New book on inequality

28/06/2013 § 6 Comments

I went to the launch last night of a new book on inequality in New Zealand. I bought the book at the launch, so no review of it, yet. Here are a few thoughts coming out of the evening’s talks, however.

The first is that inequality is complex. Jonathan Boston makes the point in a pull quote from the book:

While equality is highly valued, there is huge disagreement about why equality matters and what precisely should be equalised.

You see that in the concerns raised by the contributors. Are we worried about the dire circumstances in which some families live, particularly children? Is it more about the size of the gap between the rich and poor? Is it about the wealth of the very richest?

The reason the complexity matters is my second point: preferences about what is ‘fair’ are subjective, and we might have very different preferences about different kinds of inequality. For example, one speaker brought up the recent coroner’s case in which a baby died in miserable housing conditions. The coroner blamed co-sleeping, but the news report made it pretty clear that the whole situation was awful. I don’t think it would be hard to get most people to agree that babies shouldn’t grow up sleeping

on the floor of a cold room with leaking windows and doors, no running water and, in an adjoining room, a toilet nearly full of human waste.

I bet, though, we get very different responses when talking about gifted kids. I would like to see all kids supported to ‘reach their potential’, an admittedly vague phrase. That includes supporting very bright children to learn as much as they want to soak up. The revealed preference of the public school system is to leave such kids to their own devices, as long as they don’t cause trouble or bring the averages down. That, to my mind, is unfair and unequal.

My third thought for the night was, who’s going to pay? One speaker talked about how New Zealand had changed, how university and healthcare fees had increased since the 1980s and contributed to increased inequality. While this is true, there is nothing stopping that speaker or anyone else from establishing a trust fund to address the issue. When the tax rates were cut in 2010 (pdf), I didn’t see a big campaign of equality supporters contributing the difference to a health-and-education fund.

Brief story: when I worked for Lincoln University, I was part of the academic union. One year, there was a push for a Multi-Employer Collective Agreement. All the academic unions across the sector said yes, yes, we should stand strong together. But the big universities offered agreements to their individual unions, and striking was too hard, and the deals weren’t too bad, and, and…. The Lincoln union, the smallest in the country, was left to fend for itself. When it came to fairness, those intelligent, well-educated, reasonably comfortable people looked out for themselves.

So last night, as I looked around another room full of intelligent, well-educated, reasonably comfortable people, I just had to wonder. Which inequality are we going to fix with whose money?

Go west!

27/06/2013 § 2 Comments

The local news over the last week has been the storm in Wellington. It was the biggest in a while, by some measures bigger than the infamous 1968 storm. It took out the rail link between the central city and the Hutt Valley, leading to long waiting times and difficult commutes. That has now been fixed and the trains are running this morning.

Here’s the thing — it’s going to happen again. The rail line is at the water’s edge in the harbour, as this picture from makes clear:


That water right there? Only going to get higher. Sea level rise is projected to raise the water level over the next 100 years and beyond. This Niwa report (pdf) provides a lot of detail, but the basic idea is that we’re looking at 1.5m to 2.0m rise in the average sea level over the next century. Of course, that’s the average. Storm surges will push the water higher at random intervals.

This is an interesting map, from the 2011 regional transport plan (pdf) (Figure 8, cropped). It is essentially a ‘heat map’ of access to public transportation, red being the best access, then orange, yellow and blue. You can see the narrow rail corridor linking the central city with Lower Hutt, the black line on the northwest edge of the harbour. That’s what washed out.


The rail line is on the water because the hills are hard up against the harbour at that point. The route was actually produced by the 1855 earthquake:

The uplift created a new fringe of beach and rock platforms along the Wellington coast…. The newly exposed strip of shoreline between Wellington and the Hutt Valley offered a safe road and railway route – parts of the coastal road had previously been impassable at high tide.

All of this comes at a time when the council has just decided about future transport infrastructure in order to improve transit times between Kilbirnie and the central rail station. The big news was that the mayor backed away from light rail to support instead a bus-based option:

“While light rail is attractive, bus rapid transit may be a more immediate and pragmatic step and I want significant progress well before 2021,” she said.

Here’s my problem: those areas of the map are already red. They are already well serviced by the existing network. Other red-orange areas of the map are the suburbs north of the central city, which have rail links. The link to the Hutt is obviously fragile and only going to get worse.

I’d like to see the transport network improve access in poorly-served areas. All that yellow and blue land south and west of the centre city could be opened up, reducing the cost of housing and improving its quality while reducing the fragility of the transport network. Yes, I realise that will cost money and that topography isn’t in our favour. But we are planning to spend hundreds of millions of dollars to improve public transport to people who are already well serviced. Is that the best use of the money?

Ipsos custodes

24/06/2013 § 3 Comments

The Dominion Post had a spread on the latest concern about the US NSA over the weekend, entitled ‘Prism: Why We Should Worry’.

Before I get to my main point, one digression. If we start from the idea that words matter, what do we call Prism? ‘Spying’ evokes the Cold War and country-based activities that don’t or shouldn’t involve ‘civilians’. ‘Intelligence activity’ begs the question: it assumes that knowledge is being produced before that has been proven. ‘Eavesdropping’ makes it sound like a nosy neighbour, picking up snatches of conversations. ‘Hoovering up metadata’ is closer to the truth, and does lead to the easy-to-use ‘HUM’ acronym. Of course, ‘hoover’ as a synonym for ‘vacuuming’ is culturally specific, so might not work, but the resonance with J. Edgar works, too.

Digression done.

One of my favourite types of economic projects is the cost-benefit analysis. We get to go into an organisation, assess what they have been doing, and come up with some advice on what works and what doesn’t. Done well, we challenge people’s notions about what they have been accomplishing and whether it was worthwhile.

It is not unusual to find limited evidence that a programme or part of a programme has been effective. By effective, I’m not imposing an outside criterion; I mean ‘effective’ by the organisation’s own standards of what they are trying to do. Nothing takes more time than explaining to people that this great project with documentation and logic and funding and internal stakeholders has been a bust. One project I looked at had impact reports about all the uptake by external people who had been involved, but conversations with those actual people suggested that involvement and impacts had been minimal. Another project had a clear logic laid out about how people would move through stages from awareness to assessment to adoption, and there was no evidence in their own files that anyone had actually been progressed through the stages. And on and on.

The internal people really believe in their programmes. They believe in the mission and goals as well as the implementation. They are surrounded by other people filtering information to reinforce the idea that the programme works. Anything that hints at success is seized upon as evidence of the great things they are doing. Anything that suggests otherwise is explained away: the external party, the context, the timing, lots of things can explain failure without implicating the programme itself. Even data — such numbers from their own databases — are rejected as ‘not telling the full story’.

And that is what I read in the articles about Prism: people inside the programme convinced of the value of what they do, no different from everyone else. We’ve stopped 50 attacks! We’ve saved countless lives! It works!

That’s the value of an outside assessment, a cost-benefit or cost-effectiveness analysis or other approach. These watchmen are, after all, only human. Like most other humans, they believe in their own virtue and sincerity, and thus in the rightness of their actions.

Quis custodiet ipsos custodes? Economists, that’s who should do it.

Socially constructed profits

20/06/2013 § 2 Comments

Paul Krugman made a point on his blog yesterday that really struck me:

profits are no longer anything remotely resembling a “natural” aspect of the economy; they’re very much an artifact of antitrust policy or the lack thereof, intellectual property policy, etc.

This is something I’ve seen suggested or hinted at or mentioned in a round-about way, but Krugman made a bold, succinct statement of the issue. Profits — returns to capital — are whatever we decide they are through the legislative choices we make. Profits are socially and politically determined.

Some background: I still think the Cambridge capital controversy is an unsolved conundrum. It isn’t the simplification that bothers me — the aggregation of unlike things into the single lump of Capital. It’s a model of the economy; models simplify. No, I worry about the circularity, that the value of capital is determined by its rate of return, which is a function of the value of capital. Try programming that in Excel.

Also, JK Galbraith described an interesting dynamic in, um, The New Industrial State? Managerial capitalism was administered by managers in large corporations who were managing demand for end products and managing returns to factors of production — labour, management, and shareholders. The point was that the industrial state at the time was a partially-managed economy. Returns to the factors of production were not ‘natural’, but decided in C-suites and boardrooms.

I guess I’m putting Krugman’s observation in an historical context: some economists have been arguing for a while that profit is (at least somewhat) socially determined, rather than a function of scarcity and markets. It’s become really obvious in a case like Disney or Apple, which then explains some amount of rent-seeking in the form of political activity, rather than producing stuff consumers want.

Minor point: If I search the New Palgrave Dictionary of Economics for ‘cambridge capital controversy’, I get:

Your search for ““cambridge capital controversy”” over the entire article content within the 2008, 2009, 2010, 2011, 2012 and 2013 editions returned no results.

And yet, Wikipedia knows exactly what I’m talking about.

Wound up by dissatisfaction

19/06/2013 § 3 Comments

American author David Guterson gave a high school graduation address that stirred up emotions, at the time and later on line. Why? Apart from some of the actual content — about which more in a moment — Guterson broke the cardinal rule of graduation addresses. You are supposed to tell the kids that they are bright, shiny things off on a great adventure, special people with special destinies (our Board Chair insists on reciting Oh! The Places You’ll Go to our graduands). Guterson told them they were the same as everyone else, that their existential struggle was the stuff of human thought and literature since forever.

Two ideas from the speech are challenging for economics.

The first challenge is about the individual versus the collective:

Stop thinking about yourself every second of every day, which only produces boredom, dissatisfaction, fear, dread, anxiety, and hopelessness. Put yourself away and begin to find freedom.

Guterson points to the Enlightenment and its emphasis on the individual, and says that this emphasis has been misplaced. Instead, selflessness is the key to happiness.

This is a challenge to economics, which relies on methodological individualism. The behaviours and decisions of individuals form the basis for microeconomics; it is how economists make sense of the world.

There is an easy enough way to link the two ideas, of course. If individuals decide that their preference is to be selfless, then their individual decisions will reflect selflessness, and we can have other-regarding methodological individualism. But if individual preferences get tied up with others’ preferences, it becomes a lot harder to describe and analyse where the system is going.

Also, and perhaps more importantly, it becomes harder to talk about an individual-focused economics if people decide that we should think about ourselves as selfless. Despite the issues and mistakes with economics, it does help explain the social world. If economists are ruled out of the discussion because we have the wrong Enlightenment-derived individualistic focus, then we cease to be relevant. Like I said, it’s a challenge.

Issue number two: anxiety.

While each of us is relentlessly busy chasing after his or her personal hopes and dreams, our very sophisticated modern economy is busily exploiting the psychological and emotional vulnerabilities elicited by this state of affairs. It is an economy that motors along on your dissatisfaction, that steams ahead only if it can convince you that something is missing in your life.

I have an image of a wind-up economy powered by the rubber band of dissatisfaction. We wind ourselves up with anxiety, which then plays out in our actions and purchases. It’s a good question, and one that economists answer by assumption: what is all this running around for? Answer/assumption: because we do it, we must like to do it, so it produces satisfaction.

But, of course, that’s not really our personal experience, is it? Guterson said it one way: you are supposed to be unhappy in ways that service the economy. I think it was Joan Robinson who said it a different way: price is an index of desire, not satisfaction. We want something, so we are willing to pay for it, but that price doesn’t necessarily represent the satisfaction or happiness that the consumption produces. A third way is Freudian: Jacques Lacan developed a theory that the satisfaction of desire is, in fact, impossible; desire structures people’s thinking and emotions, their being.

Of course, this is incredibly dangerous territory. If prices don’t index satisfaction and consumption doesn’t produce happiness, then absolutely any intervention by well-meaning people is justified as ‘producing true happiness’. By turning our back on individualism — on the belief that people know what’s best for them — we are potentially turning toward the worst collective abuses.

Guterson’s speech is challenging. Read as a plea for greater self-awareness, it provides some nice advice for young adults not to get too wrapped up in the world, not too different from Ecclesiastes 1:2. Read another way, though, I’m a bit worried where he would take us.

Update: If you needed any proof that unhappiness/dissatisfaction/anxiety is fodder for marketing, look no further than the recent fashion spread from Vice: suicide as artful backdrop for clothes.

Reuse, recycle

18/06/2013 § Leave a comment

Yeah, I saw the news about the latest manufacturers’ lobby report (pdf). I wasn’t going to bother with it, but then I got an email and tweets and … must … comment…

I like Brennan McDonald’s assessment, explaining the report in terms of four biases of non-economists. Worth a read.

My reaction, well, there were two. First, let me send you to an earlier post about giving money to exporters. I do understand that a high exchange rate hurts exporters — ce sont mes oignons. The point that all the economists are making, though, is that there are two sides to this issue. Actually, there are a number of other sides to it. When we think of the producers, we should also bear in mind the consumers who benefit from high exchange rates (and the producers who benefits from cheaper input costs). When we think of a high exchange rate, we should remember that someone is buying the kiwi at that rate.

And every time a local council rejects rezoning land for housing, the forex rate ticks upward another notch because limited supply begets higher housing prices begets higher interest rates begets a higher exchange rate (so has it been written, so shall it happen unto us).

My other reaction was to head straight to the Growth and Innovation Framework (pdf). You remember that, don’t you? It was 2003, a few industrial policies ago, and it was only the latest in a line, but it’s the one whose name I can remember. This latest report laments that the government just doesn’t care about the manufacturing sector or exporters, and a history of neglect has led to this sad state of affairs.

Oh yeah?

New Zealand also needs to improve its export performance (p. 2)

[improved] Value added in hightech manufactures as a  share of total gross value added (p. 8)

Under global connectedness, we are supposed to look for ‘exports of high and medium-high technology goods’ (p. 9)

Under indicators about the economic conditions, we want to promote ‘macroeconomic stability’ (p. 9).

And on and on…

I wonder what the overseas market is for old wine in new bottles.

Imposing preferences, politico-religious edition

11/06/2013 § 3 Comments

I mentioned my Turkish colleague before. Today, he is sputtering about the new law restricting alcohol. Like many, he makes the link between the legal rules around alcohol sale and consumption, and the push for religious restrictions. This new law indicates that Turkey’s government is moving closer to the religious powers, rather than focusing on keeping the government secular.

I can’t vouch for this post on the law change, but I draw your attention to this statement:

Since alcohol abuse is not really an issue in Turkey (a government study found that 83 percent of adults never even touch a drink and only one percent have a drink every day), at its heart the new alcohol law is a political move.

That ‘government study’ link takes you to a news article with this information:

You may think Turkey has a serious alcohol problem, but according to the Turkish Statistical Institute’s Household Budget Surveys, only around 6 percent of Turkish households consume alcohol. These results are consistent with the Institute’s 2011 Family Structure Survey, which found that 83 percent of Turkish adults never use alcohol. Most of the rest are casual drinkers; less than 1 percent said they drank every day.

I haven’t gone looking for the household surveys, on the assumption that it’ll be too hard to find the right statistic, so I’m accepting this as true (or at least true-ish): alcohol consumption isn’t particularly high in Turkey. As a result, the social costs of alcohol — health, employment, and criminal externalities — wouldn’t be particularly high. And so, we in the West can look at this law change and recognise that it is motivated by religious preferences.

Why can’t we do the same for New Zealand?

I’ve generally stayed away from the alcohol debate on this blog, because it crosses over into my paid work a bit too much. Not that I have to say much — Eric Crampton has done a bang-up job of dealing with the issues in a theoretically consistent way. Once you start working through the various economic analyses and the associated social and medical literature, a few things become clear:

  • people drink booze because they like to, or because it makes things less bad. Either way, it makes them happier than the baseline
  • alcohol is a ‘problem’ for a minority of people and/or on occasion. A few people are dipsos; the average adult occasionally gets blotto. Making the problem out to be more than that is disingenuous
  • price is a stupid way to deal with the externalities. First, by definition addicts are insensitive to price. Secondly, the behavioural response of binge drinkers to increased prices is to cut out the moderate drinking sessions, not the harmful ones
  • the research that shows otherwise is flawed. Crampton’s done the heavy lifting, so go see his work, but I’ll back him up. Poor assumptions, begging the questions, faulty parameters — embarrassing, really.

Just because the alcohol activists in New Zealand aren’t banner-waving members of the CWTU doesn’t make their desire to impose their preferences on the rest of the population any better. We can see it clearly on the other side of the world. Let’s be clear about it at home, too.

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