26 thoughts on “Debate presentation

  1. Interesting presentation but you are falling into the trap of idolising the post-1945 welfare state.

    It would be far more effective to be forward looking rather than thinking that after 1945 the world was suddenly rightened.

  2. Risk is not what you percieve it to be, as something that affects a minority. And as a minority effect, something that can be absorbed by the remaining majority. Instead, programs that teach reliance on the state for risk management, actually create risk in a population by allowing the people to adopt risky behaviors. People must absorb most of their own risk. *By attempting to reduce risk you put all at risk*. This is is just one of the Austrian (Hayekian) insights. Those same financial instruments you use as an analogy have just failed us. And over the next few decades we are going to learn that the welfare state policies you are advocating will produce the same, but even more catastrophic failure. Risk management is EVERYONE”s responsibility, because it’s everyone’s NECESSITY. The state can engage in inter-temporal redistribution. It can engage in insurance that the private sector cannot fund. But you cannot ‘insure’ against death. Everyone dies. The same is for catastrophic health care. You can’t insure against something that is guaranteed. And if you can show that (A) it’s possible – good luck because this means solving the problem of induction, or (B) risk is of the nature you assume it to be, then you must be relying on (C) infinite growth in both productivity and population. If you figure out where prosperity came from in the west (geographic expansion and population movements) then the reason we can ‘afford’ such policies is temporary, not systemic. Your charts, by virtue of time frame, reflect a temporary period of west-centric prosperity caused by accumulated investment, particularly in technological research, that gave it an advantage over the other the remaining world population, accumulated social orders and institutions (many of which are undermined by attempts at risk mitigation), and wider distribution of property rights. Prosperity originates in those things, not a period of brilliant insight or policy making. You’re looking at effects not causes. In simple terms, most of the world benefits from semi-neutral trade permissible because of US dominance of the seas. A fact which could be altered at any point in the near future for internal as much as external reasons. So don’t get too caught up in your policy fantasy. And in particular don’t refer to complex financial instruments as a ‘good’ when they are a ‘bad’.

  3. Some pretty horrible charts – so why is the sharemarket rising?

    Green shoots.

  4. 4#Im not so sure about those green shoots carbonsink (thats is the very latest in phrases isnt it? Its everywhere in the news). If the only green shoots are shooting in Goldman Sachs or other large trading firms, I dont trust it. They appear to a have a huge weight of trading power and they could be behind triggering a mini bear rally. Im not totally convinced yet but then I dont really care – I could have a better time at Vegas and not give myself a nervous disorder watching the share market every day.

  5. #5 Sad to say, the majority vote went against me, though (as an unbiased observer) I thought I had the better of the argument.

  6. Alice @ 6:

    Green shoots are everywhere can’t you see them? I mean, BofA only needs another $30-odd billion so the Dow financials surged almost 4%.

    The new bull market is here. Don’t fight it.

  7. Curt, your simplification is just an ideological narrative. People adopt risky behaviours for all sorts of reasons and the availability of state support is just one factor. Removing state support will not stop risky behaviour any more than air pollution will stop people breathing. There are extremely powerful biological reasons for risky behaviours; don’t kid yourself, the school of hard knocks won’t convert us to the some kind of hyper-rational beings.

    If your thesis was correct you’d find less risky behaviour where state support was lower, in fact, we often find people take greater risks in tougher environments. Even a little look at the statistical evidence shows that your risk-welfare relationship doesn’t hold, for example, compare savings rate v welfare by country: maybe sometimes, other times not. This indicates you’re talking ideology – aka attractive narratives – not science.

  8. #9 If you say so carbonsink but Im not sure about the rising unemployment – that has to impact at some point doesnt it? How can it be fully factored in if unemployment is still rising? It seems a bit like the fuss made in the media about swine flu. Its almost over before it started?. The media make much of a lot of things. It seems such a short time since the crash and those massive bailouts….how long did sharemarket recovery take in the 1929 crash? Can that duration for recovery be compared to the current situation in any meaningful sense or are the circumstances too different (or even the 1987 crash)?

  9. “Curt, your simplification is just an ideological narrative. People adopt risky behaviours for all sorts of reasons and the availability of state support is just one factor.”

    So, what’s the point? That because state insurance is not the only factor, it can just be dismissed?

    I don’t think anyone is suggesting that state safety nets are the only reason people make bad decisions, so this looks like a straw man.

    “Even a little look at the statistical evidence shows that your risk-welfare relationship doesn’t hold, for example, compare savings rate v welfare by country”

    The countries that have had the highest savings rates over the years (like Japan, Singapore, South Korea, now China) are all countries with relatively little social safety nets.

    In Australia there has been a fairly strong correlation between rising welfare state expenditures and falling levels of national savings from about the early 1970s onwards. Indeed, one of the reasons that compulsory superannuation was introduced was in recognition of the fact that having a means-tested age pension dimishes incentives to save for retirement, and encourages people to draw down retirement savings sooner.

    It doesn’t make much sense that countries with large government sectors would also have high levels of savings. If the government taxes and spends a large proportion of national income, where are the savings going to come from? Are people going to save the lesser amounts of after-tax income? The only other alternative is for governments to run large budget surpluses consistently, and yet this seldom happens.

  10. I see taxation as a form of pooled savings. If tax dollars go to guarantee retirement income then the community have jointly saved, via tax, for that guarantee. Whether that is an efficient way of ensuring retirement income and what, if any, are the psycho-cultural reflexes of communal savings is not settled.

  11. The problem with the debate was that the topic was somewhat ambiguous. It’s unreasonable to expect anyone to argue that government is always (or never) the best risk manager – it is clear that the government is better at managing certain kinds of risks (in that private markets are unable to provide such insurance, or that private markets do provide such insurance but that government would likely do a better job), but that some risks are better insured against privately.

    For instance I’m not certain that the Government would do a better job at insuring my car than my current insurer, but I’d suggest the government has done a better job insuring me against the chance that I might enter tertiary education than any private insurer could have.

    Given this, I think your strategy of framing the debate around the need for government to be the ultimate risk manager was the only tenable one to pursue. It certainly provided a compelling argument. Having said this, I think Henry made the valid point that while some risks are best managed by government, while others are best managed by the private sector, what is of interest is who, at the margin, is better at managing risk. He made the point that when comparing the government managing the uncertainty surrounding defence contracts with the private sector managing the uncertainty surrounding property development, it is his view that the private sector does a better job. I think this is a reasonable position to take. A point I feel was strongly made by Henry was the ability of private insurance providers to better differentiate risk management, tailoring it to the specific circumstances of the individual. A counter point to this that I thought would have been interesting relates to the benefits of the greater risk pooling afforded by a social risk management scheme, as opposed to the lesser extent of pooling afforded by a multitude of different risk management schemes.

    In the end the debate reached that (unavoidable) point where the two speakers were arguing about different things, which was inevitable given the nature of the topic. My guess is that the result was just as much about the preconceptions of the audience as it was about any assessment of the actual performances.

  12. “I see taxation as a form of pooled savings. If tax dollars go to guarantee retirement income then the community have jointly saved, via tax, for that guarantee.”

    If governments were to either run larger budget surpluses, or alternatively put aside a fraction of the tax revenues from every generation of workers and invest that money in a national savings account to fund later liabilities for pensions, health care, aged care etc. when that generation is older, then this would indeed be an efficient form of pooled savings. But this seldom happens. Instead, the cost is simply rolled over to future generations of workers. Shifting costs into the future is clearly not a form of savings.

    This is one of the problems inherent in the notion of government as risk-manager. Because governments are driven by short-term electoral survival, it is more difficult for them to manage longer term risks and problems.

  13. Monkeys Uncle you seem to be continuing the ideological thread. The trick with science is to look for evidence that disproves your thesis, not to cherry pick confirmations.

    So, what’s the point? That because state insurance is not the only factor, it can just be dismissed?

    Not at all. Sure it’s a factor and should be taken into account. And encouraging reliance on the state has it’s negatives. It also has it’s positives – eg, it may be more efficient – it’s a case by case evaluation. But to claim that it is wrong – a priori or because to some fundamental underlying principle or self-reliance or whatever – is just religion. As I said, risky behaviour is part of being human, like conspicuous consumption and enjoying music, not something that has to be zapped by operant conditioning techniques. The question is how do we deal with it intelligently given a mix of concerns, not how we eliminate it.

    The countries that have had the highest savings rates over the years (like Japan, Singapore, South Korea, now China) are all countries with relatively little social safety nets.

    Yes, but there cultural and historical factors at work too. The data is mixed. As I said, sometimes, sometimes not.

    In any case, the object of social policy in a democracy is to produce a balanced response to human concerns not to satisfy abstract principles, and the welfare of others is a one of those concerns. I think you’ll find that the Chinese people want social security, they’ll get it as they can afford it, and they’ll be willing to pay for it (grudgingly, like us.)

  14. Jim, regarding your last paragraph I should clarify my position a bit. I am not suggesting that society should never offer any kind of safety nets, or that we should allow people to starve in the gutter for the sake of offering some kind of cautionary morality tale about what happens to the improvident.

    What I am suggesting is that we should recognise that these things can distort incentives and put in place measures to deal with that. They include forcing people to save more money when they can afford to do so, eliminating churn among other things. But if all else fails and someone is really hard up, then the government would still have to provide some safety net and help people get back on their feet. Or if someone has a serious disability or chronic illness, they would also need to be supported.

    All I am suggesting is that we should put in place policies to ensure that the need for assistance isn’t any greater than it need be. Is it really beneficial to encourage people to adopt behaviours that are actually more likely to end up making them more needy and less capable of looking after themselves?

    The irony is that the only way any society can sustainably offer a reasonable safety net is if we ensure that the system doesn’t become too overloaded that it collapses or becomes unaffordable.

  15. “In any case, the object of social policy in a democracy is to produce a balanced response to human concerns not to satisfy abstract principles, and the welfare of others is a one of those concerns.”

    But it is not clear that the alternative is any less abstract or more practical.

    Indeed, the notion that society should collectively share a large proportion of its benefits and risks is often more of an abstract or idealistic principle that doesn’t actually work as well in practice (due to problems like dependence, fraud, churn, perverse incentives etc.). I actually think my position is more pragmatic and focussed on what works rather than what satisfies abstract principles.

    “The trick with science is to look for evidence that disproves your thesis, not to cherry pick confirmations.”

    But aren’t you doing that yourself, by not taking on board the conflicting evidence I offer and simply looking for any other confirmations that you believe will account for everything (like cultural and historical factors)?

    If you can find evidence that disproves what I am saying, I will take it on board. But I can’t see much alternative evidence being offered.

  16. Well, I haven’t studied this in detail or read the literature, but when I’ve looked at the household savings tables by country I don’t see a inverse correspondence with welfare levels. It’s all over the place with a number of points clearly going the wrong way for the welfare theory, eg, the USA. The recent historical affluence seems to be a major determinant. Then there’s some significant variations that are still unexplained and are often put down to national character, cf. USA v Japan. All up, the welfare equals no savings doesn’t really work well, but maybe a bit.

    Curt Doolittle claimed this as a Hayekian insight. Ok, it might be a Hayekian insight but it doesn’t work to well on the ground AFAICS. It sounds like religion to me.

    More generally, Curt’s argument, (loosely) welfare induces inefficiency, and inefficiency is wrong, isn’t right or wrong on either count, the answers are clearly more complex.

  17. I had a little giggle when I browsed these slides.

    Macroeconomic volatility???? [I forget which slide in particular]

    This implies we are going through a rather dramatic but nonetheless mundane boom and bust that balances each other – with no longterm net harm or issue. From this point of view there is no need to look at deeper issues.

    However I see evidence of long-run worsening macroeconomic instability and some OECD economists have depicted this.

    So, if the world economy recovers from the current GFC, the next one will be worse.

    For example – the level of unemployment is not simply “volatile” – it is ratcheting up.

    Our current account is not simply “volatile” – though bouncing around, it is ratcheting down.

    And so on…

    The ratchetting is the issue, the so-called “volatility” is relatively boring.

    At least for me.

  18. Jim, one of the reasons the US has a low rate of savings is its tax system. Consumption taxes make up a smaller share of the tax take than in most countries, while the US effectively double taxes investment income due to a lack of imputation credits. This would tend to encourage more consumption and less savings.

    I also believe that in the US they take into account capital depreciation when calculating national savings, while in most other countries they don’t. This would tend to reduce the official rate of savings.

  19. John, with “the nanny state” and funding, you`ve grossly understated the “Problems of Public Risk Management”.

    Is it really possible to look at the nightmare of US “war on terror” and growing security state, the “war on drugs” and the corruption and instability it has generated around the globe, the corruption in the US when a single party has firm control over the pork spigots, and the endemic moral hazard that brought us the financial crisis, and not feel a need to be a little more chary about asking for greater government?

    http://mises.org/Community/blogs/tokyotom/archive/2009/02/26/the-curse-of-limited-liability-wsj-com-executives-traders-of-big-financial-corporations-generate-risky-businesss-while-smaller-partnerships-are-much-more-risk-averse.aspx

    Regards,

    Tom

  20. Tom, there appears to be either zero or a negative correlation between the willingness of the state to act as risk manager, and its willingness to wage wars of various kinds, as witness your reliance on the US for examples.

    And this is supported by a look at the political spectrum within the US. The general correlation between opposition to social democracy and support for both militarism and war on drugs is obvious. Libertarians are partial exceptions, but most of them have still ended up supporting the Republicans, which means, in the end, buying a pro-war package. In any case, the last decade has shown that the number of genuine libertarians in the US is tiny. When faced with the acid tests of the Iraq war and Guantanamo, the vast majority turned to be shmibertarians like Glenn Reynolds.

  21. JQ, I’m not sure if your characterisation of the state of US libertarians is really representative.

    Libertarian-leaning voters have been drifting away from the Republican Party since about 2000. If you look at publications like Reason, most of the folks there spend much of their time baiting social conservatives nowadays. Many of them endorsed Kerry in 2004, and the Democrats in the 2006 congressional elections.

    This is not really surprising. If conservatives can’t deliver on smaller government and less reglation, libertarians don’t have much to gain by supporting them.

  22. It was an interesting debate. There is obviously room for both forms of risk management, government and market in our economy. Perhaps in equilibrium the marginal benefit derived from each management system is equal. The question then might then be which management system provides society with the largest total benefit. When there is, a perceived failure of risk management, (e.g., the Victorian Bush Fires, or Climate Change) the public will invariably seek an increased role for government as opposed to insurance markets to manage risk. The power of coercion provides the government with unique advantages when managing risk, which society invariably turns to when feeling most risk averse.

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