Tuesday, November 29, 2011

Why occupy Sydney?

‘So, you think I am in favour of occupying Wall Street, do you? What makes you think that?’

I knew it was Jim as soon as he spoke, but it took me a moment to work out where his voice was coming from. When Jim wants to have a discussion with you, he seems to appear from nowhere and just start asking questions. I suppose he thinks that gives him some kind of advantage. It doesn’t work! Everyone I know just ignores his opening questions and goes through the usual preliminaries of saying hello and asking after his health while they compose a response.

Jim had obviously read a brief comment on my last post in which I had speculated that he might be in favour of occupying Wall Street, but not Sydney. I reminded Jim about our previous discussions about banking and limited liability. In our previous discussion about banking Jim had suggested that it was a scam for banks to promise to repay deposits on demand even though they knew that they would be unable to meet that promise if all depositors asked for their money at the same time. In our discussion about limited liability, Jim had suggested that it was wrong to allow owners of banks to gamble with borrowed money, secure in the knowledge that if their gambles do not pay off then the most they stand to lose is the value of their shares. I also mentioned that when banks have been declared by governments to be ‘too big to fail’, bankers have a strong incentive to take abnormal risks because they know that they will be bailed out by governments if they make large losses. I ended by telling Jim that I could picture him in Wall Street carrying a placard saying ‘Bankers are Wankers!’.

Jim seemed satisfied with my explanation, but when I had finished he asked: ‘So, doesn’t all that apply to Australia as well as the US? Don’t you think I should be in favour of occupying Sydney, too?’

I tried to explain that prudential regulation seems to have worked reasonably well in Australia, so there doesn’t seem to be much to protest about in terms of the way the financial system is working in this country.

Jim’s response was quite robust and is not quotable verbatim. After deleting expletives I think the message he was giving me was that although I tell people that I am a libertarian, he thinks I am actually a neo-socialist because I am in favour of some prudential regulation of the finance sector. (Jim can call me a neo-socialist if he likes – it makes a change from being called a neo-liberal. My views on banking regulation are actually fairly close to those of Adam Smith, so I am in good company.) Jim ended his outburst by telling me that while I was entitled to my own views, I should refrain from misrepresenting his views.

‘Well, does that means you actually support the Occupy Sydney movement?’, I asked.

Jim didn’t respond for a long time. Eventually, he asked, ‘What are the Occupy Sydney people actually on about?’ I wasn’t sure, but I suggested that the main theme of the Occupy movement all over the world seemed to be the injustice of unequal distribution of wealth and power – particularly the idea that the top 1% of the population in many countries tend to benefit disproportionately from economic growth.

‘And who do you think is responsible for that?’ Jim said. ‘It is the 99% who are responsible for making the 1% wealthy. We make a few film stars fabulously wealthy by going to the movies that they star in. We make a few sporting heroes fabulously wealthy by watching the games they play and buying the products they endorse. The same system applies in the business world. The CEO of a successful company develops a reputation as a star performer just like film stars and sporting heroes. Successful companies are only successful because the 99% buy the goods they produce’.

‘So’, I said, ‘you don’t think there is anything to protest about?’
Jim said, ‘No, that’s not what I mean. The Occupy Movement should be protesting about celebrity culture and the vacuousness of consumerism. They should be poking fun at the idea that a good is worth buying just because it is popular and that entertainment is worth watching just because the performer is a star. They should be asking people whether they actually get pleasure by helping Kim Kardashian to become wealthier’.

I was left wondering why Jim was picking on Kim Kardashian. One possibility that crossed my mind is that she might have green hair. Jim doesn’t like green hair.

Wednesday, November 16, 2011

Does Sophie know she is dumping on free trade?

When Jim asked me to have a drink with him I didn’t expect to be just sitting there watching him read ‘The Australian’ - and certainly not one that was a couple of days out of date. But when I looked more closely, he wasn’t actually reading. He was just scanning as though he was looking for something.

‘Ah, here it is’ he said at last. ‘What do you think of Sophie Mirabella?’

Sophie Mirabella is the federal opposition spokeswoman on innovation, industry and science. I told Jim that I thought Sophie was a clever lawyer. I said I would rather have her on my side of the argument than as an opponent.

‘What about the dumping issue?’ Jim asked.
I said that in my view she was out of order when she dumped on Julia Gillard a few months ago by comparing her to Muammar Gaddafi.

Jim replied: ‘Nah, I mean anti-dumping policy – preventing foreigners from selling goods here at prices lower than they charge in their home markets. Sophie writes here that dumping seeks to exploit Australia’s commitment to free trade and is a distortion of our domestic market’.

‘That’s crap!’ I said. ‘It is quite normal for firms to be able to sell goods in their home markets at prices that are higher than they can obtain in international markets. How could our domestic market be distorted by importing goods at the world price?’

Jim ignored my response and read on. After a minute, he said: ‘Sophie says that when Abbott comes to power she is going to provide for preliminary affirmative determinations (PADs) to “create a shift in the balance of anti-dumping investigations, requiring the foreign producer to prove its conduct hasn’t hurt the Australian industry”. What do you think of that?’

It was hard to know where to start. I could have said it seemed to me to be a peculiar legal principle to ask anyone to prove something that they are not capable of knowing. Instead, I reflected a little on the difficulty that lawyers often seem to have in coming to terms with economic issues. I said: ‘I think Sophie makes the same mistake that a lot of lawyers make when they get involved in economic issues. They see an economic practice that they can’t understand and assume that it must be unfair. In this instance, they see firms selling in export markets at a lower price than in their home markets and jump to the conclusion that they are engaged in some kind of unfair practice, such as predatory pricing. They don’t consider that the firms might be able to obtain higher prices on home market sales because of brand loyalty and other home market advantages. Her efforts to shift the balance in favour of domestic industry will just encourage the rent seekers.
Jim replied: ‘You don’t have a very high opinion of the ability of lawyers to understand economics, do you?’

When I protested to the effect that I think some lawyers have an excellent grasp of economics, he asked me to name one. The name that came to mind immediately was Richard Epstein. (Actually, that stretches the truth a little. I find that names rarely come to mind immediately. Richard Epstein’s name came to mind after just a moment’s reflection.)

Jim asked: ‘So, what does Richard Epstein say about anti-dumping policy?’ I mentioned that I had recently read a short article he wrote about the concept of fair trade that seemed relevant. I suggested that Epstein had made the point that it doesn’t make sense to view business practices in international trade as unfair that would be considered quite normal in inter-state trade within the United States. (When I just re-read Epstein’s article, ‘The “Fair” Trade Delusion’, however, I find that he didn’t quite use those words. And he seems to be implying that FTAs promote free trade – which is hard to sustain. But I am digressing - and at risk of spoiling my story!)

Jim’s line of questioning then took a surprising turn. He asked: ‘Do you think Craig Emerson would understand that the benefits of inter-state and international trade are basically the same?’

Craig Emerson, the current Minister for Trade, has a PhD in economics from a respectable university and knows quite a lot about international economics. I said I was sure that he would know that the benefits of trade between, say, Victoria and Western Australia would not be any less if Western Australia was in a different country.

Jim then said: ‘Then don’t you think you and your mates in Canberra should stop picking on Craig Emerson? How would you like to have Sophie Mirabella running trade policy? Or, perhaps even Doug Cameron, or Bob Katter?’

I responded that it must be time for me to buy Jim a drink.

On reflection, how can anyone respond to a suggestion that what seems to be a disappointment is actually a blessing compared with something worse that might happen? Even the GFC could look like a blessing compared to the aftermath of the European meltdown that the world might experience over the next few months if everything that could go wrong does go wrong. When I think about the approach that Sophie is proposing to take with anti-dumping policy, Craig does seem like a little blessing. My problem is that I thought having Craig in control of trade policy might be a huge blessing for the Australian economy, rather than just a little one.

Sunday, November 13, 2011

How should we encourage people to adopt more healthy lifestyles?

RedirectTimothy Wilson’s book, ‘Redirect: The Surprising New science of Psychological Change’, is primarily about what he describes as ‘story editing’ – a set of techniques designed to redirect people’s narratives about themselves and the social world in a way that leads to lasting changes in behaviour. Some of this story editing involves writing exercises, such as becoming more optimistic by writing about the process by which you have enabled everything in your future life to go as well as it could. But story editing also involves such things as providing information about social norms to correct mis-perceptions about what everyone else is doing. I suggest that anyone interested in a brief overview of the book should take a look at theinterview of Tim Wilson by Gareth Cook, for ‘Scientific American’ and a reviewby Mario Popova for ‘The Atlantic’.

I want to focus here on what light the book sheds on how we should encourage people to adopt more healthy lifestyles. Some people who are reading this will be thinking that I must have worked in the public sector for too long and become addicted to the ‘we’ word. Why should ‘we’ encourage people to live healthy lifestyles? Shouldn’t ‘we’ mind our own business? Well, in this instance I am using the ‘we’ word because it is appropriate. I think we would all want members of our own families and our friends to live healthy lifestyles, and probably feel that it would be good to encourage them to do that.

A logical place for an economist to begin would be to consider whether incentives - rewards, threats or punishments - should be used to encourage people to adopt healthy lifestyles. The message that I get from Tim Wilson’s book is that while incentives can change behaviour, they are not likely to bring about a desired change in the way people see themselves or in their intrinsic motivations. For example, in commenting on incentive programs designed to encourage kids to read more, Wilson writes:
‘If we want kids to read more, then rewarding them can work – as long as the incentives continue to be available. Rewards can produce compliance, just as punishment can. But … we want our kids to internalize desired attitudes and values … . After all, we can’t reward them for reading a book for the rest of their lives’.

Wilson also refers to experimental evidence that rewards can actually undermine intrinsic interest in an activity by convincing kids that they are doing it for the reward and not because it is enjoyable. When the reward is removed, participation in the activity was lower than in the pre-reward baseline period.

The conclusion Wilson comes to is that parents should use rewards and threats that are minimally sufficient to get kids to do the desired behaviours, i.e. not so strong that the kids view the threat or reward as the reason they are acting that way. If the child is told you will be ‘very upset and angry’ if she does something wrong she will desist to avoid getting in to trouble. If she is told you will be ‘a little annoyed’ she will still desist because she sees herself as a good kid.

So, incentives are no panacea. What else doesn’t work? The book provides quite a few examples of programs that bring people who are considered ‘at risk’ or ‘potential delinquents’ together in various ways (boot camps, counselling sessions etc.) to try to change their behaviour. The experimental evidence suggests that such programs don’t work because people who are brought together learn from each other and identify with group norms.

Another form of intervention that apparently doesn’t work is to scare the hell out of people by showing them very graphically what might happen if they engage in binge drinking, smoke cigarettes, take drugs and so forth. Threatening people with dire consequences for doing things they don’t want to do in the first place can have paradoxical effects. For example, some people may get the message that maybe they are tempted to engage in the undesirable behaviour, after all, since people are going to extreme lengths to talk them out of it.

So, what does work? One approach that works is autonomy support.  This involves helping young people understand the value of different alternatives facing them and conveying a sense that they are responsible for choosing which path to follow.

Encouraging young people to become involved in volunteering seems to have desirable effects on many aspects of their behaviour. The author writes:
‘Involving at-risk teens in volunteer work can lead to a beneficial change in how they view themselves, fostering the sense that they are valuable members of the community who have a stake in the future, thereby reducing the likelihood that they engage in risky behaviours …’

It may be possible to encourage young people to adopt healthier lifestyles by correcting incorrect perceptions about the behavior and attitudes of other young people.  For example, there is apparently a tendency for young people to over-estimate the amount of alcohol their peers drink. When correct information is disseminated, they lower their estimates of how much their peers drink and reduce their own drinking.

I don’t think Tim Wilson makes any broad generalizations in this book about how we should encourage people to adopt healthy lifestyles. In fact, he doesn’t make many generalizations about anything. One of the important messages in the book is the need for appropriate experimental testing to see what actually works. It seems to me, however, that it would be fairly safe to conclude from the book that the best way to encourage people to adopt more healthy lifestyles is through subtle interventions that redirect the narratives that they have about themselves.

Wednesday, November 9, 2011

Do commercial interests have excessive influence on people in modern societies?

Jeffrey Sachs makes it difficult for any libertarians who happen to look at his book, ‘The Price of Civilization’, to consider seriously his claim that powerful corporate interests have excessive influence in America. He claims that libertarians ‘hold that the only ethical value that matters is liberty, meaning the right of each individual to be left alone by others and by the government’.

There are a lot of other ethical values that matter to me – and probably to most others who view themselves as libertarians. In my view, liberty deserves primacy only because it makes it possible for people to live in peace – with minimal coercion of one person or group by another.

Perhaps I am excessively naïve, but it seems to me that anyone who is concerned that people are being manipulated by corporate propaganda might see libertarians as potential allies. Can a case for individuals to be protected from techniques of persuasion that undermine individual sovereignty be argued along similar lines as the case for laws to protect against force and fraud? If it could be, I imagine many libertarians would support additional action to protect individual sovereignty.

Why does Jeff Sachs think that corporate interests have too much influence in America? Dr Sachs, the clinical economist, identifies a range of symptoms. The media is privately owned and funded by advertising revenue. Corporate interests generate propaganda which the media disseminates. Corporate interests largely fund campaigns of candidates for political office. People spend a lot of time watching electronic media.
Sachs writes:
‘The relentless streams of images and media messages that confront us daily are professionally designed to distort our most important decision making processes. We are encouraged to act on fantasy instead of reason’.

Cartoon by Nicholson from “The Australian” newspaper: www.nicholsoncartoons.com.au

Sachs claims that America has become a corporatocracy – a political system in which powerful corporate interests dominate the political agenda. As he sees it:
‘The media, major corporate interests, and politicians now constitute a seamless web of interconnections and power designed to perpetuate itself through the manufacture of illusion’.

So, some readers may ask, does this explain why Americans no longer see much merit in equality of opportunity, don’t think governments should do more to help people in need and don’t think the rich should pay more tax? No! Dr Sachs actually cites evidence that a high proportion of Americans still want more equality of opportunity, favour more help for those in real need who are prepared to help themselves and favour taxing the rich more heavily.

Where does that leave Dr Sach’s diagnosis? I’m not sure. Perhaps the disease has not progressed very far at this stage. Sachs claims that the patient is suffering from a disconnection between shared values and national politics. He sees the disconnection as arising from various aspects of the political system that enhance the power of corporate interests – particularly the military industrial complex, Wall Street, big oil and transport, and health care.

Jeff Sachs has left me as confused as ever about the American political system. He has not persuaded me that America is a corporatocracy. Corporate interests are powerful in America, but so is religion, the teaching profession, environmentalists, etc., etc.

It seems to me to be the main problem in American politics, which is shared by other modern societies, is the trivialization of politics by media that is primarily in the business of selling entertainment. The media can’t be expected to evaluate the claims made by interest groups, but if journalists have access to such evaluations from respected sources they can hold politicians to account for the views they express (or fail to express). Think tanks perform the task of policy evaluation to some extent, but can be too easily dismissed because they are not seen to be above interest group politics. Paradoxically, the government itself is the only organization capable of creating sources of policy advice that are sufficiently above interest group politics to have some hope of commanding widespread respect in the community at large.

Despite the reservations I have about ‘The Price of Civilization’ (in an earlier post about taxation levels as well as here) I want to end this post on a positive note. I strongly endorse Jeff’s view that individuals can benefit themselves and the societies in which they live by making efforts to become more mindful. We will do less harm and may do a lot of good if we become more moderate in our habits, achieve more balance in our lives, improve our knowledge, exercise more compassion, have more regard for the effects of our actions on the environment and future generations, consider how we can promote more constructive political deliberations and be more accepting of diversity as the path to peace.

Sunday, November 6, 2011

What motivated Roger Kerr?

Roger Kerr's Blog.jpgThere isn’t anyone I have known who could match the enthusiasm and energy that Roger Kerr brought to his work. I have had the privilege of working with quite a few highly principled individuals involved in public policy work - people who are clearly motivated to a large extent by the belief that they are contributing to the greater good of society. Roger stands out, however, as a person who always seemed to be enthusiastic and optimistic – he seemed to respond to setbacks by increasing his efforts to obtain better outcomes in future. It was obvious to everyone that he had a passion for presenting his views clearly, logically and forcefully, but it would not have been obvious to casual observers what was motivating him.

In his role as executive director of the New Zealand Business Roundtable (NZBR), for the last 25 years, Roger was perceived by some people as a free market ideologue. It is evident from various speeches he gave, however, that he was somewhat bemused (if not annoyed) by that description. In a speech he gave in 2005 he suggested that to characterize policy proposals as either ‘ideological’ or ‘pragmatic’ is at best a confusion and at worst a rhetorical trick that appeals to anti-intellectualism as a substitute for serious argument. He made the point that everyone involved in the debate about public policy argues on the basis of some set of principles or ideas, whether or not they are conscious of them or make them explicit. He also suggested that serious policy debate cannot proceed unless ideas are articulated and tested. His support for free markets was not unbounded. It was based ultimately on pragmatic grounds – evidence that free market outcomes are generally superior to the alternatives. I think Roger viewed himself as a principled empiricist.

In his eulogy to Roger, Bryce Wilkinson, who worked closely with him over many years, mentioned that Roger seldom spoke about his motivations and never wore his heart upon his sleeve. Bryce notes that at some point early in his career as a diplomat - when Britain entered the EEC - Roger decided that New Zealand's economic decline was in fact largely self-inflicted. That prompted him to transfer to the New Zealand Treasury in 1976 and to relaunch his career doing an economics degree part time. Roger’s interest in economic policy was prompted by a desire for New Zealanders to be able to enjoy more prosperous and satisfying lives. Bryce provides evidence that Roger cared particularly about the effects of bad policies on those who are most vulnerable.

Bryce argues that Roger's optimism was based on his belief that ideas actually matter in policy debates. In support, Bryce referred to an essay that Roger wrote on the subject of ideas, interests and policy advice on leaving the Treasury in 1986.

I have just re-read the version of this essay that was published in ‘World Economy’ in June 1987. In this article, Roger argued that economic policy advisors should be aware that they do not have a comparative advantage in making judgements about what courses of action might or might not be politically feasible.

Roger noted:
Perceived political constraints are not always immutable. They can be shifted by reasoned analysis and well-constructed strategies for policy change … . Second-guessing political reactions can lead to a narrowing of policy options and does less than justice, in recent New Zealand circumstances at least, to the intelligence of a number of politicians, on both sides of the political fence, who have been more aware of the gravity of New Zealand’s economic problems and prepared to tell the story like it is than many of their advising bureaucrats’ (pp144-5).

Roger also noted the importance of institutional structures in determining policy outcomes:
‘There is an important role for public information, open government, policy transparency and public inquiry processes in order to expose to critical scrutiny the claims of special interest groups and the performance of bureaucrats (including the propensity of some of the latter to act as taxpayer funded lobbyists for some of the former)’ (p 150).

Roger also made the claim ‘that the emergence of interest groups with broad representation, which are thus forced to take more of an economy-wide view, may be a source of influence which is more coincident with the interests of the community at large’ (p 150). That claim might seem excessively modest in the light of the subsequent performance of the NZBR – but Roger played an important role himself in ensuring that the NZBR maintained an economy-wide focus. A decade ago, New Zealand Institute of Economic Research chairman Michael Walls said of Roger:
‘No single individual has done more over the last 15 years to persuade important parts of the business sector to support economic policies which, though often contrary to the interests of individual firms, were in the interests of the country as a whole.’

Roger was motivated by a desire to play a part in promoting policy reforms – to avoid further economic decline and to enable New Zealanders to enjoy greater economic opportunities. He was enthusiastic because he knew he was fighting the good fight and he was optimistic because he knew that good policy evaluation and advice can make a difference. Above all, Roger was motivated by the impulse to ensure that his life was meaningful.

I urge readers to take a look at the many personal tributes to Roger that can be found on his blog.