There’s been a lot done about the deadweight loss of Christmas over the years (It really starts with Waldfogel in the 1993). We’ve all received those gives that, well, suck. You know what I’m talking about; the dancing/singing gorilla, the hideous sweater, any “executive” gift, etc. The economic argument is really simple, people would get more utility (happiness) out of the whole exercise if we gave cash and let them pick what they wanted for themselves. We could even go one step further and just do net transfers and save ourselves a lot of hassle.
Well, I got a phone call from somebody this year very apologetically saying they were sending a cheque for Christmas. This suited me just fine. I can buy whatever I want, and assuming I know myself better than they do, I can come closer to maximizing my utility. Combine this with the fact that they avoid the insanity of shopping at Christmas, and wins all around right?
If it is wins all round, and this person knows I’m a weird breed (an economist) why apologize? Why should we be embarrassed to send money as a gift? Might there be something important going on?
A gift is often an expression of how you feel about them and how well you know them. This works for somebody you know really well, but not for people you don’t know that well. This is also high risk. If you get it wrong, you reveal you don’t really know them that well. Not exactly the message you want to send.
Once upon a time, if you lived in a different city or had more free time than somebody else, gift giving would have made sense. You’d have access to different goods at different prices. Or you would have been able to devote more time to shopping than the person on the other end of the exchange. With internet shopping and research, this doesn’t hold up any more.
One of the things I’ve heard people saying about shopping for somebody (and I’ve done it myself) is you want to buy them something they wouldn’t normally get for themselves. There are two ways to interpret this. One, you’re asserting the person you’re buying for is a moron and you know better than they do what will make them happy. While this is certainly a possibility, the sentiment isn’t really a match for that ol’ Christmas spirit. While I generally think that humans aren’t the best at knowing what will lead to happiness, I’d at least like to think I have a better idea of what will make me happy than you do.
The other side of buying something for someone they wouldn’t normally get for themselves is one aspect of gift giving that does make a lot of sense, particularly for those with children or other responsibilities. Money given as a gift often (in my experience) gets spent on something boring and practical, paying down the mortgage, fixing the car, toilet paper, etc. By giving someone a gift that is purely about their own enjoyment (a day at the spa for example) is actually giving them permission to enjoy a pure luxury or to be a little bit selfish and not feel guilty about it. This can have value above and beyond the purchase price.
So instead of us exchanging gifts this next year, maybe we should just give each other permission to be selfish for a day without guilt. Just don’t ask me to wrap it.
Sunday, December 26, 2010
Thursday, December 23, 2010
The Fight Over Happiness
There’s some interesting debate concerning happiness going on out there. There have been a number of studies that show self-reported happiness hasn’t increased much when a country’s GDP grows (Easterlin’s work is key in this regard). Then we look at the chart above (reproduced from the Economist’s magazine’s daily charts and at Justin Wolfers’ work) we see a pretty clear relationship between GDP per capita and happiness. So what’s going on here? Why such conflicting results?
There are, of course, the usual arguments about econometric technique and data sources and the like. This, unfortunately, is standard with results that run counter to somebody’s religiously held opinion. But let's be a little less cynical.
There could be a prospect theory style reference point problem with the time series work. People continually reset their happiness based on the income or lifestyle they are used to. While gains are adjusted to very quickly, losses may have a much greater impact on reported happiness. Having running hot water once a week would have made somebody deliriously happy 100 years ago, but now we get grumpy if we have to cut our 20 minute soak under the shower head short. I’d like to see some of these happiness studies done right about now or a year ago in the US. I’m guessing you’ll see a fall in happiness compared to when things were going great. Having the benefits of economic growth may not make us report greater happiness over time, but not having them definitely makes us unhappy.
But there’s another possible problem with both approaches. It could be that most of the people talking about this issue have got the supposed causation backward. The hypothesis being tested is that more income (GDP per capita) makes people happier. If the causation runs this way we would expect an increase in income to increase happiness within a country over time and countries with higher incomes to have higher levels of happiness, hence no conflict about what the data is saying. But what if the causation actually runs the other way?
What if what we’re actually seeing in this data is the idea that people who are happier are more productive and can generate greater levels of output, all else being equal? This would explain why we see a relationship between levels of happiness and a relationship between growth and happiness over time without showing increased levels of happiness when an economy grows.
This is a definite possibility, but I still think economic opportunity (money) is central to happiness. If you disagree, I’d be happy to accept your money. It would make me happy just to help you out.
Tuesday, December 14, 2010
The Up Side of Food Prices
Taken from the Economist’s Daily Charts
Paying more for food might be good for Saskatchewan and Canada as a whole. The price of food is on the rise again. The obvious reason why this is likely to be good for the “great flatness” is a lot of wheat and other food crops are grown here. The higher the price of agricultural output, the better the Saskatchewan economy tends to do. It also helps the price of potash (a key input into many fertilizers), again the higher the price of potash the better things tend to go for the province. The price of potash also has a major impact on the health of the government finances as potash royalties make up a huge portion of government revenue.
While both these things clearly suggest that higher food prices are good for the GDP of Saskatchewan I’m thinking about something a little less obvious. More than 1 in 5 adults in Saskatchewan rate as obese on the BMI, and more than half of Canadians are overweight, with almost 1 in 4 self-reporting obese. (And this is self-reported!). Generally, speaking an increase in the price of something reduces the amount people buy.
Now before we get too excited, the demand price elasticity of food (the sensitivity of how much people buy to the changes in the price) is fairly small. For example the Agriculture and Agri-food Canada estimate of the price elasticity of eggs is -0.35, meaning a 1% increase in price decreases the amount people purchase by 0.35%. On the plus side there is an effect. Increases in the price of food reduce consumption. An increase in the price of food generally has the potential to reduce our consumption. Remember we aren’t talking about a developing country in which people are in danger of starving to death if they eat less. A reduction in calories in developed countries like Canada is likely to improve health.
A downside might be people making a quantity for quality trade off. If this happens we might actually see an increase in obesity in response to an increase in the price of food. I don’t think this is too likely to happen for most Canadians, as other forms of entertainment will likely be substituted. Also countries with exceptionally high food prices (Japan and France for example) have relatively low rates of obesity.
Rising food prices. That’s a good thing?
Thursday, December 9, 2010
I May Need To Change My Mind
I went to a presentation by the Office of the Parliamentary Budget Officer (PBO) yesterday. (The name needs a little work, but it was likely named by committee.) I went expecting to leave annoyed by their incompetence and political hackishness, but left pleasantly surprised. This subgroup of the PBO seems to know what they’re doing.
For those not subjected to this level of minutia, the PBO was started an attempt to create a non-partisan organization to generate predictions about the Canadian economy, the federal budget, and the likely cost of government programs. It was created by the current Tory government under Steven Harper, with the stated goal of improving the transparency.
Something really interesting came up during the discussion, that didn’t really have a lot to do with their main forecasting duties. Someone, probably looking to stir things up a bit, asked how they were being treated by Finance Canada. The short answer – they weren’t getting much help from that direction. The assumption on the part of most of the audience is that this lack of help was a result of a lack of enthusiasm on the part of the Harper government. This may or not be the case, but for now let’s assume it is and try and figure out why you’d create something like the PBO and then not help it achieve its stated goal.
A former student of mine is heavily involved with the NDP in the Maritimes. When they won the Nova Scotia election he was super excited and emailed me with his good news. I congratulated him, but also warned the governing is a lot harder than winning an election. He told me a while ago that, damn it, I was right. The point is new governments don’t really know what’s involved in governing and can’t until they’re in power. The PBO was formed early in the Conservative mandate, likely when the party leadership still believed in things. The subsequent lack of cooperation maybe part of the realization that some of the things they initially believed in may be incompatible with actually running the government.
The nature of the government in its current form can make governing even more of a challenge. Minority government often means resorting to a number of tricks and stunts that would otherwise be avoided. This is done by virtually every party around the world when they are in a minority government situation. Not having the parliamentary strength to over ride objections makes you less likely to support something that can create objections.
A third possibility is that there is a severe personality conflict between the budget officer and a politician and/or high ranking civil servant. Having met the current budget officer and watched how he engages with the media, I can definitely see this happening. The PBO has no place making policy recommendations, but should be providing analysis of recommendations being generated else where.
A cynical possibility is that the current government is just giving lip service to the idea. In this case they want to do as little as possible while being able to claim to improve transparency.
Of course the assumption that the lack of cooperation is coming from the sitting government ignores another possibility. Those who’ve tried to work with the civil service will likely have identified another possible origin of resistance. The civil servants in Finance may resist working with the PBO if they believe they are going to be subjected to extra PUBLIC scrutiny or suffer a loss of authority/power. This would be particularly true if those in Finance had nothing to gain by cooperating. A quick thought about the incentives of the situation make it pretty clear that full cooperation was unlikely.
Whatever the source of the lack of cooperation, the PBO is a good idea. I fan, but I’m starting to think there’s hope for this incarnation of it.
For those not subjected to this level of minutia, the PBO was started an attempt to create a non-partisan organization to generate predictions about the Canadian economy, the federal budget, and the likely cost of government programs. It was created by the current Tory government under Steven Harper, with the stated goal of improving the transparency.
Something really interesting came up during the discussion, that didn’t really have a lot to do with their main forecasting duties. Someone, probably looking to stir things up a bit, asked how they were being treated by Finance Canada. The short answer – they weren’t getting much help from that direction. The assumption on the part of most of the audience is that this lack of help was a result of a lack of enthusiasm on the part of the Harper government. This may or not be the case, but for now let’s assume it is and try and figure out why you’d create something like the PBO and then not help it achieve its stated goal.
A former student of mine is heavily involved with the NDP in the Maritimes. When they won the Nova Scotia election he was super excited and emailed me with his good news. I congratulated him, but also warned the governing is a lot harder than winning an election. He told me a while ago that, damn it, I was right. The point is new governments don’t really know what’s involved in governing and can’t until they’re in power. The PBO was formed early in the Conservative mandate, likely when the party leadership still believed in things. The subsequent lack of cooperation maybe part of the realization that some of the things they initially believed in may be incompatible with actually running the government.
The nature of the government in its current form can make governing even more of a challenge. Minority government often means resorting to a number of tricks and stunts that would otherwise be avoided. This is done by virtually every party around the world when they are in a minority government situation. Not having the parliamentary strength to over ride objections makes you less likely to support something that can create objections.
A third possibility is that there is a severe personality conflict between the budget officer and a politician and/or high ranking civil servant. Having met the current budget officer and watched how he engages with the media, I can definitely see this happening. The PBO has no place making policy recommendations, but should be providing analysis of recommendations being generated else where.
A cynical possibility is that the current government is just giving lip service to the idea. In this case they want to do as little as possible while being able to claim to improve transparency.
Of course the assumption that the lack of cooperation is coming from the sitting government ignores another possibility. Those who’ve tried to work with the civil service will likely have identified another possible origin of resistance. The civil servants in Finance may resist working with the PBO if they believe they are going to be subjected to extra PUBLIC scrutiny or suffer a loss of authority/power. This would be particularly true if those in Finance had nothing to gain by cooperating. A quick thought about the incentives of the situation make it pretty clear that full cooperation was unlikely.
Whatever the source of the lack of cooperation, the PBO is a good idea. I fan, but I’m starting to think there’s hope for this incarnation of it.
Wednesday, December 1, 2010
The Dubious Morality of Crown Corporations
I’ve always been concerned by arguments for doing something that involve morality. The argument if often made that if profits were going to be made by providing something, it is only moral that government should capture those profits. This of course got me thinking about the moral issues associated with crown corporations. There are at least a couple of big holes in using morality as an argument in support of crown corporations.
One of the key public goods that governments provide is a common set of rules and their enforcement. This includes the rules that govern how businesses operate. An unbiased set of rules and equitable enforcement are a central part of what makes effective states like Canada so wealthy. Thus it isn’t entirely unreasonable to think of government as a referee in sports. The system only works when we can trust the ref to be impartial.
Crown corporations are like the referees deciding they wanted to play, not ref. Another way of thinking about it would be if you’ve been at a game in which the referees were closely related to one of the players. Sometimes it works out OK, but a lot of the time it doesn’t. If we can’t trust the referee to be impartial, the system starts to break down. Crown corporations may thus be more damaging to the entire system than most of us realize. Were all investors treated fairly when GM become an American “crown corp.”? Nope, some were more equal than others.
Another consideration is the nature of business itself. Most businesses don’t workout and close. Many crown corps don’t work so well either. The difference is often the scale of the failure and who loses. When we’re talking about scale, governments don’t tend to think small and have access to an incredible amount of start up capital. In case there are some that don’t recall a crown corporation of size failing I’ve got a few examples. Bricklin Motors in New Brunswick was one example, yep that’s the same guy who was responsible for North American introduction of the Yugo. Spudco in Saskatchewan (a place generally known for pretty good government) provides another example. Of course many people tend to forget that FANNIE MAE and FREDDIE MAC (a big part problem of the boom and subsequent collapse of the American housing market) were the American version of crown corps.
Private businesses fail and so do crown corps. What’s the big deal? The big deal is where the money comes from. Private firms collect money from investors voluntarily, government collect money from citizens involuntarily. Nobody (well, there are some odd folk out there) pays taxes because they want to. People pay taxes because if they don’t the government will take their stuff and possibly throw them in jail. When I think a private firm is going to do something dumb, I can choose not to invest, in many cases I can even bet against the success of the firm. If my government decides to do something dumb, as a tax payer I’m on the hook and there isn’t much I can do about it. If we were talking about public goods, I wouldn’t be as bothered by this, but we’re talking about the provision of private goods here, things like cars, potatoes, and such.
The final point I’ll make is that government activity does tend to reduce private sector activity. Crowding has a long history in economics. There are two recent papers that provide important empirical data on the topic (Furceri and Sousa 2010 www.eeg.umminho.pt/economica/nipe and Cohen, Coval, and Malloy 2010 http://ssrn.com/abstract=1426106 ). Given that government spending crowds out private sector activity we might want to think really carefully about launching more crown corporations.
There are at least 3 reasons why crown corporations aren’t necessarily moral. I’m not even talking about the effectiveness of crowns. I’m talking just about the moral implications. When governments launch crown corporations they become referees choosing to play the game they’re supposed to supervise using money collected involuntarily to supplant other economic activity. Sounds morally dubious to me.
One of the key public goods that governments provide is a common set of rules and their enforcement. This includes the rules that govern how businesses operate. An unbiased set of rules and equitable enforcement are a central part of what makes effective states like Canada so wealthy. Thus it isn’t entirely unreasonable to think of government as a referee in sports. The system only works when we can trust the ref to be impartial.
Crown corporations are like the referees deciding they wanted to play, not ref. Another way of thinking about it would be if you’ve been at a game in which the referees were closely related to one of the players. Sometimes it works out OK, but a lot of the time it doesn’t. If we can’t trust the referee to be impartial, the system starts to break down. Crown corporations may thus be more damaging to the entire system than most of us realize. Were all investors treated fairly when GM become an American “crown corp.”? Nope, some were more equal than others.
Another consideration is the nature of business itself. Most businesses don’t workout and close. Many crown corps don’t work so well either. The difference is often the scale of the failure and who loses. When we’re talking about scale, governments don’t tend to think small and have access to an incredible amount of start up capital. In case there are some that don’t recall a crown corporation of size failing I’ve got a few examples. Bricklin Motors in New Brunswick was one example, yep that’s the same guy who was responsible for North American introduction of the Yugo. Spudco in Saskatchewan (a place generally known for pretty good government) provides another example. Of course many people tend to forget that FANNIE MAE and FREDDIE MAC (a big part problem of the boom and subsequent collapse of the American housing market) were the American version of crown corps.
Private businesses fail and so do crown corps. What’s the big deal? The big deal is where the money comes from. Private firms collect money from investors voluntarily, government collect money from citizens involuntarily. Nobody (well, there are some odd folk out there) pays taxes because they want to. People pay taxes because if they don’t the government will take their stuff and possibly throw them in jail. When I think a private firm is going to do something dumb, I can choose not to invest, in many cases I can even bet against the success of the firm. If my government decides to do something dumb, as a tax payer I’m on the hook and there isn’t much I can do about it. If we were talking about public goods, I wouldn’t be as bothered by this, but we’re talking about the provision of private goods here, things like cars, potatoes, and such.
The final point I’ll make is that government activity does tend to reduce private sector activity. Crowding has a long history in economics. There are two recent papers that provide important empirical data on the topic (Furceri and Sousa 2010 www.eeg.umminho.pt/economica/nipe and Cohen, Coval, and Malloy 2010 http://ssrn.com/abstract=1426106 ). Given that government spending crowds out private sector activity we might want to think really carefully about launching more crown corporations.
There are at least 3 reasons why crown corporations aren’t necessarily moral. I’m not even talking about the effectiveness of crowns. I’m talking just about the moral implications. When governments launch crown corporations they become referees choosing to play the game they’re supposed to supervise using money collected involuntarily to supplant other economic activity. Sounds morally dubious to me.
Wednesday, November 24, 2010
Spectator Sports, Pornography, and Why Society Works
While watching football on the weekend (GO RIDERS!)I found myself getting pretty intense, even though I was watching the game by myself. I haven’t actually felt like that since I quit playing competitive sports. Why am I so worked up? What’s going on? I started trying to come up with other things which elicit a physical reaction even though you aren’t even remotely involved and are unlikely to be involved any time soon. After a little thought and a smart ass comment by a student I realized pornography works pretty much the same way.
What makes these two things so interesting? The fact that we get wrapped up in watching them as if we were actually doing it ourselves. Some would say that this indicates a great flaw in our current society. We’re constantly indulging base pleasures and not doing important things.
I’d argue the exact opposite. The fact that we have a physical response to something we see other people doing says something pretty amazing about human beings. It says we have the ability to project ourselves into different situations and feel what other people feel - in short it says we have empathy. Think about it. We choose to empathize with a sports team and feel some of the highs and lows of competition. We watch physical intimacy between other people and feel aroused ourselves.
Empathy is what makes society possible. The fact that we can feel what someone else feels serves as a check on our greed and selfishness. Without empathy, we’d have to work a lot harder to get people to pay attention to those among us who need help. We’d also have to spend a lot more time and energy on controlling people’s behaviour to limit the damage we could do to each other. In fact, without empathy it’s unlikely that we would have been able to achieve anything like the standard of living we have now. Without empathy life truly would be “nasty, brutish, and short”.
Spectator sports and pornography are not base, low brow, or pathetic. They are examples of empathy in action. They are realizations of exactly what it is that makes us truly human – the ability to feel what others feel. It isn’t a football stadium or an adult theater, it’s a shrine to empathy.
What makes these two things so interesting? The fact that we get wrapped up in watching them as if we were actually doing it ourselves. Some would say that this indicates a great flaw in our current society. We’re constantly indulging base pleasures and not doing important things.
I’d argue the exact opposite. The fact that we have a physical response to something we see other people doing says something pretty amazing about human beings. It says we have the ability to project ourselves into different situations and feel what other people feel - in short it says we have empathy. Think about it. We choose to empathize with a sports team and feel some of the highs and lows of competition. We watch physical intimacy between other people and feel aroused ourselves.
Empathy is what makes society possible. The fact that we can feel what someone else feels serves as a check on our greed and selfishness. Without empathy, we’d have to work a lot harder to get people to pay attention to those among us who need help. We’d also have to spend a lot more time and energy on controlling people’s behaviour to limit the damage we could do to each other. In fact, without empathy it’s unlikely that we would have been able to achieve anything like the standard of living we have now. Without empathy life truly would be “nasty, brutish, and short”.
Spectator sports and pornography are not base, low brow, or pathetic. They are examples of empathy in action. They are realizations of exactly what it is that makes us truly human – the ability to feel what others feel. It isn’t a football stadium or an adult theater, it’s a shrine to empathy.
Tuesday, November 16, 2010
The Canadian Mint: Coining Extra Business
Recently the Canadian Mint has been producing what seems like an extraordinary number of “collectible” circulation coins. This summer it was the Saskatchewan Roughrider looney and more recently a Remembrance Day quarter and many, many others. It’s getting rarer and rarer to get a quarter with a caribou on it as change.
Of course this gets me thinking, why go through all the cost and effort of designing, producing, and advertising these coins? I suspect, but haven’t been able to track down, that the Mint is receiving money from Canadian Heritage or some other government department for such coins. But I think there might be something else a little more subtle going on here as well.
Let’s start by a little review of some basic monetary theory. The idea is the relationship between the monetary base and the money supply. According to basic theory the relationship is
Money Supply = ((1+Currency Drain)/(Reserve Ratio + Currency Drain)) times Money Base.
Currency drain is technically money that doesn’t get deposited in banks for whatever reason. For our purposes here, this means people are hanging on to it because it looks pretty. The reserve ratio is the ratio of deposits that commercial banks keep on hand in case you want to take some money out your account.
As people choose to hold onto more cash, the money supply shrinks. When the money supply shrinks, we tend to see really low inflation or even deflation. Given that the Bank of Canada has an inflation target of 2%. It has two ways to react to an increase in the amount of cash people want to hang on to. One way to respond is to reduce the overnight rate in an effort to get banks to reduce their reserve ratio. Another solution would be to increase the monetary base by printing or minting more money. Both of these will lead to an offsetting increase in money supply.
Let’s focus on the second option, as it actually relates to the Mint. By minting “collectible” coins, the Mint encourages (if not forces) the Bank of Canada to increase the monetary base. Of course when the monetary base is increased what is needed? More currency produced by the Mint. In short by producing successful “collectibles” the Mint creates more business for itself. Not a bad deal for them, eh?
Now give me back my lucky Riders looney.
Of course this gets me thinking, why go through all the cost and effort of designing, producing, and advertising these coins? I suspect, but haven’t been able to track down, that the Mint is receiving money from Canadian Heritage or some other government department for such coins. But I think there might be something else a little more subtle going on here as well.
Let’s start by a little review of some basic monetary theory. The idea is the relationship between the monetary base and the money supply. According to basic theory the relationship is
Money Supply = ((1+Currency Drain)/(Reserve Ratio + Currency Drain)) times Money Base.
Currency drain is technically money that doesn’t get deposited in banks for whatever reason. For our purposes here, this means people are hanging on to it because it looks pretty. The reserve ratio is the ratio of deposits that commercial banks keep on hand in case you want to take some money out your account.
As people choose to hold onto more cash, the money supply shrinks. When the money supply shrinks, we tend to see really low inflation or even deflation. Given that the Bank of Canada has an inflation target of 2%. It has two ways to react to an increase in the amount of cash people want to hang on to. One way to respond is to reduce the overnight rate in an effort to get banks to reduce their reserve ratio. Another solution would be to increase the monetary base by printing or minting more money. Both of these will lead to an offsetting increase in money supply.
Let’s focus on the second option, as it actually relates to the Mint. By minting “collectible” coins, the Mint encourages (if not forces) the Bank of Canada to increase the monetary base. Of course when the monetary base is increased what is needed? More currency produced by the Mint. In short by producing successful “collectibles” the Mint creates more business for itself. Not a bad deal for them, eh?
Now give me back my lucky Riders looney.
Wednesday, November 10, 2010
Purveyors of Unhappiness
It’s been election time south of the border again and that’s got me thinking about how parties go about trying to elected. I should be absolutely clear here – I don’t like political parties of any stripe. I have a hard time with any thing that encourages a group of people to stop thinking and just follow.
One of the things that I’ve noticed in Canada and the U.S. is the tone of the parties not in power. The tone has been the pretty similar, regardless of which group from whatever side of the political spectrum was in power or opposition. This got me to thinking. Is there something about how democracy works that creates some interesting incentives.
Let’s consider a basic voter who is going to making their voting decision based on who they believe will end up making them better off. Generally the party in power is going to try and convince people that things are pretty good and getting better – all pretty straight forward.
Things get really interesting when we start to look at the strategies available to the parties in opposition. One strategy would be acknowledging the achievements of the current government and then arguing that even more could be achieved under the party currently in opposition. Basically, this strategy amounts to saying things are pretty good but they could have been even better. Not very exciting.
The other possible strategy is not to acknowledge the successes of the incumbent and argue not just that things could have been better, but that things are currently bad. In order for political power to change hands a large number of voters have to be convinced that they are unhappy. Mad as hell and not going to take it any more (a la tea party) is best. What makes this really interesting is that we know that people respond more to potential loses than gains. This might be why the Republicans have managed to do so well this time around and the democrats before them.
So the nature of how parties in a democratic system compete for power may actually end up making people feel unhappy. Remember, the self proclaimed “happiest place on earth” (Disneyland) isn’t a democracy.
One of the things that I’ve noticed in Canada and the U.S. is the tone of the parties not in power. The tone has been the pretty similar, regardless of which group from whatever side of the political spectrum was in power or opposition. This got me to thinking. Is there something about how democracy works that creates some interesting incentives.
Let’s consider a basic voter who is going to making their voting decision based on who they believe will end up making them better off. Generally the party in power is going to try and convince people that things are pretty good and getting better – all pretty straight forward.
Things get really interesting when we start to look at the strategies available to the parties in opposition. One strategy would be acknowledging the achievements of the current government and then arguing that even more could be achieved under the party currently in opposition. Basically, this strategy amounts to saying things are pretty good but they could have been even better. Not very exciting.
The other possible strategy is not to acknowledge the successes of the incumbent and argue not just that things could have been better, but that things are currently bad. In order for political power to change hands a large number of voters have to be convinced that they are unhappy. Mad as hell and not going to take it any more (a la tea party) is best. What makes this really interesting is that we know that people respond more to potential loses than gains. This might be why the Republicans have managed to do so well this time around and the democrats before them.
So the nature of how parties in a democratic system compete for power may actually end up making people feel unhappy. Remember, the self proclaimed “happiest place on earth” (Disneyland) isn’t a democracy.
Wednesday, November 3, 2010
Celebrate Success!
I’m always amazed by how people respond to good news. The UN recently announced an update on its progress toward meeting the Millennium Development Goals (MDG’s). It certainly looks like good news to me. The number of people living in absolute poverty (less than $1.25 a day at PPP) has fallen from 46% in 1990 to 27% in 2005 on UN data. We’re seeing gains in almost all the things that we decided to measure as being important.
We may not meet all the MDG’s in the time horizon initially set out, but we’re gonna get pretty close. This is great news! The level of misery in the world has been dramatically reduced. There should be parties and news flashes and whatnot, but this has been pretty quiet.
There are at least a few reasons why we haven’t heard much about this.
The first place to start is to consider the nature of the media and what sells. Unfortunately good news doesn’t sell the same way as bad news does. Imagine how well a newspaper would sell if the banner headline read “Everything Great as Usual!”. Not going to make you stop and layout the $2 for a paper. Some good news stories do sell papers – the successful rescue of 33 Chilean miners after an incredible amount of time under ground is one obvious exception to the rule. But what would the photo be for less poverty in the world? Would such an abstract story sell papers or ad space? No sales = no headline.
Another reason for a lack of celebration actually caught me by surprise. When this news made its way through academic circles – it’s always a slow news day in academic circles – many people responded by dismissing the results. The main objection was that most of the improvement came from Brazil, India, and China and poverty is still a massive problem in Africa. While it is clearly true that there is still poverty in the world, this attitude isn’t entirely supported by evidence. Yes, some places in Africa haven’t made a lot of improvement, but others are among the highest performers. Gambia, Mali, Senegal, Ethiopia, the Central African Republic and Guinea all make the top 10 in reduction of poverty. Hans Rosling has a great ted talk on the same point. http://www.ted.com/talks/hans_rosling_the_good_news_of_the_decade.html
There may also be an issue about how progress was generally made. We haven’t seen a massive global revolution against capitalism, yet. The progress generally hasn’t been made by wealthy countries interventions or aid or anything of the sort. Most of the gains have been made by economic growth that coincides with increased globalization and trade. Globalization and trade are seen by many active campaigners for the fight against poverty as the enemy. For poverty to be reduced while the enemy succeeds is no success in their eyes, thus no celebration.
Whatever the reason, it is a shame we aren’t celebrating the things that are getting better in the world. There billions of reasons why we should have a celebration. One for every person no longer living in abject poverty.
We may not meet all the MDG’s in the time horizon initially set out, but we’re gonna get pretty close. This is great news! The level of misery in the world has been dramatically reduced. There should be parties and news flashes and whatnot, but this has been pretty quiet.
There are at least a few reasons why we haven’t heard much about this.
The first place to start is to consider the nature of the media and what sells. Unfortunately good news doesn’t sell the same way as bad news does. Imagine how well a newspaper would sell if the banner headline read “Everything Great as Usual!”. Not going to make you stop and layout the $2 for a paper. Some good news stories do sell papers – the successful rescue of 33 Chilean miners after an incredible amount of time under ground is one obvious exception to the rule. But what would the photo be for less poverty in the world? Would such an abstract story sell papers or ad space? No sales = no headline.
Another reason for a lack of celebration actually caught me by surprise. When this news made its way through academic circles – it’s always a slow news day in academic circles – many people responded by dismissing the results. The main objection was that most of the improvement came from Brazil, India, and China and poverty is still a massive problem in Africa. While it is clearly true that there is still poverty in the world, this attitude isn’t entirely supported by evidence. Yes, some places in Africa haven’t made a lot of improvement, but others are among the highest performers. Gambia, Mali, Senegal, Ethiopia, the Central African Republic and Guinea all make the top 10 in reduction of poverty. Hans Rosling has a great ted talk on the same point. http://www.ted.com/talks/hans_rosling_the_good_news_of_the_decade.html
There may also be an issue about how progress was generally made. We haven’t seen a massive global revolution against capitalism, yet. The progress generally hasn’t been made by wealthy countries interventions or aid or anything of the sort. Most of the gains have been made by economic growth that coincides with increased globalization and trade. Globalization and trade are seen by many active campaigners for the fight against poverty as the enemy. For poverty to be reduced while the enemy succeeds is no success in their eyes, thus no celebration.
Whatever the reason, it is a shame we aren’t celebrating the things that are getting better in the world. There billions of reasons why we should have a celebration. One for every person no longer living in abject poverty.
Saturday, October 30, 2010
Cause or Effect?
I was recently at a conference in Cape Breton, NS. “Continental” breakfast was included with the room, so at about 8:00 AM local time I went down to get something to eat. I grabbed a copy of the Halifax Chronicle Herald to read while I swilled a cup of coffee. For those not in the know, the Chronicle Herald claims to be, and is often recognized as, the regional paper of the Maritimes.
I turned to the business section to see if I could track a couple of different developments, particularly with BHP’s bid for Potash Corp of Sask. When I found the business section I just about fell out of my chair. The entire business section was 4 pages - 2 pages front and back. One of those pages was stock listings!
This got me thinking. A regional population of around 2 million people, and yet there are only 4 pages in the business section of the regional paper? What’s going on?
As usual, two different explanations came to mind. Sorry, I am an economist, after all. They can be split between cause and effect. On the effect side, as I’m sure most people reading this blog know, the Maritimes doesn’t have a lot of business to report on. Most is concentrated into a small number of big firms, and the activities of these firms tend to make the front page, not the business section. So the tiny business section is an effect of the overall business climate.
The other possibility is that the attitude of the press and population (I’m assuming the press at some level has a positive correlation with the feelings of the populace) makes for an unhealthy business environment. So a minuscule business section corresponds with a weak business sector.
I’m not sure which is true, likely both. It’s definitely something to think about
I turned to the business section to see if I could track a couple of different developments, particularly with BHP’s bid for Potash Corp of Sask. When I found the business section I just about fell out of my chair. The entire business section was 4 pages - 2 pages front and back. One of those pages was stock listings!
This got me thinking. A regional population of around 2 million people, and yet there are only 4 pages in the business section of the regional paper? What’s going on?
As usual, two different explanations came to mind. Sorry, I am an economist, after all. They can be split between cause and effect. On the effect side, as I’m sure most people reading this blog know, the Maritimes doesn’t have a lot of business to report on. Most is concentrated into a small number of big firms, and the activities of these firms tend to make the front page, not the business section. So the tiny business section is an effect of the overall business climate.
The other possibility is that the attitude of the press and population (I’m assuming the press at some level has a positive correlation with the feelings of the populace) makes for an unhealthy business environment. So a minuscule business section corresponds with a weak business sector.
I’m not sure which is true, likely both. It’s definitely something to think about
Tuesday, October 26, 2010
Rethinking Redistribution
One of the oft cited purposes of progressive income tax systems, like the Canadian tax system, is to redistribute wealth. Assuming the wealth person doesn’t enjoy giving up their money generally means making value judgements about the relative importance of different people’s happiness. The judgement implicit in the re-distribution is that the wealthy person matters less to us than the poor person. They are made less happy than they were and the poor person is made happier than they were. At this level we can only call this an improvement by saying the happiness of the poor person is more important to us. If the wealthy person received sufficient wellbeing from equality to make this worth their while, wouldn’t they have made the transfer voluntarily?
Personally, I find making these sorts of judgement uncomfortable. What, short of a divine right, would qualify a person for making those kinds of judgements? What is the basis for deciding between people? Doesn’t this on some level dehumanize those paying taxes and somehow “uberhumanize” those receiving government payments? Isn’t such dehumanization the basis for all kinds of evil behaviours?
One response to this line of questioning that is often presented in economics is an appeal to diminishing marginal utility of income. The argument is that the extra happiness generated by another dollar of income falls as a person has more money. Therefore, if we take a dollar away from a person with high income, the loss in happiness is likely to be small. If we give that same dollar to someone with a low income, the happiness gained is likely to be large (or at least larger). The result is an increase in net happiness as the gains exceed the losses. While this ignores all the problems with trying to compare utility between individuals at least it is has the virtue of treating the two human beings involved as equally important.
As far as this goes, it isn’t a bad argument. A fly appears in the ointment when we start to think carefully about how people respond to gains and losses, however. Way back in 1979 two psychology researchers (Kahneman and Tversky) noticed that people reacted differently to hypothetical gains and hypothetical losses, a difference that has been replicated in a variety of economic experiments using real incentives. I’ve seen a difference in my own research. Most estimates estimate the relative cost of a loss to be twice the benefit of a gain. The sensitivity of a subject to a loss of $5 is the same as the sensitivity to a gain of $10.
This puts a slightly different spin on income redistribution. Taking one dollar from someone and giving it to an identical person can actually reduce the simple sum of welfare. In order for redistribution to be welfare improving on the basis of a simple sum of utilities, the marginal benefit of an extra dollar of a tax payer must be less than half the marginal benefit of an extra dollar of someone receiving transfers. While this might be the case, it isn’t a certainty.
We might want to rethink income redistribution – it might actually be welfare reducing
Personally, I find making these sorts of judgement uncomfortable. What, short of a divine right, would qualify a person for making those kinds of judgements? What is the basis for deciding between people? Doesn’t this on some level dehumanize those paying taxes and somehow “uberhumanize” those receiving government payments? Isn’t such dehumanization the basis for all kinds of evil behaviours?
One response to this line of questioning that is often presented in economics is an appeal to diminishing marginal utility of income. The argument is that the extra happiness generated by another dollar of income falls as a person has more money. Therefore, if we take a dollar away from a person with high income, the loss in happiness is likely to be small. If we give that same dollar to someone with a low income, the happiness gained is likely to be large (or at least larger). The result is an increase in net happiness as the gains exceed the losses. While this ignores all the problems with trying to compare utility between individuals at least it is has the virtue of treating the two human beings involved as equally important.
As far as this goes, it isn’t a bad argument. A fly appears in the ointment when we start to think carefully about how people respond to gains and losses, however. Way back in 1979 two psychology researchers (Kahneman and Tversky) noticed that people reacted differently to hypothetical gains and hypothetical losses, a difference that has been replicated in a variety of economic experiments using real incentives. I’ve seen a difference in my own research. Most estimates estimate the relative cost of a loss to be twice the benefit of a gain. The sensitivity of a subject to a loss of $5 is the same as the sensitivity to a gain of $10.
This puts a slightly different spin on income redistribution. Taking one dollar from someone and giving it to an identical person can actually reduce the simple sum of welfare. In order for redistribution to be welfare improving on the basis of a simple sum of utilities, the marginal benefit of an extra dollar of a tax payer must be less than half the marginal benefit of an extra dollar of someone receiving transfers. While this might be the case, it isn’t a certainty.
We might want to rethink income redistribution – it might actually be welfare reducing
Friday, October 15, 2010
The Fallacy of Relative Poverty
I’ve been spending a lot of time thinking about relative poverty lately. It’s really come to the fore as people continue to want to talk about poverty in Canada. The amazing thing about Canada is that there is virtually no poverty as measured by the UN, that is people living on less than $1.25 (US) a day. About 80% of the world population lives on less than $10 a day (www.globalissues.org). Even those receiving the absolute minimum level of state support in Canada receive more. Nobody in Canada starves to death, in fact one of the biggest health issues associated with poverty in Canada is obesity.
So why is there so much concern about relative poverty? An incredibly cynical view is that there are a remarkably large number of people who benefit from “helping” the poor. There are social workers paid quite healthy incomes to help those receiving social assistance live on 20% of what a social worker earns. One quote I’ve come across and can’t source (sorry folks I tried) is a social worker is someone paid $60,000 a year to tell someone how to live on $12,000 a year. The cynicism arises when we consider that if we stopped believing that the person receiving $12,000 a year needed extra help, that person would be out of a job that pays much better than average. While this likely plays a role in the ongoing debates about relative poverty, I’d like to think it isn’t the main conscious factor.
The general objection to relative poverty is that it is somehow unfair that some people have a lot more than others. Why is it unfair? Why do we care that somebody else has more, or less, than we do? Is it reasonable to care?
In reality I suspect concern over the relative income or wealth of people dates back to the class warfare of Marx and others of that line. But I think it might be useful to take another look at why a reasonable person might care. There are only two reasons I can think of to care how much somebody else (assuming I and they have met the basic needs of life) has.
The first is simple and ugly – envy. Envy is not new; it’s arguably been with humanity since the beginning. It is not a virtue, it’s a vice. Mosst religions prohibit envy, yet some in Canada seem to be making a positive fetish of it. If I’m earning enough to live comfortably and enjoy some reasonable luxuries how does it harm me if you can have more luxuries? I currently make a decent living, but there are people around who get paid a lot more. Does that mean I should enjoy my Friday afternoon beers with my colleagues less, just because we’re having beer & nachos instead of champagne & caviar? Are we all really that petty? Maybe we are, if so, shouldn’t we be trying to reduce our pettiness?
The other reason why people might be concerned with relative poverty is a mistaken belief that we are playing a zero sum game. People think that someone else being rich automatically means that someone must be poor. That is simply false. There is not a fixed sum of wealth available to a population, we can and do create wealth all the time. In fact the absolute number of “rich” people is and has been growing for years. People move from incredibly poor to just poor all the time. Some even go from incredibly poor to incredibly rich (though that is admittedly rare). Some one becoming rich due to a new invention or becoming a rock star doesn’t knock somebody else out of the rich group. My being rich doesn’t mean you can’t be. In fact it often means the opposite.
I know what some of you are thinking – I claim to be an economist, how can I be claiming scarcity isn’t real? The simple answer is that I’m not. We’ve seen over the last 20 or 30 years that increasing trade allows increased specialization, productivity and wealth for all those involved. We aren’t yet anywhere near the amount of trade we could be engaged in. The fact that people in Canada trade raw materials to China in exchange for manufactured goods doesn’t mean that people in Africa have less of either to consume.
I’ll end with a simple thought experiment. Imagine a group of aliens lands in a sparsely inhabited area, let’s say Canada. These aliens somehow manage to raise the incomes of everyone in the country to more than twice what it was before and leaving everyone else in the world with the same real income they had. Do we really believe the world is a worse place as a result? Relative poverty has increased.
So why is there so much concern about relative poverty? An incredibly cynical view is that there are a remarkably large number of people who benefit from “helping” the poor. There are social workers paid quite healthy incomes to help those receiving social assistance live on 20% of what a social worker earns. One quote I’ve come across and can’t source (sorry folks I tried) is a social worker is someone paid $60,000 a year to tell someone how to live on $12,000 a year. The cynicism arises when we consider that if we stopped believing that the person receiving $12,000 a year needed extra help, that person would be out of a job that pays much better than average. While this likely plays a role in the ongoing debates about relative poverty, I’d like to think it isn’t the main conscious factor.
The general objection to relative poverty is that it is somehow unfair that some people have a lot more than others. Why is it unfair? Why do we care that somebody else has more, or less, than we do? Is it reasonable to care?
In reality I suspect concern over the relative income or wealth of people dates back to the class warfare of Marx and others of that line. But I think it might be useful to take another look at why a reasonable person might care. There are only two reasons I can think of to care how much somebody else (assuming I and they have met the basic needs of life) has.
The first is simple and ugly – envy. Envy is not new; it’s arguably been with humanity since the beginning. It is not a virtue, it’s a vice. Mosst religions prohibit envy, yet some in Canada seem to be making a positive fetish of it. If I’m earning enough to live comfortably and enjoy some reasonable luxuries how does it harm me if you can have more luxuries? I currently make a decent living, but there are people around who get paid a lot more. Does that mean I should enjoy my Friday afternoon beers with my colleagues less, just because we’re having beer & nachos instead of champagne & caviar? Are we all really that petty? Maybe we are, if so, shouldn’t we be trying to reduce our pettiness?
The other reason why people might be concerned with relative poverty is a mistaken belief that we are playing a zero sum game. People think that someone else being rich automatically means that someone must be poor. That is simply false. There is not a fixed sum of wealth available to a population, we can and do create wealth all the time. In fact the absolute number of “rich” people is and has been growing for years. People move from incredibly poor to just poor all the time. Some even go from incredibly poor to incredibly rich (though that is admittedly rare). Some one becoming rich due to a new invention or becoming a rock star doesn’t knock somebody else out of the rich group. My being rich doesn’t mean you can’t be. In fact it often means the opposite.
I know what some of you are thinking – I claim to be an economist, how can I be claiming scarcity isn’t real? The simple answer is that I’m not. We’ve seen over the last 20 or 30 years that increasing trade allows increased specialization, productivity and wealth for all those involved. We aren’t yet anywhere near the amount of trade we could be engaged in. The fact that people in Canada trade raw materials to China in exchange for manufactured goods doesn’t mean that people in Africa have less of either to consume.
I’ll end with a simple thought experiment. Imagine a group of aliens lands in a sparsely inhabited area, let’s say Canada. These aliens somehow manage to raise the incomes of everyone in the country to more than twice what it was before and leaving everyone else in the world with the same real income they had. Do we really believe the world is a worse place as a result? Relative poverty has increased.
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