Month: September 2015

Bookplug: Phishing for Phools, Classical Greece, Luck in Politics

John Quiggin19 Comments

Among the winners of the Economics Nobel [1] two of the most interesting are George Akerlof and Robert Shiller. Their book Animal Spirits provided me with much of the intellectual stimulus to write my own Zombie Economics. Their latest has the intriguing title Phishing for Phools: The Economics of Manipulation and Deception.

The central theme is simple. We are all prone to errors in reasoning. Given the complexity of the world, and the finiteness of our reasoning capacity, it could scarcely be otherwise. This obviously leads to decisions that differ from the perfect optimality assumed in simplistic versions of economics.

More importantly, markets create opportunities for others to exploit and amplify our errors in reasoning. Advertising uses all sorts of device to encourage us to make decisions that we would not make if we gave careful and rational consideration to our choices. The entire credit card industry relies for its profitability on the fact that cardholders don’t (as is almost always sensible) pay off their balances every month. And so on.

As Akerlof and Shiller observe, the fact that markets systematically amplify reasoning failures undermines the standard claims about the optimality of market processes.

The proposed policy responses are a bit limited, focusing mainly on regulation and consumer protection. Still, the book is well worth reading.

An interesting side point is an argument that the harms of alcohol, a notorious source of suboptimal decisions, have been greatly underestimated.

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Income distribution: where should we start ?

John Quiggin18 Comments

Here’s another draft extract from my book-in-progress, Economics in Two Lessons, looking at income distribution. The entire draft section on this topic is available here. And the introduction, describing the general approach of the book is here.

Praise is welcome, and useful criticism even more so. As a reminder, this is an extract. If you think a crucial point has been missed, point it out, but bear in mind that it may be addressed elsewhere in the book.

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Meet the new boss …

John Quiggin44 Comments

As has happened before, I was travelling when the Prime Ministership suddenly changed hands. I’m still on holiday, though I briefly appeared before the South Australian Royal Commission on the Nuclear Fuel Cycle yesterday. But even without following the news closely, it’s easy enough to see that the Turnbull LNP government is basically the Abbott government with the gratuitous culture war element removed.

On climate change, for example, we’ve seen the end of attempts to kill the highly successful Clean Energy Finance Corporation, but no major change to the absurdly misnamed “Direct Action” policy, and a doubling down on Abbott’s support for coal from newly promoted minister Josh Frydenberg.

In particular, contrary to suggestions that Turnbull is going to push for a more “market liberal” approach, Frydenberg is still touting the idea of subsidising the Adani Carmichael boondoggle. I doubt that anything will come of this (on this score, the supposed deal with Downer EDI to build Adani’s railroad seems to have quietly died), but it’s indicative of the government’s position. And the new coalition deal, handing over water policy to Barnaby Joyce, amounts to a repudiation of everything Turnbull stood for when he was Water Minister under Howard.

The abandonment of the culture wars looks like something of a double-edged sword. On the one hand, it was obviously necessary, given the extent to which Abbott’s absurdities discredited the whole enterprise. On the other hand, much of the LNP base and commentariat are so committed to culture war politics that they will have grave difficulty in supporting Turnbull even if they want to: most of their usual lines against inner city elites, latte liberals and so on are far more applicable to their own new leader than to Labor and the Greens.

My success as a pundit is notoriously mixed. Still, I find it hard to see how Turnbull can sustain his initial bounce in the polls without taking tougher decisions than those he has been willing to make so far.

A CHAFTA election? (updated)

John Quiggin47 Comments

Malcolm Turnbull’s coup against Abbott has been the subject of much commentary, and I didn’t have anything to add. But now it’s time to look beyond the juggling of Cabinet positions and to consider some of the long term implications. Turnbull’s rise takes off the table, or radically changes the politics of, a number of issues that would have been central to an Abbott election campaign. Most obviously, there are the issues (climate change, equal marriage, republicanism) where Turnbull is known to agree with Labor but has said he will stick with Abbott’s policies. Obviously, Turnbull can’t run hard on these. It remains to be seen whether Labor can make political mileage out of the contradictions involved.

The ground Turnbull wants to fight on is that of economic liberalism, primarily as represented by the so-called Free Trade Agreements with Korea, Japan and, most importantly, China.

Turnbull has the near-unanimous support of the elites on these deals, even though it’s hard to find even a single economist who would support them with any enthusiasm. Anyone who has looked seriously at the issue understands that the trade aspect of these agreements is trivial. What matters are the side clauses on issues like Investor-State Dispute Settlement procedures, intellectual property, environmental protection and so forth. Unfortunately, political journalists, as a class, don’t do much thinking.

Here, for example, is Laurie Oakes, asserting that

>Labor needs to end up supporting this trade deal. That is the bottom line

but not providing a single argument in favour. In typical “Insider” style, Oakes says

The government charge that Labor is sabotaging jobs would not be a difficult one to sustain.

without worrying about whether this charge is actually true (it isn’t).

In the case of CHAFTA (the unlovely acronym for the China deal), the big problem is not in the agreement itself, but in a “Memorandum of Understanding”, which provides for circumstances under which a Chinese company can import its own workforce, without labour market testing (that is, even if there are Australians willing and able to fill the jobs) and without matching existing conditions.
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Is global collapse imminent ? (repost from 2014)

John Quiggin439 Comments

Update I thought I’d repost this a year on, and reopen the discussion 10 September 2015

Reader ZM points me to a paper with this title, by Graham Turner of the University of Melbourne. Not only does Turner answer “Yes”, he gives a date: 2015. That’s a pretty big call to be making, given that 2015 is less than four months away.

The abstract reads:

The Limits to Growth “standard run” (or business-as-usual, BAU) scenario produced about forty years ago aligns well with historical data that has been updated in this paper. The BAU scenario results in collapse of the global economy and environment (where standards of living fall at rates faster than they have historically risen due to disruption of normal economic functions), subsequently forcing population down. Although the modelled fall in population occurs after about 2030—with death rates rising from 2020 onward, reversing contemporary trends—the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. Given this imminent timing, a further issue this paper raises is whether the current economic difficulties of the global financial crisis are potentially related to mechanisms of breakdown in the Limits to Growth BAU scenario. In particular, contemporary peak oil issues and analysis of net energy, or energy return on (energy) invested, support the Limits to Growth modelling of resource constraints underlying the collapse.

A central part of the argument, citing Simmons is that critics of LtG wrongly interpeted the original model as projecting a collapse beginning in 2000, whereas the correct date is 2015.

I’ve been over this issue in all sorts of ways (see here and here for example, or search on Peak Oil). So readers won’t be surprised to learn that I don’t buy this story. I won’t bother to argue further: unless the collapse is even more rapid than Turner projects, I’ll be around to eat humble pie in 2016 when the downturn in output (and the corresponding upsurge in oil prices) should be well under way.

Given that I’m a Pollyanna compared to lots of commenters here, I’d be interested to see if anyone is willing to back Turner on this, say by projecting a decline of 5 per cent or more in world industrial output per capita in (or about) 2015, continuing with a sharply declining trend thereafter. [minor clarifications added, 5/9]