the losses. Residential real estate, a common Kiwi investment, depends on capital gains, as it is generally cash negative. When I look at businesses’ financial statements, many small businesses are just paying the equivalent of a wage to their owners. Of course, that calculation doesn’t even include the businesses that go bankrupt and produce a negative return.

And then think about infrastructure spending. Railroads, for example, were built with enormous sums of borrowed money, and then defaulted on a significant percentage of the loans. Proposed roads have low benefit-cost ratios — less than one in some cases. There are questions, too, about the gains from ultra-fast broadband.

This may just be the standard economic problem of making micro and macro pictures consistent. At the micro level, some investments do poorly, some businesses go under, and some time periods show weak returns. At the macro level, though, there is a clear trend.

The other thing it may show — other than my continued obsession with why things go wrong — is that good returns are not ‘normal’ and we shouldn’t expect them to be. Someone has to make 20% or 50% returns along the way, just to keep the averages up. If someone does it year after year, well, that’s pretty special. The rest of us chumps might have to settle for passbook rates.

Where Am I?

You are currently viewing the archives for August, 2012 at Groping towards Bethlehem.

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