Monday, February 27, 2012

Do comparative statements about 'national happiness' imply views about the characteristics of a good society?

Yes! I explain why in the draft of Chapter 5 of the book I am writing. This chapter is now available on the book’s web site.

The question of whether measurement of ‘national happiness’ implies views about the good society is not just an arcane topic of academic interest. International agencies such as the UN and OECD and some governments have shown dissatisfaction with use of GDP as a well-being measure and an increasing interest in measuring national well-being more directly. Some of this interest in well-being measurement is motivated by helping individuals to make better choices, but the hope is often expressed that such measurements will assist governments to make better public policy choices and even to pursue national happiness as an over-riding policy objective.
Some researchers have suggested that that average life satisfaction is the strongest candidate as a measure of societal well-being because it is a single number that can be collected directly through surveys without ‘arbitrary weighting’.  (For example, see: Jon Hall et al, ‘Cutting through the Clutter: Searching for an Over-Arching Measure of Well-Being’, Journal of Institutional Comparisons, 8(4)2010.)

After reading the draft of Chapter 5 I hope everyone will agree with me that it is fanciful to view average life satisfaction as a measure of national happiness that does not involve arbitrary weighting. Perhaps it might be helpful if I provide a brief outline of the argument here to help readers decide whether or not to read the draft chapter.

It is possible, of course, to conduct surveys asking people in different countries how satisfied with life they are on a scale of 1 to 10 and then to average the results obtained for each country. The issue is whether it is appropriate to view such averages as measures of ‘national happiness’.

When people refer to such averages as measures of national happiness they are implying that national happiness rises to the same extent if a person’s life satisfaction rating rises from 9 to 10 as if some other person’s rating rises from 1 to 2. Individual researchers can make such claims if they wish, but they cannot claim that they are value free. I don’t think that they could even claim that such a view of ‘national happiness’ reflects values that are widely shared.

The need for value judgements is usually more transparent when composite indicators are used to make assessments of national happiness.
Whatever method is used, it seems to me that when researchers make comparative statements about levels of national happiness they are making implicit claims about the extent to which different countries have characteristics that a good society might be expected to have. So, why not consider directly what characteristics ‘good societies’ should have and make comparative assessments on that basis?

I suggest that there would be widespread support for the view that good societies are characterized by peacefulness, extensive opportunities for individual flourishing and a degree of economic security. The indicators used to measure the extent to which different countries have those characteristics show a similar ranking of countries to that provided by the OECD’s ‘Better Life’ index and the UN’s Human Development Index. The main advantage of using the ‘good society’ framework is in focusing explicitly on a consideration of the characteristics of good societies.

In my view, a focus on the characteristics of good societies is particularly appropriate from a public policy perspective because it tends to concentrate attention on matters that are within the domain of public policy. By contrast, when governments adopt ‘national happiness’ as an over-riding objective they are blurring the distinction between public and individual responsibilities.

I would be grateful for any comments on Chapter 5, or on any of the other chapters.

Tuesday, February 21, 2012

Would a 'Modest Member' please take an interest in anti-dumping regulation?

It was good to see the return of ‘The Modest Member’ column in the Australian Financial Review a couple of weeks ago. The original column was written by Bert Kelly, who used his wit and wisdom to good effect in promoting free trade, much to the discomfort of many people on both sides of politics. The latter-day modest members will make a worthwhile contribution if they display half the wit, wisdom and courage of Bert Kelly.

It is not yet clear whether the latter-day modest members will have the courage to emulate Bert Kelly. The series started with a column by Jamie Briggs on 7 February about lifting the dead hand of government i.e. reducing government spending. Today’s column by Kelly O’Dwyer is about the high cost of regulation. This is not a bad start, but it is hardly a test of moral character. So far Briggs and O’Dwyer have written the sort of stuff conservative politicians usually write when they are not in government.

A useful test of character for the modest members would be to attempt to emulate Bert Kelly by writing something sensible about Australia’s anti-dumping system. The modest members could usefully begin their consideration with an article by Bert, published in March 1972 and reprinted in ‘Economics Made Easy’, in which he explained that export prices that are lower than domestic prices are quite common in Australia and elsewhere. He noted that when we do it the practice is known as ‘marginal pricing’ rather than dumping. If the modest members take up this issue they might note that Austrade actually encourages prospective Australian exporters to use this practice.

If the modest members look carefully at the Productivity Commission’s recent report on anti-dumping duties they will see that the Commission found that none of the economic arguments that had been advanced in support of the anti-dumping system ‘provide any justification for Australia to retain an anti-dumping system’. In looking at this report and subsequent responses by the government and opposition, they might ponder whether or not the Commission will turn out to have been correct in its judgement that the anti-dumping system should be retained - on the grounds that it is unlikely to do much harm and may continue to be helpful in dealing with aspects of protectionist sentiment within industry and the community.

The modest members should ask themselves what Bert Kelly would have thought of proposals by their political colleagues to require foreign producers to prove their conduct hasn’t hurt Australian industry. They should also ask themselves what consequences are likely to follow from the government’s plans to ‘streamline’ the anti-dumping system. In particular, they should ponder the appropriateness of proposals of the International Trade Remedies Forum – the high sounding title the government has given to an unholy alliance of industry, unions and bureaucrats who benefit from the anti-dumping system – to enlist the Australian Bureau of Statistics to help complainants make a case for anti-dumping assistance.

One of the great strengths of Bert Kelly’s writing was his use of particular examples to illustrate the points he was making. In that regard, the modest members might find plenty to interest them in the current anti-dumping inquiry relating to aluminium wheels from China. In the light of recent discussions concerning further budgetary assistance to the car industry, they might ask themselves whether there is not some irony in a situation where Australian taxpayers could end up having to pay for the additional cost of imported inputs if this anti-dumping case is successful.  If they read the submission by Ford Australia they might wonder about the potential for a firm that is involved in protracted and acrimonious legal proceedings against another firm to initiate anti-dumping action as a tactic in a legal battle. If they read the submission by GM Holden, which argues against anti-dumping action because of its adverse effects on down-stream users, they might wonder whether the government was wise to reject the Productivity Commission’s recommendation that a public interest test should be included in the anti-dumping system. They might wonder why GM and its advisors think that line of argument might be influential.

It would not surprise me, however, if the latter-day modest members decide not to accept the challenge of writing about anti-dumping. Their political careers might be at risk if they start questioning the views of SophieMirabella the shadow minister for industry protection. As they tell themselves that discretion is the better part of valour they may take comfort from the fact that Bert Kelly pretended not to be without fear. Bert ended his anti-dumping article by telling readers that he didn’t ‘feel like chasing after the anti-dumping hare’ because ‘Mavis says I am in enough trouble already without getting mixed up with this kind of nonsense’.

Sunday, February 12, 2012

Will Australia remain a sweet spot?

‘Australia in 2010-11 offered the best conditions for human existence on planet earth, a sweet spot indeed.’

The Sweet SpotThe quote is from Peter Hartcher’s book, ‘The Sweet Spot’, published in November last year. Hartcher bases his view that Australia is the sweet spot on well-being indexes such as the UN’s Human Development index and the OECD’s Better Life Index. That view seems to me to be soundly based. As I noted on this blog last year, Australia is ranked highly even when the weighting given to the criteria incorporated in the OECD index is changed to reflect differing priorities with respect to income, social and environmental objectives.

The great strength of ‘The Sweet Spot’, in my view, is that it provides historical perspective on how Australia came to be where it is now. This helps the author to get across the message of the sub-title: ‘Australia made its own luck and could now throw it away’.

Hartcher argues that Australia has become the sweet spot because it eventually found a good balance between opportunity and security, or between free markets and collectivism. A central focus of the book is the evolution and later dismantling of what Paul Kelly referred to as ‘the Australian settlement’, which led to what Donald Horne referred to as ‘the racket’. The Australian settlement, which was largely established around the time of federation, involved a consensus in favour of racially-based restrictions on immigration (the white Australia policy), trade protectionism, national wage regulation (the arbitration system) and government paternalism, underpinned by a belief that Australian prosperity was underwritten by the British Empire.

Donald Horne argued in his book, ‘The Lucky Country’, published in 1964, that Australia’s good fortune in terms of natural resources had become an excuse and perhaps even a licence for complacency. Hartcher reminds readers:
‘Horne had detected and foreshadowed Australia’s slide from the top ranks of the world’s richest countries, arguing that luck and complacency were poor substitutes for originality and investment. “Can the racket last?” he asked, immediately responding with a resounding “NO”. He was, of course, correct, and it was a slippage that gathered pace in the ‘70s and 80’s.’

The subsequent chapters tell the story of how Australia opened up to the rest of the world, moved away from a rent-seeking culture and reformed its economy. In my view the story has been told fairly, with appropriate acknowledgement of the immigration reforms introduced by Whitlam, the influx of refugees from Vietnam during the time of the Fraser government, the floating of the Australian dollar, industry assistance reforms and the beginning of wider ranging economic reforms during the Hawke-Keating years and the privatisations, tax reforms and labour market reforms (subsequently aborted) of the Howard-Costello period of government. Hartcher makes the point that while the general thrust of these reforms was to give markets a greater role in the Australian economy, they were achieved, for the most part, without the rancour that accompanied the reforms of Margaret Thatcher in Britain and Ronald Reagan in the United States. He attributes this to greater reliance on consultation and consensus-building in Australia, in contrast to more overtly ideological approaches adopted by the UK and US governments. I would have like to have seen more attention given to the role of the policy advice processes adopted in Australia (but my view about the importance of the role played by the IAC and Productivity Commission might not be objective).

Let us now jump to 2007, by which time the economic strength which is reflected in Australia’s current ranking in quality of life indexes would have been established. I don’t think Peter Hartcher actually mentions it, but in October 2007 Paul Kelly announced the arrival of a “new Australian settlement engineered by political leaders during the past generation and a half”. He noted that the policies of the major parties had converged. For example, economic policy had become more pro-market, foreign policy had converged on a strategic outlook of simultaneously deepening ties with East Asia and the US, and immigration policies had converged on acceptance of increased immigration accompanied by a deeper commitment to Australian citizenship. A few weeks later, former Labor leader Mark Latham observed that the policies that the major parties had put forward in the election campaign then being conducted were virtually indistinguishable. He suggested that the policies of the major parties had converged to address the concerns of the middle classes. I can remember this because in April 2008 I posted an article on this blog entitled: Do we now have a new Australiansettlement? I agreed with Kelly and Latham, but subsequent events suggest that we were all wrong. Rather than a sensible convergence on policies that build on the strong legacy left by Hawke, Keating, Howard and Costello we now seem to be drifting in the opposite direction.

I don’t agree entirely with Peter Hartcher’s assessment of the political sins of the main political players over the last few years. I think he is far too kind to Kevin Rudd and Wayne Swan. Nevertheless, that doesn’t prevent me from agreeing with him that neither Gillard nor Abbott ‘seems to be the leader to take Australia into its next golden era of national improvement’.  I also agree with Hartcher’s qualification to that judgement: ‘Leaders change, and perhaps one, or both, can develop the agenda and skills to lead the country in the national interest’.

In my view ‘The Sweet Spot’ is a fine example of big picture journalism. It deserves to be as widely read and influential as ‘The Lucky Country’. With a bit of luck this book might help prevent a return of the rent-seeking culture that saw Australia’s relative living standards slip so dramatically during the 1970s and 80s.

Thursday, February 9, 2012

How does income inequality affect happiness?

Early yesterday the thought occurred to me that it might be a good idea to write something about the effects of inequality on happiness levels. I have been thinking that the judgements people make about inequality are more like judgements about the characteristics of a good society than judgements about the effects of inequality on aggregate happiness (whatever that means). I thought I would spend an hour or so bringing myself up to date with the literature and then another hour or so writing something - and the rest of the day in the garden. However, the process has taken longer than I thought it would (and this post might also take longer to read than some people might think appropriate).

The issues involved are fairly complex. There are at least three different aspects of the relationship between income inequality and happiness that might be relevant – the effects of relative income levels on happiness, the more general effects of income inequality on happiness and the effects of income inequality on happiness inequality.

How do relative income levels affect life satisfaction? As discussed here some time ago, this is not always about envy and status-seeking. The findings of a study by Guy Mayraz et al, based on German panel data, are consistent with the more conventional view that income comparisons tend to have negative effects on life satisfaction of people with relatively low incomes. However, some of the authors’ findings shed further light on the issues:
  • ·         Life satisfaction of men is more affected by relative income than that of women.
  • ·          Comparisons with friends and neighbours are less important than broader comparisons with the whole population.
  • ·          Those who perceive income comparisons to be important tend to have lower life satisfaction.
  • ·         The negative effect of relative income comparisons for those with below average incomes is balanced (from a Benthamite perspective) by the positive effect for those with above average income.

Does inequality have an effect on life satisfaction over and above the relative income effect? Studies which have attempted to answer this question have often reached different conclusions. A recent study by Paolo Verme, which seems to be technically superior to previous studies, has found that income inequality tends to have a significantly negative effect on life satisfaction, after controlling for relative income effects etc. The results seem to apply in western countries as well as non-western countries and to rich people as well as to poor people.

This raises the question of why income inequality might have these effects. One possibility is that people feel more comfortable in societies where opportunities are relatively equal. Another possibility is that they are more concerned about equality of outcomes. If so, it seems reasonable to suppose that they are concerned about income inequality because they think it results in happiness inequality.

Is there strong correlation between income inequality and happiness inequality? In a post a couple of years ago I suggested that there was not much evidence of correlation between income inequality and happiness inequality - on the basis of a paper by Jan Ott and some research of my own. Since there were not many countries included in these studies, it seemed like a good idea to produce the scatter diagram below showing measures of income and happiness dispersion for a larger number of countries. (I used World Bank and CIA data on the income/consumption gini and data on standard deviation of life satisfaction from Veenhoven’s latest IAH paper. Both series are based on information for various years during the last decade.)

I can’t see any relationship between the variables in the chart, but statistical analysis suggests that a weak positive relationship might exist.  (The correlation between the variables is 0.13. The estimated coefficient relating inequality of happiness to inequality of income in a linear regression is positive, but the standard error is not much smaller than the estimate. The ‘t’ statistic is 1.38.)

The absence of a strong relationship between inequality of income and happiness at an international level is consistent with the observation of Betsey Stevenson and Justin Wolfers that there has not been a close link between trends in happiness inequality and income inequality in the United States. It is also consistent with the findings of a paper by Leonardo Becchetti et al, based on panel data, that the increase in income inequality has not been one of the drivers of the increase in happiness inequality in Germany.

So, how did this information enlighten me on the question of whether the judgements people make about inequality are more like judgements about the characteristics of a good society than judgements about the effects of inequality on aggregate happiness? The effects of relative income on life satisfaction do not seem relevant to this question. The relationship between income inequality and individual happiness does seem relevant, but I suspect it has more to do with empathy with compatriots and a desire to alleviate suffering of people near the bottom of the income scale rather than a more general concern about distributional equity.

Happiness inequality also seems relevant. When Ruut Veenhoven argues that the quality of a society should be judged by the disparity of happiness among its citizens as well by average happiness levels, he is clearly making a judgement about the characteristics of a good society. The weakness of the relationship between income inequality and happiness inequality certainly suggests that caution is required in basing judgements about the relative quality of different societies on income distribution data. The question I am left with, however, is to what extent disparities of happiness can be attributed to government policies and societal institutions (the rules of the game) rather than individual and group behaviour. It seems to me that to the extent that we introduce distributional considerations into our consideration of the quality of different societies, we are on safer ground in basing our judgements on the distribution of opportunities that are offered, rather than on the distribution of happiness outcomes.