Monday, May 16, 2011

What do NSW solar panel owners have in common with mining investors?

‘So you think I am a cranky old fool, do you?’ I knew it was Jim before I turned around to see who was talking. I referred to Jim as a cranky old fool on this blog a couple of weeks ago. At this point I should make sure readers are aware that this Jim is unlike any other Jim I have ever met. He is a royalist. He thinks incentives to put solar panels on roofs of houses are an abomination because the high costs of this method of generating electricity are borne by taxpayers and other users of electricity. And he asks difficult questions. A lot of the people I know avoid Jim when they see him coming. Perhaps that is why he sneaks up on people and just starts talking.

Anyhow, Jim isn’t such a bad old coot. He wasn’t even particularly upset with me for calling him a cranky old fool. After he had my attention, he said: ‘You know that photo of Sydney you have on your blog – the one with the cloud over most of it?’ I replied: ‘Yes, I’ve been thinking about replacing it with a photo I took on a sunny day, now that the dreadful Labor government has been swept out of office’. Jim said: ‘Don’t do that. Find a photo with a darker cloud!’

I was surprised to hear this from Jim. I had never thought of him as a Labor supporter. So, I asked him to explain. As I did so I couldn’t help looking at my watch. I knew I was about to be sucked in to a discussion that might take some time.

Jim asked: ‘What do you think of the decision of the New South Wales government to reduce the feed-in tariff that they will pay people who have installed solar panels?’ I said I didn’t have an opinion. I added that I thought the decision would make him happy because I remembered that he thought solar panels were an abomination.

Jim scowled and just asked another question: ‘What do you think of the proposed mining rent tax?’ I explained that I thought the latest proposal wasn’t quite as bad as the tax first proposed last year. I mentioned something I wrote last year explaining that the main problem was sovereign risk. I argued that when governments enter into agreements with mining companies they should honour those agreements whatever happens, rather than insisting on a higher share of profits because the price of minerals has gone up. I concluded my little speech by suggesting that if this tax is introduced investors will become more wary about signing any kind of agreement with any government in Australia.

Jim said: ‘That is precisely my point about the solar panels. The feed-in tariff specified in those agreements must be one of the worst deals that any government has ever made. But for a new government to just tear up the agreement is one of the lowest acts of bastardry that has ever been perpetrated on investors anywhere in the world’.

I agreed that the decision was dodgy but I said I didn’t think the rating agencies would downgrade the NSW government because of it. It might actually improve the finances of NSW. Jim said: ‘Look, you aren’t going to try to tell me that any investors should take any notice of the rating agencies after the global financial crisis. The real issue is whether anyone can be confident that the people running the NSW government at present are any more trustworthy than Jack Lang. Do you really think these people are more trustworthy than Jack Lang?’

Jim asks difficult questions. Jack Lang was the premier of NSW during the depression in the 1930s. One of the things he is remembered for is his efforts to stop payment of interest to overseas creditors until the financial situation improved in NSW. If he had succeeded this would have done enormous damage to Australia’s reputation as a destination for foreign investment. On the basis of recent performance I think the politicians running NSW at present and those currently running the Commonwealth government might default on interest payments if they had to deal with the kind of economic crisis confronting Australian politicians in the 1930s.

I told Jim that people would like him a lot more if he didn’t ask difficult questions.

Postsript: 7 June 2011

When I saw Jim this morning I asked him what he thought of the decision of the NSW government to honour their contractual obligation to people who had installed solar panels. Jim said he would have been more impressed if the Premier had made the decisions to back down because his conscience was troubling him rather than because he didn't have the numbers in the upper house to pass the legislation.

I suggested that in any case the cloud had lifted over Sydney and that I would find a better photo to put on my blog. Jim said: 'Don't do that! There is a new cloud over Sydney. They have decided to award the Sydney Peace Price to Noam Chomsky'.

I don't know who 'they' are, but if 'they' are interested in promoting peace 'they' should try to avoid provoking people like Jim.

Should we view human flourishing in terms of psychology, capablility or opportunity?

This question may seem like just another intellectual puzzle, but it is actually has important implications for the way we view public policy issues. My bottom line is that the way we answer this question if we are thinking about the flourishing of a close relative or friend might be quite inappropriate if we are thinking about the development of public policy.

I think the best place to begin my explanation is with a brief discussion of the three different perspectives. I don’t wish to imply that these are the only ways of looking at human flourishing – they just seem highly influential.

Flourish: A Visionary New Understanding of Happiness and Well-beingMartin Seligman is a leading exponent of the psychological perspective. In his recent book, ‘Flourish’, Seligman suggests that well-being theory ‘is essentially a theory of uncoerced choice, and its five elements comprise what free people will choose for their own sake’. The five elements he identifies are: positive emotion (pleasant experiences, happiness and life satisfaction); engagement (the flow state); relationships (positive relations with other people); meaning (belonging to and serving something bigger than yourself); and accomplishment (success, achievement, mastery). In an earlier post I suggested that Seligman has missed another important element that people seek for its own sake, namely control over their own lives. A more fundamental criticism of this approach is that it ignores all elements of well-being other than psychological well-being. For example, it seems reasonable to suppose that free people would usually choose to be healthy rather than ill even if their health made no contribution to their psychological well-being.

Capabilities and HappinessThe capability approach has been developed by Amartya Sen, an economist. Sen argues that a person’s capability reflects the alternative combination of functionings the person can attain and from which he or she can choose one collection. Functionings include objective criteria as being adequately nourished and being in good health as well as a range of other factors such as achieving self-respect and being socially integrated. In his contribution to ‘Capabilities and Happiness’ (2008, edited by Luigino Bruni et al) Sen notes that individuals may differ a good deal from each other in the weights they attach to different functionings. He seems unwilling, however, to leave the weighting exercise to the individuals concerned. He suggests that ‘the weighting exercise has to be done in terms of explicit valuations, drawing on the prevailing values in a given society’. He also refers to our capability ‘to achieve functionings that we have reason to value’.

The concept of opportunity proposed by Robert Sugden, also an economist, rests on ‘an understanding of persons as responsible rather than rational agents’. According to this view individuals may sometimes act foolishly but nevertheless accept responsibility for the consequences of their actions. The term ‘opportunity as mutual advantage’ expresses the idea that ‘one person’s opportunities cannot be specified independently of other people’s desires’. The freedom of some other person to seek out and take advantage of opportunities for mutual benefit encompasses his or her freedom to seek out and take advantage of opportunities to benefit you and me. Sugden implies that if everyone has opportunity in this sense, then you and I should see ourselves to be part of an economic system that is full of people who can expect to be rewarded for finding ways to benefit us (‘Opportunity as mutual advantage’, Economics and Philosophy (26)).

If we are considering the well-being of relatives and friends we might consider that opportunity, capability and psychology are all relevant to our assessment. For example, we might be able to think of people who have high levels of psychological well-being even though they have relatively low capability in some respects because we consider that they have not made good use of the opportunities available to them. We might be able to think of others who are unhappy even though they have high levels of capability and have had superior opportunities in life.

However, from a public policy perspective, what business does the government have in trying to improve the capability or psychological well-being of a person if this interferes with his or her status as a responsible agent? We might think that the capability and psychological well-being of such people would be improved if they drank less alcohol or gambled less, for example, but as far as I can see we have no right to prevent them from spending their income as they choose.

The situation becomes rather different if the government is offering some kind of benefit that is intended to improve the capability or well-being of some group. In that situation, it seems to me that the donors (taxpayers) have every right to attach conditions to the proposed benefit and the intended beneficiaries have every right to refuse to accept it if they don’t like the conditions attached.

Some might suggest that the alternatives to accepting a benefit with strong conditions attached could sometimes be so unpalatable that the conditions amount to coercion. I don’t accept that economic incentives ever force people to do anything. Nevertheless, if a person chooses to die rather than accept the conditions attached to a benefit, the question arises of whether this should be viewed as the choice of a responsible agent. Paternalistic intervention may be warranted to protect people who are not of sound mind as well as children.

However, there are also difficult issues involved in considering government proposals to improve the psychological health of children. The recent Australian Government Budget proposes a health and well-being check for 3 year old children on the grounds that ‘around 15.4 per cent of all children and adolescents (those aged up to seventeen years) have a mental disorder’. Internationally renowned experts are apparently telling the government that ‘there is a growing body of evidence showing that you can identify kids with (or at risk of) conduct disorders or poor development very early – from three years old’. The government claims: ‘Intervening early means building strong and resilient children, and avoiding behavioural or mental health issues that can persist for the rest of a person’s life’.

Should I be concerned about this proposal? Perhaps it just offers parents better opportunities to ensure that children get services necessary for their psychological wellbeing. On the other hand, it could be the thin end of a large wedge leading to greater use of pharmaceutical products to control behaviour of children and greater government intervention in family life. I wish I could be more confident that the proposed intervention will actually build strong and resilient children.

On reflection, the paragraph beginning 'Some might suggest that the alternatives to accepting a benefit ... ' doesn't adequately capture the ideas I would like to express. In my view, although welfare systems should be directed to a large extent toward helping people to help themselves, communities should have an over-riding commitment to meeting basic needs of people who have no other means of support.

Tuesday, May 10, 2011

Has Australia's media dropped the ball in reporting on Asia and the Pacific?

I don’t normally write about the media, but there are times when it seems to be necessary for me to write about the things that are on my mind before I can think about much else.

I was prompted to begin thinking about this question on Sunday by a post by Jim Belshaw on his blog, Personal Reflections. Jim’s post was about the recent ASEAN Summit chaired by the Indonesian President, Susilo Bambang Yudhoyono (SYB). The President’s speech mentions that Indonesia is in the process of finishing the Master Plan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (Master Plan for Acceleration and Expanded Economic Growth of Indonesia/MP3EI), intended to boost the development of six economic corridors in Indonesia. The President claims that this initiative will awaken ASEAN’s economy and speed up the construction of ASEAN connectivity as well as boosting Indonesia’s national economy and intra-Indonesian connectivity.

Jim Belshaw mentioned that he didn’t know what the six economic corridors in Indonesia were and implied that the Australian media’s reporting and analysis of events in Indonesia and the region is deficient. He also notes that there seemed to be no coverage of the ASEAN conference in the Australian media.

I didn’t know what the six economic corridors were either. It turns out that each of the economic corridors corresponds to a region of Indonesia and its economic specialization; for example, as might be expected Java has a focus on industry and services and other islands focus more heavily on agriculture, mining etc. The planning has a strong emphasis of infrastructure development and connectivity.

The planned areas of economic specialization seem to make sense in terms of comparative advantage. That raises the question in my mind of why the Indonesian government thinks it needs a Master Plan. Perhaps it is best viewed as a political hand waving exercise rather than an exercise in constructivist rationalism. A few years ago, when Australian media seemed to report more thoroughly on Indonesia, there was a strong focus on whether the central government would be able to maintain legitimacy in a nation with such disparate elements located on different islands. Perhaps the Master Plan should be viewed in that context as a concept that might help to instil or maintain common purpose. But SBY is presenting the plan as also having implications for ASEAN connectivity. Connectivity suggests to me that fibre optic cable might play a large role in the plan. Who knows what it means? What we do know is that the success or otherwise of economic development in Indonesia has important implications for Australia.

Shortly after reading Jim Belshaw’s blog I visited the East Asia Forum and read a post by Peter Drysdale on why the Doha round of international trade negotiations matters to Asia and the Pacific. Drysdale writes:

“In Washington, the Trans Pacific Partnership (TPP) is all the rage. Does it matter if we get yet another pseudo ‘free trade’ agreement, between the US and group of eight partners who in the total scheme of things are pretty insignificant?
It certainly would matter, being absent from Doha.
A rum deal like the one that is shaping up might be of little economic consequence (of somewhat more economic consequence in the unlikely event that Japan signed on) but it would be of considerable political consequence.
In the context of an insecure global trading system it would be a bold statement taking the world in another direction. It would drive a wedge down the middle of the Pacific, not only or mainly economically but also politically — between the United States, its partners and China. It would entrench the adversarial political psychology that is developing in US-China relations in a way that would be very difficult to unravel for a long time. That might matter less if the WTO was not also in disarray. It matters a lot, as that prospect grows daily”.

I think Peter Drysdale has good reasons for concern, but I would also like to see discussion of the implications of Washington’s focus on TPP in the Financial Review and The Australian – to name a couple of papers that I read.

That got me thinking about media coverage of other issues in the region that have implications for Australia. The issue that is probably most important to us is the future of economic development in China and in particular how long China will be able to maintain the economic strategy adopted post-GFC of a very high level of investment in infrastructure. A lot depends on the quality of the infrastructure investment that is being undertaken. I have probably seen general discussions of the issues involved in the Australia media, but if the investment program begins to produce a lot of white elephants I am not confident that I will see that reported and discussed in the Australian media before it begins to impact out terms of trade.

What is going on in India? I was just starting to get used to the idea of India as a high-growth country and a rapidly expanding market for Australian exports, and then it hosted the Commonwealth Games. The games themselves seem to have been a success, but problems with their organization have raised questions about the quality of public administration in India. It is hardly news that the quality of public administration is poor anywhere in the world, but governments do tend to try to put their best feet forward when organizing major international events. Does the quality of public administration in India actually make much difference to India’s future growth prospects? That question might be a bit too profound for the media to tackle, but perhaps Australian journalists should be discussing evidence of whether poor quality of public administration in India is having any effect on foreign investment in that country.

Then there is New Zealand. A few years ago the NZ government set up a Taskforce to advise it on policies it could adopt to catch up to Australian living standards by 2025. This 2025 Taskforce submitted a couple of reports, but the NZ Prime Minister announced a few days ago that it will now be closed down. What does that mean? Has the NZ government abandoned all hope of catching up to Australia’s living standards? If so, what are the implications for Australia? Perhaps it just means that we will be able to look to NZ as a source of labour, the price of NZ sauvignon blanc will remain within our reach and even more of us will be able to afford to have holidays there beyond 2025. Is it too much to ask for a less frivolous discussion of the relevant issues in Australia’s news media?

Is the Australian media to blame for its poor coverage of the Asia and Pacific region or does this just reflect the ‘insular internationalist’ perspective of Australians? The term ‘insular internationalist’ is one coined by Michael Wesley, who observes that Australians have become wealthier and safer than ever before by enmeshing with the world – becoming more a part of the world economy than ever before. He says:
‘We travel more than we've ever travelled before; we have more people who were born outside of this country living among us than ever before, and yet you can see a steady trend of a withdrawal of interest about the outside world, a withdrawal of real skills for dealing with the outside world among the general population in Australia’.

I don’t think that Australians are as insular as Wesley suggests. It seems to me that a substantial and growing number of us will look elsewhere if we can’t find decent coverage of Asia and the Pacific in the conventional Australian news media.

Friday, May 6, 2011

Did J S Mill really claim that violations of free trade have nothing to do with liberty?

J. S. Mill: 'On Liberty' and Other Writings‘Again, trade is a social act. Whoever undertakes to sell any description of goods to the public, does what affects the interests of other persons, and of society in general; and thus his conduct, in principle, comes within the jurisdiction of society’ … . The ‘so-called doctrine of Free Trade … rests on grounds different from, though equally solid with, the principle of liberty … . Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraints qua restraint, is an evil: but the restraints in question affect only that part of conduct which society is competent to restrain, and are wrong solely because they do not really produce the results which it is desired to produce by them.’ J S Mill, ‘On Liberty’, 1859, Ch. 5

This passage has puzzled me since I was a young man. It seems to me that individual liberty is obviously violated when governments intervene in trade. If a government imposes a tax on a good for the purposes of assisting the producers of a close substitute, this must be just as much an infringement of the liberty of consumers as when it imposes a sin tax on a good to discourage consumers from purchasing that good.

However, it is now clearer to me what Mill was trying to say. The first key to the puzzle is that Mill refers to ‘the principle of individual liberty’ rather than just ‘individual liberty’. What Mill means by the principle of individual liberty is explained a couple of paragraphs earlier as the maxim ‘that the individual is not accountable to society for his actions, in so far as these concern the interests of no person but himself’. According to that view, the individual should be accountable to society for ‘actions that are prejudicial to the interests of others’.

The Constitution of Liberty: The Definitive Edition (The Collected Works of F. A. Hayek)Friedrich Hayek and others have noted that the distinction that Mill sought to make between actions that affect the acting person and actions that affect others is not very useful because there is hardly any action that may not conceivably affect others in some way. According to Hayek the relevant issue is whether it is reasonable for the affected persons to expect legal protection from the action concerned (‘Constitution of Liberty’, 1960, p 145).

Now, in the paragraph immediately prior to his discussion of international trade, Mill acknowledges that damage to the interests of others does not necessarily justify the interference of society. In this context he discussed the views of society toward various forms of contest in which people who succeed benefit ‘from the loss of others’. He notes: ‘society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering’.

The second key to the puzzle is that in the passage quoted above Mill suggests that all restraints are evil. If Mill is referring to coercion, as seems likely, then it seems to me that at this point he is close to recognizing the merits of the definition of liberty that Hayek later adopted. Hayek defined liberty as ‘a state in which coercion of some by others is reduced as much as possible in society’ (‘Constitution of Liberty’, p 11). This definition meets Mill’s desire to acknowledge that restraints are necessary to protect citizens from force and fraud, and may be appropriate under some other circumstances where individual conduct adversely affects the interests of others.

Mill seems to have been attempting to establish that the attitude of society toward individual conduct should depend on where it lies on a spectrum. At one end of the spectrum, where conduct affects only the individual actor, other people have no right to intervene. At the other end, force and fraud should obviously be illegal. At other points on the spectrum the effects of individual conduct on the welfare of society are ‘open to discussion’. (Mill uses these words are used in the introductory paragraphs of Ch. IV.)

In asserting that the ‘doctrine’ of free trade rests on equally solid ground to ‘the principle of liberty’ Mill is clearly implying that in our discussion of trade there should be a strong presumption that free trade enhances the general welfare of society. It follows that he must believe that government intervention in trade is generally an unwarranted form of coercion. That seems to me to be just another way of saying that such intervention is generally an unwarranted interference with individual liberty.