Club Troppo

I’ve been sent two free tickets to an advance screening of the film Elergy, but unfortunately it turns out I can’t make it.  So please email me on nicholas AT gruen DOT com DOT au  and if you can pop round to my Port Melbourne house to pick up the tickets, you can have them.

The tickets are for a screening at 6.30 pm at the Cinema Nova in Lygon St, Carlton this Wednesday night (18th March). 

(BTW I found out browsing in a bookshop today that the manor house which features in Brideshead Revisited belongs to the Lygons, who go back to the Norman conquest.  So there.)

The respected Institute of Fiscal Studies has raised the spectre of a two-nation Britain, after finding that some of the poorest households are facing much higher inflation rates than average. You may catch a preview of the publication in http://www.ifs.org.uk:80/publications/4455. Otherwise you need to subscribe (which I do not).

The main reasons are that households have different spending patterns. The items of consumption of poorer households (such as rents, domestic energy costs, public transport, food and leisure services) have experienced substantially higher inflation than richer ones. The big drops in average inflation are due to mortgage interest payments and the decline in private transport (falling petrol bills). These have proportionally affected the rich much more than the poor.

The Institute finds that in January this year, the richest fifth of households had an average inflation rate of negative 1%, while the poor fifth had a positive rate of 5.3%.
This evidence appears to confirm that a recession can impact badly on the level of income equality in places like the UK and USA a situation likely to worsen with growing unemployment. As the OECD pointed out (Income inequality and poverty in most OECD countries), inequality also tends to suffer over the upswing of the cycle (more particularly in the USA).

The Institute warns that the economy may recover in a year or two, so the inflation experiences may conceivably be reversed.

That said, if we had a proper wealth distribution measure, which allows for the recent erosion of capital appreciation, we might get a different story.

Australia doesnt really do social insurance. For many years income protection policy has focussed on poverty alleviation rather than protection against negative income shocks. The forthcoming recession might be a time when we begin to regret this model. As the graph below shows, Australian average income workers losing their jobs face a larger drop in income than in most other OECD countries.

Unemployment benefit replacement rates, 2005

The graph shows the net family income that people on average wages and eligible for unemployment benefits will receive if they become unemployed, relative to the income that they had when employed. The top panel shows the situation of single workers (the average wage used was around $51,000 in Australia in 2005). Australia is the last runner among the 29 OECD countries, with single unemployed having replacement rates of around 33% compared to the median OECD rate of 58%. The bottom panel shows the situation of a married average wage worker who loses their job while their spouse continues to work (on 2/3 average wage). In Australia, the income test means that such a family would not be entitled to any Newstart Allowance though their family payments would increase.

In most other OECD countries, the typical average wage worker losing their job would be entitled to a relatively high rate of unemployment insurance for some months (eg 6 or 12). Those without sufficient prior employment, or those who experience long-term unemployment, only receive social assistance payments. The Australian system of income protection is reasonably successful in preventing poverty among these groups with long-term disadvantage. However, it provides only weak insurance against shocks like the one we are facing now.

At the macroeconomic level, this suggests that the automatic stabilisers will be weaker in Australia than in most other rich countries. At the household level, it will mean greater short-term income shocks than experienced elsewhere. This will play out in terms of mortgage arrears, increased debt and household stress, and perhaps most importantly, political discontent.

What can be done? We cannot build an unemployment social insurance model overnight and maybe we shouldnt. But we cannot expect that an income support system based on poverty alleviation will be a suitable response to an economic shock of the size of the one we are about to experience. In the absence of automatic stabilisers manual action is required. Small actions could include further relaxation of liquid assets tests (beyond those won by the Greens) and reductions in Newstart waiting periods. Temporary increases in the payments to Newstart recipients who have been conspicuous in their absence from government handouts to date – are the most obvious response.

Bruce Bradbury and frequent commenter – though mostly a while ago – Peter Whiteford, both distinguished academics at the Uni of NSW emailed me asking if we’d be interested in having them as contributors.  The answer was ‘yes’ and so you should expect a post from one of these fine fellows very soon, in fact as soon as I can put the first one up – after which I’ll be posting them instructions on how they can do it themselves.

One of the things that has surprised me in this first of all blogged financial crises is that there’s been relatively little talk of the move from a uni-polar to a multi-polar world. Long periods of global progress have tended to be accompanied by a hegemonic world power able to operate as a reflater of last resort when the global economy was sick. Certainly the Pax-Americana of the post WWII world worked better than the multi-polar world between the wars, when the Poms had been much reduced by the Great War and the Americans were not yet the acknowledged leaders of the global economy.

American economic dominance has been declining in relative terms since the rise of Asia, but with the stellar rise of China and India and the US beggaring itself with a unique mix of profligacy, aggression and sheer foolhardiness the multi-polar world is sneaking up on us faster than we thought.  This crisis may be tipping us into the multi-polar world if the Obama Administration can’t fix things.

If you’re interested in this – have a read of Brad Delong’s objection to Dani Rodrik’s complacency about the absence of a strong centralised monetary order.  Over the fold. (Continued)

The earth: it's all about YOU!

Kevin Rudd thinks that Friedrich Hayek argued that were were naturally selfish.  In fact he proposed the opposite – that human beings are naturally solidaristic, by the ‘natural morality’ that evolved in prehistoric times when bands of humans had to stick together to fight their predators (and other bands of humans).

Don Arthur set these things out in a post a while back (so did I as I recall, but I can’t find my post).  

Biology and emotion

According to Hayek, our species has adapted to its environment by developing instinctual responses. Like many other animals, early humans survived by living together in small groups. These groups relied on shared aims and perceptions to coordinate their activities:

These modes of coordination depended decisively on instincts of solidarity and altruism instincts applying to the members of ones own group but not to others. The members of these small groups could thus exist only as such: an isolated man would soon have been a dead man. The primitive individualism described by Thomas Hobbes is hence a myth. The savage is not solitary, and his instinct is collectivist. There was never a war of all against all (p 12).

This natural morality survives even though our circumstances have changed. According to Hayek, civilization depends on our ability to suppress our natural emotional responses.

Culture as a second nature

If human beings had insisted on treating everyone in the same way as they treated members of their small group, then free trade would never have taken root. Hayek argues that, “An order in which everyone treated his neighbour as himself would be one where comparatively few could be fruitful and multiply” (p 13). Over time, people learned how to cooperate with others who were not members of their own small group and who did not share their aims and loyalties. They did this by agreeing on abstract rules:

These rules are handed on by tradition, teaching and imitation, rather than by instinct, and largely consist of prohibitions (shalt nots) that designate adjustable domains for individual decisions. Mankind achieved civilisation by developing and learning to follow rules (first in territorial tribes and then over broader reaches) that often forbade him to do what his instincts demanded, and no longer depended on a common perception of events. These rules, in effect constituting a new and different morality, and to which I would indeed prefer to confine the term morality, suppress or restrain the natural morality (p 12).

For Hayek, these rules developed in much the same way as language. Morality was a human creation in the same way as language was a human creation. Nobody invented right and wrong. Instead, moral rules developed through a process of trial and error. For those of us in the industrialised West, morality includes rules about respect for private property, keeping promises, and paying our own way. These are the values which have made market society possible. 

These two ‘moral worlds’ continue to exist in dialectical tension with each other on pretty much every issue – certainly on all or many issues with an important economic dimension.  In the greenhouse debate we can see the first mindset in a great deal of the propaganda for doing something about greenhouse. It’s all about us, shorter showers, more frugal lifestyles, fewer Hummers and four wheel drives.  In fact these things make relatively small differences to actual outcomes. And they are beset with contradictions.   (Continued)

I was looking for something else and came upon this review I wrote for the CIS magazine Policy in its pre-Andrew Norton days.

I’m always surprised when I read old stuff. It’s never as I recall it. Always a bit better or worse than I thought. Anyway, I remember being a bit unhappy with this review when I wrote it, but on re-reading it, it seems OK to me. 

And since this was written in 1998 before this site became my ‘blog of record’ I thought I’d post it here FWIW.

Review: Conservation Strategies for New Zealand
edited by Peter Hartley
New Zealand Business Roundtable, Wellington, 1997, 526pp, NZ$39.95

This is a thoughtful, provocative and very interesting survey by the Tasman Institute of nature conservation strategies in New Zealand (and to a substantial extent Australia). The book provides a logical categorisation and presentation of issues with the first six major chapters presenting strong arguments in a range of different areas. Subsequent chapters on the structure and performance of the New Zealand Department of Conservation, Maori development and conservation policy and historic and cultural heritage were of less interest, partly because by that stage of the book, many of its major themes had been well worked.

The book is a powerful market-oriented polemic against the statist and conservation purism of much green politics. It benefits from a sound theoretical knowledge as well as broadly based practical knowledge of specific examples of market-oriented conservation in New Zealand and Australia (as well as some other countries especially the United States).

Particularly instructive sections include:

a section on sulphur-dioxide trading in the US (pp. 86-92)

a case study of the privately led restoration of Tiritiri Matangi Island in New Zealand (110-119)

a case study of a listed Australian conservation company Earth Sanctuaries Limited (321-335).

Each of these case studies together with a panoply of other (usually less extensive) studies and anecdotes illustrates in a very useful and thought provoking way the essential themes of the book. In particular:

market based instruments are likely to achieve their objectives much more efficiently than regulation,

voluntary action can often be superior to government regulation and management even where substantial free rider problems exist. This is because voluntary action is more likely to stimulate innovation, leadership and broadly based community knowledge, commitment and participation than direct government action.

conservation professionals are sometimes (too often?) reluctant to compromise and improvise where such measures might jeopardise the local ecological integrity of particular ecosystems. Where such compromises are necessary either because economic or ecological resources are limited the local population of a species might be sub-critical purism can worsen rather than improve environmental outcomes. For instance, conservation professionals might oppose the importation of some endangered species from one area because it contaminates local biodiversity, even when the alternative might be the likely local extinction of the species. Conversely, they can cling to pure conservation projects beyond the time when it is clear that they are losing viability and something else needs to be tried.

An important defect in the book goes both to its style and substance. It is unnecessarily tendentious in arguing for private sector conservation and against public sector activity. (Continued)

There is an interesting new boy on the block! Gerard Henderson’s Media Watch Dog is sure to be stimulating read because he has a good memory and he knows where a lot of bodies are buried. He has a long and honourable history as a media watcher, starting in 1988 with a print version appropriately named Media Watch, lately published in The Sydney Institute Quarterly. The original Media Watch for some time carried a revealing and amusing series of reviews of the book reviewers by Stephen Matchett.

Gerard kicked off on March 6 with some comments on The Monthly as a debate free zone.

The second issue focussed on the way the ABC interprets the concept of diversity of opinion in broadcasting.

Garard has a great pioneering record, he was one of the first to blow the whistle on the self-serving wage fixing industry, first in the field of systematic media monitoring, and the program at the Sydney Institute which he took over circa 1987 has set a benchmark for disinterested social and political discussion and commentary.

Andrew Leigh links argues that social policy makers should use an evidence hierarchy to sift through policy relevant research. The idea of a hierarchy of evidence (or ‘levels of evidence‘) comes from the evidence based medicine movement. As Andrew explains, there are thousands of studies on the effectiveness of social policies and it’s easy for policy makers to get overwhelmed:

In medicine, the generally accepted solution to this problem is to use what is known as an ‘evidence hierarchy’, by which evidence is ranked according to a set of methodological criteria. Doctors are then encouraged to give more weight to high-quality research, and less weight to low-quality research.

Randomised trials, along with meta-analyses of multiple randomised trials, sit at the apex of most evidence hierarchies. Randomised controlled trials are true experiments where individuals are randomly assigned to control and treatment groups and the results compared. They are commonly used to test the effectiveness of drug treatments.

In the social policy community people like to joke about ‘policy-based evidence making‘ where policy makers play up research findings that support their favourite programs and ignore those that don’t. Voters, media commentators and backbenchers often have firm (and often evidence independent) ideas about government programs and it’s unwise for ministers to ignore their views. After all, it’s far easier to make and implement policy if you’re in government rather than in opposition.

But ministers the bureaucrats who work for them aren’t the only people who make policy. A lot of policy gets made at the ‘street level‘. For example, in the Australian government’s Job Network, providers make choices about the kind of assistance they provide to their unemployed clients. When the government created Job Network, policy makers deliberately devolved decision making to providers and attempted to manage their performance using outcome payments and competitive tendering.*

(Continued)