Archive for July, 2004

Is economics an empirical science ?

July 14th, 2004 27 comments

Tyler Cowen[1] lists a number of economic propositions which he formerly believed, but has abandoned in the light of contrary evidence. Most of these propositions were elements of the economic orthodoxy of the 1980s and 1990s, variously referred to as Thatcherism, neoliberalism, the Washington consensus and, in Australia, economic rationalism. They include the efficacy of monetary targeting, the beneficence of free capital movements and the desirability of privatisation in transition economies.

Following in the same spirit, I thought I’d list a couple of propositions on which I’ve changed my mind in the face of empirical evidence. These are elements of the Keynesian orthodoxy of the 1950s and 1960s, on which I was trained. Following Cowen, I’ll list them as false claims I used to believe

* There is a long-run trade-off between unemployment and inflation

* Keynesian fiscal policy is a powerful and reliable instrument for stabilising aggregate demand

On both these issues, I’ve come to accept that Milton Friedman was largely right, and his Keynesian opponents largely wrong.
Read more…

Categories: Metablogging Tags:

A case for drug law reform

July 14th, 2004 16 comments

Prompted by the recent discussion of blogging on Australia Talks Back (audio here), new reader Ted Kroiter has sent an email asking me to point to his views on drug law reform. . You can also read my thoughts on the same topic. Discussion welcome.

UpdateA striking feature of our drug laws is that there’s a fundamental distinction drawn between those drugs that have been widely used since, say, 1600 (alcohol, tobacco, caffeine) and those that have only been used for 50-100 years (cocaine, heroin, marijuana, amphetamines and so on). Is anyone willing to defend this distinction? As a matter of personal disclosure, I should say that the current rules suit me very well. I am a regular consumer of two of the three main legal drugs, and have no interest in any of the illegal options, (though there are times when a double espresso with added benzedrine might be just the ticket).

Categories: Life in General Tags:

FTA and PBS – the US view

July 13th, 2004 2 comments

For those who think the Free Trade Agreement will do no harm to the Pharmaceutical Benefits Scheme, it’s worth reading this NYT piece, which focuses on impacts in the US>.

By the way, although we may pay more for medicine, we are the way to a cure for the dread affliction of linkrot. The NYT has provided weblog-safe links using its RSS feed. Thanks to Jack Strocchi for alerting me to this.

Categories: General Tags:

The new consensus on minimum wages

July 13th, 2004 9 comments

Coming in a bit late, I have the opportunity to survey a range of blogospheric discussion of the topic of minimum wages, which largely supports the view (not surprising to anyone but an economist) that minimum wages are good for low-income workers. The traditional view among economists was that minimum wages reduced employment and thereby harmed workers, but this view has been overturned, or heavily qualified, by empirical evidence, beginning with the work of Card and Krueger.

The debate kicked off with a piece by Stephen Landsburg in Slate, noting that recent US econometric studies had failed to find economically and statistically significant negative effects on employment resulting from higher minimum wages. This was surprising, in view of a range of earlier studies which found right-signed effects, but were statistically weak because of small samples. Landsburg argues that this might be an example of publication bias, in which studies with no statistically significant results tend to get discarded. He concludes

Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers. In fact, the minimum wage is very good for unskilled workers. It transfers income to them

Landsburg then goes on to argue against the minimum wage on the curious ground that it’s a less transparent alternative to policies such as an Earned Income Tax Credit. Brad de Long responds, endorsing the EITC, but arguing that minimum wages are also an effective policy instrument for transferring income to the poor.

There are quite a few interesting responses. Steve Verdon develops Landsburg’s argument, pointing out that a minimum wage increase which raises the general cost of goods and services is like a consumption tax and has an associated deadweight loss. That’s true, but it’s also true of whatever tax may be used to finance the EITC. Robert Waldmann suggests changing the structure of payroll tax, but as he himself points out, his argument disregards the point that the budget is already in deficit. Tyler Cowen observes that increases in wages may be offset be reductions in working conditions. Interestingly, no-one seems to have defended the traditional view on empirical grounds.
An interesting and important question is whether these results can be transferred to other countries like Australia, where the minimum wage is higher relative to average weekly earnings. In the survey of the literature we did for the National Wage Case, Steve Dowrick and I concluded that, although there might be some reduction in employment and some leakage to low-wage workers in high-income households, the evidence showed that minimum wages help low-income workers . Our study is here (PDF file)

Overall, my view is close to that of Brad de Long. Minimum wages are a useful policy instrument, but by no means the only or most important one, to improve the position of low-income workers.

Update Jacob Levy asks, reasonably enough

If, as Landsburg claims, the published studies are “all in agreement” about the direction of the effect, then the underlying distribution of studies can’t be as he describes it, can it? Publication bias in favor of significant findings, superimposed on an actually-neutral relationship ought to generate equal numbers of ostensibly-significant findings in each direction.

Actually, the Card and Krueger study found weak positive impacts of minimum wages on employment using a data set where most of the obvious sources of bias had been removed. There may have been earlier studies with similar results, but they would almost certainly have been discarded, on reasonable grounds of weak statistical significance or omitted variable bias. By contrast, studies with similar weaknesses, but with the expected sign would have been published.

Categories: Metablogging Tags:

Good fences make good neighbours

July 12th, 2004 12 comments

On my recent visit to Israel, the big new “fact on the ground” was the fence/wall/barrier, being constructed by the Sharon government through the West Bank. It’s very visible in lots of places, and it’s hard to imagine a way of breaching such a massive barrier, certainly not one accessible to an individual carrying a gun or bomb.

But, as recent court judgements from both the Israeli High Court and the International Court of Justice have shown, the very effectiveness of the barrier as a defence undermines any defensive justification for any route other than the 1967 border. It’s clear now, that Israel is in a position to safely withdraw its forces to that border, while running very little risk of attack[1].
Read more…

Categories: Metablogging Tags:


July 12th, 2004 2 comments

I’ll be on Radio National’s Australia Talks Back tonight, sometime between 6 and 7, talking about blogging

Categories: Metablogging Tags:

Monday Message Board

July 12th, 2004 11 comments

It’s Monday again, and time for the Monday Message Board. Post your thoughts on any topic (civilised discussion and no coarse language[1]).

fn1. Readers are welcome to consider how the norms of this blog, which I think work quite well, relate to “political correctness” and “civility”.

Categories: Regular Features Tags:

Words fail me

July 11th, 2004 14 comments

While collecting links for my previous post, I came across this quote from Minister for Financial Services and Regulation, Joe Hockey.

In 1930 the Bank of England sent Sir Otto to Australia to help us work through our financial problems caused by the Great Depression. The result was that Sir Otto Niemeyer had a profound impact on our recovery.

So profound, in fact, that the Depression was still in full swing when World War II broke out nearly a decade later.

It turns out the Hockey was announcing the inauguration of a “Sir Otto Niemeyer” scholarship at the Australian Graduate School of Management, supported by

• The Commonwealth Treasury;
• The Reserve Bank of Australia;
• The Australian Prudential Regulatory Authority;
• The Australian Competition and Consumer Commission
• The Australian Securities and Investments Commission and
• The Australian Bureau of Statistics.

This is an absolute disgrace, and all of these institutions should be ashamed of themselves. I doubt that anyone in Australian history has caused as much economic hardship as Otto Niemeyer.

Moreover, there was no question of error in his actions. Niemeyer knew that, if the British banks he represented were to be receive repayments of their loans (overvalued thanks to deflation) Australian living standards would have to fall, and unemployment would have to rise. He delivered precisely that outcome. He had previously done precisely the same in Britain, having been the leading advocate of the disastrous return to pre-war gold parity in 1925.

Categories: Economic policy Tags:

What I'm reading

July 11th, 2004 1 comment

Ice Station by Matthew Reilly. Readers might have picked up by now that my taste in reading is fairly omnivorous, but techno-thrillers are outside my normal range. However, given that the author is Australian, I was struck by the introduction which seemed to promise an evil genius role for a character named Otto Niemeyer, and decided to read on. In fact, he remains peripheral. As compensation, though, you get to encounter (I am not making this up!), mutated sea-elephants. Despite the absence of laser-beams, they are very ill-tempered. If you can overlook this kind of thing, and like the genre, Reilly is actually pretty good.

Categories: Economic policy Tags:

Everything old is new again (on the blogroll, anyway)

July 9th, 2004 4 comments

Restored to pride of place on the blogroll, the inimitable Don Arthur has returned to blogging.

I’ve also added The Drawing Board an Australian Review of Public Affairs, published by the School of Economics and Political Science at The University of Sydney. An article I’ve done on Labor’s economic policy should be published there soon has just (this minute) been published there.

Categories: Economic policy Tags:

Manners and political correctness (repost from January)

July 9th, 2004 36 comments

In my experience there is a close to 100 per cent correlation between the stated belief that society is suffering from a decline in “civility” and a willingness to proclaim that we are all being oppressed by “political correctness”. John Howard neatly illustrates this. A week or two ago, he was denouncing public schools as hotbeds of political correctness, and the excessive concern with offending religious minorities that (allegedly) led to the curtailment of Christmas celebrations. Now he’s calling for more civility.

The common analysis underlying both demands for “political correctness” (this actual phrase was never used, except jocularly as far as I know, until critics seized on it, but terms such as “sensitivity” or “inclusive language” cover much the same ground) and for “civility”, is that offensive words give rise to offensive acts. In both cases, there’s some ambiguity over whether the problem is with the offence to the recipient or with the reinforcement of the hostile/prejudiced attitudes of the speaker, but the central claim is that modes of speech are an appropriate subject of concern and that some form of government action to encourage more socially appropriate modes of speech, ranging from subtle pressure to direct coercion, is desirable. The only difference between the two positions is that they have different lists of inappropriate words.

I don’t have a sharply defined position on any of this, except that I find people who think that being “politically incorrect” is exceptionally brave and witty to be among the most tiresome of bores. I doubt that changes in speech will, of themselves, produce changes in attitudes. The obvious evidence for this is the rate at which euphemisms wear out and become as offensive as the terms they replaced (for example, ‘handicapped’ for ‘crippled’). On the other hand, I think there’s a lot to be said for avoiding offensive words and forms of speech and can see a place for (tightly drafted and cautiously applied) laws prohibiting or penalising various forms of collective defamation.

Categories: Oz Politics Tags:

I guess he thought he could have gone faster

July 8th, 2004 2 comments

On the topic of transatlantic language differences, I was quite surprised to see this headline in the Washington Post. And I thought Australians took sport too seriously.

Categories: Economic policy Tags:

Spot the arithmetic error

July 8th, 2004 10 comments

This story in the Oz reports a decline in the return to education, but the argument is undermined by a problem with averages. Here are the crucial bits

THE gap in earnings between university graduates and people without a degree is closing, as the cost of getting a degree escalates.

While the proportion of the labour force aged 15 to 64 with a degree had almost doubled since 1993, the salary gap was closing against average earnings, he [Michael Gallagher] said.

The ratio of earnings for bachelor degree graduates to average earnings has fallen for both men and women but is more pronounced for women.

For example, between 1995 and 2001 it fell from 105.4 per cent to 93.9 per cent for women and from 96.8 per cent to 91.9 per cent for men.

Readers should not need a university degree to see the problem with this analysis, but I’ll spell it out over the page

Update Andrew Norton at Catallaxy has already made the same point
Read more…

Categories: Economic policy Tags:

Worse than the disease ?

July 7th, 2004 6 comments

My preferred cure for jetlag is to arrive in the morning and spend a fair part of the day outside, resetting your body clock, then have as normal an evening as possible, before going to bed about 10pm. In most respects, my schedule fitted this plan perfectly. Leaving Paris on Monday evening, I got into Brisbane this morning (Wednesday) and the day was suitably sunny. With the State of Origin starting soon, there’ll be no problem about staying up.

The only unusual feature is that my normal Wednesday includes karate training. I can now report that this is a complete, if problematic, cure for jet lag. Whatever term might describe my post-training condition, it is not jet-lagged.


Categories: Life in General Tags:

Lomborg resigns from EIA

July 7th, 2004 5 comments

From bertramonline, some comment (a couple of weeks old now, but my Internet access has been spotty) on the news that Bjorn Lomborg has resigned as head of the Danish Environmental Assessment Institute and is returning to his academic job. Like me, Bertram is somewhat surprised by the limited media reaction to, and coverage of, Lomborg’s last big effort, the Copenhagen Consensus.

As attentive readers will recall, the conference concluded that fighting AIDS should be the top global priority in helping developing countries and also that climate change mitigation was a waste of money. I agree with the first of these conclusions, and more generally with the need for more spending on health poor countries, and I hope that Lomborg will put some effort into supporting it. I’ll try to keep readers posted on this.

Categories: Life in General Tags:

Back in Brisbane

July 7th, 2004 2 comments

I’m back from my travels and, even after a week in Paris, Brisbane is as beautiful as ever, with blue skies, a mild winter day and the river looking as appealing as always.

My trip to Paris was very enjoyable, and my conference paper went very well. For a mixture of historical and stylistic reasons, my work on the economics of uncertainty is more highly regarded in France than in the United States. This prompted one of my co-authors to observe, rather unkindly I thought, that I could be regarded as the Jerry Lewis of decision theory.

Although I saw many interesting sights in Paris, the most surprising was that of four men in suits riding what appeared to be Segways (as far as I recall, I’ve seen descriptions, but not pictures, of these previously). Whether this was the beginning of a trend, or one of the many demonstrations and manifestations that abound in Paris, I couldn’t say for sure.

Categories: Life in General Tags:

Belated birthday

July 4th, 2004 2 comments

In the rush of getting ready to travel overseas, I forgot to note it, but this blog was two years old on 21 June. It seems a lot longer ago than that to me. During that time I’ve moved the blog twice, and seen many other bloggers come and go, and in some cases return. There have been some big changes in the time I’ve been paying attention to the blog world, not all of them in line with what I would have expected.

Although the number of blogs has grown over time, there hasn’t been the explosion I expected to result from the capacity (in my experience highly addictive) to publish your thoughts to the world on a daily basis. By the way, this is a good time to invite anyone who thinks they should be on my blogroll to write and tell me[1].

The relationship between blogs and the print media has reached something that looks like equilibrium for the moment. Most journalists know now what blogs are, and most who engage in political and social commentary are aware that their words are going to be dissected by mostly-hostile commentators (I try to accentuate the positive, but even so, most of my links to articles in the mainstream press are critical).

Of course, as bloggers are to pundits, commenters are to bloggers. This blog developed a robust group of commenters early on, and has sustained lively debate ever since (much of it, unfortunately, lost in various database failures).

fn1. I’m generally happy to link to blogs in the listed category, though I reserve the right to make arbitrary judgements, and to put off updating the roll until I get a round tuit.

Categories: Metablogging Tags:

Monday Message Board

July 4th, 2004 19 comments

It’s Monday here in Paris, but just about Tuesday at home. I should be back on deck in a few days. In the meantime, talk among yourselves (even while I’m away, I expect civilised discussion and no coarse language.

Categories: Regular Features Tags:

The Republican case for inflation

July 2nd, 2004 14 comments

In keeping with the blog tradition of bringing you tomorrow’s talking points today, I thought I’d look a bit further than the current election campaign and consider the implications of a Bush victory. On past form, there’s no reason to suppose that a second term will lead Bush to abandon his tax cuts, or to propose any significant net reduction in expenditure. At least not when there’s an obvious alternative, that only a few shrill Democrat economists and some incredibly out-of-date Republicans would ever object to. The US government has at its disposal and endless source of costless wealth – the printing press that turns out US dollars. Hence there’s no need to do anything tough like raising taxes or cutting Socil Security benefits. The only problem is that, according to some economists, reliance on the printing press as a source of government finance is likely to cause inflation.

As a first line of defence, the views of these economists can be criticised. There are plenty of Keynesian critics of monetarism who’ve pointed out that there’s no simple or automatic relationship between the money supply and the rate of inflation, and probably there are some who’ve been incautious enough to deny that there is any relationship at all. In any case, in the new era, the dynamism of the US economy is such that everyone wants to buy US dollars as fast as the Treasury can print them (ignore any recent observations on currency markets that might suggest otherwise).

Still, these are only delaying tactics. What will really be needed is a set of talking points showing that inflation (properly referred to as price appreciation or something similarly positive) is actually a good thing. In the hope of bringing the debate forward a bit, I’ve advanced a few.
Read more…

Categories: Oz Politics Tags:

A snippet on macro policy

July 1st, 2004 22 comments

Until fairly recently, macroeconomic policy (the management of unemployment, inflation and the exchange rate) was the central concern of economic policy. Since the early 1990s, and particularly under the Howard government, these concerns have shifted to the periphery.

The Hawke government abandoned targeting of the exchange rate with the floating of the dollar, but Keating in particular continued to regard the current account deficit as an important policy target, at least until the early 1990s. Excessive concern with the current account deficit was widely seen as one of the factors behind the policy miscalculations that produced the 1989-92 recession. The counterargument, put forward most prominently by John Pitchford, was that, in a deregulated market, the current account balance is ultimately determined by the corresponding set of borrowing and lending transactions, and that these should not be a concern of macroeconomic policy. This view is now fairly generally accepted. Even though the current account deficit is as large in relation to GDP as it was in the 1980s, only a minority of commentators[1] express concern about it.

More significantly, the government abandoned the idea of using fiscal policy to manage the economy, and ceased to take an active role in the determination of monetary policy, leaving this entirely to the Reserve Bank. Although the Reserve Bank, unlike other central banks did not take the view that it should be concerned solely with inflation, the resulting policy regime was one in which inflation targeting was the primary focus, and unemployment was, at most, a matter of secondary concern.
Finally, the government abandoned Labor’s target of an unemployment rate of 5 per cent, and declined to set an alternative target.

fn1. I’m a member of this minority

Categories: Oz Politics Tags: