Relative prices

John Quiggin4 Comments

Obviously, I’m not the only one who gets annoyed by pieces pointing to purchases of consumer goods as evidence that rising inequality isn’t really a problem. But, as an economist, it particularly annoys me when this claim is put forward by people who claim to understand markets. I’ve been going on about this for yearsand years.

The most important thing that happens in markets is that relative prices change. If prices change, but income and preferences don’t, what we expect is that people will consume more of the goods and services for which prices have fallen and less of those for which prices have risen. So, when Jeff Taylor tells us that

With price points dropping below the $1000 mark, high-end TVs are moving down-market fast with Wal-Mart leading the way.

we can all cheer this renewed verification of the Law of Demand. But, of course, this tells us precisely nothing about what’s happening to inequality.
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Time to go home

John Quiggin10 Comments

About the only thing that the supporters of the Iraq war have been able to claim as a success (at least with any plausibility) has been the removal of Saddam Hussein. Now that this removal has been made permanent, wouldn’t this be a good time to declare victory and pull out?
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Driving us digital

John Quiggin12 Comments

A recent government report spoke of driving Australians into the age of digital TV. Apparently, this kind of thing is what they have in mind.

Seriously, I wouldn’t object to auctioning off spectrum, even at some cost in terms of signal clarity, if new TV channels were allowed to bid. But the absolute rule of Australian media policy is to nothing contrary to the interests of the incumbent oligopoly.

Inconvenient Truth *Not* on YouTube

John Quiggin7 Comments

I finally got around to seeing An Inconvenient Truth on a plane flight* not long ago. It’s very impressive, and sticks pretty closely to the the science. Just after this, it was posted on YouTube in nine 10-minute segments, but by the time I got there it had been taken down again.

As I’ve mentioned before it’s striking how radically the debate changed in Australia over the course of 2006. Both the Gore movie and the Stern Review played a role in this, crystallising a growing awareness of the bogus nature of the “sceptical” position.

Not only have those denying the reality of human-caused global warming lost all credibility but the fallback position of “it’s real but it’s too costly to do anything about it” has also collapsed. There’s ample evidence that the great majority of Australians are willing to pay the modest costs required to stabilise CO2 levels and stop at least the worst consequences of global warming.

* Offset by carbon credits, of course

Sensitivity analysis

John Quiggin88 Comments

One of the points on which economists generally agree on is that sensitivity analysis is a good thing. Broadly speaking, this means varying the (putatively) crucial parameters of a model and seeing what happens. If the results change a lot, the parameter justifies a closer look.

In the case of the Stern Review of the economics of global warming, sensitivity analysis quickly revelas that the crucial parameter is the pure rate of time preference. This is the extent to which we choose to discount future costs and benefits simply because they are in the future and (if they are far enough in the future) happening to different people and not ourselves. If like Stern, you choose a value near zero (just enough to account for the possibility that there will be no one around in the future, or at least no one in a position to care about our current choices on global warming), you reach the conclusion that immediate action to fix global warming is justified. If, like most of Stern’s critics you choose a rate of pure time preference like 3 per cent, implying that the welfare of people 90 years (roughly three generations) in the future counts for about one-sixteenth as much as the welfare of people alive today, you conclude that we should leave the problem to future generations.

So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.

The empirical basis of the Green Lantern theory

John Quiggin26 Comments

The idea that winning wars is a matter of willpower (what Matt Yglesias calls the Green Lantern theory of geopolitics) has been getting more and more attention as the situation in Iraq deteriorates.

At one level, the triumph of will theory is immune to meaningful empirical refutation. Whenever a nation loses a war, it can be argued that, with more willpower it would have prevailed. The one exception is where the nation is utterly destroyed, in which case, there will be no one interested in observing the failure of will.

There is, however, a specifically American version, which can be given some kind of empirical support. Until Vietnam, the United States had, at least according to the official accounts, never lost a war. The willpower theory holds that this loss was due to domestic weakness rather than defeat on the battlefield, and that subsequent failures of US forces in Lebanon, Somalia and elsewhere represent “Vietnam syndrome”.
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