My piece in yesterday’s Fin was on the attention economy, and, in particular, the kerfuffle over Holden’s use of a blimp to advertise at sporting events sponsored by Ford.
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Category: Economics – General
October surprise in Austria
The Socialists won a surprise victory (or at least a plurality) in the recent Austrian elections. The outcome appears to promise a departure from power for Jorg Haider, although the combined vote of the far-right parties was still 15 per cent, which is disappointing.
For CT election-followers, the outcome is of interest in another respect. According to the reports I’ve read, all the polls and all the pundits got this one wrong. So, if betting markets got it right, that would be pretty strong support for claims about the wisdom of crowds. But my (admittedly desultory) scan hasn’t produced any info. Can anyone point to market odds for this outcome?
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ICAPM
I’m at the Australian Conference of Economists in Perth, where I’m presenting a paper on water policy. I went to a paper today on ‘home bias’ and the International Capital Asset Pricing Model. The general home bias story is that most people hold most of their assets in their own country, when standard theory suggests the optimal portfolio should be much the same for everyone, regardless of location.
Following this up, this suggests that everyone should hold assets in a given country in proportion to its vaue share in the total world market (about 2 per cent for Australia).
It struck me that there’s a paradox here. Suppose I’m considering investing in two overseas stock markets with similar characteristics (mean return, variance, covariance with the Australian market). It seems obvious that I should invest the same amount in each market. But, if you accept ICAPM this is wrong, unless the two markets have the same capitalisation. ICAPM implies that I should invest more in whichever market is larger.
The paradox can be resolved if larger markets are more stable, but casual observation doesn’t support this. Has anyone seen this issue addressed?
Davos Down Under
I spent the weekend at Hayman Island, where I gave a talk on water to a conference run by the Australian Davos Connection, an offshoot of the Davos World Economic Forum, with quite a high-powered set of political and finance people in attendance (some are mentioned here). It’s all very low-profile and run on Chatham House rules (no names, no pack drill), so you’ll all have to imagine the fascinating gossip I could pass on if I wasn’t sworn to silence. Fortunately, there’s no problem talking about the substance of what was said.
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Notes on the size of government
I’m working on a summary of the evidence on economic effects of the size of government. I’ll probably cite the usual suspects such as Barro and DeLong in due course, but I’d be interested in comments, particularly pointing to evidence outside the usual pattern of growth regressions and so on.
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IAAE today
As I mentioned, i’ll be at the IAAE Conference today. I’m convening a symposium on Risk and Australian Agricultural Policy which will be at 3:15. I’ll be speaking, along with Chris O’Donnell and Alastair Watson.
Cars
The fight over the economics of protection has been going on, with Harry Clarke at Kalimna saying
The argument that Nicholas Gruen has propounded, and which John Quiggin seems to have supported, that low levels of tariff protection are justified by the existence of market power in export markets, is just wrong.
I don’t think Harry’s argument actually proves his claims – he just shows that the simple version of this argument is too simple, which is true of all simple arguments, including simple arguments for free trade.
My view, for what it’s worth, is that any terms of trade benefit from protecting the industry is likely to be negligibly small and that the standard counterarguments about retaliation make it a bad idea to try to impose optimal tariffs to extract such benefits. But the allocative efficiency benefits of reducing small tariffs.
But if neither of these effects is significant what are we arguing about? A couple of things.
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Heresy on Free Trade
While economists in general are trained to evaluate all arguments sceptically, there is one big exception – Free Trade. Most economists are wedded to the idea of free trade to the point that many will routinely reject the results of mainstream economic analysis in favour of logically incoherent claims about dynamic effects, ‘cold showers’ and so on.
For a variety of reasons, I apostasised from the free-trade religion early on and, for a while, became an outright protectionist in reaction. Now, I don’t have a preconceived position either way, and try to assess the issues on their merits.
One point that comes out of any neoclassical economic analysis is that, at tariff rates below around 10 per cent, the (traditional trade-theoretic) benefits associated with a reduction to zero are trivially small. This is because the welfare loss associated with a tax are proportional to the square of the tax rate, and the square of 0.1 is 0.01 (1 per cent).
Over at Club Troppo, Nick Gruen makes this point, among others, and sets off something of a firestorm. Read, enjoy and comment either there or here as you please.
Redistribution and philanthropy
Joshua Gans points to this discussion of billionaire philanthropy by Robert Shiller. Shiller’s probably my favourite economist, and he makes some nice points, but I’ll leave them for later. I want to pick up a point made by Joshua, who says
Under a voting model, those governments will take from the median voter to give to the median voter. However, the alternative [poentially implementable by, say, Bill Gates – JQ] is to take from the middle to give to the poor.
Joshua has the model right, I think, but it doesn’t really describe the actual outcome.
Taking all taxes, and opportunities for avoidance into account, tax paid is roughly proportional to income. On the other hand, when you consider cash payments (which favour the goods) and public goods (where benefits generally rise with income) the benefits of public expenditure are fairly evenly distributed. So, roughly speaking governments take from everybody above the mean income, and gives to everyone below. Because of the skewness of the income distribution, more people are below the mean income than below, so this is a politically sustainable setup.
The dismal science of freedom
The topic for my BrisScience talk tomorrow night is Economics: The Hopeful Science. The name, obviously, is an allusion to Carlyle’s characterization of economics as ‘the dismal science’. In choosing though, I was under the common misapprehension that Carlyle was attacking Malthus, and his prediction of a stationary economy with a subsistence wage, that could be raised only through ‘moral restraint’.
It turns out, however, that the phrase actually occurs in Carlyle’s defence of slavery, charmingly entitled, Occasional Discourse on the Nigger Question*, and that the primary target is John Stuart Mill and other economists who favored free labour over slavery.
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John Quiggin 