Heresy on Free Trade

John Quiggin32 Comments

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.

Is Happiness Gross ?

John Quiggin21 Comments

There’s a lot of interesting stuff around just now on the question what we should and shouldn’t do with measures of aggregate economic performance and welfare. I talked about this in my BrisScience lecture. I make (again) the point the Gross Domestic Product is a bad measure of a nation’s economic welfare because it’s Gross (doesn’t net out depreciation of physical or natural capital), Domestic (doesn’t net out income paid overseas) and a Product (takes no account of labour input)).

But if GDP isn’t a good measure, what is? There are a bunch of alternatives in the air at present such as Gross National Happiness and the Genuine Progress Indicator (the latter has been advocated by Clive Hamilton and the Australia Insitute. These ideas have been getting a fair bit of criticism lately. Andrew Leigh has a go at Gross National Happiness while Nick Gruen writes on the Genuine Progress Indicator for New Matilda. This is subscription only, unfortunately, but when Nick completes his two-part paper, I’ll try to comment more. Andrew Norton at Catallaxy has also written a lot on this.

My general view is close to Nick Gruen’s. We should be trying to get at a Net measure of Full Income (including leisure and taking account of resource stocks) but none of the attempts so far have been really satisfactory. More on this when I get some leisure (As If!).

Uses of Blogs

John Quiggin5 Comments

One of the big questions for academics engaged in blogging is whether and how blogs should count towards measures of academic output, like traditional journal articles and book chapters. The obvious answer is to write journal articles and book chapters about blogging. Uses of Blogs edited by Axel Bruns and Joanne Jacobs is the first edited collection of scholarly articles on blogging (at least so the blurb says, and I don’t know of any others), and includes a chapter from me on economics blogs. With the book coming out of QUT, there’s a strong Brisbane flavour including chapters from Mark Bahnisch (who’s already posted on this and Jean Burgess ditto.

I’ve only had time to dip into a few chapters so far, but it looks very interesting and the opening chapter by Axel and Joanne is available free

Weekend reflections

John Quiggin37 Comments

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.

Redistribution and philanthropy

John Quiggin23 Comments

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.

Howard and Costello: keeping interest rates below 17 per cent

John Quiggin50 Comments

If you sign a loan contract, you’re well advised to read all that boring fine print and get good advice on what the terms and conditions actually mean. This is also good advice if you plan to rely on promises from the Howard government. During the 2004 election, the Liberal’s ran on the slogan “Keeping interest rates low”. The content of this promise has now been explicated by the Prime Minister.

“You have to look at everything I said during the election campaign and you will find that I repeatedly said that interest rates would always be lower under a coalition government than Labor.

“In 13 years of Labor, housing interest rates averaged 12.75 per cent and peaked at 17. Under 10 years of coalition government, housing interest rates have averaged 7.25 per cent – a 5.5 percentage point difference.

Supposing, as looks increasingly likely, that Howard plans to stay on for another 10 years, he can manage an average rate of 17 per cent over that period and still keep his government average rate below Labor’s.

But at least Howard gets his facts straight. Treasurer Costello*, is quoted as saying

And the critical thing is to make sure that we don’t have interest rate rises of 300 per cent which would take us back to where the Labor Party low point was, or 1000 basis points, which would take us back to the height where they were under the Labor Party.”

It’s easy to check that the Labor party low point for the cash rate was 4.75 per cent in July 1993. But the message from Costello is the same as Howard’s. Anything below 17 per cent counts as delivering on the government’s promises, and anything below 9 per cent (the current cash rate of 6 per cent + 300 basis points) deserves extra applause.

* I think he’s segued from a selective quotation of home mortgage rates into discussion of the cash rate (only the latter is discussed in terms of basis points), but the implication is the same.

Conservatism invented in 1953:NYT

John Quiggin33 Comments

The term “conservative” gets bandied about a lot these days, and readers may wonder where it comes from. Jason DeParle in the NYT has the answer. It was invented by one Russell Kirk in 1953. DeParle’s opening para (“lede” in US newsspeak) introduces us to

Russell Kirk, the celebrated writer who a half-century ago gave the conservative movement its name

and elaborates later on

Kirk, who died in 1994, wrote 32 books, the most famous being “The Conservative Mind,� which was published in 1953. It championed 150 years of conservative thought, and offered “conservative� as a unifying label for the right’s disparate camps.

I must say, it’s a great term, offering a neat contrast with “progressive”. Surprising nobody came up with it earlier, really.

War and its consequences

John Quiggin66 Comments

The terrible war in Lebanon has been discussed from all sorts of ethical and legal perspectives, but the simplest way of judging war is to look at its consequences.

After weeks of bloodshed, with the vast majority of victims being ordinary people (mostly in Lebanon thanks to the use of airstrikes as a weapon of terror, but with many killed and wounded in Israel as well) whose only crime was to be in the wrong place at the wrong time, it’s hard to believe that anyone could claim that any good consequences are going to come out of this for the people of either Israel or Lebanon (though of course this is precisely the claim being made not only by the belligerents but by their outside backers, from Bush on one side to the Iranians on the other). But as we’ve seen time and again, the logic of war, once started, is remorseless. However obviously wrong the initial decision to go to war, the consequences of ending it always seem almost worse, at least to those who have to admit that the death and destruction they have wrought has been pointless.

And all this was not only predictable, but predicted by nearly everyone who looked at the situation objectively.
Read More »