Time for more reflections on the financial crisis, starting with seeing whether my predictions of two months ago have come true, followed by observations on a new set of unexpected twists, and rounded off by a set of policy recommendations for how to reduce the severity of the recession.
Lets start with reviewing my October predictions and their outcome, to see whether my crystal ball is worth anything and hence whether you should read the policy recommendations:
- I predicted that mortgage holders would be the grand winners of the crisis. This is obviously true. We are currently talking a drop of about one-third in mortgage payments which can be expected to become a drop of at least half. As a result, the media has stopped all talk of mortgage-stress. Mortgage-belt Australians no longer need fear eviction. Renters, on the other hand, are losing. Renters for years have enjoyed extraordinarily low prices due to the expectation amongst the owners of their house that the value would keep rising (making them willing to charge less than the full price), but are now being asked to start paying the full price of the house they stay in. Over time, this means low-income families will be pushed outside the city centres, away from where their jobs are. Expect more ghetto-like suburbs on the outskirts.
- I predicted mass-unemployment in the financial sector with good times for economists. The former is clearly the case: the major banks have started to reduce their investment groups and hedge funds are on their way out. Only 6 months ago it was hard to find financially trained people, now they pester you with their cvs. Economists on the other hand are, as predicted, in great demand. Economists are like the undertakers at a funeral: quite busy. Not only are we popular with every member of the family wanting to know about the recession, but the preliminary enrolment numbers for our courses also look up, particularly from Asia (see the various articles listed here). Its a known fact that people tent to stay in education longer during recessions and this one seems no exception.
- I said Keynesianism is back. The Australian had a decent piece recently on the return to the fold of Keyenesianism within economics (though it never was quite absent) and I confidently predict a surge of papers on Keynesian themes like contagion and information cascades.
- My assessment was that the US plan to take over toxic debt was too hard to implement and that it should follow the UK plan of buying shares in banks. This has now been universally recognised (not because of me, of course: whole hordes of economists said much the same) and the Americans have abandoned this part of their scheme and decided to adopt the plan of the Brits to simply buy equity in banks. I find it amazing, by the way, that the US congress has allowed this to happen without any further fight. Just reflect on what has effectively happened here: 700 billion dollars, or roughly 5% of US GDP, was earmarked to be spent on toxic debt, and is now suddenly spent on something else without going back to congress for extensive approval rounds. This is equivalent to deciding overnight not to spend anything this year on education and instead spend it on something else! Would you get away with that in this country?
- I denounced political talk about restrictions on CEO pay to be mainly hot air because the underlying issues were too complex and it would be really tough to legislate against it. Indeed, talk of interfering with CEO pay have now been reduced to a few token protestations that bail-out money cannot be paid to CEOs, but no general moves have been undertaken to counter-act the self-enrichment of managers in the economy. No doubt libertarians rejoice over this.
- Political talk on concerted international action to regulate the financial markets was said to be hot air. This was an easy prediction to make and has so far proven spot-on. The moment that Sarkozy stood up at the G8 and said any plan would have to make sure the worlds poor would have to be catered for, is the moment any sane observer would have known there wasnt going to be a plan. Different countries have different interests, with the countries that have something to gain by lax financial regulation frustrating any efforts by the others to get an effective global system. I still think a Tobin tax would be a great policy to enact, but cannot see it happen.
- The bank deposit guarantee was deemed an ill-thought out plan that would hopefully quietly disappear. This is the one prediction that has not quite materialised. The fact that the plan was made up after it passed through parliament is now well and truly understood (the details only became known at the end of November), but the deposit guarantee is still with us and is having distortionary effects (see below). I did hedge my bets in my predictions by allowing for the proposition that politicians have such a wish to avoid losing face that they might go ahead with the guarantee despite its failings. This is indeed unfortunately what happened.
Let us consider the surprising new winners and losers of the last 2 months:
- Funnily enough, the worlds poorest seem to have been provisional winners of the crisis. This is mainly because the price of food and fuel, staple items in every country, has dropped significantly (food has dropped about 35%) in the last few months due to the drop in world demand. Great news for Africa and the poorer parts of Asia!
- Government debts have become much cheaper to roll-over. The main reason for this is that real interest rates have gone down to roughly 0% in many parts of the world, allowing governments to roll over their high-interest rate debts into low-interest rate debts. This is particularly true for the US government which has seen a flood of loose money looking for a secure haven. It has been a real surprise that investors have chosen to hang on to their US dollars in stead of selling them and investing in industries in other countries.
- Private investments might start to suffer from the bank guarantees (commercial finance has dropped about 30% so far this year, see here): banks and individuals have become exceptionally risk-averse, putting all their money into bank and government assets. Its a classic case of the crowding out of private investment by government borrowing. The bank guarantee can strongly aggravate this tendency because it favours the holding of deposits over other investments, hence draining money out of investment funds. In this way, the coming recession might well be created by the reaction of the governments, i.e. by distorting the relative returns on various investments.
- Skilled migration might lose, though it is early days yet. Unions are calling for the Australian government to prevent the inflow of newcomers, but business is resisting this. In the past, governments usually reduce immigration in bad economic times so I guess it is still on the cards. I predict it to be a serious mistake to reduce migration at this time, mainly because migrants spend a lot of resources when they are new into a country: they have to buy cars, homes, furniture, clothes, etc. Skilled migrants are not poor and hence have quite a bit to spend at the start. Just as important, skilled migrants are in essence direct transfers of resources from other countries to Australia: for nothing, we are getting a huge slab of human capital paid for by another country. This human capital boosts production at times when other investments in capital go down. Wed be nuts to reduce the inflow of large spending power and human capital at this moment, particularly given the incentives for Australian universities to have low-quality degrees (see here).
- The environment has been seen to be a loser, but this is a mirage. One might think that the reduced attention to the carbon trading scheme, and the inability of the international community to unite on a common approach, is proof that the crisis has hurt the environment. Indeed, one might argue that the obscene amount of stress caused by the mere prospect of the population being only as wealthy next year as it already is this year, is proof of the re-assertion of the growth fetish and the loss of the environment. However, this would overstate the chance that carbon reduction schemes stood in the first place. As I have argued before, the world is not going to seriously do something about carbon emissions as long as the decisions are made by competing nation states that each have an incentive to free-ride on the others. The crisis merely provides a convenient excuse, but in reality true change was never on the cards and its derailment has been an on-going process long before the crisis.
So, what should our government do if it would want to make the coming recession a short and shallow one? The most important drivers of the recession are out of its hands, but there is a whole raft of things it then can and should do in my opinion:
- Maintain high levels of skilled migration. Skilled migrants need to buy a lot of stuff to get going, implying a quick demand boost. Also, their skills are useful to get productivity increases going, as Bruce Chapman argued before: they are the front-line troops of business investments. They represent free gifts from other countries and to increase barriers to skilled migration is to invite a longer and deeper recession. Also, they usually do not have access to welfare benefits for the first 2 years, meaning they can only become a drag on the state after the recession has ended.
- No more bail-outs of failing industries. A common political mistake is to think that one can bail-out one industry without any other industry loosing. However, you can only subsidise one area of the economy by taxing other areas, hence the bail-out to a failing industry comes at the expense of making other industries less competitive. One should not expect the recovery to come from the bailed-out industries either, but rather from the other ones. Hence, the more you tax the succesful industries to bail-out the failing industries, the longer you will be in recession.
- No stringent restrictions on the ratio of childcare nurses per baby in childcare facilities. There are now hints by the likes of Maxine McKew in the corridors of power that we should have have a maximum of 3 babies per childcare provider. This will increase the cost of childcare, thereby driving many mothers out of employment and directly reducing employment for low-skilled workers in the childcare industry.
- An expansion of generic skills education to avoid long-run welfare dependency. This recession will lead to a whole glut of new entrants into the unemployment pool. Under the current system, they have strong incentives never to return to work but, rather, to become a lone carer or be absorbed into the disability pension pool. At present, there is no real barrier to doing this and one should hence expect a large boost to the number virtually permanently on the various welfare schemes. Under a welfare-as-usual scenario, the government will try to pester those on unemployment benefits (New Start) into a job but will not tinker with disability or welfare payments for lone parents or other carers. I predict widespread use of these escape valves by the new glut of unemployed unless these escape valves are seriously tightened. Even then, it should simply be noted that the unemployed-to-be are unemployable with their current skills and health problems. There is no easy short-run solution, because this is an issue of life-long learning and of learning generic skills rather than specific skills. The only short-run solution that is remotely possible is to reduce minimum wages and make welfare time-limited. This essentially forces a lot of low-employability people onto low-wage jobs, but this might be politically difficult and is not a long-term solution.
- Private investment should be encouraged, if need be via a government investment bank. The danger is that private investment will be crowded out by government borrowing to fund second-rate infrastructure projects. Governments will prime the pump anyway via the tax and welfare system and the level of additional spending it has engaged in so far seems roughly appropriate at the level it is now. Any more will probably lead to crowding out. It is from the private sector that we expect the recovery to come and, given the slump in minerals, this will be mainly the service sector and the agricultural sector, perhaps even the eco-sector. To allow this to happen, the government should take the usual steps to get banks to lend to private investors: allow the RBA to reduce interest rates further, and allow skilled migration to fuel business investments.
- We should take this opportunity to remove the inefficiencies in the agricultural sector (i.e. the various forms of cross-subsidisation via water allocations and distortionary drought subsidies) in order to allow more rational investment in this long-term growth sector of our economy.
- Minimise the additional red tape inflicted upon the economy. Canberra is working overtime at the moment to pump out legislation on a whole raft of issues (additional labour laws, childcare laws, additional financial and accounting regulation, tax reviews, etc). This activity is also a form of government employment creation, but not a form that is very useful for other sectors if done at a frantic pace during a recession. A tongue-in-cheek suggestion would be to send a box full of sedatives to Canberra.
“[renters] are now being asked to start paying the full price of the house they stay in. ”
Yes, but maybe not. Obviously landlords want to achieve this, but rents are about the peak of what people can actually pay and I think it’s more likely that prices will fall until rental yields are more reasonable.
In fact, I’ve spent the last 2 weeks looking for a rental property and nearly everything I was shown was a “lease break” ie. the renter wasn’t willing to pay the old rent anymore and was leaving at the risk of having to bear the difference between the new lease (if one can be found) and what they were paying.
In addition nearly every landlord was willing to accept a lower rent (subject to the lease breaker’s approval).
I’m now negotiating a reduction in rent 5 days after signing the original agreement because of a misunderstanding about the facilities available and the landlord seems more keen to keep me than let me run away.
This is an inner-city property BTW so maybe my experience is not typical.
Hi JM,
well, if the interest rates go low enough then rents will have to come down again and you are probably right that the recession will put downward pressure on demand (though the sustained inflow of new migrants will keep demand up I would think, particularly for rental appartments). The point I was trying to make was that there is a long-term link between the costs of mortgaging a house and rental prices: the cost of a house to a landlord is effectively the amount of mortgage paid (not counting tax deduction) plus various council taxes plus repairs. What the landlord gets back is rents plus the expected future price increase. Ever since I have lived in Australia the actual rents were much less than this effective cost and the only reason that seems to make sense is that landlords were essentially betting on increased future housing prices. That expectation has clearly gone out of the window which is how I make sense of the recent increases in rents. However, if interests rates go low enough, then indeed we should also see rent decreases. Nevertheless, all these are essentially long-run cost factors. In the short run various demand factors will play the role you suggest.
A mixture of sense and nonsense there, Paul. I’ll pick up on two points:
This recession will lead to a whole glut of new entrants into the unemployment pool. Under the current system, they have strong incentives never to return to work but, rather, to become a lone carer or be absorbed into the disability pension pool. At present, there is no real barrier to doing this
Gee, only the barrier of poverty. No-one in their right mind tries to live on these if they have a better option – you’ve picked the two groups in the community who consistently fare worst in meaasures of hardship, deprivation and unhappiness. For example, see this report.
The push to increase the ratio of staff to children in childcare centres is evidence based – the sort of evidence you’re supposed to gather in your day job. Gains in adult female participation from skimping on childcare get swamped by the long run effects on the child of such skimping. Have a read of this recent OECD report. That said, I do wish proponents such as McKew were a little more alive to the tradeoffs.
Thx for the post Paul. Some reactions.
1. “Renters for years have enjoyed extraordinarily low prices due to the expectation amongst the owners of their house that the value would keep rising (making them willing to charge less than the full price)” Well it all depends on supply and demand of course, not ‘willingness to charge’. In the long run you might argue that the high prices and favours we do owners and investors mean that there’s excess entry – and it’s that which drives down rents. However we’ve not had excess entry of new houses (which is what would principally drive down rents) and rents had begun rising long before the price boom in houses stopped. It’s also remarkable how little the house price boom lifted home building and we’re now short – which is now driving rents sharply up.
2. On the “the US plan to take over toxic debt” this was falling over as it was taken to congress and I think you’ll find the wording of the final instrument/resolution whatever it was contained specific authorisation for buying equity.
3. ” However, you can only subsidise one area of the economy by taxing other areas, hence the bail-out to a failing industry comes at the expense of making other industries less competitive. One should not expect the recovery to come from the bailed-out industries either, but rather from the other ones. Hence, the more you tax the succesful industries to bail-out the failing industries, the longer you will be in recession.” True in the long term. Not in the short term, though I don’t know any industries in Australia I want to bail out.
4. I’m a bit struck by how micro so many of your recommendations are. We’ve got a macro-problem here, and while it’s always nice to get alignment between micro and macro, it’s not the most important thing in a macro-economic crisis. Getting the macro-economy functioning better is the highest priority.
Hi Derrida,
well, the carers and the disabled are indeed be the ones on greatest levels of poverty, but they are nevertheless not leaving welfare in great droves. As Bob Gregory pointed out in a paper a couple of years back, those on disability support pensions seem more likely to die than get a long-run job. Have a look at the following paper and the graphs in it (sorry for link-whoring to my own work):
http://www.bus.qut.edu.au/paulfrijters/documents/BobPaul15_August_2005.pdf
you can see that effectively the numbers on semi-permanent state support went up in jumps at the various downturns in the last 35 years and essentially never returned to lower levels. At the same time you see the unemployed moving into other categories. Hence I feel quite comfortable predicting that many of the unemployed-to-be are not going to return to work but will be absorbed by the welfare system. I guess this kind of prediction is my daytime job!
With respect to the childcare issue, forgive me for not being entirely convinced that it is truly necessary to have one carer per 3 babies. If you would take the arguments that are made in favour of it seriously, you’d be tempted to make it a criminal offense for a mother to have 4 babies in quick succession. I also think the long-run benefits have been exaggerated.
Hi Nicholas,
thnx for the reaction. In reply to your points:
1. Yes, I am sure you are right that there is a lot more to rents than the long-run factors I mentioned, though your observations allign quite nicely with mine. Perhaps the predictions of economists that the housing bubble couldnt last was getting through to people before prices actually peaked, perhaps not!
2. Ok, I will take your word for it that the legislation in the US was flexible in the spending. I did not read the actual legislation in that detail, but at the time of my previous writing the toxic debt scenario was still not definitely off the table.
3. We seem to agree on no bailouts in this case but we seem to differ on the principle. Maybe we have different notions in mind about what a bailout is? Whilst I think there is an argument that it might pay to phase an industry out rather then have a single glut of workers and capital flood the economy, this kind of phased-bankrupcy does not extend to wholesale bailouts which I think merely drag other sectors down.
4. Too micro? Ah well, I would say macro is made up of lots of micro nowadays. I think we agree anyway on the basic macro reactions (lower interest rates, automatic stabilisers, a bit of extra spending), so all we have to disagree about would be the micro stuff.
Regarding the carer-to-child ratio: isn’t there some logic in accepting that there is some “ideal” level that leads to a minimum of long-term downsides, but that in recessionary times you just go with the best you can afford?
That is, it’s possible even the long-term downsides of insisting on a 3-carer-to-1-child ratio in tough economic conditions are actually worse than than the downsides of allow the ratio to drift up a little.
Having said that it’s not clear to me that a recession, where unemployment is higher, is a bad time to mandate lower ratios (that drive up costs), because there’s less children that are likely to need day care. I gather the problem is that it potentially causes a drag on the recovery phase, but I’d think this could be largely compensated for by government borrowing to pay for child-care subsidisation, no?
Paul, take the US auto industry. I think letting it collapse would be pretty disastrous in the current circumstances and that it would worsen the crisis enormously. Trouble is, there’s not much point in propping it up if it’s going to go on like it is. So I’d be happy with a bailout that
1. Kept the industry going for another year
2. Removed existing management and got serious concessions from the unions (one might also use federal money to retire some of their legacy liabilities to pay pensions)
3. The best way to get better management would be for the government to help arrange an orderly sale to a completely different owner. It would probably be best if it were foreign, but if it were a genuinely new owner I guess an American firm might be OK.
In other words, the bailout would not advantage existing shareholders. That is one of the bottom lines, the other is structural micro-economic change.
Do you agree that such a ‘bail-out’ would be OK?
Hi NPOV,
I agree that there is a rationale with going with the optimal level as long as you can afford it. My understanding of the rationale behind the legislation proposed though is that it is not really based on an optimal trade-off, rather its an asymmetric zero-risk policy that pays no attention to the employment effects. It is implicitly deemed better to force mothers to quit their job and to be at home rather than have their babies cared for by someone looking after 3 other kids already. You’d have to feel bad coming from a large family is you hear all this….
Hi Nick,
I think the automotive industry is a good case in point. I agree that one wouldnt want a blank cheque and that there is some rationale for trying to salvage parts of the business. We might differ about how to do this. My stylised understanding is that it has effectively been bankrupt for years if you include the pension and health liabilities. It has been a constant drag already, whose pension fund undoubtedly took a huge knock in the recent financial crash, aggrevating their insolvency. Does it make sense to prolong the misery, subdsidising consumers to buy second-rate cars? No. The US government should at least let one car manufacturer go bankrupt, maybe more. It should look at consolidating the models that are viable or least unprofitable. In stead, it is being coopted to tax competitive industries to further prolong a losing battle.
Whether such a restructuring is politically feasible is another matter. It probably is not. If the choice is between letting them go bankrupt and dragging the rest down, my choice would be to let them go bankrupt now.
I think the most efficient process is probably straight bankruptcy, though the courts are not very efficient and it would take a long time to sort out during which time a lot of damage would be done. So if it’s possible it would be nice to
1. expropriate existing shareholders leaving their equity at zero
2. try to auction off the brands and/or facilities to other firms who would agree to keep a lot of the production going for some period of time during which the workforce would undertake to co-operate in a complete restructure. (The ‘bailout’ money would be used to get buyers in this process).
I would have thought this could quite possibly be a cost effective use of the money particularly at a time like this, and that if it was done well it would work better than laissez faire but I agree it’s risky because the process would probably get politically subverted (particularly in the US). But with the economic situation the way it is today in the US the damage of these firms going bust all at once – and it would drag down a lot of firms that would be viable in the long run going under – would also be considerable.
Anyway, it actually presents an opportunity for the Australian industry. Ford – which has been assiduously positioning itself to be the next Mitsubishi might get a Chinese owner and the owner and its new asset would have a lot to offer each other!
With rents rising and house prices falling, the incentive is for renters to stretch the extra distance and buy a house (even a house that is smaller than what they wanted or older than ideal). This puts a floor on how far house prices can fall (unless the recession gets so very bad that borrowing is not an option for most people, and I doubt it will in Australia). To some extent at least, market equilibrium does really work.
Now they can fear job loss, followed by eviction. Only approximately half of the recent interest rate falls have actually been passed through (from what I can see). Most people are still paying around 6% while the peak was approx 8.5% so we’ll see if they really drop as low as predicted. Media talk about “mortgage stress” has little connection with what happens at street level. Media reports have become an idealised formal portrait of the people they report about.
It was good enough for the World Bank to tie strings to loans and come up with their magic “structural adjustment” plans, which seems to open a precedent for others to follow. I would have thought that no legislation whatsoever is required. You write a contract that includes cuts to CEO pay and you wait for the CEO to sign it before you hand over the loan. If the CEO won’t sign and the whole thing ends up in bankruptcy court then that’s OK, the administrators can explain to the CEO just where she sits in the the queue of creditors. Those CEO’s managing to keep their ship afloat through a recession without bailout money, just might be earning their pay.
As a self confessed libertarian myself, I’m always stunned by how conscientiously governments will avoid using established methodology for negotiating commerce, and will reach for the regulation tire-iron in an attempt to legislate the answer they want (invariably ignoring any collateral damage). I’m all for transparency and publication of CEO remuneration to keep the shareholders informed (the market depends on availability of information), but if those shareholders really want to keep throwing money, then we have to accept that it’s their money. Otherwise if we can’t trust out citizens to decide where to spend their own money, how can we trust them to do something serious like vote, or sit on a jury?
By the way, if the childcare centers get a bailout, why not help the family daycare mums who take risks and expenses on their own heads without CEOs, shareholders and other parasitic costs? I mean daycare is a labour-intensive industry, not an infrastructure-intensive industry so can anyone explain why capital investment even makes sense for such an environment?
Paul, the big family argument doesn’t really cut it – for a start, it’s very rare that a mother will, all on her own, do the bulk of care for more than 3 kids in the critical 0-4 age range, and further – being the biological mother IS different to being a professional carer. They’re better intuitively attuned to their children’s needs and have more at stake in giving them the attention they need. Having said that, there are almost certainly mothers who seriously struggle with managing more than 3 very young children on their own, and those children almost certainly will wind up suffering in some way because of that.
I would think there might even be a case for having government-supported “helpers” available to such mothers, but I don’t pretend to be at all qualified to comment on the extent to which there might be a real problem, or what the best solution (if any) might be.
“there are almost certainly mothers who seriously struggle with managing more than 3 very young children on their own”
If you want some real data on this, then I think it’s generally accepted (although people argue about it a lot), that if you look at the IQ of kids, then you find slight decreases in birth order even at number 2.
http://en.wikipedia.org/wiki/Birth_order
So in terms of IQ, the optimum number is 1 (although I doubt Darwin would be too pleased :)
That doesn’t surprise me at all. And given time to adapt to our extraordinarily high survival rate for children now (which must be an order of magnitude above that of any other species, including our own some centuries ago), I would almost expect we would eventually evolve to a point where very few parents are capable of having (or would have the desire to have) more than a single child.
FWIW, we’ve pretty much decided that one is enough.
That doesn’t suprise me at all. First-born are evidently smarter. However, I’m sure there also studies showing that typical western single kids lose their implicit IQ advantage through cosseting ;)
NPOV, can you please explain an evolutionary basis for evolving to the point where women couldn’t bear more than one child???????!!!!??????!!?? Although I guess then the incentive to impregnate any given woman would be so high that we would simply evolve to mass rape of barely pubescent girls? I guess this would propogate those genes which manifested themselves in the strongest and most aggresive men! (although maybe the availability birth control would change the equation somewhat in favour of actually trying to persuade women, frankly, I doubt it would be significant)
FWIW, IIRC, there is also a free kick to being born from earlier eggs than later eggs, ie the younger the mother the healthier the baby. Psychological effects probably outweigh this too at some point, though, particularly in the above scenario.
BTW, I certainly agree that life with three babies, without professional help, would be amazingly difficult and couldn’t possibly be ideal for the kids or mum. Then again, how long ago were five-year-olds trucked off to boarding schools?
Patrick, well, no, we probably won’t evolve to that point, for various reasons. But the fact is that species with low offspring survival rates tend to have lots of offspring, whereas species with high offspring survival rates tend to have fewer. Given our offspring survival rate is so high now, and there’s obvious benefits in having minimal offspring, then it wouldn’t surprise me if there was some selective pressure towards few offspring.
You could argue that any such pressure would be swamped by the fact that those who have more offspring will reproduce in greater numbers, which is true, but what if we reach a point where resource scarcity is so severe that the benefits of being an only child (in terms of being able to control required resources) overwhelm the advantages of having lots of copies of your genes?
Paul, the 1 carer to 3 babies ratio is for babies (the ratio is considerably higher for toddlers and older children). It includes ancillary staff (cooks, cleaners, managers, etc) too. Not many families – even single parent families – have that low a ratio. Though as I said, I agree people need to be aware of some tradeoffs here.
I am of course well aware of yours and Bob’s fine work. I suppose what I objected to though in your post was the language – as though people planned to live lives of poverty, or as though the administrators who put them on DSP weren’t making realistic choices about their individual labour market prospects at the time. That more people go on to DSP in a sick labour market (and stay on it when the labour market does eventually improve) does not imply shirking. After all, there are quite a few forces other than business cycles pushing up DSP numbers – simple workforce aging, much longer life expectancies for the severely disabled, increasing rates of major depression, reduced availability of alternative forms of income support for the disabled such as workers compensation and veteran’s pensions, etc.
That attempts at making disability pensions harder to get have, throughout the developed world, been spectacularly unsuccessful at preventing rising pensioner numbers oughtta tell you things are not that simple.
zzzzz
DD, people may not plan to live ‘lives of poverty’, but they certainly do make different choices as a result of the known possible outcomes. So if there was no DSP people might try harder to find any kind of job. You know that, of course, but I am just saying it because I think that was the sense in which Paul meant it. ‘Shirking’ is a matter of degree, really.
On a slightly different note personally I would rather means-tested payments to encourage mothers/fathers (not both!) to spend at least one year at home. My conservative side showing me up I guess.
Hi Derrida,
fine. The point on babies was indeed the trade-off issue. If you think about the pay-back needed later in life to recoup the pretty substantial extra investments during baby-time, it seems unlikely a reduction in the ratio will be cost-effective. For instance: if you add another year of full-time care to childcare (=1/3 more for 3 years) then this will cost you somewhere in the region of 80,000 AUS now. If you want to recoup this with wages 20 years later, you’d need something like 10,000 dollars extra for every year (using a discount factor of only 5%) later in life. This is using a conservative discount factor and also presuming you only want the extra care for 1/3 of the day (not the whole 24 hours). Now, I don’t care how good the extra carer is, its tough to buy the argument that a bit of extra attention spread over 3 babies only during office hours is going to permamnently increase yearly income later by 10,000 AUS.
As to the language of poverty and welfare dependency, I certainly do not think the majority wants to be on welfare support the rest of their lives, and I indeed agree that the recent experience with reducing DSP numbers has been a failure around the Western world precisely because the vast majority of people on it are unemployable at anything but a very low wage. I would agree with Patrick though that this is not entirely exempt from conscious choice-making. It is the case that I think the welfare dependent consciously refuse low-wage jobs later-on (partially because it makes them materially worse off to accept them!) and that earlier life-choices they made (schooling) did entail the conscious risk of becoming permanently welfare-dependent later in life (I have a paper on this with Lisa Farrell that came out earlier this year). Hence, I would say it’s a mixture of choice, self-delusion, bad-luck, and societal expectations.
Patrick, Conrad, NPOV,
love the Darwinism angle. If you would truly take the IQ of a child as the objective function though, there are various things governments can do already, like ban low-IQ men from propagating for instance. I guess our societies are not ready for this kind of intervenion and I personally hope we never will go down that road.
I was of course being a bit tongue-in-cheek when talking about big families, though its not that far back that our societes had huge families as the norm and I bet the kids didnt get much quality attention as babies then either but still seem to have turned out alright.
Nick,
yep, agreed on all this. Its a nice thought to auction off bits of the car-industry, but cant see it happen.
Tel_,
agreed on rents. Sure, the government can put string on loans, but this also means its business as usual for those not asking for a loan, which is the vast majority of firms.
“its tough to buy the argument that a bit of extra attention spread over 3 babies only during office hours is going to permamnently increase yearly income later by 10,000 AUS”
Actually, it would be really worth calculating this all through sometime to find what the final potential function actually looks like. The problem with saying 10,000 per year is that people automatically get it into their head that the amount is evenly distributed across people. However, it more than likely isn’t — the cost effects in terms of crime and so forth are going to be extremely high for a small percentage of the population. One can also imagine the opposite (one Bill Gates, for example). It beats me what the actual break-even point is, but I wouldn’t be completely convinced just by looking at this number and thinking 10,000 is a lot. It would also be worth working out how much you could get the overall costs down by targeting specific groups, rather than just having a sledge-hammer thou must have a 1:3 ratio approach.
My father came from a family of 12. I come from a mob of 6 kids.
Luckily I was first born – so on Sunday, when it’s my turn to host our xmas do, I’ll be reminding them all how I’m smarter and it’s backed up by the science.
I would declare the possibility that cause and effect are the wrong way around in the above statement. Having more kids automatically implies spreading available resources thinner, thus putting pressure on survival rates. It sounds like a typical curve caused by the product of two inversely related variables (e.g. engine power is torque multiplied by revs). These type of curves have a sweet spot somewhere in the middle (engine gives more power for more revs up to the “red line” after which more revs gives less power). The exact sweet spot will depend on how quickly survival rate rolls off with reduced resource availability. Hopefully the optimal value doesn’t land on half a baby because then the difficult question arises of what to do with the other half ?
I don’t see any problem with this. Why would the teetering bankruptcy and government bailout of unsuccessful business A, be in any way a reason to apply sanctions to successful business B ? I have trouble comprehending such logic on either a moral level, or from an amoral efficiency point of view.
Tel_,
the rationale behind interfering with CEO pay for me has always been that CEOs dont own the business they de facto control. Hence there is an agency problem, which is particularly strong if there are no big shareholders constantly monitoring the CEOs. Just like we shouldnt just trust the government but insist on all kinds of checks and balances, one can argue one shouldnt trust CEOs. That is a general phenomenon, not just a phenomenon of this or that firm. As I argued in October though, its not easy to see how one can improve on the agency problem.
Well, there’s no reason to trust CEO’s or anyone else for that matter, but this seems kind of off topic considering that the original plan was to find ways of solving the financial crisis (check the title of the article at the top of the page). Seems to me that if a business is not in crisis, nothing needs solving.
Maybe there’s some theme of political opportunism here, whereby the crisis can be used to garner support for offbeat ideas in redesigning our economic and legal framework. I don’t see this as genuine problem solving, but I’ll buy into the argument regardless by saying once again that the correct people to put pressure on CEOs are the shareholders, and if they can’t do the job then it seems a truly hopeless situation. Juggling power between a government that cannot be trusted, and CEOs that cannot be trusted in order to protect shareholders who fail to take an interest in their own wellbeing is a losers game.
Tel_,
you are right, it is a bit off topic, but at the start it was joined with the financial crisis in peoples mind, presumably because they blamed bad managing for the problems that emerged.
“Juggling power between a government … and CEOs …. in order to protect shareholders who fail to take an interest in their own wellbeing is a losers game.”
nicely put. That is indeed the dilemma and I dont think it will go away.
“Just as important, skilled migrants are in essence direct transfers of resources from other countries to Australia: for nothing, we are getting a huge slab of human capital paid for by another country. ”
Just like capital inflows one must expect the skill tide to be coming out at critical times. Skilled migrants are a mobile mob with few allegiances. Also the broader the skill set the stronger the home-sick factor …
“This human capital boosts production at times when other investments in capital go down” – It’d be interesting to see the how the net emigration statistics would support the view under the recession.
Re: housing avaliability, rent levels and low quality degrees … One reads today’s Age to get the clue that skilled migration is being substituted by underpaid foreign student labour force putting stress on housing, getting crappy degrees and keen on staying in the country with few new skills to offer ;-)
nikita,
sure, skilled migrants can also flow out, but Australia remains a very attractive country to stay in and dnot forget that there are many skilled Australians (about a million if memory serves) overseas who might return as well. And its much harder to pack up the house, the jobs, the school, and the friends, than it is to disinvest a couple of stocks.
The emigration statistics will be interesting, and then mainly in view of the great decrease in the relative exchange rate. Compared to my European buddies, my salary just dropped about 30%
I dont know the age article you refer to, but I think (dont quote me on it) that a student can only stay if they have done particular degrees. If we stop trusting the quality of certain degrees, it is relatively simple for the Australian government to prevent those students from staying.
Hi Paul,
I’m new to the site and it’s reassuring to find some people attempting to cut through the added hype/fear of today’s issues.
Interesting blog, but the rental thing errs me a bit. Won’t reduced wages and rising unemployment reduce the tenant pool (also the quality of the tenant, as homes become more affordable to the good quality ones)? I mean, any added migration (if there is any) surely couldn’t make up the lost numbers. Its just a hypothesis, but I’m a renter myself and I’ve never felt more confident in my situation (any rent rise in my rent would be ridiculous and will force me to leave to the current “buyers” housing market).
As for economic stimulus, there is a great opportunity to force innovation in some wasteful yet large industries which are now looking to hit a depression and are begging for bucks (looking at US and local car industry… for example). Lets face it transportation is a vital thing in today’s world, and the collapse of a large sector of the automotive industry could dangerously destroy competition and hamper technological improvements, creating a path for the industry to get back to this point again in the future. It’s today’s worst kept secret (for whatever reason it may be) that the industry holds back fuel efficiency/non-dependency technology. Can a bail-out include government intervention to ensure that an industry heads in the right direction, or do we not have enough resources (skilled labour, money) in this country.
I’m just using the car industry as an example, it looks like the banks and the mining sector have bumpy roads ahead of them too, but that’s another blog.
Sorry if the above suggestions are a bit raw, i only have a couple of years experience in the business assurance sector and am sadly enough finding the financial crisis very interesting!!!
Horsome