The Cusp

The Name of the Game

2012-02-27T13:47:00.001+11:00

Holden Cruze assembly plant in Adelaide (Image from: CarAdvice.com.au)

The cat is out of the bag. An interview by Allan Kohler of the show Inside Business with General Motors Holden Managing Director Michael Devereux revealed the real purpose of government hand-outs to car manufacturers. It is not as is widely held to prop up failing industries, but to attract annual investments in R&D that have substantial multiplier effects throughout the economy.

Here is an excerpt from that interview:

ALAN KOHLER: So Australia should provide GM assistance in Australia not to help you to become profitable but because of a contest between us and other countries for the money?

We're engaged in a competition, is that correct?

MIKE DEVEREUX: Every country in the world is engaged I think in a competition to attract new, high-tech, highly capital-intensive investments - whether it's Brazil with tariffs, whether it's the UK with regional development funds, whether it's other countries with less obvious forms of either currency manipulation, or things like if you buy a car and you want to get it insured if it's an imported car it costs twice as much to insure as a domestic car [emphasis added].

So there's lots of different ways that countries play the game. The co-investment path is I think the most appropriate one for Australia and, yes, Australia does need to compete with other countries.

ALAN KOHLER: Right so but another way to look at that is the company that is playing the game is General Motors and the other manufacturers. You're actually playing off these countries against each other to improve your profitability by making them compete with assistance money?

MIKE DEVEREUX: Well, what happens around the world is GM is an about $150 billion company and we're looking to spend about 10 per cent of our total revenues on both engineering and capital [emphasis added].

And frankly, as that capital is deployed around the world, we try to deploy it in the way that returns the best return to our shareholders. And that is the purpose of business.

So every country on the planet competes for auto investment because of the multiplier effect that it has in the economy - from R and D jobs to actually capital equipment investments, to transportation and logistics.

It's got a huge multiplier effect. In terms of jobs, it's got about a five or six to one - so five to one multiplier effect.

So it's a large business enterprise. It has I think far reaching benefits into a lot of different sectors of the economy, so it's obviously why countries do that.

ALAN KOHLER: Can you can (sic) see why somebody would see that as fairly cynical - you know, the way that a company like yours would...

MIKE DEVEREUX: I can.

ALAN KOHLER: You know, just trying to get the best you can out of each country and you know, play them off?

MIKE DEVEREUX: I think a lot of people wish that the world was flat and that everybody played by the same rules but countries aggressively compete for what Australia has.
Australia is one of 13 places in the world - 13 - that can design, engineer and manufacture a car and a lot of countries want that same kind of capability [emphasis added].

Devereux then goes on to hint that GM Australia would be asking for about $300 million a year in co-investment funds from the Australian Federal government to invest in two facilities or car plants. The trade-off is that they would then have to guarantee that these projects would follow certain milestones in terms of the number and timing of jobs created.

This quite candid conversation reveals a couple of things. One, developing countries like Brazil and China (which was not named but alluded to) which have limited fiscal capacity to provide industry support in the form of co-investments can still compete through other policy instruments like tariffs and currency manipulation. Two, developed countries which preach free trade and open competition like the UK and Australia, actually engage in very interventionist policies to attract investments in high-tech and green manufacturing.

In other words, the demise of industry policy has been greatly exaggerated in the West, since it has been resurrected in other forms under the banner of "innovation" and "climate change". In the past, opposition to taxpayer funded subsidies to the auto industry has been founded on the argument that this creates a "dead weight loss" by creating encouraging activities that an economy is not competitive in.

Here we are seeing that it is actually creating public benefits through multiplier effects and a healthy return on public dollars invested that allow a nation to specialize in activities that it is well-suited for. A country such as Australia may not be able to export cars because of its strong currency resulting from the mining boom, but its mature domestic market can still support a profitable car industry within it. This strikes me as a good balance.

Oh, what a difference

2012-02-15T11:10:00.000+11:00

Back in 2005, Germany had the highest unemployement rate among the major economies of the EU (of the big four including France, UK, Italy and the PIGS economies of Portugal, Ireland, Greece and Spain). Ireland had the lowest. Today, as Moody's downgrades the credit rating of six European countries, Germany has the lowest unemployment among them all. How fortunes have changed in such a short span of time. It should be noted that the Deutschland during the global financial crisis went alone in not stimulating its economy.

Could this be a case of free-loading? Stimulus only works when everyone does it, otherwise some of the fiscal spending leaks out through imports of foreign made goods, not benefiting the local economy. Germany, having benefited from the stimulus spending of its neighbors during the GFC, does not relish its present role in bailing out its ailing neighbors. A classic case of "no free lunch."

"Poverty is a choice"

2012-02-08T16:57:00.000+11:00

That seems to be the conclusion of Charles Murray, a scholar of the libertarian American Enterprise Institute and author of the controversial book, Coming Apart which looks at the growing divide among white Americans from 1960 to 1910.

After asserting in the Bell Curve a book he co-authored with Richard Hernstein that it was their inherent lack of intelligence or IQ more precisely that reduced African Americans to the bottom of the social and economic ladder, he now claims that poverty among white Americans is a result of the decline of civic culture, a result of changing preferences rather than structural policy imbalances.

Back in 1994, the unknown civil rights lawyer Barrack Obama, as a guest commentator at NPR spoke plainly regarding Murray's work then, that

He's interested in pushing a very particular policy agenda ... With one finger out to the political wind, Mr. Murray has apparently decided that white America is ready for a return to good old-fashioned racism so long as it's artfully packaged and can admit for exceptions like Colin Powell.

It doesn't seem as though there is a role for government either in closing the divide between upper middle class white Americans and their blue collar counterparts. According to Murray, the cure for this malady is for the wealthy "to drop their nonjudgmentalism and start preaching what they're practicing" (a case for cultural imperialism?). Perhaps, in Murray's policy brief, they deserve in exchange for exercising such noblesse oblige or civic duty tax cuts on top of the ones they already receive (?).

The person who could model this kind of behavior the best among the candidates is Mitt Romney. The introduction of the book comes at an opportune time as he recently stumbled over the issue of income inequality and as many independents within the party (blue collar teaparty Republicans) cast a suspicious eye at the 'Washington/Wall Street establishment' that he seems to represent. The 'non-Romney' candidates, Newt Gingrich, Rick Santorum and Ron Paul have all railed against these 'fat cats' and sought to capture the protest vote.

It turns out, these so-called elites share many of the religious and cultural preferences as the party base according to Murray (upper middle class whites more frequently go to church, marry and stay married for longer). Of course the recent research on happiness and income explains why that may be. In the end, Murray may have tried to establish a false causation here.

Given the stagnation of income and productivity in America, the 'choice' faced by ordinary Americans isn't the same as the one they faced in the 1950s when GDP and employment were rising. Consequently, people don't 'choose' to become poor because they have lost their work ethos; the lack of a work ethos comes as a result of people being poor or unemployed for an extended period of time.

Obama Seeks to Curb Outsourcing

2012-01-27T13:04:00.000+11:00

With 2012 being an election year, President Obama set out to frame his re-election bid in November around the economy. Having cited employment and productivity gains of late, he then targeted his ire on tax incentives offered to multinational companies for outsourcing business activities overseas.

The following is an excerpt from his State of the Union Address:

If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it. That money should be used to cover moving expenses for companies...that decide to bring jobs home.
Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go toward lowering taxes for companies that choose to stay here and hire here.
Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.
It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me these tax reforms, and I’ll sign them right away.

Just as he decried the uneven playing field that countries like China have created by undervaluing their currency, he advocated the use of the tax system to provide credits and government subsidies to industries (particularly in the clean energy and advanced technology sectors) as a way of ensuring that America was "built to last". All this was part of the solution in addressing what he called "the defining issue" of his presidency--keeping the American dream alive.

Well, well, well, it seems that Washington is no longer enamored with the Washington Consensus. As it pushes for free trade agreements across the globe to lower trade barriers for its products and to enforce the intellectual property rights of its companies, it is clear that the administration has no qualms about engaging in market interventions at home to boost the competitiveness of its local industries.

Is Too Much Regulation or Too Much Innovation Responsible for Killing Jobs?

2011-11-14T13:26:00.000+11:00

Earlier this year, Tyler Cowen suggested that the Great Stagnation in productivity and incomes observed recently in the West primarily in the United States has been occurring since the 1970s and is a result of it having exhausted the "low-hanging fruit" of innovation.

An opposite case can also be made that too much innovation has led to this slowdown. The Economist through its science and technology blogger comments on the practical advances occurring in the field of Artificial Intelligence or AI:

Today, automation is having an impact not just on routine work, but on cognitive and even creative tasks as well. A tipping point seems to have been reached, at which AI-based automation threatens to supplant the brain-power of large swathes of middle-income employees.

The pace of technological progress rather than having slowed down, appears to be speeding up. So much so that as "capital becomes labor" in many industries, leading to cheaper goods and better products, income growth for workers has stagnated while corporate profits have soared.

Advanced manufacturing, financial engineering, creative industries and even mining no longer require as much labor as their first wave cousins might have. Yet to attract such industries, governments have had to cut taxes, lower regulatory hurdles and so forth. This in turn has led to more constrained fiscal spending on their side.

The one area in which more regulation has led to greater innovation is that of climate change and environmental policy. The White House under the Democrats has elected to shelve its proposed cap-and-trade scheme in favor of greater powers for its Environmental Protection Authority to promote greater air quality for the health of its citizens.

The increased restrictions on the carbon emissions of power generators is causing a shift away from carbon intensive coal fire plants in favor of gas fired stations. The adjustment into a low carbon economy is creating just about as many jobs as it destroys according to economists.

Whether or not regulation encourages or discourages jobs however is beside the point, as one Stanford policy expert was quoted by the Washington Post as saying. The adoption of regulation should be based on whether it benefits society, he says. I couldn't agree more.

China's Hard Landing: Is it around the bend?

2011-10-28T15:58:00.003+11:00

Last June, I speculated that a hard landing in China might be around the bend. That was even before the US downgrade and EU debt crisis unfolded. Now it seems the events of 2007 culminating in the collapse of Lehman the following year and the global stimulus in response to the North Atlantic crisis that followed may have returned to bite the People's Republic.

Reports of China's heavy handed treatment of foreign companies, defaults on loans and a slowing property market are developing into a credible narrative. Doomsayers like Rhoubini and Chanos have spoken. They predict the hard landing is on its way. Meanwhile confidence in China still remains strong with the EU looking east for help in financing its stability fund and Australia still expecting to profit from this Asian economy's thirst for iron ore and other mineral deposits as it did during the last global downturn.

What happens next depends on the ability of China's authorities to handle the current softening of global demand for its exports. Back in 2008, it engaged in a massive fiscal stimulus program. The unwinding of that stimulus is what gives the impression to many that it was headed for a soft landing. It can very easily turn the tap back on if the situation deteriorates. Their effectiveness at reading the situation will determine whether it has a soft or hard landing.

Does anyone deserve to be poor?

2011-08-30T11:14:00.003+10:00

The Nobel winning economist, Gary Becker, whose work on human capital I deeply admire writes a piece called Deserving and Undeserving Inequality in the blog which he shares with Richard Posner. In it he distinguishes between good inequality (deserved) and bad inequality (undeserved) saying

The great majority of people in different cultures do not object to someone who has made lots of money when they have superior abilities and talents, and they work hard at producing what are considered useful goods or services.

The meritocratic society with upward and downward social mobility would be in Becker’s view the most acceptable form. In this just society, the cream always rises to the top. He cites actors like Tom Hanks and Jennifer Anniston, entrepreneurs like Bill Gates and Steve Jobs, and skilled professionals like transplant surgeons who have grown rich by applying their exemplary talents and skills.

In contrast, Becker poses the problem society seems to have with hedge fund managers who make use of arbitrage (momentary bargains unnoticed by the market) to make huge sums of money. He lumps them together with speculators, Russian oligarchs and monopolists who enrich themselves through unfair, uncompetitive means (the latter two through government fiat).

Becker of course uses human capital theory as his framework for addressing this issue. Under its framework, individuals who acquire knowledge and skill through education and training (one cannot gain it any other way as it cannot be inherited or passed on) deservedly earn private returns in the form of higher incomes over the remainder of their working lives.

A meritocratic society should in Becker’s view reward the investments made by individuals in themselves and not rely on some other criteria. Elitism, the polar opposite of meritocracy rewards individuals for investing in other things (social standing or being raised on the right side of the tracks, marrying into the right family, etc).

It all sounds rational and justified, which is why Becker says “the great majority of people in different cultures” accept the legitimacy of a certain form of inequality. The wisdom of crowds is evident, until we start to consider the actual “merit” of the argument.

Economic, behavioral and neuro scientific research has demonstrated for instance that when it comes to employment, so many other factors aside from talent and intelligence determine the outcome of a hire/fire decision. Tall, handsome, Caucasian males for instance tend to earn more than their peers of equal and (as labor economist Daniel Hamermesh demonstrates) of even higher educational attainments.

If you are a plump woman working alongside office waifs, then you are more likely to be laid off during an economic downturn compared to your skinny female counterparts. In fact, studies in the US and replicated in other parts of the world show that job applicants could even be screened out simply because their names sound ethnically diverse (those with names such as ‘Tamika’ for instance got less callbacks from recruiters compared to those who had typically Anglo-Saxxon names like ‘Sally’).

The ‘good-bad’ dichotomy looks awefully strained at this point.

Reflecting on this a bit, I begin to wonder, how much of our lot in life really depends on our own actions, and how much of it depends on chance. In fact, beyond just the narrow hedonic enjoyment of earning more money, if the pursuit of happiness were to be the ultimate measure of success, then we could find an even bigger divide opening up.

About 50% of our ability to have a pleasant life depends on our genes, which is not very modifiable, according to psychologist Martin Seligman (other studies suggest this could be as much as 60%). This would not be good for those who weren’t born with the right disposition. Of course, for those who are disadvantaged in this way, they can still influence their level of happiness by focusing on the residual aspects of life that can be modified to produce happiness, a mere 15-20%. That is if they can afford to pay for therapy which again disadvantages those who happen to be residing at the bottom of the economic ladder.

As James Kwak who recently re-read John Rawls’ A theory of Justice, has said

well-educated, hard-working people did not deserve to make more money than other people, at least not as a normative (as opposed to a utilitarian) matter.

Kwak quotes the passage from Rawls’ treatise to support his claim

[The liberal conception of the second principle of justice] still permits the distribution of wealth and income to be determined by the natural distribution of abilities and talents. Within the limits allowed by the background arrangements, distributive shares are decided by the outcome of the natural lottery; and this outcome is arbitrary from a moral perspective. There is no more reason to permit the distribution of income and wealth to be settled by the distribution of natural assets than by historical and social fortune. . . . Even the willingness to make an effort, to try, and so to be deserving in the ordinary sense is itself dependent upon happy family and social circumstances.

At work, I am currently involved in developing and implementing a pilot project that seeks to help socially disadvantaged groups improve their learning and employment outcomes through a range of interventions. Social disadvantage comes in many forms. The issues encountered by our case officers usually involve multiple and complex needs such as drug and alcohol abuse, inter-generational poverty, lack of economic opportunity where they live, sexual abuse, abandonment, domestic violence, discrimination, disability both physical and mental.

Unfortunately much of Australian mainstream society sees these individuals as “bludgers” or people who leech off the tax and welfare system. The mainstream of society cannot really see why they can’t just find work in a country where there are skills shortages in many industries. I must admit, I used to subscribe to this way of thinking too.

This is reflective of meritocratic aspirations Aussies share with their American and British counterparts. A study by Dan Ariely and featured recently by PBS finance correspondent Paul Solman demonstrates this. Respondents were given three pie charts resembling the spread of wealth in unnamed countries. The first showed an equal distribution of wealth. The second showed a slight advantage to the two top quintiles. The last showed a very disproportionate concentration of wealth to the top 40%.

They were asked to specify which country they thought the US represented. Most went for the pie chart that showed a slight skewing of wealth to the upper classes. They were unaware that it was actually the third chart which they thought represented a third world country which represented the US. And yet, as the piece by Solman suggests, there is a lack of appetite among voters for tax reforms that would correct such a lopsided distribution of income and wealth.

At least in affluent countries, there is a system for attending to marginal groups. In less developed countries, the problem of addressing poverty, inequality and social disadvantage is harder because of scarce resources. Even in countries like China and India which have lifted millions out of poverty, this mostly depends on where people live. Those who reside along coastal provinces in China tend to have higher incomes than those that live in the interior whose incomes are closer to some countries in Sub-Saharan Africa.

In a middle income country such as the Philippines that has experienced growth but not a lot of change in its distribution of wealth, the experience has been that such growth has not been inclusive. Not only is economic opportunity not evenly distributed in the population, but this distribution itself seems to be perpetuated by laws and policies of successive governments.

I say this because the sorts of reforms that have been proposed to address disadvantage, namely tax reform, land reform, and reproductive health have been held back or denied the kind of support, moral, political, and financial, required for them to be implemented correctly. There are two kinds of attitudes that might be responsible for this:

Self serving bias is the tendency to claim more responsibility for successes than failures. Thus, those who are well-off tend to think they deserve their successes.
Just world phenomonon is the tendency for people to believe that the world is just and therefore people "get what they deserve." So those who hold this belief look at poverty and social inequality and think that those who suffer from them deserve to be where they are.

These forms of ‘cognitive bias’ may lead us to misapprehend the problem of social disadvantage and inequality to the point that we may even claim self-righteously that certain outcomes are just when in fact they are not. I certainly have come to reconsider my views on this. What about you?

London Burning

2011-08-13T21:46:00.003+10:00

No matter how hard he tries, David Cameron's attempts to evade responsibility not just for the conditions that may have caused or contributed to the eruption of riots in London, but also the inadequacy of the response to it, it is becoming apparent that not only politicians, but the public at large are losing faith with his reforms and the Big Society it promises.

Cameron of course, beset by calls from the Labor Opposition to reconsider cuts to the police budget laid the blame on parents and the so-called broken society. The rioting was criminality run wild, not a form of political protest against an unjust social order. The police response was slow and tactically wrong, he intoned during parliamentary debates.

Unfortunately for him, the police did not take too kindly to this characterization of events, and the public appear to back them instead of the political leaders. The seeming disconnection of the politicians who were on holiday, the PM in Tuscany, his deputy in France and the London Lord Mayor Boris Johnson in the United States, when the burning of London raged surely did not help build credibility for them.

In this situation, the importance not only of empathy but also a desire to ease suffering on the part of ordinary citizens could have gone a long way.

China Before the Fall?

2011-06-28T16:05:00.003+10:00

There is somethings seriously wrong with this picture:

China's dependence on investment (accounting for almost half of its economy in 2009) means that any slowdown in investment will lead to something akin to a "hard landing" in the West (an abrupt correction of monetary and fiscal policy leading to a contraction). Having experienced double digit growth since the 1980s, a hard landing in China would mean less than stellar growth of 7-8% triggering higher unemployment. Nouriel Roubini who warned investors against US sub-prime mortgages has predicted with "meaningful probability" that this slowdown of investments will occur in 2013.

Back in 2008/09, China got a foretaste of what is to happen when it grew by a mere 6.6% in the first quarter and consequently saw 20 million migrant workers in urban centers losing their jobs. The stimulus measures put in place to boost domestic consumption and investment might be coming back to bite the economy with much of this spent on redundant infrastructure (as Nouriel Roubini noticed when he took the hi-speed train from Shanghai recently) or lent to local governments and state owned companies leading to a property and debt bubble.

One phenomenon that has come out of this are the so-called ghost towns built by local governments with stimulus lending. Andie Xie, former chief Asia economist for Morgan Stanley has called China's stocks a big ponzi scheme and warns of either a US or Chinese crash in 2011.

Indeed investors have begun to question the sound governance of Chinese companies. Another leading indicator is inflation. With Premier Wen Jiabao now hinting that it cannot be contained within the government target of 4 percent, meaning that the government is unwilling to lift interest rates in the near term fearful of the effects that would have on growth, the scene is set for an abrupt correction of policy settings leading to a hard landing.

Of Wedding Feasts and Famines

2011-04-29T11:55:00.006+10:00

In the media-driven frenzy of royal-watching, the wedding between Kate and Wills harks back to a time when the pomp and pageantry of the monarchy provided a diversion from the daily struggles of their subjects. In England, as late as the 1930s, poor families struggled with the problem of hunger. Yet as George Orwell wrote,

The basis of their diet, therefore, is white bread and margarine, corned beef, sugared tea and potatoes -- an appalling diet. Would it not be better if they spent more money on wholesome things like oranges and wholemeal bread or if they even, like the writer of the letter to the New Statesman, saved on fuel and ate their carrots raw? Yes, it would, but the point is that no ordinary human being is ever going to do such a thing. The ordinary human being would sooner starve than live on brown bread and raw carrots.

The May/June 2011 online version of the magazine Foreign Policy is devoted to the problems associated with food price inflation and the impact this would have on poverty and hunger. The development aid community has flagged this as a potential cause for dragging many in the middle to low income countries into poverty.

Calls have been issued to address this pressing problem. But in a piece written by Abhijit Banerjee and Esther Duflo, the general consensus regarding the issue is challenged. What if the experts are wrong, they ask.What if the problem of hunger is not caused by the lack of affordable food? Nobel Prize winning economist Amartya Sen has famously pointed to the fact that famines have only occurred in recent times in countries that lacked democratic institutions of accountability. Poor governance rather than a lack of food supply creates extreme hunger.

In India where Sen is from, despite the rise in per capita income, per capita caloric intake has declined. The piece points out that

(t)he change is not driven by declining incomes; by all accounts, Indians are making more money than ever before. Nor is it because of rising food prices -- between the early 1980s and 2005, food prices declined relative to the prices of other things, both in rural and urban India. Although food prices have increased again since 2005, Indians began eating less precisely when the price of food was going down.

What if the problem of hunger is not driven by a lack of affordable food, but the fact that the poor demand a different variety of food? They use one example to bear this out:

Using price data from the Philippines, we calculated the cost of the cheapest diet sufficient to give 2,400 calories. It would cost only about 21 cents a day, very affordable even for the very poor (the worldwide poverty line is set at roughly a dollar per day). The catch is, it would involve eating only bananas and eggs, something no one would like to do day in, day out. But so long as people are prepared to eat bananas and eggs when they need to, we should find very few people stuck in poverty because they do not get enough to eat.

To provide more evidence of this, they cite a study conducted in two regions of China where researchers offered randomly selected poor households a large subsidy on the price of basic staples believing this would result in greater consumption of food. Instead they found that:

(o)verall, the caloric intake of those who received the subsidy did not increase (and may even have decreased), despite the fact that their purchasing power had increased. Nor did the nutritional content improve in any other sense. The likely reason is that because the rice and wheat noodles were cheap but not particularly tasty, feeling richer might actually have made them consume less of those staples.

They go on to point out the possible reasons why the poor might be eating less. Better water and sanitation for instance may lead to a lower incidence of nutrition depleting diseases. Women in rural villages which now have access to water no longer need to spend a good deal of effort fetching water to and from rivers. Aside from that is the penchant of the poor to spend on non-essentials like vices and other forms of entertainment (televisions, DVDs, mobile phones, movies, etc).

Many programs aimed at boosting protein and iodized salt intake have been met with a dismal response from poor households. It seems that when it comes to deciding what to spend their income on, they seem to have other priorities.

Reframing the Climate Debate

2011-03-22T13:30:00.000+11:00

The Climate debate has proven to be a diabolical policy problem for politicians in Australia, a country with one of the highest carbon dioxide emissions per capita in the world having an economy heavily dependent on the export of coal and other carbon intensive commodities.

It was partly responsible for the sacking of a once popular PM by members of his own party during his first term. It was dragging down the popularity of the lady that replaced him. Even a coalition between the Greens, Labor and a few independents representing country-based electorates could not provide a consensus in the debate.

Then came the proposal of an economist to offset a carbon tax with an income tax cut. The idea is hardly new. Even the Prophet of an Inconvenient Truth advised the scrapping of payroll taxes in lieu of a carbon tax a few years ago. The idea was to lighten the burden of productive activity (labor) while increasing it for environmentally destructive ones (pollution).

The advocacy of this tax cut approach as part of an overall principle of making the polluter pay while compensating vulnerable members of the community has stemmed the bleeding of support as expressed in the poll numbers and restored this government's legitimacy at least for now.

The re-framing of the debate is something that has eluded previous proposals for a carbon pollution reduction scheme. The use of a tax to price carbon rather than a synthetic market (read: emissions trading scheme) is much simpler and straight-forward. It also avoids much of the costly transactions costs involved in setting a complex trading system.

The use of tax cuts to offset additional living costs on households to whom polluting energy firms would pass on any tax burden does away with the notion that the "little man" would be the hardest hit by the tax. It also reduces the disincentive to work without creating budget pressures.

Indeed the Opposition will wish that it had proposed the Carbon tax with the accompanying income tax cuts ahead of the government as what a conservative think tank had earlier done. Having been outflanked by Labor on this issue, it now has to reconcile its carbon abatement policies which opts to use government regulation rather than a market mechanism something that economic liberals are not known for. Being the party that invented "middle class welfare" it will now find it difficult to counteract the middle and lower income tax cuts now being considered.

Tyler Cowen's The Great Stagnation

2011-03-17T12:20:00.000+11:00

George Mason University's economics professor Tyler Cowen's new book The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better has been making waves since it was released in January as an e-book. His main thesis is that the rate of technological progress has slowed since the 1970s leading to stagnant median wages.

In February, he sat down with EconTalk to discuss the reasons for this slowdown. He identified three major causes which are outlined below:

Technological plateaus. He uses the invention of the car at the start of the last century as an example. He says

If we look at the broader sweep of history, growth tends to come in spurts. The car was a big deal but the next thing after the car, while it will come someday, is really hard.

As The Economist pointed out,

The most transformative of modern innovations—the internet—generates fewer jobs and revenues than past technologies. General Motors once employed over 600,000 people; Facebook serves 500m customers with a staff of 2,000. Americans spend and borrow much as before the advent of the web.

Government distortions. He talks about the problem of measuring the value of investments in health and education

Considering our economy right now: about 17% of it is health care; about 6% in terms of GDP is education; and with some overlap, 15-20% is what we call government consumption--government activity, not just transfers. At all levels of government, including state and local. Add those all up, take out the overlap, and it's a pretty big chunk of the economy, like 20-30%. Those are all sectors where there are massive subsidies, massive distortions of incentives, a lot of bad policy; and it's hard to measure value.

Education. As a broader proportion of the population has become college educated, it becomes harder to generate producitivity improvements through higher participation rates.

Anyone in college at the beginning of the 20th century, it was very easy to educate the marginal person. You get a big gain out of it and it's easy to do…To make them much more productive through education is simply a much harder endeavor. And, we are relying on distorted institutions.

Here he is discussing the same ideas with a fellow blogger Matthew Yglesias:

Classic Under-Investment

2011-02-10T11:29:00.001+11:00

A work colleague of mine recently raised a question about why so many young people opt out of school early and never pursue any further education afterwards. For them, any sort of economic reward or incentive to invest in them just won’t be met with enthusiasm. “Why then should governments waste taxpayer’s money encouraging them to do so?” she asked.

It is a classic under-investment problem, I answered, involving the accumulation of human capital where despite the provision of services, an underwhelming take-up rate on the part of students is the response. Of course the irony is that in the developing world, there is no shortage of people that would be interested in training that would lead to better employment outcomes. For example, in this published paper that I wrote back in 2007, I found that the college participation rates in the Philippines were the same as in

Australia

, despite a lower proportion of GDP dollars being publicly spent there on tertiary education.

Society is worse off if the potential productivity and availability of skills is not realized due to this under-investment in human capital. So back to the original question, should the government spend greater effort in encouraging a larger proportion of young people to remain either in school or post-school education for longer if they apparently do not seem all too keen?

In answering that, it is best to examine the way we frame the problem first. The traditional approach is based on a rational interpretation of human behaviour, in which the choice of the individual must be respected at all costs, in that only he or she can determine what is best for him or her, and if that means less schooling, then so be it. An alternative based on a behavioural perspective however provides a different set of lenses to appreciate the problem more fully. From this perspective, there are several reasons why individuals may behave irrationally.

The first is that humans tend to over-estimate their abilities. This overconfidence leads them to settle for a sub-optimal level of schooling. Youths with an artistic bent might drop out of school believing they can successfully break out in creative careers. Teen couples do so believing too much in their ability to conquer the difficulties of raising a family. Others who are delinquent believe in their ability to lead a lifestyle outside the law. You get the picture.

The second reason is that humans have a present-bias. Meaning, time has a way of distorting decisions that involve the weighing of costs and benefits, especially when costs have to be borne in the near term for some future benefit. Like the problem of saving for retirement or improving one’s health and fitness, under-investment in education and training is the result of people putting more importance to the present to the detriment of the future.

The third reason is the commitment problem. Even when individuals decide to undertake training, they often fail to follow through with their commitment. The phenomenon of starting but never finishing--call it “buyer’s regret”, “cognitive dissonance” or the lack of persistence; individuals face an uphill battle when it comes to sticking to their commitments particularly because of overconfidence (which in this case is the overconfidence to complete what they signed-up for) and present-bias (putting off assignments until the last minute).

Finally, there is the information problem that youths encounter when making career choices. What occupation suits them? Which one will be most rewarding? What type of course to take, and which institution to register with? These are difficult decisions to make because they are infrequently faced, so the person cannot benefit from experience (or hindsight) in making them. Even the potential for social learning or gaining advice from one’s elders who have encountered making such decisions before can be obstructed due to personal biases.

With all these problems facing the individual, it is probably a wonder why anyone makes the right decision. It certainly provides the rationale for the state to stimulate greater demand for education and training. In this endeavour, there are two possibilities. The state can deal with either the front end or the back end of the cohorts coming through. The back-end involves nudging youths of school-leaving age to persist in school through career advice and greater access to information and varied training opportunities.

The front-end means intervening in early childhood as a way of affecting values and preferences. As this study showed, good quality kindies matter in determining the long-run earning capacity of pupils. The results of such a study are quite controversial, but I think that the reason early intervention works and has a long-lasting impact has more to do with instilling a love of learning and imparting a sense of wonder about the world in kids that sticks with them throughout life and keeps them engaged in school much longer than would otherwise be the case.

Instead of Tax Cuts, Nudges to Join Community Groups?

2011-02-09T17:52:00.005+11:00

In Baseline Scenario, James Kwak neatly discusses the implications of the science of happiness and that of behavioral economics on public policy.

It is an intriguing read, as he observes that the two seem to point us towards opposite directions. While behavioral economics tends to provide a basis for the state to get involved intimately with people's lives (i.e. finances, diet, fitness, sexual activities, vices, child-rearing to name but a few), the science of happiness supports the notion that besides guaranteeing a minimum standard of living, the state should take a back seat to churches and other forms of socio-civic engagements. That is because additional income above a minimum threshold does not increase happiness as much as human contact (among other things).

So rather than handing out tax cuts (that increase our incomes but do not necessarily improve our level of happiness), should the state be providing what behavioral economist Richard Thaler calls "nudges" to encourage greater social connections?

That would give both liberals and conservatives something to be both happy and sad about.

Austerity and the End of Multiculturalism in Britain

2011-02-08T12:17:00.002+11:00

Toby Helm, Matthew Taylor and Rowena Davis report in the Guardian that

David Cameron was accused of playing into the hands of rightwing extremists today as he delivered a controversial speech on the failings of multiculturalism within hours of one of the biggest anti-Islam rallies ever staged in Britain.

A coordinated attack or just a slip up? Salma Yaqoob seems to think the latter. She writes also in the Guardian

I like to think Cameron was genuine in his words when he visited my ward. And that somehow his mind was hijacked by the right wing of his party. I hope for all our sakes he wins it back. Because while areas like Sparkbrook are not perfect, they are succeeding...

Cameron once had a vision. It was a positive and genuinely uniting and inclusive one that gained him admirers across the political spectrum. He should return to it.

The "Big Society" the name coined by PM Cameron to couch his vision for Britain to counter the idea of "Big Government" attached to Labor which has resulted in huge fiscal deficits was coincidentally his way of re-branding the Conservative Party in Britain and make them electable. Margaret Thatcher had previously declared, "there is no such thing as society." This was a complete reversal of that way of thinking. Just as Tony Blair had reinvented the Labor brand, so was Cameron.

It now appears that the "Big Society" that the PM had in mind is not so big after all having some strict preconditions for entry. As Yaqoob notes, this is a total reversal of the "face" he put on when he was aspiring to become Britain's next PM. Does the PM's statement unmask the fact that the new Tory brand is just a repackaging of the mean old Thatcherite ideology?

While all this was taking place, a fourth quarter contraction in GDP was hitting the headlines. Dean Baker commenting on the Great British Austerity Experiment notes that

(t)he fourth-quarter GDP report showing that the economy went into reverse and shrank at a 2.0% annual rate is exactly the sort of warning that many of us here were expecting. Weather-related factors may have slowed growth some, but you would have to do some serious violence to the data to paint a positive picture. Of course, the austerity in the UK is just beginning. There will likely be much worse pain to come, with a real possibility that the country will experience a double-dip recession, or at least a prolonged period of stagnation.

With the pain of economic stagnation possibly setting in, is this the end of multiculturalism in Britain?

Gross National Happiness, Tax Cuts and Income Inequality

2010-11-19T21:46:00.001+11:00

It is going to cause grief and discomfort to the statisticians, but British PM David Cameron indicated this week that he was adamant at developing national indicators of happiness to guide public policy. So perhaps instead of bar charts and graphs, government ministers might issue smiley faces and frowny faces depending on what the mood of the citizenry might be.

In this age of austerity, this might not be such a good idea as many public services are going to be subject to the hatchet. On the other hand, if the science of happiness is anything to go by, increasing happiness might be a function of simply reducing inequality (meaning the absolute level of wealth is not what matters, but the relative level). If this is what will bring happiness to the greater number of people, then the last decade of growth that benefited the top tier of society may have had the adverse effect of reducing national happiness in America.

Paradoxically, the party that wants to extend tax cuts to this top tier has been restored to power in the lower house of Congress by the simple fact that many felt Obama gave a handout to the banks and the powerful lobbyists. Their theory of course is that tax cuts will bring growth which will lift all boats (increasing absolute wealth for all, never mind the way the wealth is distributed). That theory may come back to bite them if they repeal the health care measures passed by the last Congress which is aimed at ensuring a minimum threshold of income protection for millions (improving relative wealth). As in Britain, the threat of service cuts makes for a heroic posture, but time will tell if it really pays off in the end.

Global Aging Preparedness Index

2010-10-27T15:44:00.002+11:00

The report prepared by the Center for Strategic and International Studies provides a good indication of why countries like France are thinking about raising the pension age. In the West, the aging of populations combined with the recent aversion towards immigration as a solution to the demographic shift is causing governments to re-jig their retirement systems. This report should provide some food for thought to policy makers as to the strategies needed to be employed in order to manage the "graying" of their workforce.

Global Aging Preparedness Index | Center for Strategic and International Studies

The Happy Prince

2010-10-23T16:49:00.002+11:00

I wrote “The Happy Prince” when I was 8. It is a fable depicting life under Martial Law in the Philippines (although I did not realize this then). At the time it was written in 1978, my father, a promising lawyer and banker, turned his back on his wedding sponsor, then First Lady Imelda Marcos to join the late Sen Benigno Aquino, Jr in his fight to win seats in parliament. It was he who took it upon himself to publish the book in 1980. This year marks the 30th anniversary of its release by the mosquito press. It also marks the year in which Benigno III became elected president of the Philippines, making him in a way the happy prince foretold in the story.

Chapter I: The Orphan

Once there was a king who died in bed, not in battle, for he was a peace-loving ruler. He had only one son. Before his breath faded out, he gave his friend, Merham, the Wizard, his last wish.

“Merham,” he said, “raise my son as if he were your own.”

“I can’t do that, your Majesty,” Merham replied.

The dying king was insistent. “Do you want my son to be lonely?” he asked.

“No!” Merham exclaimed. “But it is foolish for me to take care of the Prince.”

“I don’t have much time to live,” the king said. “You are to raise him to become a noble and great king.”

After saying his last words, the king died with a smile. Thus the King’s son became an orphan.

Chapter II: The Strange Ruler

After the funeral and burial of the king, Merham took the young King Matrahan II to the kingdom of the old king’s friend. On the way, Merham asked some villagers, “Pray, tell me, where is the palace of King Merchian?”

The villagers looked puzzled. “We have not heard of a King Merchian?”

“Then who is your ruler?” Merham asked.

“King Herdaka. He is our only ruler, and he will be our only ruler!”

Everywhere the pictures of King Herdaka were painted on the walls. “Even if he dies, it seems he will live on. With those ugly pictures, he will seem to be always alive and present in the kingdom.”

“Who is this strange ruler called King Herdaka?” The people merely turned away and kept their silence.

Chapter III: The Different King

As days went by, the young prince became known as King Matrahan II. He was a different king. He had no servants to attend to his personal needs. No slaves. No guards to protect his person and property. He loved his people and treated everyone as his friend.

Everybody loved him.

King Matrahan II was good of course. But he was sad because the villagers were unhappy. King Matrahan II wanted to know why and do something about it. He knew what he wanted for his people, but either day or night, the villagers were always unhappy.

Chapter IV: The Told Secrets

As time passed, the villagers became gloomier and gloomier. Until one day, King Matrahan asked them why they were so unhappy.

“Why are you always unhappy,” King Matrahan asked. “Is it because you hate me?”

“No,” replied a peasant called Canto. “It is because of King Herdaka, our ruler.”

“What?” exclaimed King Matrahan. “I thought I am your king!”

Then Canto continued, “I’m sorry King Matrahan. We pretended you were our king.” He then proceeded to talk of the cruelty of their mean king Herdaka.

Afterwards, Merham suddenly spoke, “Matrahan, I am sorry. I am not your real father.”

“What?” cried King Matrahan.

“It is true. Your real father died when you were an infant. But before he died, he told me to bring you here to this city to find your father’s best friend, King Merchian.”

Then Canto interrupted. “Merham, remember when you did that years ago? My father was the one who told you there was no such king called Merchian here.”

An old man stood up and said, “Yes, but I do recall what an old gypsy once told me. He said that there were two brothers—two princes. They were having a contest, an election, on who was to be king. He told me one of the princes was called Herdaka. He also said that the other prince won.”

“Then the other prince should have been King Merchian,” said Canto.

“That is a possibility,” said King Matrahan II.

“It is a distinct possibility,” agreed Merham. “Why do you think your father told me to go to King Merchian?”

“Then where is he?”

“In the dungeon of the palace of King Herdaka, probably,” answered the old man.

Chapter V: The Victory

King Matrahan gathered his men. They rode to the palace of King Herdaka. They stormed the walls. After days of fighting, King Matrahan’s men finally broke through. They defeated the army of King Herdaka.

King Matrahan captured King Herdaka who was forced to lead them to the dungeon where King Merchian was imprisoned. The stairway was dark, for the dungeon was deep under the palace. King Matrahan freed King Merchian. The people were happy.

King Herdaka was punished for his crimes. He was ordered imprisoned in the dungeon. The survivors of his army were all banished. The gypsy, a spy for King Merchian, was rewarded with a place in the King’s court.

King Merchian adopted King Matrahan and gave him a kingdom in the East. Merham, the Wizard, became a minister of King Merchian.

After many years, King Matrahan died. But his people still remember him as the happy prince.

MENA and SSA

2010-09-03T14:14:00.002+10:00

View Larger Map

My previous post compared East Asia and Latin America in terms of their political economies using the online graphic tool developed by the Legatum Institute for its Prosperity Index. I am referring to the contrast between developmental states in East Asia and the laissez-faire democratic traditions in Latin America. The emphasis on individuals giving way to collective goals in the former contrasts with the ascendant place individual happiness is accorded in the latter.

A similar comparison can be drawn between two emerging markets: the Middle East and North Africa (MENA) and Sub-Saharan Africa (SSA). Both are endowed with rich natural and mineral resources, but within each region, distinct characteristics and patterns of development seem to emerge that distinguish one from the other. Similar themes as with the East Asian/LatAm comparison emerge in analyzing these two regions.

Firstly, with respect to MENA, there are some similarities in its socio-political and economic make-up with East Asia in that a greater emphasis is placed on economic fundamentals and security. There does not seem to be as much entrepreneurial and innovative activity though (the UAE being the lone exception) which is due to their dependence on minerals for propelling economic growth. Apart from East Asia, the Middle East is the only other region where poverty has been reduced to a great extent.

Secondly, on the part of Sub-Saharan Africa, there are shared traits with Latin America in terms of strong individual freedom and democratic institutions. While generally anaemic in terms of most social indicators, at least two countries, Nigeria and Mali rate well in terms of social capital. Perhaps their use of trust and community involvement is a way of coping with their impoverishment. Like Latin America, the resource curse seems to afflict SSA as evidenced by poor governance, health and education.

Thirdly, as a result of such comparisons, we might be tempted to think that democracy impedes economic development. Here we can find counterfactual examples that debunk such a claim. One is Turkey, a democracy in MENA which is doing relatively well economically. Another is Zimbabwe, an autocracy in SSA that is at the bottom of most economic league tables.

While many lessons about growth and development can be learnt from East Asia, one has to be cautious about prescribing their model to other regions where the institutional fabric is different. Each region and nation within it has to work out a set of arrangements consistent with its socio-political make-up that would foster economic growth and development. Although the general principles may be the same, there is more than just one way for achieving prosperity and happiness.

East Asia and LatAm

2010-08-24T16:24:00.003+10:00

Image taken from Web Resources Depot.

New graphic tools tell the oft-repeated story behind these two regions in a visually compelling format.

Lately I have been playing around with the online graphing tools of the Legatum Institute; in particular, I have been using the results of the 2009 Prosperity Index which the Institute publishes to compare East Asia and Latin America. This multi-dimensional index is an aggregator of sorts in that it combines various measures of prosperity and well-being and allows users to plot different countries on a “spider web” chart.

It is a well-known fact that East Asian and Latin American countries share many socio-cultural traits as well as development strategies. This is borne out by the Institute’s results for these regions. As shown here, LatAm seems to converge into one distinct pattern, while East Asia does the same here. Note that for purposes of demonstration, I have lumped the Philippines (a Latin country transplanted in Asia) and Chile (the reverse case) with their affinitive counterparts.

The patterns show different models of development. LatAm nations score high on Personal Freedom and Democratic Institutions, but relatively low when it comes to Economic Fundamentals, Entrepreneurship and Innovation, and Social Capital. Despite this, the most well-off nations of Argentina, Uruguay and Costa Rica seem to do well in terms of some social indicators Education, Health, and Safety and Security. There is a general lack of good performance in Governance save for the richer nations.

The opposite seems to be happening with East Asia. Here Personal Freedom seems to have been less prioritized in favor of Economic Fundamentals, Entrepreneurship and Innovation, Health, Education, and Safety and Security. As countries in the region get richer, a gradual improvement in Personal Freedom and Democratic Institutions takes place as evidenced by Japan, South Korea, and Hong Kong. Governance tends to improve as well (with

China

in the embryonic stage of this development path).

Does this imply that democratic institutions are not good for development or that authoritarian governments promote growth? Not necessarily as this Economics By Invitation feature by The Economist showed. While as Alberto Alesina states, there may be no evidence that democracies promote faster growth, and that as Lant Pritchett suggests authoritarian regimes tend to have a spotty record, as Daron Acemoglu who co-wrote a book on this (shown below) as well as Ricardo Hausmann, Arvind Subramaniam, and Yang Yao suggest, getting the right incentives, institutions and governance arrangements do matter.

Nudge Theory Makes Its Way Across the Pond

2010-08-17T00:25:00.006+10:00

First it was the Obama White House that adopted nudge theory by appointing Cass Sunstein as regulatory czar, examining all new regulatory proposals. Now it is the coalition government of PM Cameron which has provided a home for it in 10 Downing Street with the setting up of a nudge unit as reported by Andy McSmith of the Independent UK.

The fact that this new theory which is sometimes referred to as libertarian paternalism by its founders appeals to both conservative and liberal leaders alike is evidence that it in fact serves as the real Third Way. It is paternalistic in the sense that it supports the idea that people may not necessarily act in their own self-interest at times, an insight revealed by behavioral science.

But on the other hand the manner by which to correct this according to the theory is not by imposing a "one-size-fits-all" solution that often limits choice. Instead nudge theorists look at ways to improve the "choice architecture" or to frame the decisions for individuals in such a way that they come to make better informed decisions.

Cognizant that nudges are present all around us, and that they can be used for good as well as for ill, the idea behind applying nudge theory is to correct bad nudges that might lead to predatory practices that abuse the rights of consumers or to improve the poorly designed nudges with respect to personal individual decisions that could have profound public and social impacts such as the amount of savings to set aside for retirement or the kind of health insurance to purchase.

These nudges are cheaper for society in the long-run and lead to greater personal and societal happiness as well, which is probably why the leaders of both the US and the UK are both seeking to apply them, given the tight fiscal situations they are facing which require major reforms in the coming years.

Fallacies

2010-07-27T12:08:00.000+10:00

Which among the following pairs of countries would you consider to have a larger share of their exports in high-tech manufactures:

a. Korea or Japan

b. Philippines or Singapore

c. China or the United States

d. Mexico or Germany

The answers are found below: a. Korea b. Philippines c. China d. Mexico

Surprised? Certainly these facts run counter to the commonly held beliefs about rich and poor countries. The most intriguing insight in all this is that the Philippines, the poorest of the four emerging countries just cited, long considered a laggard in its region as far as exports and investments are concerned, has emerged as a world leader in this regard, edging out Singapore, the former front-runner since 1996. See for yourself here.

Other interesting observations are: (1) China has been ahead of the US since 2005, (2) Korea has led Japan since 1997, and (3) Mexico has edged out Germany since 1994. Safe to say, the strong performance of these emerging economies over their richer peers cannot be considered a fluke or the result of luck. In economic terms, a "structural shift" has occurred in these economies which have traditionally been exporters of cheap, basic commodities.

What accounts for this increasing specialization in high-tech manufactures by emerging economies? More importantly, what does it say about their future prospects for growth? Is it a healthy sign or is too much specialization counter-productive?

Let us first define what high technology means in this context. According to the World Bank definition, these manufactures include "products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery" or in other words, products with a high innovation component.

In the Philippines, electronics is the biggest contributor to exports accounting for about 60%. They consist of a wide variety of products with different applications from consumer, auto, office, computer related, to telecommunication, medical and industrial uses. Data from the National Statistics Office for 2008 and 2009 show the value of electronics exports exceeding $20 billion per year, while imports are roughly 68-70% of their totals. This runs counter to the common perception that these domestic industries belong to the low value adding category.

According to Ricardo Hausmann from the Center for International Development at Harvard University, a professor of the Kennedy School of Government, the complexity of products made by a nation is a reflection of the capabilities that exist within it. Nations that produce highly elaborate products have exhibited the ability to grow and develop due to the fact that very few countries are able to replicate the same conditions required by such activities (here he is explaining his theory of development based on this notion).

It is more than a question of incomes or wealth. Sri Lankans have an average income slightly above Filipinos, yet their major exports are in textiles and garments. The lack of infrastructure, rule of law and good governance does not seem to deter the presence of high-technology industries in the Philippines. The abundance of engineers and highly skilled, flexible workers appears to be the main driving force.

Nudge or Shove? Debating the Merits of Behavioral Economics in Policymaking

2010-07-22T11:18:00.000+10:00

In designing policies that reduce negative externalities or public "bads" (as opposed to public "goods") such as the ills associated with the rise of obesity or carbon pollution, governments have borrowed many instruments from the behavioral economist tool kit.

The recent health care measures in the US that mandate the printing of caloric content of food in menus and packages is one example; so is the use of peer pressure in the billing systems of regulated energy companies that use informational cues (smiley faces) to instruct customers of their relative efficient use of power (compared to that of other customers).

These approaches try to influence irrational decision-making by some without necessarily limiting the choices of those for whom they are intended and without imposing unnecessary costs on others whose decisions are perfectly sound and rational. A more direct and appropriate approach to resolve these problems according to Lowenstein and Ubel in a recent NY Times piece entitled Economics Behaving Badly would be to increase the relative cost of consumption whether of fatty processed foods by withdrawing subsidies to their key ingredients like corn oil or that of energy by putting a price on carbon.

The two pillars of the behavioural economist school argue that policymakers have taken the politically expedient route of utilising the light touch or "nudges" espoused by their field when the more direct but unpopular approach of applying subsidies and taxes prescribed by traditional economists or "shoves" would guarantee the desired outcomes more effectively.

Not so, counter Sunstein and Thaler, authors of the influential book Nudge: Improving Decisions About Health, Wealth, and Happiness. Both traditional and behavioural approaches are needed to influence decisions by rational and irrational actors. The fault they say lies in the politics of the situation, not the economics of it.

The Ecological "Arc" of the World Economy

2010-07-13T13:17:00.001+10:00

The following entry contains nothing new about carbon emissions that hasn't already been picked up by the media; instead, it seeks to present the facts differently.

The map below shows the total size of CO-2 emissions over five decades where each bubble represents total emissions by a country. If you hit the play button, you will see the gradual growth of emissions over time. Quite striking is the rise of China over the past decade dislodging the US as the biggest emitter with 6 million kilo tons (kt) of emissions compared to 5.7M for the US. Russia and India follow suit with about 1.5M kt each, and Japan ranks fifth with 1.3M kt.

The next chart plots the CO-2 emissions per capita of each country along the vertical axis with average incomes (gross national income per capita) on the horizontal axis based on purchasing power parity (or PPP) measuring income in terms of what citizens can afford based on the cost of goods and services relative to wages. The bubbles represent the population size of each country.

One sees clearly an "arc" that gradually slopes upwards such that as countries get richer, each citizen consumes more resources and generates more pollution. From 1980, this arc gradually moves rightwards reflecting technological advances that have made industries more efficient in their use of resources, i.e. it takes less carbon to produce a dollar's worth of goods. In 1980, the point at which emissions per capita started to rise was at $1,000. In 2006, it was close to $4,000.

For the world economy to grow in a sustainable way, rapid technology development is needed to make production less reliant on carbon so that as poorer countries move up the income scale, they do not cause environmental damage at a rate similar to that of rich countries in the past. The arc needs to be flattened and pushed rightwards. It is not viable to prevent the rise of affluence in poorer nations as poverty tends to be correlated with faster population growth.

China with its 1.3 billion people earning $4,700 on average is already on the upward sloping part of the arc. Displacement of industries from rich countries that have stringent environmental policies is largely responsible. Egypt which has about the same level of income per person as China, emits 3-kt per capita compared to China's 5-kt reflecting a different mix of industries. India with an average income of $2,500 per person still lies on the flat portion of the arc and has a relatively low carbon footprint of 1-kt.

For the arc to flatten and shift rightwards, incentives are needed to encourage investments in new technology that will shift production away from carbon intensive methods and into cleaner ones. The rate of technological progress has to be faster than economic progress of poorer nations. The arc has to be bent downwards faster to accommodate the bigger but poorer nations who are "catching up" with the smaller but richer ones. If not, the future well-being of all those who live on the arc could be at-risk.

For a discussion on the history of the science behind global warming, I found the following source quite illuminating: http://www.aip.org/history/climate/ from the American Institute of Physics.

Mind the Gap: Global Health and Wealth by 2050

2010-07-10T09:23:00.001+10:00

One of the most exciting developments in recent years in the area of technical communication has been the work of Hans Rosling, a Swedish public health economist, who uses publicly available data and interactive technology to debunk many prevailing misconceptions about the global gap in development.

Here he is at a TED conference returning to more basic analogue roots to explain the growth of world population. His paradoxical contention is that only by raising living standards among the poorest nations can the world reach a sustainable level of development by 2050. Towards the end, he employs the "Gapminder" his digital tool kit to prove his point.