Johnny gets one right

John Quiggin15 Comments

Howard’s sudden announcement of a proposal that the Commonwealth should take over the hospital system may be the result of desperation for a “Big Idea”, as some say. Still, since I have long advocated this idea myself (see the AFR article below), I’m happy to endorse it. The mixture of state and commonwealth funding for health is a recipe for cost-shifting and administrative duplication. If the Commonwealth took over health completely, and somehow managed to hand the GST properly to the states, it would also largely resolve the problem of vertical fiscal imbalance.

While we’ re in the business of tidying up spheres of responsibilities, I’d suggest getting the states out of the university and TAFE sectors (although they get almost no state funding, most universities operate under state acts of Parliament) and the Commonwealth out of school funding.

Update: It appears that I overstated the definiteness of this proposal. Here’s a semi-denial from Howard. In the current quasi-campaign environment, it’s increasingly hard to tell what’s policy and what’s not.
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Optional preferential dominates approval voting

John Quiggin2 Comments

I thought I’d said my last word on voting systems, but it’s a topic that’s hard to exhaust. The comments thread to Brian’s latest post raised the notion of Approval voting in which you cast a vote for all candidates of whom you approve, the candidate with the largest number of votes being elected. I suggested that “the appeal of approval voting is mainly to people who can see the inadequacies of plurality (first past the post) but are worried about the supposed complexity of preferential” and the site linked above, with its frequent references to simplicity, supports this view.

I now want to make a stronger point. Approval voting is, for nearly all purposes, dominated by the “optional preferential” system, in which voters can list in order all the candidates whom they wish to give any support, leaving the remaining candidates unranked. In effect, optional preferential is an approval voting version of the preferential system, with the desirable property that voters don’t have to give any support to candidates they dislike. Given the data from on optional preferential ballot, it would always be possible to implement approval voting by disregarding the rankings given by voters, but its hard to see when this could ever be desirable.
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Who wants to be a semi-demi millionaire

John Quiggin8 Comments

Although parenthood pushed him into blogging hiatus eighteen months ago, David Morgan has had time to attempt become a millionaire. He faced the $500 000 question last night, on the length of Mercury’s rotation, picked the right answer (88 days), but wisely decided not to risk the $250 000 he already had.

Congratulations on his success!

In another manifestation of the mysterious BlogGeist, my thought processes watching the show were almost exactly parallel to David’s. I had the same guess, and a similar calculation that the expected utility[1] of backing my judgement would be less than that of the certain quarter-mill.

fn1. Rank-dependent, for those who care about exactitude in these things.

Trapped ?

John Quiggin4 Comments

Brad de Long picks up my post on opportunities and outcomes in which I argued that the achievement of meaningful equality of opportunity in a society with highly unequal outcomes would require extensive government intervention to prevent the development of inherited inequality, and says that I’m falling into Irving Kristol’s trap, which he describes, accurately enough, as

an ideological police action designed to erase the distinction between Arthur Okun and Mao Zedong, and delegitimize the American left.

I agree that many people, particularly critics of social democracy like Kristol ,use the outcome/opportunity distinction in a dishonest way. This is particularly true in the American context, since anyone honestly concerned with the issue would have to begin with the observation that the United States performs just as badly on equality of opportunity (as measured by things like social mobility) as it does on equality of outcome (see the book by Goodin et al, reviewed here for one of many demonstrations of this). So if Kristol were genuinely concerned about equality of opportunity he’d be calling for at least as much intervention as the liberals and progressives he’s criticising.

On the other hand, there is a genuine debate within the social democratic/socialist movement[1] which I was addressing. On the basis of fairly limited knowledge, I identified Blair and Brown as proponents of equality of opportunity and outcomes respectively. In a long comments thread, no-one picked me up on this point, so maybe my judgement on this was accurate. My comments were addressed to the fairly large group of social democrats who genuinely think that, as long as you equalise opportunity, for example by providing good-quality schools for all, it’s not a problem if income inequality increases. To restate my point, that might be true for one generation, but in the second generation the rich parents will be looking to buy a headstart for their less-able children, for example by sending them to private schools where they will be coached in examination skills and equipped with an old school tie. Given highly unequal outcomes in the previous generation, it’s much harder to prevent the inheritance of inequality, and the achievement of equality of opportunity requires more, and more drastic, intervention rather than less.

In the real world, no-one advocates either perfect equality of outcomes or perfect equality of opportunity. My point is that, in the same real world, these two are complements, not substitutes. The more progress you make on equalising outcomes in one generation, the easier it is to equalise opportunities in the next. I don’t expect Irving Kristol to embrace this insight with hosannas, but then it’s a long time since I expected anything positive from Irving Kristol.

fn1. I’ll post more on this distinction soon, I hope.

Ideas and interests

John Quiggin9 Comments

One of the justifications I make for the time I spend blogging is that it gives me a chance to try out arguments I use in my work. With that in mind, I’d very much appreciate comments on this short summary of the role of ideas and interests in explaining policy outcomes.
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An unbalanced panel?

John Quiggin14 Comments

Reader Mike Martin points to an initiative called the Copenhangen Consensus being promoted by The Economist and Bjorn Lomborg’s Environmental Assessment Institute in which nine economists, including four Nobel prizewinners, are supposed to set priorities for global challenges, notably including global warming and sanitation and water. As regular readers will know, one of Lomborg’s favorite arguments is that money spent on mitigating global warming would be better allocated to clean water, a point on which I’ve repeatedly challenged his consistency and sincerity. (Start here and work back).

So who’s on the panel. The list is (with Nobel prizewinners indicated by asterisks)

1. Jagdish Bhagwati
2. Robert Fogel*
3. Bruno Frey
4. James Heckman*
5. Justin Yifu Lin
6. Douglass North*
7. Thomas Schelling
8. Vernon L. Smith*
9. Nancy Stokey

What can we say about this list? The Nobel prizewinners are obviously eminent, but they’re not the names that spring to the front of my mind when I think about a question like setting global priorities for development and the environment. Heckman is a micro-econometrician, Smith is an experimenter, focusing on micro issues, and Fogel and North are economic historians (North’s ideas are relevant to the big-picture issues of growth and development, so he’s a partial exception, but only a partial one).

The problem becomes clearer when I consider the names of those Nobelists who would be obvious candidates, including Kenneth Arrow, Joseph Stiglitz, James Mirrlees, Robert Solow and Amartya Sen. All of these economists have made extensive contributions to the theory of economic growth and development, and all have been keenly interested in environmental issues. Unfortunately for Lomborg, though, all except Mirrlees[1] are strong supporters of action to mitigate global warming. Having looked at the absentees, I look back at the list of inclusions and note that the one thing they have in common is that they are all generally regarded as right-wing.

It might be argued that Arrow and the others, having already expressed a viewpoint, have been excluded for that reason. But Schelling and Bhagwati have been equally active in the debate, Schelling arguing that global warming is not a big problem and Bhagwati on the free-trade side of the trade and environment debate.

Of the remaining panellists, Frey is a public choice theorists whose views are consistent with those I’ve mentioned above. I’ve only seen one paper by Lin (on reform in China) but that also seemed consistent. I’ve only ever read technical papers by Stokey (very good ones, I should say) so I can’t comment on her views.

All things considered, I will be very surprised if this panel comes up with the conclusion that mitigating global warming should be a high priority for the world.

Update: As several commentators have noted, we have yet to see what conclusion the panel reaches. If, contrary to my expectation, the panel correctly concludes that a global emissions trading system for greenhouse gases would both contribute to the mitigation of global warming and, by transferring tens of billions of dollars to poor countries, facilitate meeting the other challenges, I’ll happily, if a bit shamefacedly, take back everything I’ve said in criticism of Lomborg.

fn1. Mirrlees was very critical of the Club of Rome as I recall, and this might lead to the supposition that he would support Lomborg’s viewpoint. But it was pretty hard for an economist not to be criticial of the Club of Rome. Perhaps readers can advise if Mirrlees has taken a public position on the issue of global warming.

A challenge on Telstra

John Quiggin5 Comments

For about the fiftieth time, Saturday’s Fin editorial (subscription required), bemoans the unsustainable state of Telstra with its absurd mixture of public and private ownership. Yet at the time this structure was proposed, it was supported by the Fin and lots of others. When I observed that partial privatisation was the worst of all possible worlds, I copped plenty of flak for my pains. Although it was obvious enough that partial privatisation was a stalking horse for full privatisation, its proponents were quite clear at the time that it was a sustainable and desirable policy in itself, whether or not full privatisation ever came in.

So here’s my challenge, in two parts. First, is anyone who supported the partial privatisationof Telstra now prepared to admit they were wrong to do so? Second, is anyone at all prepared to defend the partial privatisation of Telstra [as an improvement on full public ownership in itself, not as a step towards full privatisation].

PS: I linked to the article above because of the discussion of Telstra, but I hope readers will forgive me for gloating a little about the accuracy of my analysis of the National Electricity Market, and the poor understanding of basic economics shown by many of its boosters.

The equity premium and the mixed economy

John Quiggin10 Comments

Brad de Long correctly summarises the argument of my papers with Simon Grant. If you accept that the equity premium (the large and unexplained difference between the rate of return expected by holders of private equity and the rate of interest on low-risk bonds) is explained in large measure by the fact that capital markets do not do a good job in allocating and spreading risk, the the natural solution to all this is the S-World: Socialism: public ownership of the means of production This is because risk can be more effectively through the tax system, and through governments’ capacity to run deficits during economic downturns than through private capital markets. A very robust implication of the observed equity premium is that a dollar of investment returns received during a recession is worth two dollars during a boom – this provides governments with a huge arbitrage opportunity.
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Stocks, bonds and social security

John Quiggin3 Comments

Brad DeLong has had a string of posts referring to the possibility that some or all of the US Social Security fund should be invested in stocks rather than, as at present, in US Treasury bonds, of which the most pertinent is this one. This idea first came up in a major way in Clinton’s 1999 State of the Union speech, and has since had some play on the Republican side, especially now that privatization individual accounts seem to be off the agenda.

The key fact that makes the idea attractive is the equity premium, the fact that, historically the rate of return to investment in stocks has been well above that in bonds. This used to be explained by the fact that stocks were riskier than bonds. But ever since the work of Mehra and Prescott in the 1980s it’s been known that no simple and plausible model of the social cost of risk that would be generated by efficient capital markets can explain more than a small fraction of the observed premium. The immediate response, that of finding more complicated, but still plausible models hasn’t gone very far. The alternative explanation is that capital markets don’t do a very good job of spreading risk. For example it’s very hard to get insurance against recession-induced unemployment or business failure, even though standard models imply that this should be available.

Simon Grant and I have done a fair bit of work on this, with some specific attention to the Social Security issue. In this paper (large PDF file), published in the American Economic Review, we argued that substantial gains could be realized by investing Social Security funds in the stock market. We didn’t put a number on it, but I don’t find Brad’s half-embraced suggestion of $2.4 trillion in present value implausible.

An important point, though, is that investing in stocks will generally not be the best way to go, at least if the amount invested is large. A government agency holding, say 20 per cent of the shares in Ford and General Motors, would seem to have big problems. Leaving aside the specific institutional issues of the US Social Security fund, the obvious implication of the equity premium is that, unless there are large differences in operating efficiency between private and public enterprises, government ownership of large capital-intensive enterprises like utilities will be socially beneficial. The case is strengthened if monopoly or other problems mean that the enterprises have to be tightly regulated in any case. Again, Simon Grant and I have written this up, this time in Economica (PDF version available here)