why all elections are flawed

May 26th, 2015

The Conservative party in the UK recently won a clear majority of seats in Parliament with support from only 36.9% of voters, and a mere 24.4% of those eligible to vote. The new Conservative government cannot possibly reflect the ‘will of the people’, nor even the ‘will of the majority of the people’.

FT undercover economist Tim Harford explains that this result is not unexpected, since all elections are flawed. This is true even for elections that are democratic, with free speech and secret voting for politicians chosen from an open selection of candidates.

There are two deep reasons why democratic elections are always flawed.

The first is that voters are, quite rationally, rather ignorant about politics. Sensible people vote to express themselves or out of a sense of duty, not because they harbour the illusion that it might be their vote that swings the entire election. ….

The second reason is Nobel laureate Ken Arrow’s “impossibility theorem”, one of the most celebrated and misunderstood results in economics. Arrow’s theorem is often described as showing that there is no voting system that will reflect what society truly prefers. Arrow actually showed something more profound: that it makes little sense to speak of what “society truly prefers”. That very idea is incoherent. And those who expect that a democratic election will ever give society what it “truly prefers” will have to get used to disappointment.

Tim Harford, “Why democratic elections are always flawed“, Financial Times, 23 May 2015 (metered paywall).

privacy and access to knowledge

May 25th, 2015

Welcome, customers, to this column. I write articles and you subscribe to the FT and tell me how wrong I am (to be fair, some of your are kinder). Now, let us imagine you read this piece, or other FT content, for free on Facebook or Google. It is a far sweeter deal, right? You get something for nothing and Big Data can bask in its own beneficence. Apply that to any amount of diverse content. Rarely in the history of human knowledge have so few offered so much to so many for nothing. ….

But there are hidden costs. Ponder how Google and Facebook, are interacting with you. In exchange for free social networking, emails, videos, search, satellite maps and now telephone calls, they are building your profile in ever more granular detail.

Without really digesting it, we have made a Faustian bargain. They give us free computing power — beyond our wildest imagination — and we reveal ever more about ourselves. The more Google knows about you, the better it teases out preferences you never realised you had.

Edward Luce. “Big Data’s infinite harvest”, Financial Times, 25 May 2015 (metered paywall).

The FT charges for full access to content. I pay a hefty subscription fee, but suspect that the FT is nonetheless constructing my profile for commercial purposes. I may be wrong, but the suspicion lingers.

unintended consequences of invading Iraq

May 23rd, 2015

We live in difficult times. Here is an excerpt from an editorial in today’s Financial Times.

The US spent more than $40bn training and arming Iraq’s military after it disbanded the army of Saddam Hussein — an unintended but precious gift to Sunni insurgents. But the corruption and sectarianism of the government of Nouri al-Maliki, a Shia Islamist backed by the US and Iran, so hollowed out Iraq’s new army that Baghdad now relies on Shia militia, trained by Iran and blooded in the sectarian war of 2006-09 — and seen by too many Sunni as an existential threat much greater than Isis. ….

President Obama is right to insist that if “they [Iraqis] are not willing to fight for the security of their country, we cannot do that for them”. But there is not the remotest chance of turning the tide against the jihadis, in Syria or Iraq, until the Sunni feel they have a real stake in these crumbling nations and thereby in their own security. No strategy is worth discussing unless it is built around that central fact.

Menacing Isis gains in Iraq and Syria“, editorial, Financial Times, 23 May 2015 (metered paywall).

It is a pity that we cannot reset the clock, return to the pre-Blair/Bush/Cheny years, and do things differently. The consequences of the neo-conservative rush to invade, though unintended, in my opinion were predictable.

means-tests for New Zealand’s universal pension?

May 22nd, 2015

New Zealand’s Labour party is out of office, opposing the ruling centre-right National party. To my surprise, the Labour leader recently brought up the possibility of re-introducing means-tests for the country’s universal pension, known as Superannuation. Some years ago, for a short period, ‘super’ benefits were clawed back from taxpayers with high reported incomes. The income-tests proved to be very unpopular, were removed after a national referendum, and the universal pension became a dreaded ‘third rail’ that politicians – until now – feared to touch.

[Centre-left] Labour leader Andrew Little has raised the ghost of broken promises past with talk of means testing the state pension. ….

On Friday morning, during a post-Budget speech, where Opposition leaders traditionally towel the Government for its lack of vision/broken promises/miserliness/feathering of mates’ nests, he managed to blurt out something that sounded like means testing state superannuation payments [New Zealand’s universal pension].

Now we know it wasn’t that, because his office said so – and so did his finance spokesman Grant Robertson.

But when someone at the top of politics starts musing about whether it is fair that those who continue working past 65 also get the state pension it is hard to think it is anything else. [Emphasis added.]

Unless, that is, what he was nutting around was withholding super from those earning wages and salaries past 65, but not those who earn other income such as dividends, rents, business income or …. capital gains?

Does he, a Labour leader, really think someone working 40 hours a week should miss out on super but not someone earning $2000 a week from investment income? [….]

Little had better have a convincing argument, because his thoughts conjures up memories of the Lange-Bolger years and the dreaded surtax, a form of means testing the universal pension […]. Prime Minister Jim Bolger famously promised to scrap it in 1993 and then retained it – a major reason why [the centre-right National party has]… been so careful to be unequivocal about leaving super alone since they took office.

Vernon Small, “What was Andrew Little thinking?“, Stuff (Fairfax Digital), 22 May 2015.

sins of our fathers

May 21st, 2015

When will we ever learn?

On May 13 1939 the SS St Louis, a German ocean liner, set sail from Hamburg. On board were 915 Jewish refugees hoping to escape gathering oppression in Europe. There were dances and concerts aboard the luxury vessel and the indulgent captain permitted passengers to throw a tablecloth over an offending bust of Adolf Hitler. Two weeks later, the ship dropped anchor in Havana, pending what passengers, who had purchased Cuban visas, fully expected to be a warm reception. It was not to be. The Cuban authorities turned them away as, subsequently, did those of the US and Canada. The St Louis was obliged to return to Europe. An estimated quarter of its passengers ended up perishing in Nazi concentration camps.

The St Louis story is served up as a shameful indictment of our forefathers. Yet 75 years later, something just as grotesque is playing out on the azure waters of the Andaman Sea (not to mention the Mediterranean). In the past few weeks, at least 6,000 refugees have been cut adrift in the ocean, refused entry by Thailand, Malaysia and Indonesia. Some 300 have died this year, according to the UN. Dehydrated, emaciated and desperate, unless the situation changes rapidly, many more lives will be lost.

For the Rohingya, the bulk of the refugees, there are echoes of the treatment of Jews in Europe. Many are fleeing refugee centres that have been compared to concentration camps. They are a Muslim minority in Myanmar and Bangladesh.

David Pilling, “Rohingya boat people are becoming the Jews of Asia“, Financial Times, 21 May 2015 (metered paywall).

the origin of ketchup

May 20th, 2015

It was inspired by Indonesian fish and soy sauce, but evolved into a tomato sauce, without fish or soy.

Ketchup derives its name from the Indonesian fish and soy sauce kecap ikan. The names of several other Indonesian sauces also include the word kecap, pronounced KETCHUP, which means a base of dark, thick soy sauce. Why would English garum [or fish sauce] have an Indonesian name? Because the English, starting with the medieval spice trade, looked to Asia for seasoning. Many English condiments, even Worcestershire sauce, invented in the 1840s, are based on Asian ideas. ….

But the English and Americans began to move away from having fish in their ketchup. It became a mushroom sauce, a walnut sauce, or even a salted lemon sauce. These ketchups originally included salt anchovies, but as Anglo-Saxon cooking lost its boldness, cooks began to see the presence of fish as a strong flavor limiting the usefulness of the condiment. ….

Ketchup became a tomato sauce, originally called ‘tomato ketchup’ in America, which is appropriate since the tomato is an American plant, brought to Europe by Hernán Cortés, embraced in the Mediterranean, and regarded with great suspicion in the North. The first known recipe for ‘tomato ketchup’ was by a New Jersey resident. All that is certain about the date is that it had to be before 1782, the year his unfashionable loyalty to the British Crown forced him to flee to Nova Scotia.

Mark Kurlansky, Salt: A World History (Penguin Books, 2002), pp. 188-191.

HT Delanceyplace.


CEO pay is scandalously high

May 20th, 2015

writes FT columnist Michael Skapinker.

Chief executive pay is a scandal. It is too high, too complicated and has badly damaged the image of business. Even fervent defenders of free markets think top pay is out of control.

Simon Walker, head of the UK’s Institute of Directors, whose members are rarely heard humming “The Red Flag”, has said: “What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.” ….

Defenders of the current set-up may seize on Mr Walker’s jibe about rewards for failure and say: “Ah, but what about all those successful CEOs who deserve their pay?” The … riposte is that there is little evidence that performance-related pay schemes are, in fact, rewarding performance. ….

There is no need for US chief executives to earn 296 times as much as the average worker or UK bosses 120 times. [Emphasis added.]

Michael Skapinker, “CEO pay: it is time for one brave leader to ask for less“, Financial Times, 20 May 2015 (metered paywall).

When corporate management worries about the gap between executive pay and the wages of workers, we have a problem. I wondered if corporate America has voiced similar concern. The Wall Street Journal (WSJ) is the US equivalent of London-based Financial Times (FT), so I searched for WSJ columns decrying high CEO compensation. I was unsuccessful, but I did find a column arguing that the gap is small, so nothing to worry about! (See the extract below.)

I seldom read the WSJ. Can a reader please pass on to me any WSJ article or op-ed that expresses concern with the gap between executive compensation and the pay of workers? Does one exist?

[T]he AFL-CIO and its aligned think tanks have made hay of the huge difference between the pay of CEOs and employees.

One of the most widely cited measures of the “gap” comes from the AFL-CIO’s Executive Paywatch website. The nations largest federation of unions laments that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the rest of us. As proof, it points to a 331-to-1 gap in compensation between Americas chief executives and the pay of the average worker.

That’s a sizable number. But don’t grab the pitchforks just yet.

The AFL-CIO calculated a pay gap based on a very small sample—350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013.

The BLS [Bureau of Labor Statistics] reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker. That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.

Mark J. Perry and Michael Saltsman, “About That CEO/Employee Pay Gap“, Wall Street Journal, 12 October 2014 (free access).

Wow! That is impressive shrinkage of the reported wage gap. I am not convinced, though. What counts is the gap between total executive compensation and the compensation of workers (who generally receive no compensation other than wages and salary). For highly-paid CEOs, income from salaries is a fraction of total compensation, which includes bonuses and company stock. Also, few are concerned with CEO compensation in companies that employ few workers, so the S&P 500 is not an irrelevant sample of firms to examine.

Perry and Saltsman were motivated to write an op-ed by introduction in Congress of the CEO-Employee Paycheck Fairness Act, a piece of Democrat legislation referred to the House Committee on Ways and Means at the end of January 2015.

The Act, in words of Perry and Saltsman, “would prevent a public company from deducting executive compensation over $1 million unless it also gives rank-and-file employees raises that keep pace with the cost of living and labor productivity”.

Mr Perry is a resident scholar at the American Enterprise Institute and blogs at Carpe Diem. Mr Saltsman is research director at the Employment Policies Institute (EPI), a front group created by Berman and Company, a Washington, D.C. public relations organization that lobbies for the restaurant, hotel, alcoholic beverage and tobacco industries. The EPI has no employees of its own, other than Mr Saltsman, who is also economist and researcher for Berman and Company.


Iraq and Vietnam in US politics

May 18th, 2015

The US presidential campaign, always a drawn-out process, usually with multiple candidates, is now in full swing. In the United States, the election of president is extremely important because voters choose both head of government and head of state: a single leader who is, so to speak, both prime minister and monarch.

In the current foreign policy debate, the role of the US in Iraq features prominently. FT columnist Edward Luce explains why.

Much like the role Vietnam played in American politics long after US choppers had flown Saigon, the Iraq syndrome stalks foreign policy debate. The latest victim is Jeb Bush, who last week gave four different answers to whether he would have emulated his brother had he known then what he knows now. He arrived at the correct one — “no” — three responses too late. As a display of political constipation, it was awkward to watch. Nor is the question likely to go away. Unlike Vietnam, which did not pose a direct threat to the US, Iraq remains a live challenge.

Edward Luce, “The ghosts of Iraq future“, Financial Times, 18 May 2015.


a Scandinavian solution for tax collection

May 17th, 2015

No-one likes paying taxes, yet Scandinavian countries somehow succeed in collecting about 45% of their GDP in tax revenue, compared to about 25% in the US and about 35% in Germany and the UK. “The Scandinavians” writes FT ‘undercover economist’ Tim Harford, “have managed to raise large sums from their citizens without destroying their economies. How?”

[T]he answer is partly cultural.

It is also partly about the comprehensive tax reporting in Scandinavia, which makes outright evasion very difficult. Norwegian tax returns are published for all to examine. ….

Not everyone will feel delighted about an all-seeing government determined to invade privacy in the name of higher taxes. But there are other elements of Scandinavian taxation that any government might want to emulate: Scandinavian countries minimise the distortions of their tax system by avoiding the bad habits of politicians in other countries.

Chief among these habits is targeting a narrow tax base. The US tax system is full of ad hoc deductions and exemptions. The UK system needlessly excludes swaths of the economy from tax. ….

The simplest way to broaden the tax base is to dismantle barriers to getting a job. Scandinavian governments subsidise education, transport and care for children and the elderly, all of which help people to work who might otherwise find themselves stuck at home. As a result, even high taxes do not keep them out of the labour market. [Emphasis added.]

Tim Harford, “Tax: a Scandinavian solution“, Financial Times, 16 May 2015 (metered paywall).

Note that if subsidies for education, transport, child care and elder care are means-tested, the result is high implicit taxes on income from wages.

Mr Harford’s column is gated, but most of the information he draws on is from an AEA journal that is freely available to non-subscribers:

Henrik Jacobsen Kleven, “How Can Scandinavians Tax So Much?Journal of Economic Perspectives 28:4 (Fall 2014), pp. 77-98.

Kleven’s article is part of a symposium on “Tax Enforcement and Compliance” that includes three related articles.

public transportation for home deliveries

May 17th, 2015

Is Amazon riding a wave of the future?

The online retail giant [Amazon] has started delivering parcels to its Manhattan customers using the city’s underground train network, having discovered what New Yorkers have known for years: it can be much quicker than driving.

In December, Amazon started piloting an ultra-fast service, Prime Now, which promises to deliver popular items such as phone chargers, soap and pet food in as little as an hour for $7.99, or within two hours for free. The scheme was launched in New York, but has since been rolled out in a handful of other US cities, including Miami and Dallas. ….

Amazon confirmed it was using the subway for Prime Now orders: “In Manhattan, our folks bike, walk or use public transportation. They only drive if the item is large like a flat screen TV.”

David Crow, “Amazon trolleys take a ride on New York subway“, Financial Times, 18 May 2015 (metered paywall).