Club Troppo has a great new feature (actually, a revival of an old one from Ken’s days at the Parish Pump). Called the Missing Link, it’s an intelligent ‘best of Ozplogistan’ selection each Monday, Wednesday and Friday. Here’s a recent example
Once my slow-motion site redesign is finished, I’ll add a link to an RSS feed, but you can probably pick this up over at Troppo.
Brad DeLong carries on the discussion about discounting and the Stern Review, responding to a critique by Partha Dasgupta that has already been the subject of heated discussion. As Brad says, all Dasgupta’s assumptions are reasonable, and his formal analysis is correct
But … The problem I see lies in a perfect storm of interactions:
This brings me to one of my favorite subjects: the equity premium puzzle and its implications, in this case for the Stern Review. I’ll try and explain in some detail over the page, but for those who prefer it, I’ll self-apply the DD condenser and report
Shorter JQ: It’s OK to use the real bond rate for discounting while maintaining high sensitivity to risk and inequality.
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My piece in Thursday’s Fin was about claims that the family farm is doomed. This is one of these notions that seems impossible to kill, having been around for decades, it looks as if it will outlast me. It seems to appeal to just about everybody. Sometimes its pushed by farmers who want more government aid. At the moment though, it’s mainly being run by economic rationalists who want to sweep away these small and allegedly inefficient operations.
Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.
I’ve attached a copy of a petition I’ve signed opposing the imposition of the death penalty on Scott Rush and others of the “Bali Nine”. Apart from general issues concerning the death penalty, I agree with the petition’s view that the actions of the Australian Federal Police in this matter have been deplorable. Although the primary offence being committed was against Australia, and the AFP was in a position to arrest Rush and others on their arrival in Australia, they chose to hand them over to the Indonesian police instead. As noted in Rush’s case, the police ignored an approach from his parents to prevent his committing the crimes.
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In yet another round of the controversy over discounting in the Stern Report, Megan McArdle refers to Stern’s use of “a zero or very-near-zero discount rate”. Similarly Bjorn Lomborg refers to the discount rate as “extremely low” and Arnold Kling complains says that it’s a below-market rate.
So what is the discount rate we are talking about? Stern doesn’t pick a fixed rate but rather picks parameters that determine the discount rate in a given projection. The relevant parameters are the pure rate of time preference (delta) which Stern sets equal to 0.1 and the intertemporal elasticity of substitution (eta) which Stern sets equal to 1. The important parameter is eta, which reflects the fact that since people in the future will mostly be richer than us, additional consumption in the future is worth less than additional consumption now.
Given eta = 1, the discount rate is equal to the rate of growth of consumption per person, plus 0.1. A reasonable estimate for the growth rate is 2 per cent, so Stern would have a real discount rate of 2.1 per cent. Allowing for 2.5 per cent inflation, that’s equal to a nominal rate of 4.6 per cent. The US 10-year bond rate, probably the most directly comparable market rate, is currently 4.44 per cent; a bit above its long-run average in real terms. So, Stern’s approach produces a discount rate a little above the real bond rate.
Arguments about discounting are unlikely to be settled any time soon. There’s a strong case for using bond rates as the basis for discounting the future. There are also strong arguments against, largely depending on how you adjust for risk. But to refer to the US bond rate as “near-zero” of “extremely low” seems implausible, and to say it’s below-market is a contradiction in terms. It seems as if these writers have confused the discount rate with the rate of pure time preferences.
I’m visiting Canberra for a couple of days and stayed last night at Rydges Lakeside Hotel, which is something of a blast from the past for me. My first job, for six weeks after leaving school, was as a porter at the Lakeside, then brand-new and top-of-the-market. Some decades later, we’re both showing our age, and the upmarket place to stay is the Hotel Canberra, which was massively revamped some time in the 80s. An even sharper indication of age (and inflation) – the bill for one night’s stay is the same as the total amount I earned here.
A more minor temporal warp: the downstairs cafe is a bit of a mishmash in terms of decoration, but the main theme is old ad posters from the 20s and 30s. One set is of stage magicians, notably including Houdini. But there’s a ring-in. The Amazing Randi, scourge of Uri Geller and of alleged psychics in general, has managed to inveigle himself into the scene.
It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.
The Atrocity Archives by Charles Stross. SF meets horror meets spy thriller (in the drab Deighton mode) as underpaid bureaucrats struggle to stop revenant Nazis loosing an infovorous ice demon on an unsuspecting universe. Those of a certain age will feel right at home by page 3
Logged in, I find myself in a maze of twisty little automounted filesystems, all of them alike.
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Also The Marketplace of Christianity by Ekelund, Hebert and Tollison, interesting both as an instance of economic imperialism and as part of a growing literature, largely emerging from the US, that treats religion and religiosity as goods, independent of the truth or otherwise of the doctrines being propounded. Oddly enough, this kind of reasoning to be welcome to many religious believers, though not to those who think the issue through. I’m just beginning on Ekelund et al, so more soon on this I hope.
I’m backing Rudd and Gillard to win in Monday’s leadership ballot both in the sense that I think they will win and in the sense that I think they should win.
The remorseless logic of leadership challenges is such as to guarantee the defeat of the incumbent in most cases. By the time there are enough people discontented enough to call on a challenge, the possibility of a convincing win for the incumbent has just about vanished. And anything less leaves them mortally wounded, while the challenger is encouraged to wait for another go.
In this case, Labor can’t afford a mortally wounded leader and there’s no time for a second round. So the logic is that those who are concerned about a win have to vote for the challengers.
As regards the substantive choice, I backed Rudd in 2003 and again in 2005. Since then I’ve only given up more on Beazley. Like lots of others apparently, I turn off as soon as he starts talking, even if I agree with what he’s saying at the time. On the other hand, Rudd has put in a solid performance, and shows some actual signs of thought.
The case for a change is even stronger when you consider the tickets as a whole. Macklin has been invisible as deputy leader (not always a defect in a deputy, but a disaster when the leader is as inchoate as Beazley). Gillard usually has something to say, and can attract attention when she says it.
I don’t know how this will run electorally, but I don’t see any reason Labor should suffer much damage from a change, assuming the losers retire gracefully.
