Climate, demographics and economics: the next twenty years

Next month I’m doing a gig for Rotary where I’m going to be on a panel with a demographer and a climatologist and they’re going to ask us to say what will happen in the next 20 years.

In five minutes.

That’s five minutes each – so there’s plenty of time. I get to talk about the economy.

I already know that I won’t be playing the clairvoyant but will suggest that the best questions about the future are what things we can do to make it better. It will look much like today, though we’ll be richer, mining will (presumably) be a lot bigger and other traded sectors commensurately smaller. Anyway, if I were to think about the biggest challenge it’s inequality. It’s hard not to see rewards to the stars getting higher. And trade and technology will continue to undermine the wages of the unskilled.

I thought I might quote the work of Mike Norton who was written up by Dan Ariely in one of those ‘smarties for 2012’ columns as follows;

There’s a significant amount of literature on the theory that, as people become richer, they don’t necessarily become happier. Norton asked instead whether people know how to use money to buy happiness. [Mike] asked: if you give money to people, what do they do with it? The answer was that they spend it on themselves. He then posited: what if we ask people to spend money on other people? His research revealed that those people are actually happier as a consequence. This worked with individuals, and also with groups — when people spent money on people they worked with, the team became more productive. He and I have been working together to try to figure out what level of wealth inequality people in developed countries are willing to tolerate. What we found is that people want to live in societies that are much more equal and much fairer than currently. So why are we willing to tolerate the current level of inequality? We don’t have the answer for this yet.

So I might run that by them. I’ll be interested to hear what they think. When I think of this it rings true. I think there’s a deep dissonance in people’s attitudes to inequaliy – especially in Australia. They don’t like inequality. They really don’t. But it’s not just that they don’t like it in principle, but then reject the measures in practice.  I think there’s an additional step. If you want to tackle inequality effectively explaining what you’ll do will require abstract thought. You’ll explain that you’ll need capital gains taxes, and high taxes on top marginal incomes. And rent taxes – including green taxes. If you had an hour with everyone in the country you might be able to bring them round, at least those who would be made better off by what you have in mind – which is a large majority.

But that’s not how people make up their mind on these things.  They see that a politician is putting up some tax somewhere (even if it won’t do them a skerrick of harm like the mining tax) and they can easily be made to think “There’s that sneaky politician trying to slip their hand into our pockets”. The fact that it’s proposed by Ken Henry who has no axe to grind and is opposed by self-interested billionaires doesn’t seem to change the dynamic.

Anyway, what do you think I should I talk about?

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Patrick
Patrick
9 years ago

Maybe discuss how working/workplaces will be different and how this creates the challenge of building a different kind of welfare support state (as well as different kinds of unions and different kinds of training).

You can think of it as a 5-minute gateway issue to your bigger point that might prime the audience for a later exposition on the virtues of greater taxation.

chrisl
chrisl
9 years ago

Talk about inequality in education. In the “land of the fair go” how come education is not fair.

hammygar
hammygar
9 years ago

Greater taxation is essential to promote inequality. What people keep from their income after existing taxes is properly called “tax expenditure”. We have far too much tax expenditure in Australia. No taxpayer should be allowed to keep income above the level required for a reasonably sparse existance – we have to live more sustainably, and too much money spent in private hands militates against that.

hammygar
hammygar
9 years ago

Greater taxation is essential to promote inequality equality.

David Walker
David Walker(@d-w-griffiths)
9 years ago

You could give them the two-by-two matrix: How well does the future go, and how well do we deal with it?

Scenario 1: The boom doesn’t last – Chinese building slows down and new commodities supplies come onstream – and when that boom ends we start to go down the road to national shame (think of Greece), fighting over the remaining spoils, increasingly corrupt, with the social consensus breaking down.

Scenario 2: The boom doesn’t last, but the social consensus does. We have essentially a re-run of our own 1980s, where we go through a lot of painful restructuring to reduce our reliance on old industries.

Scenario 3: The boom goes on, but we fritter it away like the Saudis.

Scenario 4: The boom goes on, and we use it to make the place even better. We plan and build the infrastructure we need for the next few decades; we maintain our willingness to give a hand up to the most disadvantaged; we solve the education challenges and find ways to make people want to learn and achieve more; we help our less fortunate regional neighbours and act as a force for stability in the world. Britain, the US, Germany, Japan, Korea, Taiwan, Botswana and the Scandinavian nations have all done this to some extent at different times.

This isn’t really about economic performance so much as about who we are as a nation – whether we can hold it together in tough times, and whether we can turn good times to our advantage.

Glenn Stevens is fond of pointing out that historically Australia has managed adversity much better than prosperity. He’s spot on. The 1980s was one of our greatest decades because we faced adversity and dealt with it face-on. Right now we are being confronted with prosperity, and how we deal with that will tell us a little more about what we are as a nation.

JJ
JJ
9 years ago

I’m guessing Rotary is an older audience.

I’d be tempted to say “Well you’ve asked me to speak about the next 20 years – how about we compare now with 20 years ago. What have we gained and what have we lost?” and then note that we’ve gained lots of money, but lost some things too such as inequality.

And we’ve learnt that lots of money isn’t the panacea (I bet many of them think their grandchildren have way too much stuff).

I’m guessing they will respond to the opportunity to rebuild equality (could link to community spirit).

Just some ideas

Patrick
Patrick
9 years ago

I think someone (hint they’ve commented twice above) has shattered my irony meter beyond repair :(

David Walker
David Walker(@d-w-griffiths)
9 years ago

JJ: “I bet many of them think their grandchildren have way too much stuff”

Smart advice. Work this in early and you’ll have them. It also has the advantage of actually being true.

Corin
Corin
9 years ago

I think you should be more sceptical on the ‘wealth story’ as people will likely feel less rich even though they will earn more in wages. Housing will be a story of general weakness for a good long while (a la Sydney 2004-09). It could suffer very badly if China had a long period of difficulty, which I think is a low probability, and more likely housing pricess will simply limp along at low capital growth rates (probably less than inflation for a fair while). I think for that reason people will feel that the next 10 or so years has been harder than the noughties …much like Sydney felt rich in 1998 and comparatively less so in 2008.

I think Australians will be richer in wage income and will feel poorer as a result of asset prices having a long period of bear-like ‘growth’. In the next 20 years, how you invest will be more important than in the mid nineties, when all asset classes did well for at least a decade.

Clearly, more globally, the rise of the BRICS is the big issue. This is not to mention the adjustment from carbon pricing and other big stuff.

john
john
9 years ago

Taxes for fairly visible things that we (mostly) all use: roads, bridges, police, hospitals ….are pretty easy.

Its the less concrete redistributed forms of sharing that run into conflict other senses of the meaning of ‘fair share’.

BTW fixing up capital gains-negative gearing would be a good twenty year target.

murph the surf.
murph the surf.
9 years ago

What do you think the other two will be talking about?
Rotary – hummm, I would go easy on the taxes help makes others happy so we are all happier.
Combining a demographer and climatologist looks like a set up.

observa
observa
9 years ago

There’s a significant amount of literature on the theory that, as people become richer, they don’t necessarily become happier.

Well we can test that empirically by trying to take some of it away and observe the reaction but I reckon it naively ignores the the general life cycle effect of increasing liabilities, not to mention the task of managing and keeping it all together.

The O can happily recall when he could fit his worldly possessions into an aging FB Holden complete with racing motorcyle in tow. Income was much lower and was readily consumed above and beyond the necessities of life by the insatiable demands of said racing motorcycle and the need to keep its rider well lubricated between gatherings of like minded young men forever going around in death defying circles.

Well one chapter closes and another opens and a young man suddenly discovers an interest in soft furnishings and Laura Ashley bed sheets which are the price of other attractive compensations but to cut a long story short eventually he won’t fit the whole kit and caboodle into a B Double. Somewhere along the journey it wasn’t just his happiness that was of prime concern but take some of it away and you’ll have more to reckon with than just his own well being. Mind you reminiscing about the dire poverty of FB Holden days is inextricably linked with another age and responsibilities but no doubt he would have given Wayne Gardner a run for his money with the right wealthy benefactor at the time. Well that’s his story and he’s sticking to it along with the B Double.

observa
observa
9 years ago

I might add it’s just as well Facebook and Youtube weren’t around then as that sort of grinding poverty is not a pretty sight in more genteel circles and any meagre empirical evidence of the hard times is best gone the way of Kodak Eastmann.

Michael
Michael
9 years ago

Talk about the inter-generational transfer of wealth going on now by the degradation of the ecological services they have reaped the benefits of, and how it is their own high-consumption in countries like Australia that is causing the world’s problems not population growth, which by the way they were willing participants in their breeding days. Just keep an eye on the exits.

On equality, how many people even accurately know where they sit in the income/wealth distribution?

Dan
Dan
9 years ago

Observa@14:

‘Well we can test that empirically by trying to take some of it away and observe the reaction…’

Bad experimental design, you haven’t accounted for a variable well-known to both psychologists and economists – loss aversion. People hate losing stuff even when they’re not gaining anything from possessing it.

Better experimental design – ask people to respond to a psychometric test designed to measure happiness, and ask their income. Plot the results.

Additionally, this experiment has the neat property of having already been done. In Australia, the threshold is about $120k a year – after that your happiness plateaus, then goes backwards.

Paul Frijters
Paul Frijters
9 years ago

Nonsense. The rich are happier and those who get a positive income shock get happier whilst the agony of negative income shocks is huge. There is a lot of wishful thinking on this going on but no serious disagreement in the economic literature of happiness on this point.

Suggestions for topics? Rent-seeking is a good golden-oldie. Another one is the future of the nature of public debate as it shifts from think-tanks to twitter.

Dan
Dan
9 years ago

Paul@18 – I dispute this. The psych literature says something quite different. Can you post a link to an abstract/paper saying that the relationship between wealth and happiness does not peter out?

(Incidentally, an economist would think there’d at least be diminishing marginal returns attached to wealth.)

Dan
Dan
9 years ago

I’ll back up my argument, from a happiness economist no less:

‘In 2010, Daniel Kahneman and Angus Deaton found that higher earners generally reported better life satisfaction, but people’s day-to-day emotional well-being only rose with earnings until a threshold annual income of $75,000.’

(This is a US result, obviously.)

Dan
Dan
9 years ago

And here’s something useful:

http://en.wikipedia.org/wiki/Easterlin_paradox

I note that there was a 2008 study that supports your side of the argument, but other results – from what appear to be more robust studies – disconfirm it.

Calling ‘nonsense’ is exactly the sort of positivism that keeps getting economics (and economists) into trouble.

Dan
Dan
9 years ago

And Lord Layard says that happiness in rich countries (ie. once basic needs are catered for) depends on one’s relative position in the income distribution, not on the absolute level of one’s income or wealth.

Dan
Dan
9 years ago

(I think the Australian result I mentioned was an Australia Institute finding, I’ll see if I can dig up the reference.)

Paul Frijters
Paul Frijters
9 years ago

Dan,

try this one: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3012515/

and this one, more for the individual-level stuff:

and this one: Betsey Stevenson & Justin Wolfers, 2008. “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox,” Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 1-102.

And, if you will allow me some self-promotion: Frijters, P., Johnston, D., Shields, M.A. (2011), ‘Happiness Dynamics with Quarterly Life Event Data’, Scandinavian Journal of Economics, Volume 113, Issue 1, pages 190–211, March 2011.

The data these people have used is quite astonishing in its volume: they use data on hundreds of surveys, with millions of respondents, spanning many decades. Most psych studies dont bring that kind of data power to this question.

I know the psych studies. I see Bob Cummin’s line about decreases after 120,000 being trumpeted in the thread, which is minimal data based and simple techniques. More careful panel data work from the scholars above shows no point at which money stops buying happiness. Of course the marginal effects gets smaller (the best fit is a logarithmic function which has a strongly declining marginal effect), but no reduction.

Michael
Michael
9 years ago

Nicholas, that’s a pretty difficult question to answer except in a superficial material way. The experience of wealth is not really objectively measured and is relative to context. How do you prove a 62inch TV brings someone in 2012 more pleasure than a much smaller B&W TV did in the 60’s. Someone’s enjoyment of a procession or experience can be instantly destroyed by fashion or new technology. I have several computers that have gone from thousands of dollars in value to negative value without losing any of their original utility.
Where is the deterioration in the environment priced into the equation? There are certainly real effects in the climate that may reduce future generations well being. Do you honestly think that sufficient efforts have been made over the last 20 years to address this? If not then why? Certainly there has been evidence available, for things like deforestation, collapses in fishing stocks etc.

Michael
Michael
9 years ago

Sad that you’ve got all that stranded computer stuff Michael. Do you think your grandkids are likely to want that or the new stuff then? I think they’ll think they’re better off with the new stuff.

OK, I walked into that one, but the point remains that whether they “think” they’re better off or not is subjective, like people who “think” they are worse off because they have to spend a greater multiple of their incomes to buy houses than their parents did. Anyway I’m clearly out gunned so I will bow out.
BTW, are you familar with Andrew Oswald’s work?

Russell
Russell
9 years ago

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Wilkins Micawber

john
john
9 years ago

” the stories of happy families are all much the same, the stories of unhappy families are always unique”.

Beyond the level of basic material comfort , I doubt that ‘happiness’ has much to do with how much money you relatively have.

Much misery comes from the desire to be something that you are not, and can never be.

JJ
JJ
9 years ago

I was thinking about this on my bike ride to work today. I think what you choose to highlight is not as important as how carefully you pitch it, given the 5 minute time limit (as in the writer who sent the long letter, not having time to craft the short one).

I think many themes can be got over to this audience – it depends on choosing one and arguing it carefully and linking it to their experience.

If it’s the environment, I would pitch it as something along the lines of stewardship or how a farmer cares for a farm to leave it in good shape for the next generation (given that Rotarians are more likely to have a church background or link to the land). If it’s inequality, I would link it to fair reward for hard work (today’s astronomical salaries are hardly that) or something along those lines. Or a reward for someone who actually creates a business (rather than merely speculates) etc.

We’ll be interested to hear how it goes.

observa
observa
9 years ago

Where is the deterioration in the environment priced into the equation?

It’s imperfectly priced in in markets. But when you try to price it in, it turns out the economic effect is small.

No, it’s the constitution of the marketplace that is wrong whereby say a John Walmsley investment in an Earth Sanctuaries Ltd must rely upon philanthropy to survive. Then we go and limit freedom with symbolic gestures like banning plastic supermarket shopping bags vis a vis all the other packaging and Glad products we bring home from the supermart and play reshiftable power bills by publicly anointing those who can afford solar feed-in systems, not to mention the handouts to large scale wind farmers. When the battlers and working families buck we call it market failure. It all makes sense in some circles.

Dan
Dan
9 years ago

Paul,

Thanks – I’ll look into it more.

It is, however, incongruous that we don’t appear happier than we were 60 years ago, given the enormous increase in material wealth at almost all levels of the income spectrum since then.

Paul Frijters
Paul Frijters
9 years ago

dan,

yes, but the phenomenon of no happiness growth over time in a population that gets wealthier is a different one to the one talked about here, which is whether money makes the individual happier. It turns out that the main reason for the individual getting happier if he gets more money is his increased status amongst his peers. That’s a zero-sum game though because the higher status of one goes at the expense of a lower status for the other. So increased wealth is good for the individual but, in the long run, not happiness improving for the collective (though there are many important nuances to be told about this too. It turns out that wealth might not matter, but the belief of being in a winners-society does).

Tel
Tel
9 years ago

Given the drift of the conversation toward happiness index, I can’t resist reprinting Richard North’s comment in response to 8 million UK pounds of taxpayers’ expense, asking people if they are happy:

All I can say for certain is that I would be a bloody sight happier if Cameron took his questionnaire and inserted it deep into a place where the sun don’t shine – at his own expense.

I like the way North says the things I always wanted to say, but I’m much too polite.

Oh yeah and this:

People hate losing stuff even when they’re not gaining anything from possessing it.

I think you have just answered your question about what makes people happy. Of course, there’s this nagging doubt that maybe not all people are exactly the same… hmmm.

JJ
JJ
9 years ago

Nick

“Where is the deterioration in the environment priced into the equation?

It’s imperfectly priced in in markets. But when you try to price it in, it turns out the economic effect is small.”

Are you able to refer me please to sources for this?

Thanks

Dan
Dan
9 years ago

Tel@36:

Stretching things rather to go from ‘people don’t like losing stuff’ to ‘not losing stuff results in happiness’.

As for people not being exactly the same – sure, but it’d be good to draw some general conclusions and form some general principles. That is, whatever you think of the field, what psychology (apart from psychopathology) is all about.