Club Troppo

Ross Gittins asked me if I’d fill in for him during his summer break, which gives me a chance to get a few things off my chest. So here’s the first of four weekly columns.

In 2009, I chaired the federal government’s Government 2.0 Taskforce. We sketched out how government might be transformed by the open zeitgeist and tools of Web 2.0 – like Wikipedia, Facebook, Twitter and Google.

Web 2.0 massively scales up our capacity to communicate – with possibilities both trivial and earth-shaking. And it scales up simple improvisation. Whether you’re organising a party or a working bee, just hop on to Facebook or Twitter and Bob’s your uncle.

Two hours after the Christchurch earthquake, work commenced on a map on the net on which could be plotted emerging developments on the ground. The information, such as the address of pharmacies that still had insulin, was parsed from 300,000 tweets bearing hashtags like #eqnz.

If you think this was a job for official emergency services on the ground, think again. Tim McNamara wasn’t with the government, but spearheaded the initiative from the North Island capital Wellington. The people who parsed the tweets were further away still, a band of humanitarian ”Crisis Commons” volunteers spanning every continent. (Continued)

About 8 months ago, I had a look at what was then happening in the Arab world and made predictions about what was going to happen next. Time to see what really happened and update the forecast.

A minor prediction I was making was that Libya would again succumb to the resource course, making democracy impossible there, an article taken over by the Congressional Quarterly in the US (December edition). So far I am looking good for that prediction, with individual cities maintaining their own prisons and militias, as well as open fights about the division of the oil spoils.

The main prediction I was making concerned Egypt where I predicted the regime would re-constitute itself, coopting deal makers in agricultural and slum areas. I predicted that the urban youth which was driving the protests would lose out.

This is indeed exactly what has now happened: the army has put the torture chambers on full throttle in order to intimidate the urban youth. The elections have clearly shown that the largely uneducated and agricultural population has no appetite for supporting intellectuals in cities, and has gone for what they know, which is the muslim brotherhood, more radical muslims, the army, or some regional politician. The muslim brotherhood, which over the years has become so infiltrated by the regime that it was amongst the first to condemn the original protests against Mubarak, has about 40% of the preliminary vote and the reform parties have merely 15%. The radical Islamists get 25% and more regional parties make up the rest. Given that the army has already decided to simply give itself some seats in parliament if it needs them, as well as several more months of systematic torture of any opposition before parliament is even convened, one is already seeing a grand bargain between the Muslim brotherhood and the regime: a further move towards religious austerity in exchange for no challenge to the economic parasitism of the army. Egypt will become a very dull place indeed.

(Continued)

George Monbiot bells the “libertarian” cat:

Freedom: who could object? Yet this word is now used to justify a thousand forms of exploitation. Throughout the rightwing press and blogosphere, among thinktanks and governments, the word excuses every assault on the lives of the poor, every form of inequality and intrusion to which the 1% subject us. How did libertarianism, once a noble impulse, become synonymous with injustice?

In the name of freedom – freedom from regulation – the banks were permitted to wreck the economy. In the name of freedom, taxes for the super-rich are cut. In the name of freedom, companies lobby to drop the minimum wage and raise working hours. In the same cause, US insurers lobby Congress to thwart effective public healthcare; the government rips up our planning laws; big business trashes the biosphere. This is the freedom of the powerful to exploit the weak, the rich to exploit the poor.

Rightwing libertarianism recognises few legitimate constraints on the power to act, regardless of the impact on the lives of others. In the UK it is forcefully promoted by groups like the TaxPayers’ Alliance, the Adam Smith Institute, the Institute of Economic Affairs, and Policy Exchange. Their concept of freedom looks to me like nothing but a justification for greed.

Quite.

The Effects of Home Computers on Educational Outcomes. Evidence from a Field Experiment with Schoolchildren
Date: 2011-09
By: Robert Fairlie (Department of Economics, University of California, Santa Cruz)
Jonathan Robinson (Department of Economics, University of California, Santa Cruz)
URL: http://d.repec.org/n?u=RePEc:net:wpaper:1114&r=exp
Are home computers are an important input in the educational production function? To address this question, we conduct a field experiment involving the provision of free computers to schoolchildren for home use. Low-income children attending middle and high schools in 15 schools in California were randomly selected to receive free computers and followed over the school year. The results indicate that the experiment substantially increased computer ownership and total computer use among the schoolchildren with no substitution away from use at school or other locations outside the home. We find no evidence that the home computers improved educational outcomes for the treatment group. From detailed administrative data provided by the schools and a follow-up survey, we find no evidence of positive effects on a comprehensive set of outcomes such as grades, test scores, credits, attendance, school enrollment, computer skills, and college aspirations. The estimates also do not indicate that the effects of home computers on educational outcomes are instead negative. Our estimates are precise enough to rule out even modestly-sized positive or negative impacts. The lack of a positive net effect on educational outcomes may be due to displacement from non-educational uses such as for games, social networking, and entertainment. We find evidence that total hours of computer use for games and social networking increases substantially with having a home computer, and increases more than total hours of computer use for schoolwork.

Looks like they work . . .

Inducement Prizes and Innovation.
Date: 2011-12-15
By: Brunt, Liam (Dept. of Economics, Norwegian School of Economics and Business Administration)
Lerner, Josh (Harvard Business School)
Nicholas, Tom (Harvard Business School)

http://d.repec.org/n?u=RePEc:hhs:nhheco:2011_025&r=ino

We examine the effect of prizes on innovation using data on awards for technological development offered by the Royal Agricultural Society of England at annual competitions between 1839 and 1939. We find large effects of the prizes on competitive entry and we also detect an impact of the prizes on the quality of contemporaneous patents, especially when prize categories were set by a strict rotation scheme, thereby mitigating the potentially confounding effect that they targeted only “hot” technology sectors. Prizes encouraged competition and medals were more important than monetary awards. The boost to innovation we observe cannot be explained by the re-direction of existing inventive activity.

Herewith an paper about my encounter with design, on taking up the Chairmanship of the Australian Centre for Social Innovation and encountering the Family by Family program.  The site where it’s been published doesn’t have any comments facility, so I’m opening up discussion here should anyone wish.

And I read today a quote that might have been a good complement to the quote appearing at the head of the article – immediately below.

Not only was he [Edward Land - inventor of 'instant cameras' and founder of Polaroid] one of the great inventors of our time but, more important, he saw the intersection of art and science and business and built an organization to reflect that.

Designing better lives: An economist’s appreciation of design

Design is often described as making things not only useable but useful and desirable/delightful. We’d agree this is important – but what is even more fundamental (and rare) is making things that prompt change. – Sarah Schulman and Chris Vanstone [2]

       I.

Design is on the march. Apple teeters on being the most highly valued company in the world – its core competitive strength lying in design and systems integration, not technology. ‘Design thinking’ is becoming increasingly prominent not only in the development of products and processes, but also in the delivery of services. So much so that Deloitte has recently begun investing heavily in its own ability to provide its clients with design knowhow as a crucial engine of its innovation and competitiveness. As I write this, a prominent article on Australia’s Deloitte Online’s homepage [3] is titled “Design thinking demystified”. So what is the core contribution of design and what is behind its rise?

Adam Smith’s invocation of the benefits of self-interest – or as he called it self-love – is famously encapsulated in this aphorism:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Smith’s point is not that self-interest is good in itself, but that the self-interest of one person in a market brings them into relation with others’ self-interest. Note that Smith’s injunction (implicitly to both parties) is for each to seek their own interest by addressing themselves to the other’sinterest. Since Smith founded it, the discipline of economics has focused on the incentives facing each of the parties to a bargain and on their relative bargaining strength.

But there are more things in heaven and earth. For the butchers, bakers and brewers of Smith’s time there was no great mystery as to what constituted the customer’s wants or needs. Today’s world is much more complex. If you’re making computers or even cars, customers have specific wants that are not so easily divined by producers. Thus, part of Japan’s auto-producers’ recipe for competitive success was meticulous attention to consumer needs.[4]

This process has now gone much further. A great transformation occurred at the outset of the personal computer era when the Apple Macintosh showed that consumers didn’t just want more technical capability from their software and hardware – something that could be captured well enough in standard disclosures of those technical capabilities. They wanted user-friendliness – a very different thing and something inherently difficult to ‘disclose’ in specifications.

It turns out you can’t really make a car or a computer useable without a lot of work, almost invariably involving the users themselves. And indeed there is a discipline that has grown up under our noses which has been all but ignored by economists and policy makers but which nevertheless addresses itself to this issue. That discipline is design. (Continued)

I am just no good at those ‘values’ questionnaires. Whenever I’m asked a question about values my only answer is “it depends”. I don’t think this is very clever, but there you go.

Here is the first page of 120 questions in a questionnaire I’m supposed to fill out about an organisation I’m involved with.

In your preferred culture, to what extent should people be expected to…?	Select your response by clicking a number here…					… or by typing a number here.
	Not at all	To a slight extent	To a moderate extent	To a great extent	To a very great extent
point out flaws	1	2	3	4	5
show concern for the needs of others	1	2	3	4	5
involve others in decisions affecting them	1	2	3	4	5
resolve conflicts constructively	1	2	3	4	5
be supportive of others	1	2	3	4	5
stay on people’s good side	1	2	3	4	5
be a “nice guy”	1	2	3	4	5
do things for the approval of others	1	2	3	4	5
“go along” with others	1	2	3	4	5
win against others	1	2	3	4	5
work to achieve self-set goals	1	2	3	4	5
accept goals without questioning them	1	2	3	4	5
be predictable	1	2	3	4	5
never challenge superiors	1	2	3	4	5
do what is expected	1	2	3	4	5
stay detached and perfectly objective	1	2	3	4	5
oppose new ideas	1	2	3	4	5
help others to grow and develop	1	2	3	4	5
be a good listener	1	2	3	4	5
give positive rewards to others	1	2	3	4	5

But in each and every case the only answer is not ‘more or less’ but in some circumstances more, in some less. I expect these kinds of questionnaires can do more good than harm. But I’m no good at them.

What thinkest thou Oh Troppodillians? (I wonder why my spellcheck doth say that ‘thinkest’ is not a word?)

In conclusion, please tell me whether values are really like this? (And where is Dr Troppo when you need him?)

Last month, I talked about the route that Mario Monti should take with Italy if he truly wanted to get it back to a higher-growth path. My advice was to take on the rent-seekers in blitz-reforms, whilst keeping the population in a state of great anxiety about the economy in order to reduce political opposition. Freeing the Italian economy from the many rent-seeking groups that stifle it was in my opinion needed to get long-term growth. I questioned whether Mario, the ultimate financial insider, was up to that kind of job.

How did he do?

Well, I would say he went one-third on the mapped route. As advised, he moved with lightning speed, bringing forward a set of reform packages by December 4^th, less than a month after taking power. Also, as advised, he went for some quick hits on existing vested interests. His increased tax on property and his taxing of funds owned up to after a tax-amnesty make up the majority of his tax increases and are visible forms of taxing the wealthy. He went for welfare reductions by removing the indexation of pensions for a few years (exempting the poorest) and a general tax increase via more GST.

In terms of long-term reforms, he went for pension age reform, which is a move that will not have major short-run fiscal benefits because in reality almost no-one works until the official pension age anyway and hence pension age reform should be seen as a long-term reform designed mainly for the civil service that retires early: it takes a long while for the various pension ages to adjust to the official one and for significant groups of people to go through the new system. Perhaps most important for the long term is that Monti is trying to reform the calculation of pensions such that they reflect total contributions rather than the wages of the last few years. Anyone who knows anything about pensions knows that that is a fairly revolutionary change and that it cant be done in the short run. It simply cannot be implemented retrospectively because of missing information about past wages. It is even hard to imagine that the whole stock of current employees close to retirement will be subject to this change, so I can only guess that the fine-print will say that it only applies to pensions from some far future date. It is a good example though of the kind of reform that economists have been calling for for decades (it is a key example in my own co-written econ textbook) but that you need the right moment for in order to push it through politically.

Yet, Mario didnt go for the truly debilitating special interest groups that would open up the economy in the short-run. No tackling of the laws on retrenchment, which is a real problem for hiring. No tackling of the professions (doctors, etc.), which debilitate much of the tertiary sector. He is even promising more unhelpful subsidies for business, like subsidies for eco-friendly building.

Hence, to be brutal, Mario went for the easier targets and didnt do much. Reduced welfare, an indexation freeze on pensions, indirect increases in income tax (i.e. via the states and not the central government), increases in GST, and a couple of obvious long-run reforms that will take decades to come into effect. No concerted effort to go after the tax avoiders and the fat-cats that dominate the political landscape in Italy. No major clashes with the unions either. Indeed, the size of the reform (20 billion Euro more taxation and 10 billion extra spending) is pretty paltry if you consider the problems that Italy faces (with about 2 trillion in debt). There is hence more of the appearance of decisive action, whilst the reality is that of a couple of helpful long-run changes whilst no major interest group has been offended in the short run. Indeed, all the reforms look pretty much off-the-shelf to me, which tells you there is little going on in the background in terms of policy development. Italy is not getting ready for real change.

What does this mean for Italy in the longer run? It most importantly means that there is now a much higher chance that Italy will default on its government debt: the reforms are simply not enough to either pay back the debt nor do they give confidence in medium-term future economic growth that would get rid of the debt.

Mario Monti undoubtedly knows this. So what game is he playing? Is he hoping for a miracle in the form of suddenly returning faith that Italy will always pay its debt and thus a return to 2% bond interest rates? I suspect he is not really hoping for a miracle but consciously has resigned himself to some form of default and meanwhile simply refuses to attempt the politically difficult, which is to take on the major interest groups that paralyse Italy and make it a place you prefer to visit rather than work in.

It is hard to know what Monti’s end game is, or even if he has one. Perhaps he thinks he can have another round of more serious reforms if this one gets through parliament. Perhaps he simply thinks this is the best he can do given the internal political realities of Italy. Perhaps he is trying to put Italy in the position where it could get by if it merely defaulted on the foreign part of the debt, not the domestic part, which in turn would strengthen its bargaining position in a bailout scenario. Whatever the end-game is, with these baby-reforms Monti has proven himself to be a conservative who will not upset the internal status quo. They chose well.

A cool graphic curtesy of McKinsey

Hard to believe we have a share of the global film industry revenue which is about a fifth of the revenue of the US industry. Anyway, it’s a cute graphic.

What is the road of least resistance scenario, and thereby the most likely scenario, for the Eurozone financial crisis? To solve this conundrum, we need to map the major elements of high resistance around which the road must navigate and the areas of low-resistance towards which the road will flow. These are:

1. (high resistance) It is actually politically very hard for any country to leave the Euro. If, say, Greece announces it leaves the Euro then one should expect a bank-run overnight with Greece deposit holders cashing in their savings and putting it in foreign Eurozone banks. Moreover, it might easily take a year before Greece could physically re-introduce its own currency, during which time the uncertainties and capital flight accumulate: money-machines have to be changed, accounts have to be converted, export contracts have to be re-written, and a system of converting anything valued originally in Euros into the new currency has to be negotiated. Apart from being a major hassle requiring expertise many countries do not have, it would give all the other countries an immediate excuse to stop paying that country any transfers. Young ambitious Greeks should be expected to shun a defaulting Greece. It is hence quite costly in the short run to step out of the Euro, as well as virtually guaranteeing a severe deepening of the recession overnight. This is equally true for any other country in the Eurozone: leaving the Euro is a bold and courageous step, unlikely to be witnessed any time soon. The road of least resistance therefore does not include any single country leaving the Euro.
2. (low resistance) The political costs to defaulting within the Euro are, when one reflects on it, surprisingly low. Greece has in effect been defaulting for several years now and has been handsomely rewarded with transfers and debt-write-offs. It was certainly the road of least resistance within Greece to steer straight into default. So too will the governments of Italy and Portugal be calculating that any default on their debts is a viable scenario and preferable to major internal upheavals that could be blamed on the government of the day. For what are other countries actually going to do when governments default on their debts? Not much. There is no mechanism via which they can kick countries outside of the Eurozone or the EU, so barring a whole set of richer countries deciding to set up a new EU and abandoning the rest, the Euro countries are stuck with each other. Countries cant kick each other out, nor can they really force any sanctions within the system. If, say, Italy decides to only pay back the government bond loans to its own banks in order to prevent them from going bankrupt but defaults on any loans held by foreigners, then the other countries have no other course of action than to protest and take the hit. They might retaliate by not honouring any loans to Italian banks but, again, apart from a wholesale break-up of the EU, they actually have surprisingly little means to punish any country. This incidentally is true even under the newly proposed stability pacts: if a country simply refuses to pay any fines then there is not much the other countries can do. Hence, defaulting is a low-cost option for individual countries.
3. (high resistance) The political costs for the rich countries to start a new EU of their own, the so-called rump-Europe scenario, is surprisingly high. Think firstly of how the richer countries benefit from the current union: because they suffer less from civil-service-demanded wage growth, their countries are more competitive precisely because they are in a currency-union with countries that do suffer more from civil-service driven wage inflation. This guarantees them higher levels of employment and exports, a brain drain of the less well-organised countries towards them, and very low interest rates at which to borrow, all advantages that would disappear if they cut the ties. Also, cutting the union would not in fact mean that their own banks would no longer be linked to the government bonds of other countries so cutting political ties does not actually stop the financial ties. Hence the economic benefits are neither immediate in the short-run, nor obvious in the long-run. Then think of the politics by thinking of the mechanism involved in breaking away: the countries would have to formally abandon the EU, would have to negotiate their relation with the Eurozone with those remaining in the EU (!!), then set up a new treaty for a new zone and introduce a new currency or convert the Euro into a Euro-plus that would hold for their region. Each step has to go through all the parliaments involved, virtually guaranteeing years of wrangling about the shape of a new treaty. Now, this scenario is certainly imaginable, but would take years to go into effect and hence cannot be sold by any politician as the solution to anything. Hence, a break-away by the rich countries would only be assured to lead to short-term economic loss (the countries being set loose would have to default almost immediately, with all the consequences associated to that) without clear long-term gain. It is therefore not a viable scenario. What rich countries can do is to ensure their own banks and economies are less exposed to those of the high-debt countries, but that is a slow process that takes years.
4. (low resistance) The European Central Bank’s determination not to become a printing press is, probably, brittle. Mario Draghi, the president of the ECB just last week reiterated how countries must help themselves. At the moment hence, the ECB is sticking to the line that it is there for price stability in the Eurozone and is refusing to write blank checks to over-spending governments.  It is quite openly gambling on the current crisis to force governments into tighter spending regulation, with, it might be said, some apparent success. Yet, if the going gets really tough and neither commercial banks nor governments have the cash to pay back their loans to each other and to outsiders, is the ECB really going to refuse to bail out governments and the financial sector by means of printing money? It would seem highly unlikely that the ECB would indeed keep up its refusal for massive capital injections if its back was against the wall because it really is the only institution that can do it. More probably, it would indeed take on the role of the American Fed and simply print money on a massive scale to prevent widespread bankrupcies of governments and banks.

With this contour map in mind, the road of least resistance is starting to come into view. (Continued)