Archive for December, 2010

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India’s infrastructure needs

Friday, December 31st, 2010

Some thoughts inspired by Chinese Premier Wen Jiabao’s tour of India (15-17 December):

India’s economic momentum is impressive …. But it is achieving this development in spite of its infrastructure, not because of it. Road traffic is slowed by single lanes and uneven surfaces. Ships take almost 96 hours to unload and load at Indian ports, about 10 times longer than in Hong Kong. And 18 per cent of India’s urban population defecates daily in open spaces, compared with 6 per cent in China. [emphasis added]

Unlike China, of course, India is burdened by democratic government, a respect for private land rights, and a very zealous Environment Ministry, which means that the state cannot simply bulldoze settlements or drain wetlands to make way for power plants.

Lex, “India”, Financial Times, 30 December 2010.

The ‘Lex’ business and finance column is published daily in the Financial Times. It is written anonymously by a team of eleven FT journalists: six based in London, four in New York and one in Hong Kong.

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income effects and substitution effects

Thursday, December 30th, 2010

I’m an expert on how non-economists think. That’s because every year I try to teach 300 non-economists to think like economists.

Non-economists think in terms of income effects. Economists think in terms of substitution effects. That’s a stereotype that isn’t 100% true, but it still contains a lot of truth.

Nick Rowe, “Income Effects don’t really exist”, Worthwhile Canadian Initiative, 30 December 2010.

Carleton University economist Nick Rowe explains that  income effects do not exist  – in aggregate – for price increases because a buyer’s loss is some seller’s gain (and vice versa for price decreases).

Read his full post, which has examples (and caveats) that are very interesting, but difficult to summarize.

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Denis Dutton died on 28 December 2010

Wednesday, December 29th, 2010

Contrarian academic Denis Dutton has died, aged 66 years.

The professor of philosophy at Canterbury University (Christchurch, New Zealand) was from Los Angeles, and was educated at the University of California-Santa Barbara. He joined the faculty of Canterbury University in 1984 and co-founded Arts & Letters Daily <www.aldaily.com> in 1998.

There is more information in the pages of the New Zealand Herald.

Hat Tip to Michael Littlewood, who writes: “New Zealand (and the world) has lost  a talent.”

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non-contributory pensions in the USA

Tuesday, December 28th, 2010

One of the characteristics of means-tested benefits is that not everyone who is entitled to them applies for them. ….

The US public pension framework includes a low-level, heavily income- and asset-tested ‘Supplemental Security Income Program’ (SSI) at Tier 1. At Tier 2 is the contributory Social Security system. According to the US Social Security Administration, 9% of the aged receive just the SSI and a further 5% receive the SSI and at least some of the Tier 2 pension. ….

[The report finds,] in respect of the elderly who are applying for the SSI on account of age (and, of course, poverty), … the take up rate is about 50%. ….

PensionReforms wonders whether the income tax system ‘talks’ to the Social Security system as any who potentially qualify for the SSI will presumably have no or very low incomes. Perhaps the government as a whole needs to be more pro-active in seeking out potential recipients. The sort of people for whom the SSI is intended and who are applying for the first time in old age are likely to be those who are unfamiliar, or even put off, by the bureaucratic intrusions necessary with a means-tested benefit. That’s why PensionReforms likes universal pensions.

Review of “A Longitudinal Analysis of Entries and Exits of the Low-Income Elderly to and from the Supplemental Security Income Program”, by Todd Elder and Elizabeth Powers, Michigan Retirement Research Center, 2007. PensionReforms, 16 December 2010.

PensionReforms provides a link to the full paper. I suspect that one reason for the absence of a link between the IRS (income tax folks) and SSA (the public pension folks) is that the very poor do not file income tax returns, and SSI targets those in extreme poverty. Even a 100% take-up of benefits would not end poverty among the elderly, as SSI pensions are tiny: too low to lift anyone out of poverty. Paradoxically, universal benefits tend to be more generous than benefits subjected to tight tests of income and assets.

PensionReforms is a website run in New Zealand by the University of Auckland’s Retirement Policy and Research Centre. PensionReforms wants to encourage high quality debate on pension issues by making research easily accessible to anyone with an interest in the area. Not only does PensionReforms summarise the reports covered (and give direct, on-line access to the ungated, original paper) but it also says what it thinks of each report’s conclusions. Currently, 425 searchable reviews of mostly academic research reports have been posted, and 2-3 more are added each week.

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Martin Wolf interviews Ebenezer Scrooge

Monday, December 27th, 2010

“‘Public prudence and private philanthropy’ is my motto. How are we rich people to show our benevolence if the state persists in looking after absolutely everybody?

“Worse, the state looks after the deserving and the undeserving. One thing that even Dickens got right was that the objects of my charity were deserving. Who could be more so than the Cratchits? Think of my favourite charity, ‘Christmas Turkeys for the Worthy’. Do we give birds to just anybody? Not at all. We choose carefully. I think of it as the Big Society in action.”

“So you’re also in favour of the government’s reform of the welfare state, to make work pay.”

“Absolutely,” replied Scrooge. “‘Make the poor work’ is my motto. The only thing worse than the undeserving poor is the idle poor. They are almost the same thing. Those are good Victorian values.”

“So what about the undeserving rich? Scrooge Bank was bailed out by the government and has gone straight back to paying bonuses to its management and dividends to you. How do you justify this state welfare? Not very Victorian, is it?”

“No, indeed, and all the better for it. In most respects things have gone downhill over the past 170 years. But this is not one of them. Banks are too important to be allowed to fail. Rich people do really important things, such as employing the poor and giving some of them charity. The government and Bank of England were quite right to guarantee our debts and provide us with cheap money. It was really all the central banks’ fault anyway: they encouraged lending. What did they expect banks to do?”

Martin Wolf, “Lessons in Scroogenomics”, Financial Times, 24 December 2010.

This is only a portion of Martin’s ‘tongue-in-cheek’ interview. There is more at the link on Scrooge’s best-selling new book Scroogenomics – or How to Do Well out of Doing Good.

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holiday reading tips on finance and pensions

Monday, December 27th, 2010

VoxEU columns, which are excellent, are often featured by Thought du Jour. Vox was launched three and a half years ago, at first with limited readership since its columns are written by professional economists, and are more academic than typical newspaper columns. Then the subprime crisis struck. Pageviews skyrocketed from 195,000 in July 2008 to 870,000 in September and exceeded one million by November.

Richard Baldwin, Editor-in-Chief of Vox since he founded it in June 2007, suggests that, over the holiday break, everyone should read (or re-read) the e-book Completing the Eurozone rescue: What more needs to be done? that he edited with Daniel Gros and Luc Leaven in June of 2010.

[Our e-book has] been viewed 25,000 times, and the analysis still seems fresh. If you want to see what EU leader are going to have to do in early 2011, read the chapters that are written by economists who have a proven track record on this:

* Drawing a line under Europe’s crisis
Barry Eichengreen
* The Eurozone needs a political union, or at least elements of one
Paul De Grauwe
* The Eurozone’s levitation
Charles Wyplosz
* Eurozone governance: What went wrong and how to repair it
Jean Pisani-Ferry
* The European bicycle must accelerate
Angel Ubide
* What more do European governments need to do to save the Eurozone in the medium run?
Thomas Mayer
* The narrative outside of Europe about Europe’s fiscal crisis is wrong
Avinash D. Persaud
* Rethinking national fiscal policies in Europe
Philip R Lane
* A credible Stability and Growth Pact: Raising the bar for budgetary transparency
Michael C. Burda and Stefan Gerlach
* Fiscal policy at a crossroads: The need for constrained discretion
Antonio Fatás and Ilian Mihov
* Fiscal consolidation as a policy strategy to exit the global crisis
Giancarlo Corsetti
* German spending is not the cure
Alberto Alesina and Roberto Perotti
* The long shadow of the fall of the wall
Daniel Gros

Richard Baldwin, “Vox’s annual break and some holiday reading tips”, 25 December 2010.

Links to the free downloads are at < http://voxeu.org/index.php?q=node/5194>

For pension buffs (there must be one or two of you out there!), Pension Reforms is celebrating its 4th anniversary and has updated its list of ten most downloaded abstracts over the full four years. To my surprise, the abstract of a report on Sri Lanka, that I co-authored with Stephen kidd, now graces the number one spot. Here is the full list:

Tackling Poverty in Old Age: A universal pension for Sri Lanka
Sri Lanka can afford a universal pension despite its relative poverty and undeveloped financial framework. The State Pension Age and annual pension are the key variables. The same logic applies to rich and poor countries alike. 

Savings in the Absence of Functioning Property Rights
What to do about public policy on pensions if formal property rights don’t really exist? The usual prescriptions shouldn’t apply so building on traditional ways of looking after the old is at least part of the answer. Fixing the legal system should also be part of the solution and not just for retirement incomes.

Universal pensions in Mauritius: Lessons for the Rest of Us
Not many countries have a universal (Tier 1) pension. Mauritius (pop. 1.3 m; GDP per capita now $US5,500) started one in 1950 almost by accident when it was a lot poorer. It experimented twice with income tests but now everyone over 60 gets a pension.

Macroeconomic Effects of Pension Reform in Chile
This 20 year review of Chile’s pension arrangements identifies its achievements and quantifies its contribution to key economic indicators. However, looking at the past doesn’t mean it should be the future.

Are Kiwis saving enough for retirement? Preliminary evidence from SOFIE
For the last 20 years, New Zealand has had a two-pillar retirement income system – an elegant, universal, PAYG state pension plus voluntary saving. There have been no tax incentives or compulsion for the second pillar of private provision. So, how have New Zealanders responded? Apparently, mostly quite rationally. So what’s the problem?

A Synopsis of Theory, Evidence and Recent Treasury Analysis on Saving
The radical extensions to KiwiSaver by the New Zealand government’s 2007 Budget on the eve of its 1 July 2007 start date have raised the issue of whether governments really can change behaviour to increase either total individual or national saving. This carefully worded officials’ commentary implies not, or not much.

Pensions at a Glance Special Edition: Asia/Pacific
International comparisons of pensions – public or private – are fraught with difficulties. The OECD has published a first Pensions at a Glance for the Asia/Pacific region. Necessary constraints in the comparison affect the robustness of the results.

2009 Ageing Report: economic and budgetary projections for the EU-27 Member States (2008-2060)
The European Commission reports on the economic impact of ageing populations over the next 50 years – low birth rates, longer lives mean higher pension costs. There could be another 59 million immigrants but the median age will still increase from 40 to 48. The news is not new; the recommendations unsurprising.

Old-Age Income Support in the 21st Century – the World Bank’s Perspective
The World Bank’s pension specialists have re-visited the Bank’s 1994 “three pillar” model and come up with five pillars. There are some obvious and curious gaps.

How does the New Zealand retirement savings environment rank? or, Is KiwiSaver a world leader?
New Zealand’s KiwiSaver is the world’s first national, auto-enrolment, retirement savings scheme (starting 2007). The UK also proposes such a scheme – similar but different. Which is likely to be more successful? Does either country need one at all?

Pension Reforms also provides a list of 10 “Editors’ Picks” : reports that the editors think are of significance and worth reading. There is no (zero) overlap between these ten recommendations and the top ten downloads. This shows,I suppose, that popularity is not everything, or that editors have little influence over downloads.

Happy reading and Happy Holidays!

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incentives, rewards and public service

Thursday, December 23rd, 2010

Merit pay for teachers and other public servants seems to be a good idea. Why not pay public sector workers the way workers are paid in the private sector (supposedly related to performance)?

John Kay doubts the wisdom or usefulness of this advice. He draws on Richard Titmuss’ final book The Gift Relationship (1970) to explain how commercial relations can devalue social relations. “It sometimes makes sense,” Kay says, “to bribe children to undertake household tasks or pass examinations. But not even Chicago economists have cash registers by the kitchen sink.”

The problem of disrupting social relationships through the introduction of commercial relationships is most evident [though] in the public sector. In northern and western Europe, the traditional deal was that public service was demanding but poorly paid, but participants were rewarded with respect, job security and a sense of public service.

Many factors have eroded this public sector ethos. …. Job security and autonomy for state employees are hard to reconcile with accountability and performance measurement. The BBC attempts to reconcile a mission of public service broadcasting with competition for the services of popular entertainers, and the outcome is a mess. ….

Incentives and rewards are not the same thing, and people who complain that the spirit of Christmas is eroded by commercialisation are not simply priggish. The direct juxtaposition of the purely commercial exchange with the exchange based solely on mutual affection is offensive and unstable.

John Kay, “Untainted giving – and the true meaning of Santa”, Financial Times, 22 December 2010.

Richard Titmuss (1907-1973), a professor of social policy at LSE, felt strongly that universal services such as health care ought to be allocated on the basis of need rather than ability to pay. He also preferred public to private provision of social services.

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thinking the unthinkable

Tuesday, December 21st, 2010

British author Brian Landers has posted a short piece on sovereign debt, drawing on the 19th century history of external finance in North Africa.

The idea of governments defaulting on their financial obligations is supposedly an anathema but why? We are constantly being told that the public sector must act more like the private and private sector defaults are commonplace. It is after all precisely because financial markets consider some companies to be greater risks than others that different corporate bonds have different yields. Interest rates reflect risks. The Irish government must pay higher interest rates than the German because the market believes its bonds are riskier. And yet politicians across Europe appear determined to prove the markets wrong: again why? Companies in financial difficulties renegotiate their obligations, nations should do the same.

We are told that the market for government bonds will collapse if nations can default. Rubbish – the corporate bond market survives the occasional renegotiation, so would the government bond markets. Of course interest rates might rise but that would encourage governments to be more careful before borrowing – just like the private sector.

Brian Landers, “Nations must be allowed to go bust, and the nineteenth century histories of Egypt, Tunisia and Algeria remind us that lenders will cope just fine”, openDemocracy, 16 December 2010.

Brian Landers is the author of Empires Apart (Picnic Publishing, 2009),  a history of American and Russian imperialism. He has an MBA from London Business School and until recently was a director of the publisher Penguin. (Note, though, that Penguin is not the publisher of his book!)

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Star Trek finance

Sunday, December 19th, 2010

I learn something new every day … perhaps because my age places me some distance from younger generations. I had no idea that online social games were so popular among young women aged 25-35 years. Are they also popular among young men? The article does not mention the males of our species, so perhaps they have less desire to purchase imaginary pink tractors or purple cows.

[Ken Chenault, the chief executive of American Express,] wants to strike deals with gaming companies such as Zynga, which allows its customers to use the “points” they accumulate via the credit card to play online social games, such as FarmVille, where consumers “purchase” virtual animals and tools. “This is incredibly popular among young women, particularly in the 25-35 age range,” Mr Chenault explained. Apparently women rush to buy virtual items such as pink tractors or purple cows.

In some respects, this is bizarre. For one thing, I would like to know how those young Amex-toting women find enough spare time to play around with purple cows (presumably some must have jobs, babies, dates or houses, which demand time). But more importantly, I am also baffled why these consumers don’t have something better to do with those American Express points. After all, they can potentially be translated into tangible goods, such as sofas or handbags; or services, such as holidays.

So why, with Christmas approaching, would anybody wish to invest in imaginary purple cows?

One reason may be boredom or stress; playing online farm games is presumably fun and relaxing (as the estimated 56 million social gamers in the US alone would undoubtedly point out). But there may be something more subtle at work too, about the nature of modern money. Two millennia ago, when those Wise Men presented the first Christmas gifts to the baby Jesus, money and riches were tangible, physical things: you could touch gold coins, and carry them around, before exchanging them for items such as myrrh. These days, money has spun off into a strange ethereal space, so futuristic and hard to understand that it seems more akin to Star Trek finance.

Gillian Tett, “Reality cheques in cyberspace”, Financial Times, 18 December 2010.

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good advice from an outstanding economist

Saturday, December 18th, 2010

Jeremy Clift, Editor-in-Chief of the IMF quarterly publication Finance & Development, profiles Economist Avinash Dixit (1944-). Professor Dixit, who recently retired from full-time teaching at Princeton, and is now a visiting professor at Lingnan University in Hong Kong, thinks that financial crises will always be with us.

“We shouldn’t think they have been abolished,” Dixit said. “Thinking that we have abolished them is an illusion and perhaps a dangerous illusion, because if you think you have abolished crises, your policymakers, business people, consumers, et cetera, will behave in more reckless ways and thereby make crises more likely.”

He advises prudence in good times. “The lesson that really should be learned, and I’m afraid will never be learned, is that the time for fiscal prudence is when times are good. “That’s when governments should be running substantial surpluses, so that when crises or a recession hit, they can spend freely without worrying about debt.

“Unfortunately, the reason the lesson will never be learned is that good economic times are especially conducive to the illusion that bad times will never return.”

Jeremy Clift, Profile of Avinash Dixit, Finance & Development 47:4 (December 2010).

There is much more in the full profile. Dixit and I were born the same year (1944), we are both economists, and we are both fiscal conservatives, but there the similarity ends. Dixit received a BS in mathematics and physics from Bombay University in 1963. He earned a second bachelors degree in mathematics from Cambridge University in 1965, then entered MIT’s graduate school, where he completed an economics PhD in 1968 – the same year that I completed a BS in history! He attained recognition very early for his work with Joseph Stiglitz on imperfect markets, work now known as the Dixit-Stiglitz model of monopolistic competition.

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