From here to fraternity

My brother and I both tried quite hard not to be economists. And we both failed fairly miserably.

He’s been busy producing some interesting graphs concerning the two intergenerational reports.

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stephen bartos
stephen bartos
14 years ago

An excellent paper from David, illustrates both the value and the difficulty of longer term thinking like this.

I personally think there is less need to panic about PBS spending than commonly assumed. Medical care is a luxury good, and the wealthier we become individually, the more we can expect people to pay for it themselves: not because government changes policy to make this happen, but because people actually prefer to. We already see this in relation to choices about some types of aged care, and it would be interesting to model whether this is likely to happen to high end pharameuticals – my guess is that it will.

I wrote an article on the reaction to IGR2 at the time, which (in summary) said

“The 2002 Intergenerational Report, released with the 2002-03 Budget, influenced policy and commentary for months. The 2006 Intergenerational Report, released by the Treasurer last week, dropped out of sight in a matter of days. It was not just that it was overshadowed by a leaked speech from the Treasury Secretary later that week even on release, much of the commentary on IG2 was at best dismissive.

Yet by comparison with the 2002 report, the latest version is a vast improvement.

IG1 was obsessive and overly alarmist about the costs of ageing and its associated health care costs (more nuanced in the attachments, but few people read that far). IG2 still arguably concentrates too much on health and ageing, but it also covers education (building human capital is vital for future generations), infrastructure (briefly) and climate change; its commentary is more balanced and thorough.

Instead of being welcomed as a step upwards, however, this report was widely criticised. What is going on here?

The reaction to the 2007 report is a marker of a more fundamental change in the political debate. The measure of government performance is shifting. That IG2 is better than IG1 – but still not good enough – is in microcosm an indicator of the bigger change. Increasingly, it is not enough for a government to show things are better than they used to be the measure now is whether they are as good as they ought to be.

Global warming is one of the best examples of this shift. By any quantitative measure, we have more programs in place today to reduce carbon emissions than we did a decade ago. Better than we used to be…nowhere near as effective as we ought to be. The imperative is to march into the territory of what should be done – small changes do not meet the public sense of urgency about the problem”.

Chris Lloyd
Chris Lloyd
14 years ago

Concerning demography and immigration levels, the argument seems to be that the age distribution (a) of the incumbent population is skewed towards older, less-productive age groups and (b) of the migrant population has more people in the younger productive age groups. As a consequence, higher projected migration levels (in IGR2 but the argument is general) lead to higher GDPph.

It seems to me there are two flaws in this argument. The first is a possible empirical objection. While the first migrants in a family are young and productive they, quite naturally, bring their parents and grand-parents out under family reunion programs. So I wonder whether the age distribution of recent migrants is a good estimator of the equilibrium distribution, bearing in mind the recent increase in migration levels.

The second flaw is more fundamental. Australias age distribution is skewed towards older groups as a mathematical consequence of near ZPG of our generation those who went to school in the 60s and 70s and absorbed the message of sustainability. If you replace the missing age-groups with people from outside, then you are simply trying to reconstruct what would have been the distribution without ZPG. And at the same time you obviously undo ZPG mathematically you must. Moreover, the age bulge is only a transient phenomenon while we move from an unsustainable 3.5 child per couple society to a sustainable 2.1 child per couple society. After that once off bulge moves through, you settle at an equilibrium that is less skewed towards older age-groups than current, though still older that the unsustainably growing society.

There is no way to fix the age-distribution without undoing the sustainable choices our generation made. It is also only a transient problem. Solution? Dont fix it. Migration may be a fine idea, but not as a fix to a problem which is not a problem but a consequence of an earlier decision to maintain a sustainable population.

Kevin Cox
Kevin Cox
14 years ago

I’m not too sure about the purpose of these projections and studies. If we have policies in place that build the productive capacity of the nation and try to maximize what is important to us then things like intergenerational issues will take care of themselves. That is if our society is becoming more productive in output per person and if we have appropriate measures to tell us how our society is functioning then the system will adjust itself. Productivity increases will cover a lot of potential problems. Here are some things that may be more useful to worry about than intergenerational issues.

What is the distribution of spending of all people across the population and across the generations? My guess is that too flat and too skewed are both less productive. You need incentives but there is a limit to the effectiveness of incentives once you get beyond a certain level of consumption.

What is the proportion of spending that is going to capital accumulation and productivity improvements and what is going on consumption that does not create long term wealth.

Can we reverse environmental degradation and work more towards building up the physical capital of the environment so that the earth is more liveable. The most obvious problem to be solved is reversing the accumulation of greenhouse gases but we all know there are many others.

Can we improve the way we measure our wealth to include factors other than consumption? The problem with having a single measure of wealth that seems to be based mainly on consumption is that the system sets about maximising consumption rather than say maximizing measures of livability, sustainability, productivity, capital accumulation, healthiness, contentment, security, – I am not sure what else but a system that concentrates almost exclusively on maximising the measure of consumption seems doomed. It is a bit like what happens to people when they concentrate on the consumption of food to the exclusion of other things in life.

A system that includes expenditure on building bombs as being as worthy as spending on building a solar hot water heater seems fundamentally flawed.

Perhaps Treasury and other policy areas worry about these things but if they do they are not very effective in telling us about them.

Fred Argy
Fred Argy
14 years ago

Congratulations to both of you. Your Dad would be very proud of you.