Archive for August, 2011

pension reform in Chile

Wednesday, August 31st, 2011

[Salvador Valdés-Prieto,] a Chilean economics professor, concludes that Chile’s 2008 pension reform was not necessary because Pinochet in 1975 provided the poor from age 65 with a non-contributory Assistance Pension. “[E]lderly poverty in Chile has remained at … half the national poverty rate for all ages. Controlling for her income level, Chile had one of the best old-age poverty alleviation schemes before the 2008 reform, by international standards.” The report concludes: “The main reform of 2008 was to rename, expand and redesign Pinochet’s Assistance Pension. The new name is `Solidarity Pension’.”

PensionReforms senses the reform did not go far enough, but reaches a more positive assessment – more on that below.

Poverty in Chile has to date been expressed by reference to household income. `Household’ is defined as one or more persons, not necessarily related, who live together in the same dwelling and share a common food budget. The 2006 household survey revealed that 13.7% of all households had per capita incomes below the poverty line, but only 7.5% of households with an elderly member (aged 60+) had less than poverty-level per capita incomes. An elderly person who lives in a non-poor household – with a friend or with the family of an adult child, for example – is not classified as poor, even if she has no income of her own. ….

Everyone 65 years and older, regardless of their contribution history, is entitled to a minimum pension of 60,000 pesos (US$118) a month beginning July 2008, increasing to 75,000 pesos in July 2009 and subsequently indexed to consumer prices. The report surprisingly concludes that the new Solidarity Pension is too generous, since “the non-elderly … must work all day to attain a level of consumption similar to the retired elderly”. This assertion is justified by looking at “the autonomous income (market wage) of a couple in the 40th percentile of the income distribution” in the household survey, then making the dubious assumption that this is equivalent to wages earned by both husband and wife working at full-time jobs for the entire year. A pension of 60,000 pesos is about 13% of per capita GDP – 37% of the minimum wage – which does not seem excessive to PensionReforms. ….

The [Valdés] report fails to mention that the means test is now based only on the per capita income of husband, wife and dependent children [rather than the household]. It notes only that “the new law defines household on the basis of blood ties, while the CASEN [household] survey defines household on the basis of sharing cooking and shelter”, and points out that since the new definition “is incompatible with the definition used by the survey which is the source of the data used to rank households by average income per capita”. PensionReforms discovered that the government is aware of this, and intends to amend the annual household survey to include questions on family groups. For elderly persons without pension income and who want to live with their adult children without becoming a burden, this reform will be seen by them as a godsend. ….

PensionReforms thinks that the 2008 reform was both useful and necessary but suggests that it should be seen as just a step in the right direction. Chile since 1975 has recognised that compulsory Tier 2 schemes cannot meet a government’s social objectives for financial support to its older citizens. Now it is time to move to a universal Tier 1 pension. The 2008 reform has made that easier.

The 2008 Chilean Reform to First-Pillar Pensions“, Pension Reforms, 26 February 2009.

Recycled from the TdJ archive, 12 March 2009. There is a link to Valdés-Prieto’s report at the end of the Pension Reforms abstract.

pension reform in Chile

[Salvador Valdés-Prieto,] a Chilean economics professor, concludes that Chile’s 2008 pension reform was not necessary because Pinochet in
1975 provided the poor from age 65 with a non-contributory Assistance Pension. “[E]lderly poverty in Chile has remained at … half the
national poverty rate for all ages. Controlling for her income level, Chile had one of the best old-age poverty alleviation schemes
before the 2008 reform, by international standards.” The report concludes: “The main reform of 2008 was to rename, expand and redesign
Pinochet’s Assistance Pension. The new name is `Solidarity Pension’.”

PensionReforms senses the reform did not go far enough, but reaches a more positive assessment – more on that below.

Poverty in Chile has to date been expressed by reference to household income. `Household’ is defined as one or more persons, not
necessarily related, who live together in the same dwelling and share a common food budget. The 2006 household survey revealed that 13.7%
of all households had per capita incomes below the poverty line, but only 7.5% of households with an elderly member (aged 60+) had less
than poverty-level per capita incomes. An elderly person who lives in a non-poor household – with a friend or with the family of an adult
child, for example – is not classified as poor, even if she has no income of her own. ….

Everyone 65 years and older, regardless of their contribution history, is entitled to a minimum pension of 60,000 pesos (US$118) a month
beginning July 2008, increasing to 75,000 pesos in July 2009 and subsequently indexed to consumer prices. The report surprisingly
concludes that the new Solidarity Pension is too generous, since “the non-elderly … must work all day to attain a level of consumption
similar to the retired elderly”. This assertion is justified by looking at “the autonomous income (market wage) of a couple in the 40th
percentile of the income distribution” in the household survey, then making the dubious assumption that this is equivalent to wages
earned by both husband and wife working at full-time jobs for the entire year. A pension of 60,000 pesos is about 13% of per capita GDP -
37% of the minimum wage – which does not seem excessive to PensionReforms. ….

The [Valdés] report fails to mention that the means test is now based only on the per capita income of husband, wife and dependent
children [rather than the household]. It notes only that “the new law defines household on the basis of blood ties, while the CASEN
[household] survey defines household on the basis of sharing cooking and shelter”, and points out that since the new definition “is
incompatible with the definition used by the survey which is the source of the data used to rank households by average income per
capita”. PensionReforms discovered that the government is aware of this, and intends to amend the annual household survey to include
questions on family groups. For elderly persons without pension income and who want to live with their adult children without becoming a
burden, this reform will be seen by them as a godsend. ….

PensionReforms thinks that the 2008 reform was both useful and necessary but suggests that it should be seen as just a step in the right
direction. Chile since 1975 has recognised that compulsory Tier 2 schemes cannot meet a government’s social objectives for financial
support to its older citizens. Now it is time to move to a universal Tier 1 pension. The 2008 reform has made that easier.

“The 2008 Chilean Reform to First-Pillar Pensions”, Pension Reforms, 26 February 2009.

http://www.pensionreforms.com/Preview.aspx?274

Recycled from TdJ archive. There is a link to the full report in the Pension Reforms abstract.

http://uk.groups.yahoo.com/group/thought_du_jour/message/1395

http://uk.groups.yahoo.com/group/thought_du_jour/

the continuing “great contraction”

Wednesday, August 31st, 2011

Martin Wolf has returned from holidays, and treats us to another of his regular Wednesday columns. He predicts that there is no danger of a “double dip” recession, but only “because the first one did not end.” Countries remain mired in recession because politicians are either unwilling or unable to stimulate the economy.

In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander of unfolding events …. Both are – and, to a degree, operate as – outsiders. Mr Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed. Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing. The realisation that neither the US nor the eurozone can create conditions for a speedy restoration of growth – indeed the paralysing disagreements over what those conditions might be – is scary.

Martin Wolf, “Struggling with a great contraction“, Financial Times, 31 August 2011.

solving the euro crisis

Tuesday, August 30th, 2011

The euro is in crisis, with no viable solution in sight. A German industrialist has a radical idea. “If it was possible to form one currency out of 17″,  he reasons, “it should also be possible to form two out of one”.

Having been an early supporter of the euro, I now consider my engagement to be the biggest professional mistake I ever made. But I do have a solution to the escalating crisis. ….
[W]e need a plan …: Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation. Some non-euro countries would probably join this monetary union. Depending on performance, a flexible membership between the two unions should be possible.

Implementing [this] plan … requires that four underlying problems are addressed separately. We must rescue banks, not countries. Stabilisation of banks on a national level should replace current European umbrellas. In many cases, this requires temporary bank nationalisation. Second, Germany and its partners in a new currency must forgo a significant portion of their guarantees to help refinance Greece, Portugal and others. As much of this money is already lost, this is an acceptable price for an “exit ticket”. Third, there must be a new European central bank based on the Bundesbank, preferably not led by a German. The new currency should not be called the “D-Mark”. Fourth, mechanics for entry would be similar to those for getting into the euro.

Hans-Olaf Henkel, “A sceptic’s solution – a breakaway currency“, Financial Times, 30 August 2011.

Hans-Olaf Henkel (born 1940) is former head of the Federation of German Industries (BDI).

Update: Nick Rowe launched an excellent discussion of this proposal over at at WCI.

targeting nominal GDP instead of prices

Monday, August 29th, 2011

Some economists, with Scott Sumner of Bentley University in the lead, want central banks to target nominal GDP (or NGDP) instead of inflation. Nominal GDP is equal to real GDP times the price level. If the two components moved in tandem, there would be no difference between NGDP targeting and inflation targeting. They rarely move together, so fluctuations in real output in theory could be smoothed by targeting NGDP, albeit at the cost of more fluctuation in prices. The Economist, in an “Economics focus”, explains the costs and benefits of this proposed change in policy.

Advocates of nominal GDP targeting claim that it would achieve greater macroeconomic stability. When recession hits, real output falls but prices tend to adjust more slowly. This means that by targeting nominal GDP, central banks could actually smooth output fluctuations better. They could also react more appropriately to supply shocks. Take the example of an economy that is hit by a negative supply shock through high oil prices depressing output and raising inflation. An inflation-targeting central bank may feel compelled to tighten policy, worsening the slump in output, whereas one mandated to hit NGDP could be more flexible. There could be advantages, too, in the opposite case where a positive supply shock through productivity-enhancing new technology boosts real GDP growth while lowering inflation. An inflation-targeting central bank would respond by easing monetary policy, which could produce asset bubbles, whereas an NGDP-targeting central bank would hold steady. Certainly inflation would be more volatile, but the overall economy would not be.

For those reared on price stability as a guiding principle of economic policy (and those who recall the turbulent 1970s when inflation lurched out of control), a regime that permits higher inflation from time to time may be hard to stomach. Yet the target for NGDP growth would still put a lid on inflation and thus prevent it from careering out of control. And lifting NGDP growth should move the economy closer to its real potential and reduce unemployment, as well as any additional inflation it might generate. Some observers suspect that the Bank of England has covertly been targeting nominal income of late, pointing to its tolerance of inflation running consistently above target and the relative stability of Britain’s nominal GDP growth.

Changing target: Should the Fed target nominal GDP?“, The Economist, 27 August 2011.

response to ecological bottlenecks

Saturday, August 27th, 2011

I am an economist who shares [Jared] Diamond’s worries, but I think he has failed to grasp both the way in which information about particular states of affairs gets transmitted (however imperfectly) in modern decentralised economies – via economic signals such as prices, demand, product quality and migration – and the way increases in the scarcity of resources can itself act to spur innovations that ease those scarcities. ….

Here is an example of what I mean. Forests loom large in Diamond’s case studies. As deforestation was the proximate cause of the Easter Islanders’ demise, he offers an extended, contrasting account of the way a deforested Japan succeeded, in the early 18th century, in averting total disaster by regenerating its forests. Now consider another island: England. Deforestation here began under the Romans …. In the mid-18th century what people saw across the landscape in England wasn’t trees, but stone rows separating agricultural fields. The noted economic historian Brinley Thomas argued that … England became the centre of the Industrial Revolution not because it had abundant energy but because it was running out of energy. France, in contrast, didn’t need to find a substitute energy source: it was covered in forests and therefore lost out. I’m not able to judge the plausibility of Thomas’s thesis … but the point remains that scarcities lead individuals and societies to search for ways out, which often means discovering alternatives. Diamond is dismissive of the possibility of our finding such alternatives in the future because, as he would have it, we are about to come up against natural bottlenecks. We should be persuaded by the evidence that has been gathered over the years by environmental scientists that he is right, but simply telling us that we are about to hit bottlenecks won’t do, because environmental sceptics would reply that discovering alternatives is the way to avoid them.

Partha Dasgupta, “Bottlenecks“, London Review of Books, 19 May 2005.

Recycled from 17 May 2005.

Cambridge University Professor Partha Dasgupta is reviewing Jared Diamond’s book Collapse: How Societies Choose to Fail or Survive (2005). Terry Hunt and Carl Lipo, in a new book, argue convincingly that the Easter Islanders managed to survive and thrive despite deforestation, and that their ‘discovery’ by Europeans – not deforestation – was the proximate cause of their demise. The book by Hunt and Lipo is The Statues that Walked: Unraveling the Mystery of Easter Island (Free Press, New York, 2011).

Easter Island

Friday, August 26th, 2011

Anthropologist Terry Hunt (University of Hawaii-Manaoa) and Archaeologist Carl Lipo (California State University-Long Beach) have written a very readable book on the history of Easter Island, or Rapa Nui. Their theory that the island was deforested by rats, not humans, is not accepted by all scholars, but how deforestation occurred is less important than the fact that an indigenous population was able to thrive on an inhospitable, treeless island located far from other human populations. Contact with Europeans proved more fatal than deforestation for the inhabitants of Rapa Nui. This fact, often ignored, is not disputed by scholars.

Dutch explorer Jacob Roggeveen was the first European to sight Rapa Nui. He spotted the island on Easter Sunday in 1722, and gave it the name “Easter Island”.  He and his crew went ashore to find a treeless island, inhabited by about 3,000 healthy individuals. The visit was devastating for the native population, as was a subsequent visit by the Spanish in 1770, the consequences of which were witnessed by the English Captain James Cook in 1774.

Within three days of their visit ashore, the Dutch had sailed over the horizon ignorant of so much of what had transpired. Indeed, they were ignorant of even the possibilities.  …. [H]ordes of new germs were unleashed, posing a far greater and devastating threat than the muskets that had killed a dozen or so of the Rapanui assembled on the shore just days earlier. What happened next was witnessed only by the victims, the Rapanui themselves. (p. 156)

A catastrophic population collapse would have obliterated the social, political, and economic status quo. The devastating epidemics and longer-term effects of venereal disease, for example, would have come as a shock to the Rapanui.

If by 1725 there were only a few hundred survivors left on Rapa Nui, they effectively ofrmed a new founding population – of survivors. The Rapanui people were isolated again from the outside world and its diseases … and this small group would have rebounded relatively quickly, approaching the original population size, probably within three to four generations.

But in 1770 the onslaught began anew …. [with the arrival of] two [Spanish] warships led by Felipe Gonzales de Haedo …. (p. 158)

While no violence erupted during the Spanish visit, something more potent had been unleashed on Rapa Nui. From the six days on the island and the explicit references to sexual encounters, we can be certain that venereal disease gained a foothold. Epidemic disease must also have followed the Spanish visit, and this time unwitting witnesses of the impact would arrive on the scene within four years: the British. (p. 159)

At the time of Cook’s [three-day] visit, just four years after the Spanish had arrived, the Rapanui were almost certainly suffering in the aftermath of disease outbreaks. Indeed, the 600 to 700 people Cook reports for the island’s population must be survivors of whatever pathogens were introduced and epidemics that ensured. And there are venereal diseases; they don’t kill quickly, but linger to inflict long-term maladies, reproductive problems, and sterility.  (pp. 162-163)

The British were unknowing witnesses to an epidemic that had just passed. But what had just transpired was still incomprehensible to them. They were perplexed by the small population size, what the perceived as poverty, and generally by the disheveled state of things; in hindsight, this is precisely what the aftermath of epidemic and a population crash would look like. (p. 163)

Terry Hunt and Karl Lipo, The Statues that Walked: Unraveling the Mystery of Easter Island (Free Press, New York, 2011).

Amazon.com sells this short book in hardcover for $15.44 and a Kindle (e-book) version for $23.88. There is no paperback yet available.

TdJ reviewed some of Terry Hunt’s earlier writings on Rapa Nui in 2006 and 2009.

paper recycling and trees

Thursday, August 25th, 2011

Two years ago TdJ posted a statement of University of Toronto philosopher Joseph Heath with the title “Paper recycling can be bad for the planet“. Heath’s argument in essence was:

Why are there so many cows in the world? Because people eat cows. Not only that, but the number of cows in the world is a precise function of the number that are eaten. If people decided to eat less beef, there would be fewer cows. Yet the same is true of trees.

In the current issue of the Canadian Journal of Economics, two economists from the University of Montreal reach the same conclusion, with a sophisticated model that embodies precisely the same reasoning. Here is the abstract of their paper:

Interest in recycling of forest products has grown in recent years, one of the goals being to conserve trees or possibly increase their number to compensate for positive externalities generated by the forest and neglected by the market. This paper explores the issue as to whether recycling is an appropriate measure to attain such a goal. We do this by considering the problem of the private owner of an area of land, who, acting as a price taker, decides how to allocate his land over time between forestry and some other use, and at what age to harvest the forest area chosen. Once the forest is cut, he makes a new land allocation decision and replants. He does so indefinitely, in a Faustmann-like framework. The wood from the harvest is transformed into a final product that is partly recycled into a substitute for the virgin wood, so that past output affects the current price. We show that in such a context, increasing the rate of recycling will result in less area being devoted to forestry. It will also have the effect of increasing the harvest age of the forest, as long as the planting cost is positive. The net effect on the flow of virgin wood being harvested to supply the market will as a result be ambiguous. An important point, however, is that recycling will result in fewer trees in the long run, not more. It would therefore be best to resort to other means if the goal is to conserve the area devoted to forestry.

Didier Tatoutchoup and Gérard Gaudet, “The impact of recycling on the long-run forestry“, Canadian Journal of Economics 44:3 (August 2011), pp. 804-813.

The link is to an earlier version of the paper, which has a slightly different title: “The Impact of Recycling on the Long-Run Stock of Trees”.

For the moment, I continue to toss all old paper into designated recycling bins, but should reconsider this action, given its negative effect on the number of trees, hence positive effect on greenhouse gases.

the euro/dollar exchange rate

Wednesday, August 24th, 2011

Harvard economist Martin Feldstein thinks the US dollar will continue to fall against the euro.

The dollar is likely to continue falling relative to the euro and other currencies over the next several years. As a result, the Chinese will be able to allow the renminbi to rise substantially against the dollar if they want to raise its overall global value in order to decrease China’s portfolio risk and rein in inflationary pressure.

Martin Feldstein, “China’s New Currency Policy“, Project Syndicate, 23 August 2011.

Both currencies are weak, but Feldstein believes that the US dollar is weakest. If true, this will aid US recovery. We shall see.

pitfalls in the use of economic data

Wednesday, August 24th, 2011

A visit to the “International Festival of Statistics” in Dublin prompted John Kay to write a column filled with advice for young (and not-so-young) scholars on the use and misuse of data. Here is a sample.

When the data seem to point to an unexpected finding, always consider the possibility that the problem is a feature of the data, rather than a feature of the world. I recently saw a study of comparative productivity in financial services in which Italy came top and Britain and the US bottom. You might have thought alarm bells would ring, but no: the authors went on to comment that this divergence was serious because of the size of the financial services sectors of Britain and the US. A little thought might have directed the researchers’ attention to questions such as “what is meant by output of financial services?”.

But it is now easy to import data into a computer program without thought. ….

Statistics are only as valid as the sources from which they are drawn and the abilities of those who use them. When I discover something surprising in data, the most common explanation is that I made a mistake.

John Kay, “Sex, lies and pitfalls of overblown statistics“, Financial Times, 24 August 2011.

John Kay must be referring to the 58th World Statistics Congress of the International Statistical Institute (ISI), known also as “ISI 2011″. It is hosted by Ireland’s Central Statistics Office. The event began three days ago, and concludes on Friday, 26 August 2011. If Mr Kay visited this year’s Congress, he must have left early.

“International Festival of Statistics” does sound more interesting than “World Statistics Congress”. Organisers of this biennial event should take note!

human evolution and modern life

Tuesday, August 23rd, 2011

Today’s New York Times contains “A Conversation with Daniel Lieberman”, an evolutionary biologist who teaches at Harvard University. The entire column is worth reading, but Lieberman’s answers to two questions caught my attention.

Q. Are there any practical benefits to your research?

A. There are. ….

For example, impacted wisdom teeth and malocclusions are very recent problems. They arise because we now process our food so much that we chew with little force. These interactions affect how our faces grow, which causes previously unknown dental problems. Hunter-gatherers — who live in ways similar to our ancestors — don’t have impacted wisdom teeth or cavities. There are many other conditions rooted in the mismatch — fallen arches, osteoporosis, cancer, myopia, diabetes and back trouble. So understanding evolutionary biology will definitely help my students when they become orthopedists, orthodontists and craniofacial surgeons.

Q. People with bad backs often blame evolution for their pain. They say, “My back aches because man was not meant to walk on two feet.” Are they right?

A. If that were true, natural selection would have its toll and we’d be extinct. What is more likely is that many people sit in chairs all day, get no exercise, and thus have weak backs. We did not evolve to sit in chairs all day.

Claudia Dreifus, “Born, and Evolved, to Run“, New York Times, 23 August 2011.

Remember that last sentence the next time your back aches: “We did not evolve to sit in chairs all day.” So true! But what kind of bodies would we have if we did evolve to sit in chairs?