Archive for the ‘Political Economy’ Category

happiness, satisfaction, and GDP

Wednesday, October 22nd, 2014

I would like to call everyone’s attention to a superb article written by University of Southern California economist Richard Easterlin, a scholar who, years ago, touched off the booming field of “happiness studies”. I, for one, am not convinced that happiness – even life satisfaction or subjective well being – is something we can usefully measure, aggregate and use for policy purposes. Nonetheless, Easterlin makes a spirited, impassioned case for replacing GDP (Gross Domestic Product) with SWB (Subjective Well Being). He has succeeded in convincing me that SWB, with all its faults, is at least preferable to HDI (the UNDP’s Human Development Index) as a measure of welfare.

Here are two paragraphs from the introduction, and two from the conclusion of the essay. The entire essay (4 pages) can be downloaded, copied and printed without charge, so click on the link below. You will not be disappointed.

Since 1990, GDP per person in China has doubled and then redoubled. With average incomes multiplying fourfold in little more than two decades, one might expect many of the Chinese people to be dancing in the streets. Yet, when asked about their satisfaction with life, they are, if anything, less satisfied than in 1990.

The disparity indicated by these two measures of human progress, Gross Domestic Product and Subjective Well Being (SWB), makes pretty plain the issue at hand. GDP, the well-being indicator commonly used in policy circles, signals an outstanding advance in China. SWB, as indicated by self-reports of overall satisfaction with life, suggests, if anything, a worsening of people’s lives. Which measure is a more meaningful index of well-being? Which is a better guide for public policy? ….

Examples of the disparity between SWB and GDP as measures of well-being could easily be multiplied. Since the early 1970s real GDP per capita in the US has doubled, but SWB has, if anything, declined. In international comparisons, Costa Rica’s per capita GDP is a quarter of that in the US, but Costa Ricans are as happy or happier than Americans when we look at SWB data. Clearly there is more to people’s well-being that the output of goods. ….

[W]ith SWB, the judgement of well-being is made by the individuals affected. GDP’s reliance on outside statistical “experts” to make inferences based on a measure they themselves construct looks deeply flawed when viewed in comparison. These judgements by outsiders also lie behind the growing number of multiple-item measures being put forth these days. An example is the United Nations’ Human Development Index (HDI) which attempts to combine data on GDP with indexes of education and life expectancy.

Richard A. Easterlin, “Why our happiness and satisfaction should replace GDP in policy making“, The Conversation, 21 October 2014.

Professor Easterlin, to his credit, ends the essay with these words: “[A]s as measures of well-being go, SWB is [not] the last word, but clearly it comes closer to capturing what is actually happening to people’s lives than GDP ever will. The question is whether policy makers actually want to know.”

HT: Mark Thoma

economic inequality and Hong Kong protests

Tuesday, October 21st, 2014

Hong Kong’s protest movement – now more than three weeks old – has largely focused on definitions of universal suffrage and various methods for electing political leaders. However, many of those taking part also feel economically disenfranchised ….

The territory’s per capita GDP has soared from below $7,000 two decades ago to about $38,000 now. ….

However, that economic dynamism has come at a price. A fifth of Hong Kong’s 7m people live in poverty, according to the charity Feeding Hong Kong, while the income gap is the widest in the developed world. ….

“The Hong Kong economy has been flying since 1997. It has skyrocketed. But a lot of people don’t enjoy the success,” says Eric Yeung, a 26-year old protester, who works in a hospital. “We are earning our money to feed this small group of people. They get richer, while we get more underprivileged. Our burden has become heavier.”

Josh Noble, “Economic inequality underpins Hong Kong’s great political divide“, Financial Times, 21 October 2014.

workers’ rights

Saturday, October 18th, 2014

FT columnist Simon Kuper complains that politicians routinely ignore the rights of workers, even as they focus on “‘Rights’ – for gay people, women and other suppressed groups”.

Politicians rarely mention them any more except to mock them. Barack Obama spoke of “bitter” jobless small-town Midwestern voters who “cling to guns or religion, or antipathy toward people who aren’t like them”. David Cameron evokes a “broken Britain” of dysfunctional jobless slackers. Mitt Romney identified 47 per cent of Americans “who believe that they are victims?.?.?.?who believe that they are entitled to healthcare, to food, to housing, to you-name-it”. And French president François Hollande, at least according to his angry ex-girlfriend Valérie Trierweiler, calls poor people “the toothless ones”. ….

Many working-class people are now shifting to parties that still promise community – a national or ethnic community. France’s Front National and the Scottish, Catalan and Flemish nationalists have never done better. The US Republicans own most white working-class votes. The UK Independence Party just won its first parliamentary by-election, on the largest increase in voting share for any British party in any by-election ever. Nigel Farage, Ukip’s leader, says: “We are now tearing great holes in the old Labour vote in the north of England.”

The left discovered rights. Now it ought to rediscover community.

Simon Kuper, “The working classes deserve respect“, Financial Times, 18 October 2014.

a conversation with economist Jean Tirole

Friday, October 17th, 2014

In this special FT News podcast, Professor Jean Tirole, who won the Nobel economics prize this year for his insights into market dominance, talks to Ferdinando Giugliano about his views on the evolution of regulation and whether economics has become excessively mathematical.

Ferdinando Giugliano, “Interview with Nobel economics laureate Jean Tirole“, The World blog, Financial Times, 17 October 2014.

This 14-minute interview can be freely accessed. (Registration is required, without charge, and blogs do not count against your 8 free downloads per month.) Here is an interesting quote, from the end of the interview (at 13:24): “It [economics] is a science. It’s a social science, but it’s a science. And it is very important to use the right tools.” For Professor Tirole, these tools include mathematics and statistics.

 

FT Tirole podcast

 

 

 

markets in Hong Kong

Tuesday, October 7th, 2014

You may think, like the Heritage Foundation [and Milton Friedman!], that Hong Kong is a free market. However, except for external trade, it is not. ….

Cartels are everywhere in Hong Kong. Supermarkets are a duopoly, one whose pricing power allows the chains to charge higher prices for the same products in some of Hong Kong’s most deprived areas. Drug stores are a duopoly. Buses are a cartel: high-priced, mostly cash-only, running shoddy, dirty diesel vehicles with drivers who earn a pittance. Electricity is provided by two, expensive monopolies that handle everything from generation to distribution, one on Hong Kong island and the other in Kowloon. The container ports are an oligopoly, with the world’s highest handling charges. Yet they will not supply onshore electricity to vessels, which must instead run diesel generators that pollute the city air.

Joe Studwell, “Hong Kong should focus its fight on the tycoon economy“, Financial Times, 7 October 2014 (ungated link).

Joe Studwell is a freelance journalist based in Cambridge (UK). His latest book is How Asia Works: Success and Failure in the World’s Most Dynamic Region (Grove Press, 2013). He blogs here.

Mr Studwell writes from the political left, so overlooks two features of Hong Kong that illustrate the paucity of free markets. First nearly half the population lives in public housing. Second, anyone with a Hong Kong ID is eligible for subsidized medical care in public facilities. There are 41 hospitals and 122 outpatient clinics run by the government’s Hospital Authority (HA), but only 13 private hospitals.

economic and political costs of income inequality

Thursday, October 2nd, 2014

Another outstanding column from Martin Wolf:

The US – both the most important high-income economy and much the most unequal – is providing a test bed for the economic impact of inequality. The results are worrying. ….

According to the Federal Reserve, the upper 3 per cent of the income distribution received 30.5 per cent of total incomes in 2013. The next 7 per cent received just 16.8 per cent. This left barely over half of total incomes to the remaining 90 per cent. The upper 3 per cent was also the only group to have enjoyed a rising share in incomes since the early 1990s. Since 2010, median family incomes fell, while the mean rose. Inequality keeps rising. ….

[T]he economy will not become buoyant again without a redistribution of income towards spenders or the emergence of another source of demand. Unfortunately, it is not at all clear what the latter might be. Government spending is constrained. Business investment is curbed by weak prospective growth of demand. It is also unlikely to be net exports: everybody else wants export-led growth, too. ….

To my mind [though], the greatest costs are the erosion of the republican ideal of shared citizenship.

As the US Supreme Court seeks to bend the constitution to the will of plutocrats, the peril is to the politically egalitarian premises of the republic. Enormous divergences in wealth and power have hollowed out republics before now. They could well do so in our age.

Martin Wolf, “Why inequality is such a drag on economies“, Financial Times, 1 October 2014.

Hong Kong tycoons and Beijing Communists

Thursday, October 2nd, 2014

Paragraph of the day:

Most Hongkongers want [something the British somehow failed to implement:] a genuine form of democracy  that will allow them to choose their own leaders, though by no means all are willing to face tear gas to get it. They want it not only for abstract reasons of being treated like citizens. They want it for practical reasons too: to vote in a government more attuned to their concerns. Many are dissatisfied with the current state of affairs in which house prices are too high, social mobility too low and welfare provision inadequate. They see this, rightly, as the result of collusion between Hong Kong’s tycoons and Beijing’s Communists, who both see cheap doormen and a safe place to park their money as more important than social justice. The idea of letting people vote scares those who run Hong Kong almost as much as it does those running China.

David Pilling, “Hong Kong’s special status is stretched to its limit“, Financial Times, 2 October 2014.

owners vs renters of housing

Saturday, September 20th, 2014

Everyone needs a roof over their head, a place to live. This need can be satisfied by owning or by renting. The choice has consequences for tax that is payable. Homeowners pay no tax on benefits (notional income) they receive from housing. Renters, in contrast, pay full income tax on the rent they pay for housing. I always thought that fairness required taxation of the imputed rent of owner-occupied housing. FT columnist Martin Wolf has another, very feasible solution that never occurred to me: give renters the same privilege that homeowners receive. How? Make rental payments tax-deductible.

Some countries provide even more perks to homeowners, by providing cash grants to first-time purchasers of housing, or by making mortgage interest tax-deductible. Such policies should also cease, unless government wants to subsidize homeowners. I can’t think of any rational reason for such a policy. Owners tend to be wealthier than renters, so the subsidy is very regressive. In addition, home ownership discourages labour mobility. Unemployed renters can move easily to a location where jobs are available. Selling a home is costly, especially in an economic downturn, so discourages relocation.

Here is a small excerpt from Martin’s column. There is much more in the full column, so do read it. His main point is that finance of housing is important, and is a major contributor to macroeconomic instability.

Rising house prices justify more lending; and more lending then drives house prices higher. In the process, housing finance may generate asset-price bubbles, huge increases in leverage and unsustainable household spending. This is exactly what happened in many countries in the run-up to the post-2007 crises.

Behind all this lies a strong social consensus in favour of owner-occupation. This has justified a range of subsidies for this form of tenure. One of these is widely ignored: the universal failure to tax “imputed rent”. Owner-occupiers in effect “rent” from themselves. But this notional “rent” is tax-free. Landlords, however, pay tax on the rent they receive This makes owner-occupation far cheaper than renting the same property. Interestingly, this tax advantage would be ended if rent were tax-deductible.

Martin Wolf, “Deeper reform of housing finance is vital for stability“, Financial Times, 19 September 2014.

Metered paywall (free registration required)

democracy in Hong Kong: the Chinese view

Tuesday, September 9th, 2014

Hong Kong residents, for the first time, will be allowed to choose their chief executive on the principle of one man-one vote. Critics complain that this is sham democracy, as voters will have to vote for one of three candidates, all of whom have been vetted by the Chinese government.

C Y Leung, Hong Kong’s current chief executive, responds to pro-democracy critics in today’s Financial Times. He claims, not without reason, that China has done more to move towards democracy in Hong Kong than the British did during 155 years of colonial rule. In due course, we will be able to judge for ourselves whether this is true. Recently, on the BBC television channel, I heard a member of Hong Kong’s legislative council state categorically that Hong Kong was moving towards the Iranian model of democracy.

The 28 British governors who ruled Hong Kong for a total of 155 years before 1997 were dispatched by the British government without any input at all from the Hong Kong people – or the British people, for that matter.

The Sino-British Joint Declaration signed in 1984, now cited as the basis of Britain’s legal or moral obligation to Hong Kong, makes no mention of universal suffrage.

It only states: “The chief executive will be appointed by the Central People’s Government on the basis of the results of elections or consultations to be held locally.”

Only the Basic Law, promulgated in 1990 by the National People’s Congress, China’s parliament, and implemented in July 1997, states that the ultimate goal is to elect the chief executive by universal suffrage.

C Y Leung, “Hong Kong must seize the first chance to elect its own leaders“, Financial Times, 9 September 2014.

Although Mr Leung does not mention him by name, this was obviously written in response to a column of the last British governor (Lord Patten), published in last Wednesday’s Financial Times.

no future for Gross National Happiness

Friday, September 5th, 2014

Raising a standard against happiness is never going to be popular, but here goes.

The mountain kingdom of Bhutan has got a lot of mileage out of its practice, first adopted in 1972, of using a broad “Gross National Happiness” (GNH) measure of its people’s welfare rather than a narrow measure like income.

… [M]any people … have fallen in love with the idea – the UN went as far as declaring March 20 the “International Day Of Happiness” ….

Unfortunately for its international enthusiasts, its originators are losing faith. Tshering Tobgay, elected with a thumping majority last year in only the country’s second parliamentary election, has distanced his government from the concept. ….

GNH has proved no guarantee of individual human rights. Taking it at face value, you would never know that Bhutan has for decades been carrying out a brutal ethnic cleansing policy against the country’s Nepali-speaking minority. Once around a sixth of the population, a “Bhutanisation” campaign that began in the 1980s resulted in tens of thousands of Nepalis being expelled from the country. Their houses were seized or burned down and people deported for speaking Nepali, refusing to eat beef (Nepalis are generally Hindu while ethnic Bhutanese are Buddhist) or declining to wear traditional dress. The displaced are still living in refugee camps in Nepal, or have been resettled in the US or elsewhere: none has been allowed to return. ….

As for the future of GNH in Bhutan, Mr Tobgay seems to have exactly the right idea. He wants the king (now happily reduced to the role of a constitutional monarch) to proselytise for it in an abstract way, much as Queen Elizabeth II is sent abroad to chunter vaguely about Britain’s enduring values while the UK government gets on with running the country according to what its voters want.

Alan Beattie, “Gross National Happiness: a bad idea whose time has gone“, FT Beyond Brics blog, 4 September 2014.