Category Archives: Politics

299 – Are higher house prices a benefit or a problem?

In the research reported in PD298, we used the impact on house prices as an indicator of the benefits of an investment in a public amenity. This is a well-established approach, but twice in recent times I’ve encountered an attitude that higher house prices are more of a cost than a benefit. Could that be right?

The issue that people have in mind when they raise this concern is housing affordability. This certainly is something that is worthy of attention. House prices in many parts of Australia (and other developed countries) are often so high that they place great financial stress on buyers with relatively low incomes or they result in too many people being excluded from the housing market.

However, talking to a former government minister last year, she said that measuring improved local amenity by the resulting rise in house prices was not acceptable because rising house prices are a problem for housing affordability.

housingAlthough I applaud her concerns for the welfare of low-income groups, her rejection of rising house prices as a measure of community benefits is not sound at all.

For one thing, it implies that rising house prices are a bad thing regardless of the cause of the rise. The logical extension of that thinking is that we would prefer completely impoverished suburbs with no amenities or services for residents. Let’s encourage crime, leave road potholes unrepaired, remove all street trees and encourage toxic industries to set up in urban areas. That would certainly result in affordable housing! This is obviously not the solution to the housing-affordability problem.

The second flaw in the politician’s logic was that it confused measurement with objectives. Improving the amenity of a suburb does result in benefits for the residents, and these benefits are reflected in the prices that people are willing to pay to become residents in that area. So the change in house prices that is attributable to the improved amenity is a sound quantitative measure of the benefits. There may also be spillover effects that are viewed as being negative, but the requirement then is to measure those negatives as well, not to reject the valid measurement of the benefits.

Thirdly, the politician is implicitly suggesting we should aim to achieve two different policy objectives (affordable housing and improved urban amenity) using only one policy mechanism, the decision about whether to invest in urban amenity. An important economic insight, known at Tinbergen’s Rule, says that you need at least one policy mechanism for each policy objective – in this case, one related to urban amenity (e.g. investment in drain restoration) and a different one related to affordable housing (e.g. increased land releases). If you try to achieve two objectives with only one mechanism, the community will end up worse off overall than it might have been.

I was completely unprepared for the ex-minister’s comment at the time, and so dazzled by its many problems that I wasn’t able to quickly provide a very coherent counter-argument. I’ll be better prepared if it comes up again.

Further reading

Borrowman, L. Kazakevitch, G. and Frost, L. (2014). Measuring Housing Affordability: What Types of Australian Households are in Stress? Discussion Paper 42/14, Department of Economics, Monash University. Full paper ♦ IDEAS page

Polyakov, M., Fogarty, J., Zhang, F., Pandit, R. and Pannell, D. (2016). The value of restoring urban drains to living streams, Water Resources and Economics Journal web site ♦ IDEAS page

294 – Slovakia

Most people outside eastern Europe know little about Slovakia, and it’s not a noted tourist destination for the English-speaking world. But after spending two weeks there in June-July 2016, I’d recommend it highly as a great place to visit and explore.

I knew little about the place before selecting it, almost at random, as a place that would be interesting to go to. It turned out to be a great choice.

The Slovakian people have lived through multiple dramatic events and drastic changes over the past century. Here’s an extremely brief summary.

Before the First World War, the area we now call Slovakia was part of the Austro-Hungarian Empire. After 1918, the state of Czechoslovakia was formed, and was reasonably prosperous for a while, but then the country became a puppet state of Nazi Germany. After World War II, Czechoslovakia had a few years of independence, but in 1948 the Communist Party staged a coup and Czechoslovakia became a Soviet-controlled satellite state. In 1968 the country entered a period of political liberalization known as the Prague Spring, but this was brutally put down when they were invaded by the Soviet Union and three communist neighbours. After the fall of the Berlin Wall in 1989, the communist government in Czechoslovakia resigned and there was a completely non-violent transition out of communism and into democracy and a market economy. Initially the Czechs and Slovaks stuck together in Czechoslovakia as one country, but in 1992 the Slovak parliament declared that Slovakia should become an independent state. It joined the European Union and NATO in 2004 and adopted the Euro as its currency in 2009.

What a roller coaster ride! Imagine the eventful life of a Slovakian who was born in, say, 1930 and is still alive.

After all that, it is quite remarkable to see what a stable, safe and prosperous place it is today. We observed clean, attractive towns, modern shops, well-maintained housing, new cars on the streets and people who are clearly doing pretty well. Their GDP per capita was 76% of the EU average in 2014.

Of course, the story is not all happy. The country’s treatment of its Roma minority seems quite disgraceful. Many Slovakians are disillusioned with the quality of their government (but who isn’t?) and they do seem to have more corruption scandals than you would hope. Amongst the new office buildings and shops, there are ugly and neglected old Soviet buildings. And many city people still live in large apartment blocks, presumably from the Soviet era, which look rather sterile, at least from the outside.

We spent 5 days in the capital Bratislava, which is right next to the Austrian border. If you ever visit Vienna, I suggest also making the short journey to Bratislava for at least a day trip. I can recommend going by boat, along the River Danube. Central Bratislava has lots of great old buildings and a big castle, and its setting on the Danube is fantastic.

slovakia2We enjoyed a relatively relaxing time in Bratislava, but the best part of the visit was yet to come. We caught a train to Poprad-Tatry, near the High Tatras Mountains in northern Slovakia, and then on to Stary Smokovec, part way up the mountains.

The scenery throughout the journey was just spectacular, with rivers, valleys, green fields, castles, hills and mountains. What an incredibly beautiful place!

slovakia3We spent 10 days in Stary Smokovec, resting, exploring and enjoying the region. It’s really cheap and convenient to get around on a small electric train. The main towns all have ski lifts, cable cars or funiculars to get you up the steep mountain sides. We tried out almost all of these and had a fantastic time, marveling at the views, walking along mountain paths, enjoying the local food and observing the locals.

Once we got out of Bratislava, we found that most things are really cheap compared to what we’re used to. Train travel within the country is an absolute bargain.

The area we stayed in had lots of tourists, almost all of them from within Slovakia, plus a few from neighbouring countries Poland, Hungary and Ukraine. We didn’t come across any other English-speaking tourinsts the whole time we were in the High Tatras. There must be some, but clearly not many.

Despite that, we managed to get by speaking only English, as there were enough people with a bit of English around, particularly among the younger generation. Innovative sign language can be remarkably effective too.

Pauline and I agreed that the High Tatras area is right up there with the best places we have ever visited. We’ve been talking about how and when we might make a return visit.

285 – The collapse of North Atlantic Cod

Humanity has a terrible track record when it comes to managing fisheries. There are many examples where over-fishing has led to the collapse of a fish population. One of the most spectacular collapses was the cod fishery in the north-west Atlantic.

Prior to the 1950s, cod had been fished off Canada for hundreds of years without any major decline in fish stocks. From the 1950s, fishing technologies improved and people got greedy.

“The decline began with the arrival of large factory stern trawlers in the late 1950s and the exploitation rate increased dramatically as these vessels were able to harvest cod offshore in winter months and at places where they were never previously caught,” (Grafton et al., 2009).

The numbers of cod caught by Canadian firms skyrocketed in the 1960s, crashed in the 1970s, recovered slightly in the 1980s and crashed to close to zero in the early 1990s.

cod_graph

http://www.grida.no/

The importance of the fishery to local economies in eastern Canada meant that their government was reluctant to take strong action to reduce fishing effort until it was too late. Right to the end, the government failed to respond as dramatically as it should have.

In 1992 they set a quota for cod catch that was more than the total amount caught the previous year. However, this quota was a foolish fantasy. By this stage the fish stock had been reduced to about one percent of what it was before the over-fishing started – there were almost no fish left that could practically be caught. So despite the quota, the government decided to impose a complete moratorium on cod fishing for two years, and since then the catch has been minimal compared to historic levels.

Ironically, the government’s delays in taking strong action were meant to benefit fishers, but this backfired terribly, resulting in huge job losses. The cod fishery had supported jobs for around 35,000 fishers and fish plant workers, although it should never have been that high, of course.

The dramatic reduction in fishing since 1992 has allowed cod stocks to recover a bit, but they remain very scarce compared to their earlier levels. In 2013 there were 10,500 tonnes of Atlantic Cod caught off eastern Canada, about 1% of the peak catch of 810,000 tonnes in 1968.

The loss of a dominant large fish from the marine ecosystem of the north-west Atlantic has had big flow-on effects, resulting in what ecologists call a “trophic cascade”, meaning that the populations of species lower down the food chain are dramatically altered.

codWe learn from our mistakes, if we’re sensible. In a few countries, fisheries management has improved significantly since the cod disaster. For example, New Zealand and Australia are relatively good at it compared to most countries. But globally, we are continuing to over-fish, to our own detriment. According to a 2008 report by the World Bank, “the difference between the potential and actual net economic benefits from marine fisheries is in the order of $50 billion per year – equivalent to more than half the value of the global seafood trade.” And “If fish stocks were rebuilt, the current marine catch could be achieved with approximately half of the current global fishing effort.”

Even in Australia there is more that we could do to secure our fish stocks in the long term. For example, Grafton et al. (2006) find that marine reserves where fishing is banned (Marine National Parks in our current parlance in Australia) can provide financial benefits to fishers in the long run, largely by accelerating the recovery of fish stocks in surrounding waters following an unexpected decline or “shock” (e.g. due to an environmental factor, or poor management).

If a Marine National Park is in place, fishers miss out on fishing in the reserve areas, but in the long run they are likely to be better off due to increased resilience, unless the frequency of shocks is really low.

Grafton et al. (2009) showed that a sizable no-take marine reserve in the north-west Atlantic (e.g. covering 40% of the total cod population) would have prevented the catastrophic crash in cod numbers, and would have been highly beneficial to fishers. However, the current review of zoning in our marine reserve system in Australia seems to be shaping up to reduce the planned area of Marine National Parks. I don’t think that would be in anybody’s interest.

Further reading

Grafton, R.Q., Kompas, T. and Van Ha, P. (2006). The Economic Payoffs from Marine Reserves: Resource Rents in a Stochastic Environment, The Economic Record 82(259), 469-480. Journal web site ♦ Ideas page

Grafton, R.Q., Kompas, T. and Van Ha, P. (2009). Cod today and none tomorrow: the economic value of a marine reserve, Land Economics 85(3), 454-469. Journal web site ♦ Ideas page

World Bank (2008). The Sunken Billions. The Economic Justification for Fisheries Reform. The World Bank. Washington D.C. Summary here

283 – Whose environmental values matter?

One of my pet issues is how to decide which the environment projects should receive public funding. One of the factors influencing this decision is (or should be) the importance or value of the environmental outcomes that would be delivered. But whose judgements about importance or values should be taken into account?

There are at least three groups whose values might be influential:

  1. Environmental experts.
  2. The general public.
  3. Politicians.

Environmental experts, such as ecologists, are crucial to decisions about environmental investments. We need their advice about threats to environmental assets, and about the effectiveness of different ways of managing them. However, they often also provide advice on priorities, which are, at least implicitly, value judgements. In my observation, many environmental scientists don’t appreciate how much of their own preferences and values they are injecting into this advice. This matters because studies have shown that the preferences of environmental experts are often rather different from the preferences of the general public (e.g. Seymour et al. 2011; Rogers 2013). The experts tend to be greener, and they emphasise factors that don’t matter as much to others.

seagrassThe general public’s views about the relative importance of different environmental outcomes should be considered because (a) they pay the bills and (b) this is a democracy. The way that economists tend to approach Benefit: Cost Analysis implies that values expressed by the general public are the only values that should matter in these decisions. I don’t agree with that because, like many environmental scientists, I think that the ignorance of the general public is an important consideration. For example, people may feel that sea grass is not very important, but only because they are unaware of its contributions as a source of food and shelter for many marine organisms, or of its roles in stabilising the sea floor and maintaining water quality. Basing decisions on people’s expressed values could result in outcomes that they themselves are not happy with. At least some in the community are aware of their ignorance and feel that their own views are not sufficient to base decisions on (e.g. Clark et al. 2000).

Finally, there are politicians. Ministers have more influence than anybody else in the determination of environmental decisions. In principle, their decisions should reflect community preferences and expert advice, and sometimes they do. However, their own preferences and values also impinge. For example, this was starkly evident in the Abbott government’s decision making about climate change.

Although environmental values are crucial to sound public decision making, there is no clear-cut “correct” way to combine the values of these various groups. Somehow we need to factor in the preferences of the general public, but also account for the greater knowledge of experts, even though we know that their personal values may be different. (Politicians’ views should not matter in principle but inevitably will in practice.)

The INFFER framework (Pannell et al. 2012 – www.inffer.com.au) embodies a particular way to combine public and expert input when prioritising environmental projects. It’s not the only option, of course, but it does work quite well at bringing the values discussion to the surface.

Further reading

Clark, J., J. Burgess, and C. M. Harrison. 2000. I Struggled with this Money Business: Respondents’ Perspectives on Contingent Valuation. Ecological Economics 33 (1), 45–62. Journal web site

Pannell, D.J., Roberts, A.M., Park, G., Alexander, J., Curatolo, A. and Marsh, S. (2012). Integrated assessment of public investment in land-use change to protect environmental assets in Australia, Land Use Policy 29(2), 377-387. Journal web site ♦ IDEAS page for this paper

Rogers, A.A. (2013). Public and expert preference divergence: Evidence from a choice experiment of marine reserves in Australia, Land Economics 89(2), 346-370. Journal web site

Seymour, E., Curtis, A., Pannell, D.J., Roberts, A. and Allan, C. (2011). Same river, different values and why it matters, Ecological Management and Restoration 12(3), 207-213. Journal web site

280 – Lomborg at UWA

The news of Bjorn Lomborg establishing the “Australian Consensus Centre” at the University of Western Australia has generated plenty of media attention and much discussion within the University.

Some people within UWA are concerned about the University becoming associated with such a controversial and divisive figure. They are worried about the University’s reputation, and about the perception that his work is scientifically flawed.

There has also been commentary on the fact that the Australian Government could find $4 million for this initiative at a time when government funding in general (and university funding in particular) is under such great pressure.

I had no idea that the UWA arrangement was in prospect until Lomborg dropped in to meet me briefly the day before it was announced a couple of weeks ago. I had not had any contact with him in the past. I found him to be very personable and he asked sensible and genuine questions about environmental issues in Australia.

I have been aware of Lomborg’s work since his 2001 book The Skeptical Environmentalist (TSE), with its message that many environmental problems are not as bad as we’d been led to believe, and some are getting better. I’ve also been interested in his writings on climate policy, and his more-recent initiative, the Copenhagen Consensus, which sets out to prioritise a set of major international policies. The latter will be adapted for a new set of policies in the UWA initiative.

tseAll three of these areas of work have generated controversy and criticism. I’ve read many of the critics, particularly in the early days of TSE when the criticism was raging.

I split the criticisms into two types: identification of errors of fact and criticisms of what he does with the facts (interpretations and judgements). There were some errors of fact in TSE, but not as many as claimed. In my judgement, many of the claimed errors were misinterpretations, misunderstandings or misrepresentations by the critics, quoting him out of context, highlighting trivial issues, and so on. People who didn’t like his conclusions went out of their way to find the smallest hint of an error and blow it up. There is a web site called Lomborg Errors, which includes numerous so-called errors from TSE, but when I read it I was singularly unconvinced by many of them. In fact I found myself laughing out loud at some of them. Given the huge scope of the book, the number of significant, genuine errors is remarkable small, really, and they don’t change the general message of the book. But the myth of there being numerous serious errors got well established, and is accepted as received wisdom by many.

I didn’t agree with everything in TSE. Some parts were less convincing, and it seemed too optimistic to me in some respects. These were generally not errors of fact, but differences in judgement about what they implied or what should be done about them.

Lomborg has faced plenty of disagreement about his policy recommendations, particularly in relation to climate change. He argues that the political barriers to pricing carbon at a price level that will achieve the desired outcomes are so great that we may as well not bother with it. Instead he advocates a large public investment in development of new technologies, such as for renewable energy. This position is obviously at odds with most people who are concerned about climate change, but my own view is that his pessimism about the politics is justified (reinforced by the messages coming out of India recently) and that the technology route is likely to be the only approach with any real chance of averting serious climate change. I’ve written about this here.  Interestingly, his position is not that of a climate sceptic/denier, although he is sometimes characterised as being one.

Looking around the web, I see some scientists arguing that climate change will be greater and more costly than Lomborg has concluded in his climate book, often coupled with attribution of dubious motivations and associations. Perhaps he has made errors here and underplayed some potential outcomes – I haven’t taken the time to evaluate the claims. Nevertheless, even if he has, it doesn’t affect the logic behind his recommended policy approach.

The Copenhagen Consensus work, a version of which he will bring to UWA, is somewhat different in nature. His contribution is to set up and manage the process, bring people together and publicise the results. The judgements made in the process are not his judgements, but those of panels of people (usually senior economists) responding to evidence and cases put by commissioned experts. The focus is on identifying priorities for policy action. From a set of defined policies, which are the ones that are likely to have the greatest benefits for mankind? The explicit focus on prioritisation is critical, but is often missed by people advocating for a particular policy.

The controversy here arises because carbon-pricing policies consistently come out as being much lower in priority than other things like improving childhood nutrition in developing countries and fighting infectious diseases. In my view, this result isn’t a surprise, considering the likely benefits, feasibility, time lags and costs of the options. But it adds to the impression that Lomborg is a climate “contrarian”, even though the results are not actually generated by him.

Some have argued that the concept of prioritising these policies is wrong – we should just implement them all. I think that’s very naïve. It’s not how the world works. None of the policies being evaluated is currently in place. It’s a huge, difficult, risky task to try to get a major new policy adopted, especially when international agreements are needed. Governments have to carefully prioritise how to spend their financial resources and their political capital.

It’s very interesting that Vice Chancellor Paul Johnson has signed up to the University hosting this new centre. He must have anticipated that there would be controversy. I think it’s positive that the University hasn’t been scared off. A university is a good place to do work that challenges people to think differently.

Overall, if it can sufficiently avoid the taint of politics (which might be tricky), I think the initiative could make a worthwhile and interesting contribution to the policy debate in Australia. But also there will no doubt be aspersions cast against Lomborg and UWA.