Another year is pretty much over, and a new one on the way. I might try a review of 2006 early in the New Year, but for the moment I’ll just give my best wishes to all my readers and commenters for 2007.
One of the points on which economists generally agree on is that sensitivity analysis is a good thing. Broadly speaking, this means varying the (putatively) crucial parameters of a model and seeing what happens. If the results change a lot, the parameter justifies a closer look.
In the case of the Stern Review of the economics of global warming, sensitivity analysis quickly revelas that the crucial parameter is the pure rate of time preference. This is the extent to which we choose to discount future costs and benefits simply because they are in the future and (if they are far enough in the future) happening to different people and not ourselves. If like Stern, you choose a value near zero (just enough to account for the possibility that there will be no one around in the future, or at least no one in a position to care about our current choices on global warming), you reach the conclusion that immediate action to fix global warming is justified. If, like most of Stern’s critics you choose a rate of pure time preference like 3 per cent, implying that the welfare of people 90 years (roughly three generations) in the future counts for about one-sixteenth as much as the welfare of people alive today, you conclude that we should leave the problem to future generations.
So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.
Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.
The idea that winning wars is a matter of willpower (what Matt Yglesias calls the Green Lantern theory of geopolitics) has been getting more and more attention as the situation in Iraq deteriorates.
At one level, the triumph of will theory is immune to meaningful empirical refutation. Whenever a nation loses a war, it can be argued that, with more willpower it would have prevailed. The one exception is where the nation is utterly destroyed, in which case, there will be no one interested in observing the failure of will.
There is, however, a specifically American version, which can be given some kind of empirical support. Until Vietnam, the United States had, at least according to the official accounts, never lost a war. The willpower theory holds that this loss was due to domestic weakness rather than defeat on the battlefield, and that subsequent failures of US forces in Lebanon, Somalia and elsewhere represent “Vietnam syndrome”.
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I just ate my first banana since cyclone Larry. My intertemporal elasticity of substitution for bananas is too high (at least for time periods of a year) to justify buying them at $12/kg, but the sight of some lovely bananas at $8/kg was too much temptation for me.
This reminds of the story about Evelyn Waugh told (IIRC) by his son Auberon. Bananas had been unobtainable in England during the War, and Auberon and his two siblings had grown up hearing about this marvellous fruit. The first shipment after the War arrived and the government of the day (the only seriously socialist government in British history) decreed that every child in the country should have one. Waugh senior claimed his family’s allocation of three, cashed in the family ration of sugar and cream and ate the lot in front of his children.
Following the publication of this piece in the NY Times, I’ve had a string of email exchanges with Hal Varian, cc:ing Brad DeLong in the role of interested onlooker. I was surprised by the NY Times article since it included both a correct statement of the way in which Stern treats discounting and income redistribution (roughly speaking a 1 per cent change in income has the same value whenever it is incurred and whoever receives it) with a lot of statements that were either misleading or downright wrong, implying that the near-zero rate of pure time preference in the Stern Review implied a near-zero discount rate for cash flows.
Since Varian is one of the brightest and most technically careful people in the economics profession, I was unsurprised by the correct statement, but very surprised to see errors I’d already refuted when put forward by Arnold Kling, Bjorn Lomborg, Megan McArdle and others. Email revealed that the main problems arose from editorial attempts to ‘simplify’ things for readers, but we still have a lot of disagreements about the justifiability or otherwise of inherent discounting.
In any case, all this has spurred me on to produce my long-promised review of Stern on discounting, at least in draft form. Read, enjoy and criticise.
It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.free p s i love you
I’ll be taking things more slowly over summer. With luck this will translate into occasional reflective essays. More regular posting will resume sometime in the New Year.
Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.
My draft review of Karen Cerulo
“Never Saw It Coming: Cultural Challenges to Envisioning the Worst” (Karen A. Cerulo)
is over the fold. Comments much appreciated
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It appears that neither criminal charges nor any kind of misconduct proceedings will arise from the death of an innocent man, Mulrunji, from injuries received in custody at Palm Island. What’s even worse, is that the Director of Public Prosecutions chose, not merely to state that there was insufficient evidence to proceed to trial, but to make a positive finding of accidental death, contrary to the findings of the Coroner on the same evidence. The Courier-Mail reported the decision as “overturning the findings of a two-year coronial inquest”.
As far as I can tell, the DPP has no power to do anything of the kind. Certainly, I can’t recall anything like this announcement in the past. Maybe someone with more legal background can clarify this. But even if the DPP hasn’t exceeded her powers, the statement was ill-advised and inflammatory.
As Noel Pearson points out, this isn’t the first dubious decision made by Leanne Clare, and something of a pattern seems to be emerging. If you’re on the outer with the establishment (Pauline Hanson, Di Fingleton) dubious charges will be pursued to the limit. But if you’re on the inside, things are very different. The government and the Police Force have mishandled this case from day one, and it’s unsurprising the the victim’s family feel that they have been railroaded.
And I agree with Federal Minister Mal Brough. We need a public inquiry into the whole tragic business, including the government’s handling of it.
An interesting piece by Tim Colebatch about new data on weddings showing that only 40 per cent of weddings are now religious ceremonies. This, rather than answers to Census questions, is probably a good representation of the level of religious belief in Australia. Apart from cases where the parties have strongly conflicting religious beliefs, and choose a civil ceremony as a compromise, it’s hard to imagine a serious religious believer not wanting a religious ceremony for marriage. On the other hand, I doubt that many convinced non-believers these days would go for a church rather than a civil ceremony, given the range of options on offer.
Another interesting feature of the article is the assumption (probably accurate) that this trend is entirely driven by brides – the word “groom” doesn’t even appear.
It turns out that Tim Blair’s post, linked below, is based on this piece by Alex Robson (a former colleague of mine and also briefly a blogger), who argues from claimed prediction errors by “leftist economists” (he’s kind enough not to mention me by name) that we shouldn’t trust climate science. His crucial point is that whereas we predicted that the 1996 budget cuts would cause increased unemployment
Howard did indeed reduce overall spending in real terms in the two years following the 1996 election, and he cut the size of the commonwealth public service in each year between 1996 and 2000. But following Howard’s “savage” budget cuts, the unemployment rate did not rise; it fell, from 8 per cent in 1996 to 6 per cent in 2000.
Unfortunately, Alex is being a little economical with the information he reports here. As can be seen below (courtesy of Economagic, unemployment did in fact rise following the 1996 budget cuts. It wasn’t as bad as it might have been (and was in New Zealand where monetary policy was messed up as well), but the facts are clear: contra Robson, unemployment did not fall, it rose.
The unemployment rate didn’t clearly resume its earlier decline until the shift to an expansionary fiscal and monetary policy during the Howard government’s second term.
Another piece of misdirection is the reference to cuts in the Commonwealth public service, largely driven by contracting out. This is a red herring, apparently designed to distract attention from the more relevant variable, public expenditure.
Tim Blair quotes a statement I and others wrote in 1996, criticising expenditure cuts, and saying in part
More attention needs to be given to the role of government expenditure on repairing the nation’s rundown infrastructure, creating jobs and fostering industry and regional development. If necessary, increased taxation and other revenue options should be under consideration. Savage expenditure cuts are economically irresponsible and socially damaging.
As Blair points out^, this is an argument that has now been pretty generally accepted. Most of the cuts we were criticising have been reversed (not without doing damage along the way). Infrastructure spending is now a high priority for governments. Without getting into sterile arguments about whether or not the current Federal government is the highest taxing in Australian history, it’s clear that the idea of radical cuts in public expenditure and taxation, which Blair has long advocated, is politically defunct in Australia.
The case was well stated by one of our political leaders in 2004, when he observed
There is a desire on the part of the community for an investment in infrastructure and human resources and I think there has been a shift in attitude in the community on this, even among the most ardent economic rationalists.
He could just about have been quoting our words from 1996.
As I noted at the time
A new bipartisan consensus has emerged, in favor of the social-democratic policies that have, until recently, been derisively described as ‘tax and spend’.
The only surprise is that it has taken Blair so long to wake up to the fact that he’s on the losing side of this debate.
^ With yet another kind reference to my success in winning a Federation Fellowship.
Kayoz points to this story about how Howard blocked emissions trading three years ago. This makes interesting reading in the light of the recently-announced Task Force on Emissions Trading, consisting entirely of public-servants and representatives of carbon-intensive industries. As one might expect, farmers, and others who want action are Not Happy.
Pinochet is dead, and it looks certain that Fidel Castro will soon follow him to the grave. I don’t have the same visceral loathing of Castro that I feel for Pinochet, whose brutal coup in 1973 was one of the big political events that formed my view of the world, along with Brezhnev’s invasion of Czechoslovakia five years earlier.
Viewed objectively, though, the similarities between the two outweigh the differences. Any good they have done (education in Cuba, economic growth in Chile) is less substantial than claimed by their admirers, and in any case outweighed by the central fact that, to impose the policies they thought were good, they were willing to jail, torture and kill those who got in their way. And Pinochet’s gross personal corruption is matched by Fidel’s conversion of his dictatorship into a family business, to be inherited by his brother.
Moreover, Pinochet and Castro were two sides of the same political coin. Pinochet justified his destruction of Chilean democracy by the fear that Allende would turn into a new Castro. Castro used Pinochet’s coup (among many other US-backed attacks on Cuba and other Latin American countries) as a justification for repressing domestic dissenters. The world will be a better place when both are gone and, hopefully, democracy comes to Cuba.
Update Predictably, Andew Bolt defends Pinochet. It’s important to observe that Bolt is even-handed in these matters. He would be just as eager to excuse Castro’s crimes if Fidel happened to change sides (hat tip: Tim Dunlop)
It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.
Murderous dictator Augusto Pinochet is dead at 91. While he escaped a formal trial and conviction for his crimes, the last decade of his life was spent under the continuous threat of prosecution, and he died under house arrest.
Multiethnic Australia by Celeste Lipow McLeod. It’s aimed at a US audience, and gives a potted history of Australia since European settlement, from a pro-multiculturalist point of view. More here. Written after the Cronulla riots, the book maintains an optimistic viewpoint, which I think is broadly consistent with our history in the long run.
It’s worth remembering in this context that until quite recently, resentment about immigration and multiculturalism was directed mainly against East Asians. This was true both of Pauline Hanson and of the previous big backlash in the 1980s led by among others, Katherine Betts, Geoffrey Blainey and John Howard. In the decade since Hanson’s famous maiden speech, this kind of prejudice has ebbed dramatically, even as the number of Australians of East Asian background has increased rapidly. And the still older prejudices against Southern Europeans have disappeared almost entirely, along with most of the feelings of resentment and exclusion that were once very strong among these groups.
It may be a while before we overcome our current problems, but I’m confident we’ll do so in the end.
Club Troppo has a great new feature (actually, a revival of an old one from Ken’s days at the Parish Pump). Called the Missing Link, it’s an intelligent ‘best of Ozplogistan’ selection each Monday, Wednesday and Friday. Here’s a recent example
Once my slow-motion site redesign is finished, I’ll add a link to an RSS feed, but you can probably pick this up over at Troppo.
Brad DeLong carries on the discussion about discounting and the Stern Review, responding to a critique by Partha Dasgupta that has already been the subject of heated discussion. As Brad says, all Dasgupta’s assumptions are reasonable, and his formal analysis is correct
But … The problem I see lies in a perfect storm of interactions:
This brings me to one of my favorite subjects: the equity premium puzzle and its implications, in this case for the Stern Review. I’ll try and explain in some detail over the page, but for those who prefer it, I’ll self-apply the DD condenser and report
Shorter JQ: It’s OK to use the real bond rate for discounting while maintaining high sensitivity to risk and inequality.
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My piece in Thursday’s Fin was about claims that the family farm is doomed. This is one of these notions that seems impossible to kill, having been around for decades, it looks as if it will outlast me. It seems to appeal to just about everybody. Sometimes its pushed by farmers who want more government aid. At the moment though, it’s mainly being run by economic rationalists who want to sweep away these small and allegedly inefficient operations.
Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.
I’ve attached a copy of a petition I’ve signed opposing the imposition of the death penalty on Scott Rush and others of the “Bali Nine”. Apart from general issues concerning the death penalty, I agree with the petition’s view that the actions of the Australian Federal Police in this matter have been deplorable. Although the primary offence being committed was against Australia, and the AFP was in a position to arrest Rush and others on their arrival in Australia, they chose to hand them over to the Indonesian police instead. As noted in Rush’s case, the police ignored an approach from his parents to prevent his committing the crimes.
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In yet another round of the controversy over discounting in the Stern Report, Megan McArdle refers to Stern’s use of “a zero or very-near-zero discount rate”. Similarly Bjorn Lomborg refers to the discount rate as “extremely low” and Arnold Kling complains says that it’s a below-market rate.
So what is the discount rate we are talking about? Stern doesn’t pick a fixed rate but rather picks parameters that determine the discount rate in a given projection. The relevant parameters are the pure rate of time preference (delta) which Stern sets equal to 0.1 and the intertemporal elasticity of substitution (eta) which Stern sets equal to 1. The important parameter is eta, which reflects the fact that since people in the future will mostly be richer than us, additional consumption in the future is worth less than additional consumption now.
Given eta = 1, the discount rate is equal to the rate of growth of consumption per person, plus 0.1. A reasonable estimate for the growth rate is 2 per cent, so Stern would have a real discount rate of 2.1 per cent. Allowing for 2.5 per cent inflation, that’s equal to a nominal rate of 4.6 per cent. The US 10-year bond rate, probably the most directly comparable market rate, is currently 4.44 per cent; a bit above its long-run average in real terms. So, Stern’s approach produces a discount rate a little above the real bond rate.
Arguments about discounting are unlikely to be settled any time soon. There’s a strong case for using bond rates as the basis for discounting the future. There are also strong arguments against, largely depending on how you adjust for risk. But to refer to the US bond rate as “near-zero” of “extremely low” seems implausible, and to say it’s below-market is a contradiction in terms. It seems as if these writers have confused the discount rate with the rate of pure time preferences.
I’m visiting Canberra for a couple of days and stayed last night at Rydges Lakeside Hotel, which is something of a blast from the past for me. My first job, for six weeks after leaving school, was as a porter at the Lakeside, then brand-new and top-of-the-market. Some decades later, we’re both showing our age, and the upmarket place to stay is the Hotel Canberra, which was massively revamped some time in the 80s. An even sharper indication of age (and inflation) – the bill for one night’s stay is the same as the total amount I earned here.
A more minor temporal warp: the downstairs cafe is a bit of a mishmash in terms of decoration, but the main theme is old ad posters from the 20s and 30s. One set is of stage magicians, notably including Houdini. But there’s a ring-in. The Amazing Randi, scourge of Uri Geller and of alleged psychics in general, has managed to inveigle himself into the scene.
It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.
The Atrocity Archives by Charles Stross. SF meets horror meets spy thriller (in the drab Deighton mode) as underpaid bureaucrats struggle to stop revenant Nazis loosing an infovorous ice demon on an unsuspecting universe. Those of a certain age will feel right at home by page 3
Logged in, I find myself in a maze of twisty little automounted filesystems, all of them alike.
.
Also The Marketplace of Christianity by Ekelund, Hebert and Tollison, interesting both as an instance of economic imperialism and as part of a growing literature, largely emerging from the US, that treats religion and religiosity as goods, independent of the truth or otherwise of the doctrines being propounded. Oddly enough, this kind of reasoning to be welcome to many religious believers, though not to those who think the issue through. I’m just beginning on Ekelund et al, so more soon on this I hope.
I’m backing Rudd and Gillard to win in Monday’s leadership ballot both in the sense that I think they will win and in the sense that I think they should win.
The remorseless logic of leadership challenges is such as to guarantee the defeat of the incumbent in most cases. By the time there are enough people discontented enough to call on a challenge, the possibility of a convincing win for the incumbent has just about vanished. And anything less leaves them mortally wounded, while the challenger is encouraged to wait for another go.
In this case, Labor can’t afford a mortally wounded leader and there’s no time for a second round. So the logic is that those who are concerned about a win have to vote for the challengers.
As regards the substantive choice, I backed Rudd in 2003 and again in 2005. Since then I’ve only given up more on Beazley. Like lots of others apparently, I turn off as soon as he starts talking, even if I agree with what he’s saying at the time. On the other hand, Rudd has put in a solid performance, and shows some actual signs of thought.
The case for a change is even stronger when you consider the tickets as a whole. Macklin has been invisible as deputy leader (not always a defect in a deputy, but a disaster when the leader is as inchoate as Beazley). Gillard usually has something to say, and can attract attention when she says it.
I don’t know how this will run electorally, but I don’t see any reason Labor should suffer much damage from a change, assuming the losers retire gracefully.
Norman Geras pulls out one of the oldest moves in the Cold War playbook, saying
There are some clever people about who will tell you that responsibility isn’t zero sum: Bush and Blair bear responsibility for what’s now happening in Iraq even if others do too. They only fail to follow through on the ‘others do too’ part of this idea, reserving all their blame, all their ire, all their passion, for… Bush and Blair.
He’s aiming mostly at Chris Bertram, but since I’ve made exactly the same argument, and Geras is using the plural, I’ll respond.
Of course, I’ve never posted a condemnation of terror attacks, noted successes in the struggle against terrorism or matched condemnation of Bush and Blair with the observation that whatever evil has been done in our names, our terrorist enemies have shown that they can and will do worse. Well, only here, here, here, here, here, here, here, here, here, and so on.
But this is unlikely to worry Geras. As he would know from his days on the left (and from the parallel experiences of dissidents on the other side of the Iron Curtain), the point being made here is that, unless every criticism of our own government is matched by a ritualistic denunciation of our enemies, taking up at least as much space as the original criticism, it is obvious that you are on the wrong side.
And having made this point, it’s not necessary to examine your own support for policies that have brought death and disaster on hundreds of thousands of innocent people.
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