How much would carbon policies hurt?

10/06/2014 § 3 Comments

We’ve been talking about carbon policies to address climate change for years — the Kyoto Protocol was agreed in 1997 — but carbon emissions keep increasing. The recent news about the West Antarctic Ice Sheet seems to confirm that climate change and sea level rise are coming, ready or not. Policies are not biting enough to change emissions enough to have an impact.

One thing holding us back is that we don’t want to pay for it. There are interesting discussions about the best way to pay for climate change policies. Do we reduce economic activity now by a little? Or, do we grow faster now and pay more later but out of a larger pot of money? How do we divide our efforts among prevention, mitigation, and adaptation? But these interesting discussions also serve to delay, limiting our ‘prevention’ options and de facto pushing us into adaptation. We will end up paying one way or another.

Also, emissions reductions are not necessarily that expensive, as a new study confirms and earlier research has shown. Car emissions are a good example. I have driven American cars made in the 1970s; they were horribly inefficient compared to modern cars. We have learned how to motor around using a lot less fuel per kilometre, and we are getting better all the time.

I often think about the economic impacts of carbon policy as turning back the clock to some earlier time when we were poorer. That’s not to say I’m taking the Roger Pielke view that energy and the economy have an immutable one-to-one linkage our only two options are either economic growth or ‘technological innovation in energy systems on a predictable schedule‘ — a view ably rejected by Paul Krugman. Less carbon, though, does mean less energy use, which does mean less energy-intensive production, which essentially means less stuff. It might mean prettier stuff, in a baroque/Japanese, let’s-make-it-exquisite sort of way. But, still, probably, not so many physical objects that have been transformed from raw materials into commodities.

So, what are we talking about? Even with more efficient cars, lighting, heating, hot water systems, etc., we might have to put up with less stuff. Can we place it in an era? Well, let me explain with US data, with the caveat that the New Zealand experience has been different. How about the 1980s? Or the 1970s? How awful was it, really, just to have one television set per household instead of three? Or, to have 50 square metres per person instead of 100?

On the other hand — and I think this is important when considering resistance to carbon policies — a lot of people aren’t much richer than they were 20, 30, or even 40 years ago. The recent focus on inequality keeps emphasising that growth has been better for some people than others:

income

There are two ways to look at this. The first is that moving to the same level of consumption as 1975-ish wouldn’t be that painful for a lot of people. They are already there. The consumption basket has changed, sure, but the overall level of consumption has barely moved.

The second way, the one that creates the resistance, is this: lots of people have gained only a little over the last 40 years. Would carbon policies ask them to give up what little they have gained? If so, that’s a big ask.

The question, therefore, isn’t just ‘how much would carbon policies hurt’. It is also, ‘who bears the brunt of the change?’

Why inequality? A reply

07/02/2014 § 4 Comments

Paul Walker asked a question recently — why are some of us focusing on inequality? That started a discussion on the Dismal Science feed at Sciblogs. Since I’ve been implicated by link, I figured I should say something.

Why inequality?

Well, first, other people are talking about inequality, but they are getting it wrong. One thing I’m trying to do is establish a sort of factual basis for the discussion. For example, people like to point to The Spirit Level as somehow the final word in the evils of inequality. So I’ve read the  book and pointed out its faults, which I think are serious enough that the book doesn’t prove its thesis. Or, alternatively, I’ve calculated that mobility of income quantile doesn’t tell you as much as you think it might. I’m doing this work 500 words at a time, so it takes a while.

Secondly, I’m interested in the economy as a human construction. We’ve designed it, and we can re-design it. Note that I’m not suggesting something like a New Socialist Man. I’m not advocating that we re-make people. But if as economists we believe that (a) incentives matter and (b) institutions matter, then changing incentives and institutions produces different results. So, I’m interested in exploring how we make changes to meet different goals.

Finally, I’m acting according to my preferences. I like fairness. I like symmetry and order. There’s something about equity that appeals to my sense of order. Now, perhaps you think the economy is fair, in the sense that people get what they deserve and actions lead to appropriate consequences.  Or, perhaps you think that life is not fair and that’s enough of an explanation. Me? I look around and see more than just the background cussedness of it all. I see people using power and privilege to maintain their own positions, and then saying that it’s just The Way Things Are. Or, more academically, that we shouldn’t turn away from the fraud that accompanied the global financial crisis, for example.

That’s why I’ve been writing about inequality. It’s just my tiny little effort to make the world a better place.

Again with Inequality

07/10/2013 Comments Off on Again with Inequality

I have already written about Inequality: A New Zealand Crisis, here on the introductory section and here in relation to evidence-based policies. Today, I’ll finish with it.

I still don’t buy the idea that inequality is bad for everyone (p. 13):

in less equal societies nearly everybody, not just the poor, is adversely affected.

The book cites The Spirit Level in support of these claims, but I’ve already addressed the weaknesses of that book. But then, the authors of Inequality don’t really believe this idea, either. Max Rashbrooke reviews the data on income equality and the divergence since the 1980s, and shows clearly how the top income decile has done well. Robert Wade explains how the divergence has been worst for the bottom 40%, best for the top 10%, and relatively neutral for the other 50% in the middle. Even amongst Maori, some have done better than others through the claims settlement process, according to Evan Te Ahu Poata-Smith.

They agree that some people do just fine out of inequality, thank you very much.

The book is good at making the case that inequality is more important than poverty. It runs through some of the standard arguments — that lack of options or access is necessarily comparative, that people need a minimum to participate fully in their society, that recognition of fundamental human rights requires greater equality. What convinced me more was that ‘poverty’ is othering, whereas ‘inequality’ recognises that we are all bound up in the process.

Several chapters are by economists: Robert Wade, Ganesh Nana, Paul Dalziel and Nigel Haworth. Wade does a good job of explaining the international context for New Zealand inequality and the zeitgeist that lies behind it. Nana wanders away from economics, which reduces the impact of his chapter. He calculates that the unemployed cost the country $27 billion in lost production. But his assumption relies on the idea that the unemployed would be averagely productive, even as the other chapters tell us about poor education and training. He forgets that better training would cost money, too. Dalziel (a former colleague of mine) focuses on what he knows well — education-employment linkages for school leavers — and provides some realistic ways to improve the situation.

Haworth has an interesting chapter. The central idea is one of path-dependence: New Zealand has become locked into a low-wage economy. Businesses are organised around low-skill, low-wage work, so workers don’t train or work more efficiently, and the process reinforces itself. Changing the situation requires pushing the whole country in a new direction, a la Singapore or Finland. Now, I’m not interested in living in either of those countries, but the idea of path-dependence is interesting.

The book could be better organised. For example, Dalziel provides a good framing statement but it is buried on pp. 187-188:

Inequality is entrenched in all five pillars of New Zealand’s welfare state — employment, income, housing, health and education.

Also, Jonathan Boston’s chapter is very good for setting up the whole notion of inequality — well, equality — but it’s several chapters in.

Another issue is focus. The book clearly starts with an intended focus on income inequality. Rashbrooke explains that income inequality is a key issue — income allows people to participate fully in society, and it is a clear outcome measure. Some chapters — like one on prisons and crimes — stray a bit too far from the central premise.

The book also doesn’t get its story straight. Gareth Morgan and Susan Guthrie tell us that

New Zealand superannuation delivers recipients a level of well-being that is exceptionally high by international standards.

But this statement comes soon after Mike O’Brien says:

This is not to argue that payments for superannuitants are too high: the evidence suggests that those living only on New Zealand superannuation (with no other income) are close to or below the poverty line.

So, the book is uneven. It covers the right material for people who are already concerned about inequality in New Zealand. I’m afraid, though, it isn’t well constructed enough to prod more people to do anything. It also doesn’t provide many recommendations, so it’s not clear what they should do and why.

Inequality: I’m not yet convinced

29/07/2013 § 4 Comments

I have started the book Inequality: A New Zealand Crisis. It’s slow going but want to start teasing out my reactions, so I’ll review it piecemeal. Today, we’ll look at Part One, the introduction. My apologies at the start — this is long and somewhat rambling.

The reason it is slow going is that I’m having to weigh up each sentence. I think there are logical flaws, so the book doesn’t carry me along. I’m sure some readers will enjoy the outrage and devour the book — I’m not one of them.

A major premise of the introduction is that we are all worse off when inequality increases. They rely on Wilkinson and Pickett’s The Spirit Level for this argument, even reproducing a figure from the book (see here for my take on that book).  But they know themselves that this isn’t true. On page 17, we are told

We are all worse off for having wide income gaps in New Zealand.

On page 16, by contrast, the argument is

in countries with large concentrations of income, the wealthy can use their power to argue for policies that further their interests rather than those of the economy as a whole.

When you put these two statements together, the argument is that the wealthy are working against their own interests by arguing for policies that favour their interests. Obviously, this is illogical.

I also think it’s a tactical mistake. People working to lessen inequality are trying to get other people on board, to make equality politically popular. They are doing this by saying that equality is in everyone’s benefit. But this is simply not true, and obscures the fight they have on their hands.

(There is a similar retrospective argument going on over slavery in the United States during this sesquicentennial of the Civil War. One side says that slaveowners could have been bought out and everyone would have been better off. The other side argues that this wouldn’t have been possible.)

A second issue is that equality/inequality is a muddled concept throughout the Introduction. It seems to stand in for ‘things we don’t like’ rather than having an independent definition. This was quite striking with the second personal profile in the book. It’s a profile of a family with mum, dad and four children. They moved from Auckland to Whanganui, then mum lost her job and things got tight. But ‘tight’ is a relative term. For example, the family can afford some after-school activities but not all of them. Is that deprivation or not? Most important, though, is the notion of choice:

But even though she’d almost certainly get work in Auckland, Kristine doesn’t regret the move to Whanganui. ‘Being down here enables us to do so many more things for the children. We get a far better lifestyle here, with far more time together as a family.’

So how is this inequality? This family is choosing non-monetary rewards over monetary rewards and dealing with the consequences of that choice. They know they have other options and choose not to exercise them.

Another issue is that the statistical basis for the arguments is not consistent. Sometimes, the talk is of personal income, which includes all the superannuitants. We are told, for example, that 30% of individuals have incomes less than $15,000. In the very next paragraph, we move to a discussion of household incomes, which look much less dire (decile 1, single person, no children: $16,600 or less). Further on, the discussion moves to disposable incomes (after tax) for single households, but figures for the top 1% of those earners are given as pre-tax amounts because of data constraints. In essence, the number of people at the low end is inflated, and the incomes at the high end are inflated. It would have been better to work harder at a consistent measure of income to present a fair picture of the situation.

This kind of ‘worst case’ picture doesn’t stop with the incomes figures. For example, we are told that

this country has a relatively small earnings advantage to those with degrees.

As it happens, I know a little about this topic. The footnote (ftnt 66!) to the statement correct notes that the OECD has measured returns to tertiary education. However, that includes not only degrees but also sub-degree qualifications. The composition of New Zealand tertiary education (comparatively more sub-degree qualifications than other OECD countries) drags down our average return.

This statement about a small earnings advantage also shows the incoherence of the whole introduction. In a relatively equal society, we should have low returns to increased education. The premium should cover the time spent out of the workforce but not much else. Just because someone didn’t get an education is no reason for them to be disadvantaged in the workplace.

If this strikes you as a silly argument, that’s because you are thinking about productivity and economic efficiency. Clearly, the book recognises that some inequality is okay (degree holders should make more money), but too much is not. What I want is a clear statement about where they think that line is, and how they propose to measure it.

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?

A little more on inequality

13/05/2012 § 2 Comments

Paul Krugman’s blog today has a bit on a new paper (pdf) on teen births in the US. He specifically relates it to the kind of research on inequality reported in The Spirit Level, which I disputed here. Krugman presents a key graph from the paper:

The problem is that this graph doesn’t support the thesis of The Spirit Level. Recall that Wilkinson and Pickett say that unequal more equal societies are better for everyone; that’s why we should all pull together to reduce inequality. This graph says nothing of the sort. Mothers with any college have the same rate of unmarried, teenage births, regardless of the underlying equality in their US state. For mothers with a high school diploma, the difference is small and probably not significant. It is only high-school dropout mothers — those with the least opportunities and the futures with the lowest expected incomes — who are really disadvantaged by inequality.

The message is that inequality is bad for those holding the short end of the stick. That’s a problem for Wilkinson and Pickett. If inequality hurts everybody, then it should be easy to get everyone involved in reducing it. It is in their own, selfish interest. If inequality is bad only for the worst-off, then it takes a leap of empathy for others to worry about them. That’s a harder ask.

New Zealand is different

08/03/2012 § 2 Comments

I started reading The Spirit Level yesterday. It’s gotten some exposure, so you probably already know the central theme: societies that are more equal are better for everyone.

I don’t want to comment on the main ideas until I’ve read more. Something Zizek noted (but I can’t re-find) is relevant, though. Critiquing Rawl’s egalitarian, veil-of-ignorance theory, he asked us to imagine the horror and resentment if our social status were entirely our own fault.

Reading the first few chapters, I was struck by how New Zealand is often at the edge of the data cloud or far from the regression line. Several key slides are available on The Equality Trust website (associated with the book). Here are a couple:

This graph shows the relationship between the level of national income per capita and average life expectancy. New Zealand, a rich country by world standards, is up in the top bit with the other rich countries. Compared with them, however, it does really well in life expectancy. We get more years for our earnings than many other countries.

This graph shows levels of trust in a country compared to the level of income inequality. New Zealand is far above the regression line, and has relatively high trust despite greater-than-average inequality.

It isn’t all rainbows and unicorns. For example, the measure for child well-being is abysmal, even after accounting for income inequality.
The main point, though, is simply this: something about New Zealand makes it different. Comparing it to Australia (location), Ireland (size), or Norway (fjords) without also saying, ‘but, the comparison is inexact’ does everyone a disservice.

Poverty comparison

13/12/2011 § 2 Comments

In this morning’s column in the Dominion Post, Phil O’Reilly tells us about income inequality [no link – can’t find one]. He tells us two things:

  • it isn’t the rich getting richer and the poor getting poorer, and
  • people are not stuck in poverty, because they can move to higher income groups.

I’m reasonably familiar with the US data on incomes, and less so with the NZ data. I did the usual poking around, and discovered that the two countries have quite different experiences.

Income growth: the US Center on Budget and Policy Priorities has some material on this. One key graph is this one:

As you can see, all the income groups have seen growth in after-tax income since 1979. It’s just that the bottom 20% has seen growth of only 18% over that time, less than one percent per year. So, the poor aren’t getting poorer, but neither are they benefiting from any broad-based prosperity.

In New Zealand, on the other hand, poverty appears to be reducing after spiking upward in the late 1980s and early 1990s. I can’t get the graphs out, but this MSD report [pdf, 12 pages] has the highlights.

Income mobility: over lifetimes, high mobility tends to moderate the inequality seen at any particular time. In the US, mobility is declining. A paper from the Boston Fed found:

Overall, the evidence indicates that over the 1969-to-2006 time span, family income mobility across the distribution decreased, families’ later-year incomes increasingly depended on their starting place, and the distribution of families’ lifetime incomes became less equal.

The good news is that NZ’s intergenerational mobility looks better:

The results show that only a small proportion of variance in income or SES was explained by the economic situation of people’s parents, indicating that other explanatory variables are more important.

So, things in NZ are more hopeful than in the US. Poverty generally trending downward, with higher intergenerational income mobility to overcome the lottery of birth. That’s not to say that I’d want to be poor in any country, just that things might be a bit better here.

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