Murderous dictator Augusto Pinochet is dead at 91. While he escaped a formal trial and conviction for his crimes, the last decade of his life was spent under the continuous threat of prosecution, and he died under house arrest.
What I’ve been reading
Multiethnic Australia by Celeste Lipow McLeod. It’s aimed at a US audience, and gives a potted history of Australia since European settlement, from a pro-multiculturalist point of view. More here. Written after the Cronulla riots, the book maintains an optimistic viewpoint, which I think is broadly consistent with our history in the long run.
It’s worth remembering in this context that until quite recently, resentment about immigration and multiculturalism was directed mainly against East Asians. This was true both of Pauline Hanson and of the previous big backlash in the 1980s led by among others, Katherine Betts, Geoffrey Blainey and John Howard. In the decade since Hanson’s famous maiden speech, this kind of prejudice has ebbed dramatically, even as the number of Australians of East Asian background has increased rapidly. And the still older prejudices against Southern Europeans have disappeared almost entirely, along with most of the feelings of resentment and exclusion that were once very strong among these groups.
It may be a while before we overcome our current problems, but I’m confident we’ll do so in the end.
The Missing Link
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.
The equity premium and the Stern Review
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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Future of the Family Farm
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
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.
Petition against the death penalty for Scott Rush and others
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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Close to zero?
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.
Temporal warp
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.
Monday message board
It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.
