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You Can Ignore Economics

But economics won\’t ignore you:

But of milk, eggs, sugar and cooking oil there was no sign. Where were they? The question yesterday prompted a puzzled look from the manager. "There isn\’t any. Everybody knows that. Pasta is probably the next to go," he shrugged.

Welcome to Venezuela, a booming economy with a difference. Food shortages are plaguing the country at the same time that oil revenues are driving a spending splurge on imported luxury goods, prompting criticism of President Hugo Chávez\’s socialist policies.

Milk has all but vanished from shops. Distraught mothers ask how they are supposed to feed their infants. Many cafes and restaurants serve only black coffee.

Families say eggs and sugar are also a memory. "The last time I had them was September," said Marisol Perez, 51, a housewife in Petare, a sprawling barrio in eastern Caracas.

When supplies do arrive long queues form instantly. Purchases are rationed and hands are stamped to prevent cheating. The sight of a milk truck reportedly prompted a near-riot last week.

This isn\’t actually a surprise. When you set the price of an item below its cost of production then people won\’t produce the good.

Government price controls on staple foods are so low that producers cannot make a profit, they say, and farms and businesses hesitate to invest in crops or machinery, or stockpile inventories, for fear of expropriations.

"We\’ve warned about this from the beginning – all of these price controls in the long run end up producing shortages," Ismael Perez, of the industry group Conindustria, told Reuters.

You can even fight economics but economics will win.

Ken Rogoff

We should all be worried about rising inequality, correct?

Are massive income and wealth differences an inevitable outcome of fast growth? By and large, the answer from history is "yes".

Hmm. Maybe actually we have to work out why inequality is rising first? If it is a side effect of that growth (and more controversially, if curbing the inequality led to a slow down in the growth) then perhaps we don\’t actually want to curb it?

Let\’s think of it another way. Currently the global distribution of income is hugely skewed. The World Gini is somewhere above 0.8. Global GDP, if we could share it out equally (which we can\’t, but still) would be around the $8,000 per person mark. So, I think we would agree that the world is not currently producing enough income each year for all humans to live rich and satisfying lives: that\’s why we want the growth to carry on.

Good. Now, if it is a side effect of such growth that inequality increases (remember though, we\’re not saying here that the poor get poorer: rather that the rich get richer faster than the poor do, leading to higher living standards all around, but greater inequality), is that a price worth paying for that increased growth?

I would argue yes but then agree that others differ.

We can also get into the nitty gritty of just what sort of inequality we\’re talking about. Branko Milanovic is the person to go to here. (Try this book, I\’ll review it properly sometime soon (to the extent that this isn\’t already) and thanks to Jim for recommending it and the publishers for a copy.)

We can first talk about inequality within a country. I think it\’s pretty much a given that this is increasing as a result of globalisation. Ginis are certainly going up in every country. We can then talk about international inequality in a number of different ways. Concept 1 is that we take the average income in each country and then compare them. On this measure inequality is increasing. However this isn\’t taken all that seriously any more. In our 192 or so numbers, we\’ve got 54 for Africa and only 2 for India and China. We\’re thus measuring Djibouti as being as important as China in our calculations.

So we move on to Concept 2 inequality (this is associated with Xavier Sala-i-Martin) where we weight said country averages by population. We thus have a crude, but better than Concept 1, idea of changes in international inequality. This is falling, as the rise of India and China, with one third of the world\’s population between them, would make you think would happen.

However, this is a crude measure. Milanovic\’s work attempts to measure Concept 3 inequality. It\’s not an easy thing to do as we don\’t have the raw statistics but he\’s made a stab at it. Instead of using countries as a proxy and their associated averages, we actually want to measure the real inequality between the various people in the world. We obviously get much higher numbers, but that\’s not the point, we\’re interested in the direction. More or less?

Here the evidence is more mixed. Milanovic showed that in the 5 year period up to 1992 (this is from memory, so apologies if out by a year or two) global Concept 3 inequality increased. In the period following that it decreased. It\’s important to note that Concept 2 and 3 moved in different directions in that first period, which is why the distinction needs to be made between the two.

So if global inequality were indeed what we worry about, what does this tell us? I agree that my economic history is not entirely up to scratch but I seem to recall that the late 80s and early 90s contained a stuttering in both the Chinese and Indian growth rates. Certainly, in 1991, India had very serious problems: so serious that they at last led to the breaking of at least some of the Licence Raj.

So I\’m able to come back to my default position, the one I had before reading Milanovic: that it\’s the growth or not of India and China, at a respectable clip, which is reducing global inequality (ie, that if those two are growing fast enough then Concept 2 and Concept 3 point in the same direction).

All of which leads us to an interesting conclusion. Is globalization increasing inequality? Well, it depends what you mean. Within a country, almost certainly yes. Across the globe, as long as Indian and Chinese growth is high enough, probably not, it decreases it. Which means that we might be sensible to put up with the national inequality in the name of the lesser international such.

Unfortunately, that\’s not a question "economics" can answer, whether we should or not. That\’s a moral value that you bring to the table before the economic analysis. If you are an egalitarian, are you a national one (and there\’s good reason to be so: people do compare ther living standards with those around them, not with someone on the other side of the world) or an international one?

Myself, I worry far more about absolute poverty than relative. That we\’ve still got hundred of millions living on less than a $ a day, hundreds million more on $ to $2 a day, tells me that we want more economic growth and bugger the side effects on inequality. But your view might differ,



John Quiggin Astonishes!

On the measures that make sense for social democrats, social democracy does better.

Well, bugger me John! You mean people prefer to use statistics that support their arguments?

Bit of a shocker isn\’t it?

Err, Ms. Parsons?

Apologies but:

A world where you drop dead upon retirement because you forgot years ago how to relax.

As people, on average, live a dozen years into retirement when, only a generation or two ago, they lived 3 or 4, what are you talking about?

Memo to Guardian Journalists

And other assorted economic illiterates:

Now Martin knows as well as any economist that dividing a stock (wealth) by a flow (GDP) is a no-no, and immediately classifies you as economically illiterate, along with those others who divide, say, stock-market valuations of multinational enterprises with country GDPs to say things like "these companies are bigger than whole economies…"


Just Say No!

Errm, Dean, Well…

I see your point but….

The regulatory policy that states had in place was deliberately to designed to have a cross subsidy, with industrial users paying more so that residential and commercial users could pay less. One expected result of deregulation would be that this cross-subsidy would be eliminating, which would mean that electricity prices for residential and commercial users would rise relative to prices for industrial users. It would be quite striking, if it turns out that even industrial users did not benefit from deregulation.

I\’m perfectly willing to agree that such a cross subsidy was in fact what was planned, what was desired. However, I would argue that there is at least the possibility of an alternative explanation of the results of deregulation. That such a cross subsidy was not in fact achieved. That, despite the desires of the planners, it was actually industrial large users who were subsidised by residential and commercial users.

That does at least explain the observed facts, that industrial users are facing higher (I assume relative to commercial and residential…for if everyone is paying higher prices then that might just be changes in raw materials or fuel costs) prices under the deregulated system.

It also fits with my own prejudices Bayesian Priors, that when a system of such cross subsidy, of regulation, is set up, whatever the intended outcome, those with the biggest incentives are going to be those who strive most to make sure that the system benefits them. Thus the industrial users, given that they had vastly higher and more concentrated benefits from gaming the system than residential users did, worked harder to make sure that they system benefitted them, not the residential users.

In short, such planned systems might have an intended outcome, and we often see when they unravel that the actual outcome was the opposite of what was planned.

A good reason not to have such planned systems, of course.


I\’m Very Confused

And please stop laughing at the back there, yes, I kow, not an unusual situation.

Richard Murphy:

But what is clear is that in this case the banks, despite having a useful role for which they have been given the right to claim for themselves about 97% of all seignorage, worth about £45 billion a year for their profits, have declined to support Northern Rock even though it is, according to the Bark of England solvent and able to pay its way.

Hunh? Are bank profits in the UK actually £45 billion at all? I\’d be astonished if they were (note, profits from banking in the UK, not of global banks that happen to have their HQ here). The links gives me this:

That technical factor also points the way to monetary reform at the national level. Dematerialised non-cash money (i.e. electronic bank-created money held in bank accounts and transmitted between them by modern information and telecommunication technology) is now overwhelmingly important. About 97% of this country\’s money supply is created in that form by commercial banks, and only 3% as banknotes and coins issued by the Bank of England and the Royal Mint.

The commercial banks create the non-cash money out of thin air, calling it credit and writing it into their customers\’ current accounts as profit-making loans. That gives them over £20 billion a year in interest, while the taxpayer gets less than £3 billion a year from the issue of banknotes and coins. Stopping
commercial banks creating non-cash money, and transferring to the central bank responsibility for creating it and issuing it debt free to the government to spend into circulation, will result in extra public revenue of about £45 billion a year. This is the reform with which this book is specifically concerned.

Errm, is this just fractional reserve banking all over again? I think it is you know. Didn\’t know that Murphy hung out with the LaRouchies.

Paul Krugman: Wobbled By Wealth


The public wants change. … Nor is the demand for change solely about Iraq: there has been a strong revival of economic populism. Democracy Corps asked those who believe America is on the wrong track to choose phrases that best described … what’s gone wrong. The most commonly chosen were “Big businesses get whatever they want in Washington” and “Leaders have forgotten the middle class.”

So much, by the way, for pundits who claim that Americans don’t care about economic inequality…

Paul laddie. That first answer isn\’t a condemnation of economic inequality. It\’s a condemnation of the way in which the State pokes its nose into economic life. If Congress weren\’t so hell bent on detailing what we all may do then business wouldn\’t be in there buying the right to do as they wish. The way to stop business buying such influence is to stop Congress attempting to have such influence capable of being bought.

Quote of the Day

In the comments to some anti-market eco-wibble at CiF:


Comment No. 906068

November 4 19:50


The article poses a simple question: do we want Government to decide how to allocate this valuable, scarce resource or leave it to the market?

Easy one. The scarcer oil becomes, the more important it is to leave its allocation to the market. That\’s what markets are good at.

Quite. Some things are simply too important to be left to governments.

\”Town Faces Defeat To Tesco\”

This is an interesting little example of the different conceptions of freedom that are out there. On the one side we have democracy, the will of the majority as expressed through the political system (and for the moment we\’ll accept that the local council is indeed reflecting that). On the other we have the market conception of freedom, that people themselves should decide what they want to do. That is, that people should not be subject to the tyrrany of the majority:

An 11-year planning battle pitting Tesco against townspeople and featuring secret agreements, allegations of corruption and dramatic U-turns could end in victory today for the supermarket giant.

Twelve councillors will vote on whether to allow Tesco into the Norfolk town of Sheringham after the district council\’s planners urged them to accept Tesco\’s proposal for a 1,500sq metre store.

While anti-supermarket campaigners will make a final plea to councillors, the mood in the seaside town of 7,000 residents and more than 100 independent businesses – the only settlement of its size in Norfolk still without one of the big four supermarkets – was pessimistic yesterday.

On the democracy side we have people insisting that the choices of their fellow residents must be limited. In order to keep those 100 independent businesses, as they the vocal majority desire, others are not to be allowed to shop at a local Tesco\’s.

On the other side we have people moreorientated to an individual, or market, conception of freedom (like myself for example) who would look at it the other way around. Why should the desires of that majority stop the minority from expressing their own preferences? The only possible answer that I can see is that by expressing such desires, by shopping at Tesco\’s, they will be reducing th choices of the others by making those 100 independent businesses unviable.

Fine, so we have two groups each arguing for the thing that they desire and they are mutually conflicting. So a decision has to be made between the two, yes?

Well, not quite, and this is where the market vision of freedom comes into play. Instead of looking at what people say they want, or at the number of people willing to write to the council on the matter (about 8% or so of the population it seems) look at what people think that people will actually do in the future.

Will that democratic majority not shop at Tesco\’s? Tesco obviously doesn\’t think that will happen, otherwise why all this effort to build a store? But the thing is, nor do the opponents of the store. If they thought that people wouldn\’t shop there then they wouldn\’t give two figs whether Tesco wasted its money or not.

The very fact that they oppose the plan shows that they think people will shop there: they are thus using politics to deliberately limit the desires and freedoms of others. Which is why the store should be built, of course, so that individuals may make their own decisions, not be subject to such a tyranny of the majority.

One other matter: you know all these stories of the supermarket\’s land banks? If it takes 11 years just to get planning permission, don\’t you think it\’s actually entirely rational of them to have such?


Thomas Palley really does come up with some beauties.

The current global exchange rate system is a sub-optimal arrangement. There are many theoretical reasons explaining why foreign exchange markets are prone to mis-pricing, and the empirical evidence shows exchange rates persistently depart from their warranted fundamental levels. Moreover, the system permits strategic manipulation so that some countries (particularly in East Asia) actively intervene to undervalue their currencies. That has made for a lop-sided world in which half play by free market rules and half are neo-mercantilist, creating threatening tensions.

OK, right, agreed even. Current exchange rates are influenced by governments and this leads to imbalances. Sure.

Beyond such realignment, there is need for systemic reform to avoid recurring misalignments. That suggests a system of managed exchange rates for major currencies in which countries cooperatively set exchange rates.

So we should give more power to governments to influence exchange rates and this won\’t lead to imbalances.


Property Rights, Property Rights.

We hear a lot about what we should be doing for the poor of the world. But what is it that the poor themselves seem to be demanding?

Demonstrators will present their demands to parliament today, including a call for a national land commission to grant patta — legal title — to those who have occupied land for generations but have been ousted with little compensation.

Property rights d\’ye say? My, have they all been reading Hernando de Soto or something?


The Register.

As Matt says, a spectacular missing of the point.


It\’s always possible that the man is merely being comical in some leaden economist fashion.

Err, yes, that is a possibility.

Regulation and Incentives


The number of childminders has fallen by almost a third over the past decade. In 1997, there were 98,500 registered childminders in England. Today, according to the National Childminding Association, there are 69,925.

So, do we want more or fewer child minders?

Childminders are quitting in their thousands because of the bureaucratic "lunacy" governing their work.

Should the regulation be as it is or be relaxed? For it would appear that we can\’t have both the strict regulation and more child minders. Clearly, we\’d like to have both perfect regulation and the exactly right number of child minders but then we\’d all like a pony as well.

So which is it? Oh, and why is it that the bureaucrats seem incapable of realising that there is in fact a choice that has to be made, that regulations are not costless?

Gordon Brown\’s Economy

Not really a great validation of the way he\’s acted over the past decade:

"Judging by the fiscal deficit trend, the UK is now in worse fiscal shape than almost any other major Western country. In the event of an economic downturn, the UK now has little leeway for stimulus," it said.

If we were to have followed Keynesian type management of the economy then, at the end of 15 years of uninterrupted growth, the public sector finances should be hugely in surplus, we should be payin back the debt, as Lawson was back in the late 80s. Clearly we haven\’t been doing that, we still have huge public sector deficits and if there is indeed a recession coming then we don\’t any longer, have the option of borrowing and spending our way out of it.

Quite simply Brown left the spending taps too open too long.

If that recession does indeed come in the next year or two (for there will be one sometime, no one really thinks we\’ve abolished the business cycle) then it really ain\’t gonna be pretty. Could even be that the next election is one that you want to lose, not win.

Carol Sarler and Economics

Well, quite:

Nevertheless, a radical review of the standard we expect, not from most but from all nurses, and of how we properly reimburse it, is his business. The laws of economics might not be his area of expertise. But even he must know the one about peanuts and monkeys.

Very good, incentives and selection.

What, then, is the difference between a regular ward nurse and one working in an ICU? About six grand.

An ICU nurse, who has chosen to specialise, can earn up to £31,000; one who has not so chosen has a ceiling of about £25,000. And so what, you say: in every trade the more studied and trained gain seniority and higher salaries. But if it is a matter of life or death, and if it is the case that better-paid nurses are better nurses – “vocation” notwithstanding – we might revisit the thorny question of nurses’ pay in general, which is, as ever, less than is earned by teachers or police.

Ah, thus if we raise all nurses\’ pay, all will perform to the higher standard?

Not quite. It\’s the very fact of the wage differential that provides the extra incentives. Raising the general level of pay doesn\’t raise the incentive to be a better nurse at all: it might raise the incentive to be a nurse in the first place, but not to perform better once there.

Water Trading

I have no doubt that this will have various greenies up in arms:

Global shortages of water could lead to the precious liquid being exchanged in a similar way to permission schemes used by countries for carbon dioxide, the head of one of the world’s leading exchanges said yesterday.

Craig Donohue, chief executive of the Chicago Mercantile Exchange (CME), said that water could become a commodity as droughts and demand place huge pressures on river systems and water tables.

Trading water as a commodity would, it is argued, put financial pressure on users to keep consumption down, in the same way that carbon emission trading schemes penalise the biggest polluters.

You can hear it now, can\’t you? Water is a right, it shouldn\’t be commodified….and what about the Children!

A pity that none of them will actually look at the details: it\’s a form of insurance. Farmers (and we are talking about farmers, they use most of the world\’s fresh water) can buy insurance from speculators that there won\’t be enough water to grow their crops. That\’s how it will work: no one is actually suggesting a physical trading scheme, where water is taken from British Columbia to Australia, say.

Not a Surprising Finding

Immigrant workers are both higher paid and more reliable than their British counterparts and contributed £6 billion to economic growth last year, a Government study said yesterday.

Wow! Isn\’t that a shock children? People who move thousands of miles to work tend to be more reliable. And, amazing, the more reliable workers get paid more!

The study, the first official attempt to establish the economic and fiscal impact of the record levels of immigration seen in recent years, states that \’\’in the long run, it is likely that the net fiscal contribution of an immigrant will be greater than that of a non-immigrant".

Another stunner! The immigrant arrives already adult: so some other place has paid for their upbringing and education. So we\’re not paying those costs of the first 20 years of their life, unlike the manner we do for the native born. It would be tough for them to cost us more than a native, wouldn\’t it?

The Nobel in Economics

So here\’s the announcement:

This year\’s Nobel Prize in economics goes to Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson.

Greg Mankiw then asks:

Eric is used to teach economic theory at Harvard and was a great teacher and colleague. If my recollection is correct, when he moved from Harvard to the Institute for Advanced Study in Princeton, he bought the house Albert Einstein used to live in. I wonder if there are any other houses that can claim two Nobel laureates.

Err, any house that Linus Pauling lived in between 1962 and 1994?