Category: Economics – General

Legal reasoning (crosspost from Crooked Timber)

John Quiggin28 Comments

Not surprisingly, the US Supreme Court’s non-decision on equal marriage has caused plenty of debate, including John Holbo’s smackdown of NR’s Matthew Franck.

The discussion got me thinking about the broader problem of legal reasoning, at least in its originalist and textualist forms, and also in precedent-based applications of common law. The assumption in all of these approaches is that by examining (according to some system of rules) what was legislated or decided in the past, lawyers and judges can determine the law as it applies to the case at hand. There are all sorts of well-known difficulties here, such as how words written a century ago should apply to technologies and social structures that did not exist at the time. And it often happens that these approaches produce results that seem unacceptable to most people but for which a legislative or constitutional fix is impossible for some reason.

It’s always seemed to me, though, that there is a much bigger problem with this approach, namely the implicit assumption that “the law” actually exists. That is, it is assumed that, if the appropriate procedure is used to interpret the inherited text, and applied to the problem at hand, it will produce a determinate answer. But why should this be true? The same law might contain contradictory clauses, supported by contradictory arguments, voted in by different majorities, and understood at the time of its passage in contradictory ways. Most notably, the same constitution might grant universal freedoms in one place, while recognising slavery in another.

At a minimum, such contradictions mean that there is no determinate law on the particular points of difference. But the problem is worse than this. The law rarely prescribes an exact answer in a specific case. The standard view of legal reasoning is the principles can be extracted from case law, then applied to new cases. But contradictory laws and contradictory cases produce contradictory principles. The ultimate stopping point is the paradox of entailment: a contradiction implies anything and everything.

I don’t have a fully worked out answer to this problem but I think it underlies a lot of the disquiet so many people feel about legal reasoning (apart from the ordinary disappointment when the answer it produces isn’t the one we want).

r > g

John Quiggin26 Comments

A standard piece of advice to researchers in math-oriented fields aiming to publish a popular book is that every equation reduces the readership by a factor of x (x can range from 2 to 10, depending on who is giving the advice). Thomas Piketty’s Capital has only one equation (or more precisely, inequality), at least only one that anyone notices, but it’s a very important one. Piketty claims that the share of capital owners in national income will tend to rise when the rate of interest r exceeds the rate of growth g. He suggests that this is the normal state, and that the situation prevailing for much of the 20th century, when r was less than g, was an aberration.

I’ve seen lots of discussion of this, much of it confused and/or confusing. So, I want to offer a very simple explanation of Piketty’s point. I’m aware that this may seem glaringly obvious to some readers, and remain opaque to others, but I hope there is a group in between who will benefit.

Suppose that you are a debtor, facing an interest rate r, and that your income grows at a rate g. Initially, think about the case when r=g. For concreteness, suppose you initially owe $400, your annual income is $100 and r=g is 5 per cent. So, your debt to income ratio is 4. Now suppose that your consumption expenditure (that is, expenditure excluding interest and principal repayments) is exactly equal to your income, so you don’t repay any principal and the debt compounds. Then, at the end of the year, you owe $420 (the initial debt + interest) and your income has risen to $105. The debt/income ratio is still 4. It’s easy to see that this will work regardless of the numerical values, provided r=g. To sum it up in words: when the growth rate and the interest rate are equal, and income equals consumption expenditure, the ratio of debt to income will remain stable.

On the other hand, if r>g, the ratio of debt to income can only be kept stable if you consume less than you earn. And conversely if r < g (for example in a situation of unanticipated inflation or booming growth), the debt-income ratio falls automatically provided you don’t consume in excess of your income.

Now think of an economy divided into two groups: capital owners and everyone else (both wage-earners and governments). The debt owed by everyone else is the wealth of the capital owners. If r>g, and if capital owners provide the net savings to allow everyone else to balance income and consumption, then the ratio of the capital stock to (non-capital) income must rise. My reading of Piketty is that, as we shift from the C20 situation of r <= g to one in which r>g the ratio of capital to stock to non-capital income is likely to rise form 4 (the value that used to be considered as one of the constants of 20th century economics) to 6 (the value he estimates for the 19th century)

This in turn means that the ratio of capital income to non-capital income must rise, both because the capital stock is getting bigger in relative terms and because the rate of return, r, has increased as we move from r=g to r>g. For example if the capital-income ratio goes from 4 to 6 and r goes from 2 to 5, then capital incomes goes from 8 per cent of non-capital income to 30 per cent[^1]. This can only stop if the stock of physical capital becomes so large as to bring r and g back into line (there’s a big dispute about whether and how this will happen, which I’ll leave for another time), or if non-capital owners begin to consume below their income.

There’s a lot more to Piketty than this, and a lot more to argue about, but I hope this is helpful to at least some readers.

[^1]: Around 20 per cent of GDP is depreciation, indirect taxes and other things that don’t figure in a labor-capital split, so this translates into a fall in the labor share of all income from a bit over 70 per cent to around 50 per cent, which looks like happening.

Pyne on the American model

John Quiggin16 Comments

I appeared yesterday before the Senate Committee inquiring into the government’s proposed higher education reforms. I focused on criticism of the US model being advocated by the government and the Go8, and was ready with quotes from the Go8 submission. I was unprepared, however, for the line of questioning I got from LNP members of the Committee, who denied that the government, as distinct from the Go8, was pushing the US model. My iPhone wasn’t up to the job of producing a definitive statement on the spot, but I have now located the source I wanted, in which Pyne, speaking to the Policy Exchange group in the UK says (emphasis added)

We have much to learn about universities competing for students and focussing on our students. Not least, we have much to learn about this from our friends in the United States. They have developed a diverse array of institutions encouraging prospective students to pick and choose their futures and where they are going to study, immerse themselves in enriching extra-curricular activities, and make life-long friends. Students routinely chase a range of options as to where they study, whether that’s at home or in a place known as college. Going to college is a rite of passage for American high school graduates. And it is a gift that keeps on giving.

The competitive nature of American tertiary education breeds the sort of focus on competition for students that Glyn Davis referred to. It breeds loyalty and devotion to one’s alma mater – and we know that American colleges leave us for dead when it comes to attracting philanthropic support from their graduates.

Another Australian Vice Chancellor, Professor Warren Bebbington of the University of Adelaide, wrote last week in The Times Higher Education supplement, and I quote:

higher education in Australia could be transformed into the most dynamic system in the world. It (could) have the rich variety of the US university landscape but without the crippling debts that American students suffer.
This should be the focus of a fundamental community-wide debate.

He opined that:

the debate has been largely contained thus far, and has taken place in terms incomprehensible to the average person. Even worse, some of the most influential academic voices seem intent on preventing Australians ever benefitting from what is proposed.

In the US, nearly half of all students do not go from high school to a public university of the Australian type, but instead attend teaching-only undergraduate colleges offering only Bachelor degrees. Without research programmes, these colleges do a first-class job of teaching: through small classes and an intense extra-curricular programme. Students have an unforgettable, utterly life-changing educational experience.

He continued that:

this huge array of highly-individual undergraduate colleges is one of the glories of American higher education.

Such colleges do not exist in Australia. Ours has been a highly constrained system of universities with limited scope for universities to shape their own offerings to students.

As I’ve previously pointed out, Bebbington’s claim is ludicrously wrong. He’s describing liberals arts colleges that educate perhaps 2 per cent of the college-age cohort in the US, charge around $50 000 per year and have endowments of the order of $1 million per student. The second-tier state universities, community colleges and for-profits actually attended by half or more of the student population are nothing like this.

Clearly, Pyne (like the Go8) doesn’t have a clue about the model he is pushing. This whole package should be scrapped: If the government wants to make changes, it should do some research first.

Rawls, Bentham and the Laffer curve (cross-post at Crooked Timber)

John Quiggin34 Comments

The 1970s saw two important and influential publications in the long debate over justice, equality and public policy. In 1971, there was Rawls Theory of Justice, commonly described in terms like “magisterial”. Then in 1974, at lunch with Jude Wanniski, Dick Cheney and Donald Rumsfeld, Arthur Laffer drew his now-eponymous curve on a napkin. Of course there was nothing new about the curve: it’s pretty obvious that an income tax levied at rates of either zero or 100 per cent isn’t going to raise any money, and interpolation does the rest. What was new was the Laffer hypothesis, that the US at the time was on the descending side of the curve, where a reduction in tax rates would raise tax revenue.

I’ve always understood Rawls in terms of the Laffer curve, as arguing in essence that we should be at the very top of the curve, maximizing the resources available for transfer to the poor, but not (as, say, Jerry Cohen might have advocated) going further than this to promote equality.

A couple of interesting Facebook discussions have led me to think that I might be wrong in my understanding of Rawls and that the position I’ve imputed to him is actually far closer to that of classical utilitarianism in the tradition of Bentham (which is, broadly speaking, my own view).

Facebook has its merits, but promoting open public discussion isn’t one of them, so I thought I’d throw this out to the slightly larger world of blog readers.

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Republicans see Ebola, think DDT (crosspost from Crooked Timber)

John Quiggin12 Comments

I wrote not long ago about the zombie idea that the US ban on agricultural use of DDT, enacted in 1972, somehow caused millions of people elsewhere in the world (where DDT remains available for anti-malaria programs) to die of malaria. A thorough refutation is now available to anyone who cares to look at Wikipedia, but the notion remains lurking in the Republican hindbrain.

So, with the recent outbreak of Ebola fever (transmitted between humans by direct contact and bodily fluids), the free-association process that passes for thought in Republican circles went straight from “sick people in Africa” to “DDT”. Ron Paul was onto the case early, with stupid remarks that were distilled into even purer stupidity in a press release put out by his organization. Next up, Diana Furchgott-Roth, of the Manhattan Institute.
And here’s the American Council on Smoking and Health.
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How can we convince rightwingers to accept climate science …

John Quiggin436 Comments

… persuade them to stop being rightwingers[1]

I have a piece in Inside Story arguing that the various efforts to “frame” the evidence on climate change, and the policy implications, in a way that will appeal to those on the political right are all doomed. Whether or not it was historically inevitable, anti-science denialism is now a core component of rightwing tribal identity in both Australia and the US. The only hope for sustained progress on climate policy is a combination of demography and defection that will create a pro-science majority.

With my characteristic optimism, I extract a bright side from all of this. This has three components
(a) The intellectual collapse of the right has already proved politically costly, and these costs will increase over time
(b) The cost of climate stabilization has turned out to be so low that even a delay of 5-10 years won’t render it unmanageable.
(c) The benefits in terms of the possibility of implementing progressive policies such as redistribution away from the 1 per cent will more than offset the extra costs of the delay in dealing with climate change.

I expect lots of commenters here will disagree with one or more of these, so feel free to have your say. Please avoid personal attacks (or me or each other), suggestions that only a stupid person would advance the position you want to criticise and so on.

fn1. Or, in the case of young people, not to start.

Energy storage getting real

John Quiggin130 Comments

Now that renewable energy sources like solar and PV are cheaper than new coal-fired power stations in most jurisdictions (anywhere with either favorable conditions or a reasonable carbon price), the big remaining question is that of supply variability/intermittency. As I’ve argued before, this problem is greatly overstated by critics of renewables who assume that the constant 24/7 supply characteristic of coal is the ideal. In fact, this constant supply produces a mismatch with variable demand and current pricing structures are set up to deal with this. A system dominated by renewables would have different kinds of mismatch and require different pricing structures.

That said, for a system dominated by solar PV, meeting demand in the late afternoon and evening will clearly depend on a capacity to store energy in some form or another. There are lots of options, but it makes sense to look first at relatively mature technologies like lithium and lead-acid batteries. Renewable News is reporting a project in Vermont, which integrates solar PV and storage.

The 2.5-MW Stafford Hill solar project is being developed in conjunction with Dynapower and GroSolar and includes 4 MW of battery storage, both lithium ion and lead acid, to integrate the solar generation into the local grid, and to provide resilient power in case of a grid outage.

The project cost is stated at $10 million, or $4m/Mw of generation capacity.

Assuming this number is correct, let’s make some simplifying assumptions to get a rough idea of the cost of electricity and the workability of storage. If we cost capital and depreciation at 10 per cent, assume 1600 hours of full output per year and, ignoring operating costs, the cost of electricity is 25c/KwH. There would presumably be some distribution costs, given the need to connect to the grid. Still, given that Vermont consumers are currently paying 18c/Kwh, this doesn’t look too bad. A carbon tax at $75/tonne would make up the difference.

How would the storage work? I’m starting from scratch here, so I’ll be interested in suggestions and corrections. I assume that the storage is ample to deal with short-term (minute to minute or hour to hour) fluctuations, which are more of a problem for wind.

How about on a daily basis? It seems to me that the critical thing to look at is the point in the afternoon/evening at which consumption exceeds generation (As I mentioned, prices matter a lot here). This is the point at which we would like the batteries to be fully charged. The output assumption suggests an average of about 12 MWh generated per day. If we simplify by assuming that the cutoff time is 6pm and that output drops to zero after that, the system requires that 8MWh be used during the day and 4MWh at night. That wouldn’t match current demand patterns, but if you added in some grid connected power (say, from wind, which tends to blow more at night) and shifted the pricing peak to match the demand peak, it would probably be feasible.

As regards seasonal variability, this would be a problem in Vermont, where (I assume) the seasonal demand peak is in winter. But in places like Queensland, with a strong summer peak, a system with lots of solar power should do a good job in this respect.

What remains is the possibility of a long run of cloudy days, during which solar panels produce 50 per cent or less of their rated output. Dealing with such periods will require a combination of pricing (such periods can be predicted in advance, so it’s just a matter of passing the price signals on to consumers), load-shedding for industrial customers and dispatchable reserve sources (hydro being the most appealing candidate, given that potential energy can be stored for long periods, and turned on and off as needed).

To sum up, we aren’t quite at the point where PV+storage is a complete solution, but we’re not far off.

Team Australia

John Quiggin84 Comments

George Brandis’ spectacular live meltdown over metadata retention has distracted attention from the abandonment of the government’s plans to repeal Section 18C of the Racial Discrimination Act, prohibiting the kind of racial abuse dished out by the likes of Andrew Bolt and Fredrick Toben. Abbott’s rationale is that a purist attitude to freedom of (racially divisive) speech is something we can’t afford, given the need to unite against terrorism.

Obviously, neither Bolt nor Toben is a member of Team Australia[1]. Each makes it their primary business to stir up hatred, in Toben’s case against Jews and in Bolt’s case against (among many others) the “muslims, jihadists, people from the Middle East” he sees as responsible for Abbot’s backdown. The striking conflation of religion, geographical origin and terrorism is typical of Bolt’s approach.

Horrible as he is, though, Toben is not a serious problem. His Holocaust denialism is universally reviled, and it is a sign of strength, not weakness, in our democracy that he is free to walk the streets. Repealing the constraints imposed on him by 18C would only emphasise this.

Bolt is another story. It is his case that led the government to seek the repeal of 18C, and that motivated George Brandis’ gaffe (that is, a politically inconvenient statement of an actual belief) that people have a right to be bigots. Far from being reviled, Bolt has been embraced and coddled by the government, to the point of having exclusive access to the Prime Minister. He enjoys a well-rewarded position in the Murdoch Press. Even casting the net wider among our so-called libertarians, I’ve can’t recall seeing a harsh word against Bolt. He’s a tribal ally and his bigotry is either endorsed or passed over in silence.

It’s impossible in these circumstances, for the government to be taken seriously when they mouth the (apocryphal) Voltaire line about defending to the death speech with which they disagree. The repeal of 18C was clearly intended as an endorsement of Bolt, and not a statement of bare toleration. That position is now untenable, and it’s too late to switch back to Voltaire.

In summary, those on the right lamenting the continued existence of 18C ought to reflect on the fact that it’s their own overt or tacit endorsement of bigotry that’s brought this about. If they cleaned house, and dissociated themselves from the likes of Bolt, their claims to be supporting free speech might acquire a little more credibility.

fn1. I was going to add Sheikh Hillaly to this list. But based on this report, he seems to have joined the Team.