Category Archives: Social issues

301 – Inequality in the USA

Following the catastrophic result of the US unpopularity contest last week, one of the many suggested explanations was the level of economic inequality in the country. This made me think of the graph below, which I saw last year. It shows that, when it comes to inequality, the US is truly exceptional.

The graph shows the Gini coefficient (a measure of inequality) for 115 countries, plotted against their GDP per capita (a measure of their average income). There is a very clear pattern. Above a certain level of inequality (Gini coefficient of about 37), almost all countries have really low average income levels, while above a certain level of average income (GDP per capita of $12,000), almost all countries have fairly low inequality.

 

gini

Source: http://visualizingeconomics.com/blog/2006/01/04/gdp-per-capital-vs-gini-index

 

The exception is the US, which has both high average income and high inequality. There is a lot of wealth in the US but it is concentrated into a minority of hands. As one illustration, between 2009 and 2012, 95% of income gains in the US accrued to the top 1% of income earners. Other data seems to show that their inability to share around the wealth has become worse over time. Other countries with a similar level of inequality have about one eighth as much average income.

If it is true that inequality is behind this incredible electoral result, we can perhaps draw some solace from the fact that inequality is so much less in all other wealthy countries.

On the other hand, inequality was clearly not the only factor. Already, like-minded politicians around the world are feeling empowered and emboldened to spread their noxious views throughout their societies. We can see that happening in Australia, France and The Netherlands, for example.

And there seems plenty to worry about from what could now happen in the US. The world’s most powerful country will soon be led by a deeply ignorant man of appalling values and character. Even by the low standards of politicians, he tells obvious lies to an extraordinary extent. I feel angry that so many Americans were taken in by this conman, and now the whole world will have to suffer the consequences.

The other thing I can’t stop thinking about is a certain historical parallel. Can you think of another prominent national leader from the 20th century who was elected on a promise of making his country great again? This other leader also used an ethnic minority group as a scapegoat for his society’s problems, and found a sympathetic ear from countrymen who felt they had been badly treated. He had notable authoritarian tendencies, fomented hatred and resentment, was not averse to jailing his political opponents, did not respect the rule of law or democratic institutions, and was unable ever to admit that he had made an error. He excited mobs with messages that were simple and bold but facile and dangerous. He was friendly with other authoritarian leaders (although that didn’t last). And he had a distinctive hair style.

I’m not expecting that the US will now proceed to annex Alberta as a prelude to invading all of the countries they can practically get to, but I do think there is a serious risk that voices of reason, balance, kindness and openness within the country will be repressed and perhaps even persecuted. We have to hope that good Americans will be able to moderate or even prevent the barrage of stupid and repugnant policies that will now come forth.

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.

284 – The world food price crisis of 2007

In 2007, the world prices for a number of important food commodities suddenly increased dramatically. Many reasons for the price hike were proposed at the time, but some of them turned out to have little to do with it. One factor that did play a big role was American policy that mandates use of biofuels.

Between 2006 and 2008, the price of rice increased by around 200%, and the prices of maize, wheat and soybeans all increased by over 100%.

food_prices

Figure 1. Index of food prices since 1990.

 

It was estimated that this big jump in food prices pushed an additional 130-155 million people into poverty. People rioted in protest at the high food prices in various countries, including Bangladesh, Mozambique, Egypt, Tunisia, Senegal, Zimbabwe and Haiti.

A number of possible reasons for the price rises were identified, including:

  • Increasing oil and energy prices
  • Drought and climate change
  • Panic buying
  • Export restrictions
  • Increased demand for food in Asia
  • Biofuel policies

food_riotIt was felt at the time that it was the combination of all these things that did the damage. There were so many factors thought to have contributed that some described the situation as a “perfect storm”.

However, we now have the benefit of hindsight and it’s clear that some of these factors played little or no role in the price spike (Wright 2014).

It’s true that the oil price spiked in the first half of 2007, just before the food price spike, so there is at least a smoking gun. Higher oil prices would have increased the cost of agricultural production to some degree, and this could have been passed on to buyers. However, Wright argued that this sequence of events (high oil prices followed by high food prices) was largely coincidence, not a causal link. He noted that prior to this event, there was no notable relationship between oil and food prices:

The 1970s oil spike began after the spike in grain prices was well under way, and another huge oil price surge starting in 1978 had no counterpart in the grain market. The sharp but forgotten spike in maize and wheat in 1996 was not matched by a similar movement in oil prices. When energy prices doubled after 1998, grain prices on average barely moved until 2006. (Wright 2014, p. 546).

If drought or adverse climate change was a significant cause, we would have seen significant declines in global food production in 2007-08. People observed that there was a big reduction in Australian grain production at just this time, due to the long drought in the Murray Darling Basin. However, Wright showed that there was no major decline in aggregate global production for any of the three major grains, so other countries must have had production increases that offset Australia’s shortfall. Furthermore, looking at past spikes in food prices, he found that (back to 1962) none of them coincided with large production shortfalls. This is intriguing, because a shortage should in theory cause a price increase, but it seems to have been overwhelmed by other factors in past years at least.

There was “panic buying” by several countries (Bangladesh, The Philippines, Nigeria and some Gulf countries) who increased stocks in an attempt to contain local food prices. This may have made a temporary contribution to higher prices on world markets, but it probably wasn’t a major factor. As evidence of that, I note that panic buying soon ceased, but prices remained high for several years (until about 2014).

A number of countries that traditionally have been exporters of cereal grains imposed a ban on exports during the crisis: Argentina, China, India, Egypt, Pakistan, Russia, Ukraine and Vietnam. This would have reduced the supply of grain in international markets. The World Trade Organisation and International Monetary Fund estimated that prices would have been 13% lower without these restrictions.

Increased demand for food in Asia, especially China, probably contributed. Higher incomes led to higher demand for meat, which led to higher demand for grain to feed to livestock, particularly soya beans. Higher prices for one grain flows through to other grains through substitution in demand. Wright noted that the evidence about the role of higher food demand in pushing up prices in 2007-08 is complex and somewhat confusing, but that it probably did play some role.

Finally, we have biofuels policy, particularly the US policy that caused large volumes of corn to be diverted away from food and livestock production and into the production of ethanol for use as a transport fuel. Although this was ignored by many commentators at the time, it undoubtedly played a significant role in the food price jumps. In addition to pushing up food prices, this policy increased the area and intensity of corn production, which probably led to increased environmental damage in the forms of water pollution, soil erosion and biodiversity loss. And, tragically, even in terms of its contribution to abatement of greenhouse gases, it was (and still is) a very poor policy. The climate benefits provided are small and very expensive.

One lesson from this is that we need to be careful in drawing conclusions about the reasons for changes in market prices. It is easy to be misled by simple correlations, such as that between 2007 oil prices and food prices. A plausible story is not sufficient evidence.

Another lesson is the importance of thinking through policies before committing to them. The failure to do that for biofuels policy in the US and Europe probably resulted in them doing more harm than good.

Further reading

Wright, B.D. (2014). Data at our fingertips, myths in our minds: recent grain price jumps as the ‘perfect storm’, Australian Journal of Agricultural and Resource Economics 58, 538-553. Journal web site ♦ Ideas page for this paper

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