What is the appropriate discount rate to use in assessing climate change mitigation policies?

The correct answer, in my view, is that the appropriate discount rate depends on the kind of policy that is being considered. If that answer seems odd to you then there is a good chance you have not yet read Mark Harrison’s paper entitled ‘Addressing Wellbeing in the Longer-Term: a Review of Intergenerational Equity and Discount Rates in Climate Change Analysis’. The paper was published last year in Measuring and Promoting Wellbeing, a collection of essays in honour of Ian Castles (an Australian who deserved to be honoured highly for his work on measurement of wellbeing).

The kind of policy that was evaluated in the famous cost benefit study by Nicholas Stern (and the subsequent study by Ross Garnaut) involves imposing some kind of tax (perhaps via a cap and trade mechanism) on carbon emissions in order to improve the well-being of future generations. Stern and Garnaut assume that economic growth will continue even in the absence of policies to mitigate carbon emissions and global warming, resulting in much higher average income levels in future (3.6 times higher 100 years from now in Stern’s projection).

Photo by Robin Ellis. Some rights reserved.

The carbon tax that this kind of modelling exercise suggests to be appropriate is highly sensitive to the discount rate that is used to determine the present value of mitigation efforts. The use of a low discount rate suggests that strong immediate action is warranted to mitigate climate change, whereas a higher discount rate suggests that the most appropriate course of action is to begin with a very low carbon tax and raise it gradually. In an illustrative example Harrison shows that with a discount rate of 1.35%, as assumed by Stern, the optimal current carbon tax is $78.48 per tonne, whereas with a discount rate of 6% it is only $0.88.

The discount rates used by Stern and Garnaut are an application of the social welfare function approach. Social welfare functions necessarily embody ethical judgements, even though such judgements are hidden beneath empirical facts in some versions of the, so called, Ramsey formula used by climate change modellers. Opinions differ on what ethical judgements are appropriate and discount rates can vary widely depending on what assumptions are made. Harrison demonstrates that the Ramsey formula gives estimates of a risk free discount rate ranging from 0.24% to 11% under the range of parameter values used in a variety of studies over the past decade.

At this point some readers will probably be throwing up, while others will be wondering what discount rates would be consistent with ethical judgements that they would be prepared to endorse. One way to consider whether you would be prepared to pay a carbon tax costing you $x per month in order to make your great grandchildren better off is to ask yourself whether you would prefer to make a financial investment of the same amount each month into some kind of trust for their benefit. The answer you obtain by considering opportunity costs in this way is equivalent to discounting the real money value of the benefits of climate change mitigation by the rate of return that you could expect to obtain on the alternative investment – presumably higher than the average real long term bond rate over the past 20 years or so.

One possible objection to this approach is that the rate of return on alternative investments will incorporate an element of compensation for risk, which is not appropriate in considering public investments such as climate change mitigation. The response which Mark Harrison provides is to point out that investment in climate change mitigation are far from risk free. There is a great deal of uncertainty about future costs and benefits of such policies. Most obviously, if you decide to vote for the carbon tax option you have no guarantee that people in other countries will pull their weight by imposing similar taxes on their citizens.

Some of you will by now be thinking that the cost benefit framework outlined above must be a load of garbage because you remain concerned about climate change, even though you would prefer to invest money for the benefit of your great grandchildren rather than to pay a carbon tax. If you are concerned about climate change, you are unlikely to be concerned that your great grandchildren will suffer losses that you could compensate for by increasing your savings rate by a small amount. The chances are that you (like me) will be concerned about the remote possibility that your great grandchildren might suffer from having to live with potentially catastrophic climate change outcomes.

Mark Harrison points out that by explicitly accounting for risk, rather than assuming it away, we can distinguish between policies that reduce risk and those that don’t. Mitigation policies that are potentially effective in averting disasters should be subjected to a discount rate that is below the risk-free rate because they pay off at a time when returns on other assets are low or negative, and when willingness to pay is great.

So, my conclusion:

•  the most appropriate discount rate to use to evaluate policies such as carbon taxes is the long-term average of real market rates of return on capital; and  
• the most appropriate discount rate to use to evaluate policies directed more specifically toward averting disasters - such as public investment in research to develop low-cost ways to removing greenhouse gases from the atmosphere - should be lower than the long-term average of real government bond rates.

In the unlikely event that we are faced with something close to the worst case climate scenario, our current policies to encourage adoption of inefficient alternative energy options are unlikely to avert catastrophe.  If the objective is to reduce the risk of catastrophe we should be using an evaluation methodology that helps us to choose the lowest cost method of achieving that objective.

Postscript:

There seems to be increasing awareness that we should be asking how we can insure against the worst climate change outcomes at lowest cost. Martin Wolf has published a relevant article entitled ‘Climate actions hould be seen as insurance’, in which he discusses Climate Shock, a new book by Gernot Wagner of the Environmental Defense Fund and Martin Weitzman of Harvard University. There has been a fairly favourable review of Climate Shock by William Nordhaus in the New York Review of Books.

I get the impression that the authors of Climate Shock have come to the conclusion that the best form of insurance is to reduce CO2 emissions as rapidly as possible. They rule out engineering solutions directed toward managing solar radiation (probably for good reasons) but it is not clear whether they have considered the potential benefits of research into ways to take greenhouse gases out of the atmosphere.

It is also unclear whether urgent action is justified, given the fact that when global warming resumes it will probably have positive net economic benefits for a few more years. I expect the variance of potential outcomes is not as great over the next decade or so as it is when we look further into the future.

The review article by William Nordhaus offers a solution to the free rider problem in international negotiations in the form of a climate change club  imposing trade sanctions on countries that are perceived to be laggards. That kind of thinking makes me wonder whether the science of climate change might turn out to be less important for a country like Australia than foreign policy and trade considerations. The formation of a climate change club seems a more worrying prospect at the moment than the potential for an increased incidence of droughts and bushfires. 

How does nature connectedness affect happiness?

White sands walk: Jervis Bay, NSW, Australia

How important is a constant intercourse with nature and the contemplation of natural phenomena to the preservation of moral and intellectual health!   Henry David Thoreau, Journal, 6 May 1851.

Thoreau still speaks eloquently for everyone who feels a need to spend time in the natural environment in order to re-charge their emotional batteries. Recognition of the importance of the natural environment to human happiness now seems to be supported by the findings of social research which show that nature connectedness - identifying with and feeling connected to the natural world – is correlated with happiness. The strength of this relationship is similar to that between happiness and personal income, marital status, volunteering, and personality traits such as conscientiousness and agreeableness.

Formal evidence on links between nature connectedness and happiness has only emerged during the last few years. What I write below is based mainly on a meta-analysis by Colin Capaldi, Raelyne Dopko and John Zelenski published in September last year. In order to be included in the meta-analysis, studies had to include at least one explicit, self-report measure of nature connectedness and at least one measure of happiness and report on their relationship. The meta-analysis covered 30 samples, giving a total sample size of 8523. Most samples came from Canada, the U.S. and Europe.

The meta-analysis showed that the strength of the measured relationship between nature connectedness and happiness was influenced by the way these variables were defined and measured. A measure of inclusion of nature in self had a stronger relationship than other measures of connectedness. Vitality was the happiness concept with the strongest relationship to nature connectedness.

The authors note that correlation between nature connectedness and happiness does not necessarily indicate that nature connectedness causes people to be happier. It is possible that causation might run from happiness to nature connectedness or that some third variable might be responsible for the observed correlation.

However, there is fairly clear evidence from another meta-study (by  Diana Bowler et al) that exercise in natural environments promotes greater emotional health benefits – in terms of feelings of energy, and less anxiety, anger, fatigue and sadness - than exercise in an artificial environment. There is also evidence that nature connectedness is positively related with time spend outdoors in contact with nature.

It is possible that some part of the correlation between nature connectedness and happiness is associated with feeling connected. Feeling connected to nature might be similar in that respect to feeling connected with the community. The relationship between nature connectedness and happiness is still evident, however, when other connections (e.g. family and culture) are controlled for.

The authors note that the relationship between nature connectedness and some forms of happiness may be adversely affected, to some extent, by a tendency of people who feel connected to nature to be worried about the future of the environment. Such concerns are more likely to dampen positive emotions than eudaimonic measures of happiness because such people are likely to become engaged in pro-environmental behaviours that make their lives seem more meaningful.

There is evidence that feelings of nature connectedness are stronger in some cultures than others and are influenced by early childhood experiences. That suggests to me that causation runs from nature connectedness to happiness, rather than vice versa.

Is human flourishing inconsistent with living in harmony with nature?

A view of Sydney in 2014

I like many of the ideas in the Ecomodernist Manifesto, but I don’t like the idea of having to choose between making room for nature and living in harmony with nature. Before discussing this issue I will provide some background.

The Manifesto, published in April of this year, has 18 authors of whom the best known are probably Ted Nordhaus and Michael Shellenberger of the Breakthough Institute.

The Ecomodernists begin with the proposition that the earth has entered into a new geological epoch, the Anthropocene, or age of humans. That provides the backdrop for consideration of the interaction between human flourishing and the natural environment.

Many environmentalists assert that a good Anthropocene is not consistent with the ongoing expansion of opportunities for human flourishing which economic growth provides. By contrast, the authors of the Manifesto are optimistic that the Anthropocene can offer expanding opportunities for humans, as well as protecting the natural environment, if knowledge and technology are applied with wisdom.

I endorse this proposition:

“A good Anthropocene demands that humans use their growing social, economic, and technological powers to make life better for people, stabilize the climate, and protect the natural world.”

My problem is with what follows immediately after:

“In this we affirm one long-standing environmental ideal, that humanity must shrink its impacts on the environment to make more room for nature, while we reject another, that human societies must harmonize with nature to avoid economic and ecological collapse.

These two ideals can no longer be reconciled”.

I don’t see any necessary conflict between the two ideals. It seems to me that the ideal of harmonizing with nature means that we should seek to live in harmony with the natural laws of the world in which we live. That means accepting that humans are in many respects like other animals and have deep emotional connections to the natural environment and other living things. These emotional connections are explicitly recognized in Chapter 5 of the Manifesto.

That suggests to me that the problem is just definitional. Nevertheless, it is hard to understand why the authors of the Manifesto would risk losing support by asking people to make an unnecessary choice between ideals.

What is the real choice that the authors want us to make?  When they object to the ideal of human societies harmonizing with “nature”, it seems that what they are referring to are natural systems - the part of the natural environment that has not yet been significantly modified by human activity. 

The authors argue:

“Natural systems will not, as a general rule, be protected or enhanced by the expansion of humankind’s dependence upon them for sustenance and well-being.

Intensifying many human activities — particularly farming, energy extraction, forestry, and settlement — so that they use less land and interfere less with the natural world is the key to decoupling human development from environmental impacts. These socioeconomic and technological processes are central to economic modernization and environmental protection. Together they allow people to mitigate climate change, to spare nature, and to alleviate global poverty”.

The real choice the authors want us to make is between intensifying human activities in particular regions and allowing them to spread in ways that would be detrimental to the natural environment.

The idea of decoupling human development from environmental impacts seems to me to make a great deal of sense as a broad generalization. I expect that governments will encounter difficulties in implementing such a strategy sensibly, but outcomes are likely to be worse if they do not try. One of the difficulties that is likely to stand in the way of implementation in some areas is the need to recognize the rights of indigenous people to use the natural resources they own. Another difficulty is the tendency of over-zealous supporters of wilderness to oppose the eco-tourism which is likely to be necessary to maintain broad political support for protection of wilderness areas. In some areas the involvement of indigenous people in eco-tourism is helping to meet the twin objectives of improving their economic opportunities and enlisting their support for greater environmental protection.

It seems to me to be particularly important for human well-being that attempts to decouple human development from environmental impacts does not occur at the expense of the ideal of living in harmony with nature in areas of intense human activity. The emotional needs that humans have for connection with the natural environment and other living things are unlikely to be satisfied by observing nature on TV and a once-in-a-lifetime visit to a wilderness area. 

Postscript:
In my next post I discuss the link between happiness and feeling connected with nature. 

Is Bitcoin better than gold?

When suggestions have been made to me in the past that I should write about Bitcoin, I have expressed reluctance on the grounds that I don’t know much about it. Some would say, however, that is also true of some other things I write about on this blog.

Time seems to be running out for me to write about Bitcoin while the topic is still interesting. I keep reading news reports suggesting that Bitcoin is rapidly becoming respectable. Apparently New York State’s top financial regulator has just granted the first license to a Bitcoin exchange. A couple of weeks ago it was reported that Goldman Sachs is making a significant investment in a Bitcoin-focused company.

Anyone looking for a simple explanation of what Bitcoin is and how it works can find a fair amount of information online without much difficulty. The Economist attempted to provide an explanation a couple of years ago, but I found an explanation aimed at five year olds to be more helpful. A couple of months ago Nicolas Dorier referred me to the excellent explanation which Andreas Antonopoulos provided to a committee of the Canadian Senate in October 2014. Mr Antonopoulos also appeared before a committee of the Australian Senate and responded admirably to concerns about use of Bitcoin for nefarious purposes such as funding of drug trafficking and terrorism. He also argued strongly that incumbents in the finance industry should not be allowed to dictate government regulations applying to Bitcoin.

Should we view Bitcoin as money? In order to look at this question it is necessary to consider three functions of money: a unit of account; medium of exchange and store of value. Some economists, including Scott Sumner, argue that the unit of account function is the distinguishing characteristic of money from an economic perspective, and I am inclined to agree. Bitcoin is not widely accepted as a unit of account at the moment - it certainly does not seem likely to displace national currencies in that role in the near future.

However, Bitcoin seems to be proving itself to be very useful as a medium of exchange in international transactions. It is particularly pleasing to see reports of Bitcoin being used to enable guest workers from countries such as the Philippines to send remittances home to their families for a much lower price than is charged by firms such as Western Union. Further innovations are occurring in this area. For example, it has been recently reported that an Australian company, Digital CC, has set out to become the Uber of international transfers by developing a peer-to-peer transacting technology to allow remittance payments to be made via a mobile app.

There is no question that Bitcoin is much better than gold as a medium of exchange, because gold is expensive to store and transport.

It is when we consider the potential for Bitcoin as a store of value that the question of whether Bitcoin is superior to gold becomes harder to decide. A glance at the charts below might suggest that investors in Bitcoin are being optimistic if they think it will soon be accepted as a reliable store of value.

How much attention we should pay to past volatility in the price of Bitcoin in thinking about its potential as a store of value in the future?

The author of an article in Fortune, entitled ‘Gold vs. bitcoin: An apocalyptic showdown’, has suggested:

“Of course, as a new technology, bitcoin is subject to much more volatility than gold. But over the long run, given the fact that no new bitcoins will be mined after the 21-millionth, we can expect it to ultimately serve as a better store of value than gold”.

I feel inclined to agree. However, the more difficult question for me is whether to put my money where my mouth is. 

Postscript:
Nicolas Dorier has provided the following response:

"There is nothing to to fear about Bitcoin, but like owning gold, if your lose the map where you buried it, you lose everything. So one should be confident in his ability to protect the map. To learn how to do so, one should start training by protecting some pocket money first before burying his treasure.

First, start small, and consider it a learning experiment rather than an investment. Bitcoin is relatively new, and the tools and ecosystem are not as user friendly as they will become. The learning curve might be a little steep. Owning Bitcoin means being responsible for your money, and most people are not responsible of their own computer.

So be careful, you can always try to buy a few (for 10-50 dollars), and play with it by trying to buy stuff, transfer them between addresses, backup them on paper etc, restore them etc. This stuff was easy to learn for me as I am a developer. But it is not for most people. 

Second, never let your bitcoin on fiat/bitcoin exchanges once you bought. You don't own bitcoins if you don't own the private key. Any balance you see on exchanges are just IOU, not bitcoins.

By playing with it you will learn little by little all what you can do with it that you can't with traditional fiat currencies, and all the business opportunities that it opens. But don't rush it, start playing with it first.

Bitcoin is also an hedge against monetary mismanagement and financial oppression, a typical example right now is Argentina.

The value of Bitcoin increases when governments take measures to restrict the movement of other forms of money. As they do everything to restrict it, it forces people to use bitcoin. Not because they believe or use it as store of value, but because, it is easier to transact. (It is for this reason that Bitcoin came to be used first in black markets.)

As the failure of our central banks becomes more and more obvious, they will start to impose capital controls. (War on cash, that you start to see happening everywhere). This is mainly what will ultimately drive the value of Bitcoin."

Should self-funded retirees be concerned that interest rates on term deposits have declined?

Some readers will wonder why I am bothering to ask this question. It appears to be fairly obvious that people who are relying on interest on term deposits to fund their retirement must have greater difficult in surviving without drawing upon their capital when interest rates are as low as they are now.

However, it is by no means clear that the relevant interest rate is lower now than it has been over most of the last 15 years or so.

So, what is the relevant interest rate? First, nominal interest rates should be adjusted for taxation since the interest income that people are able to spend is the amount left after tax has been paid.

Second, it is also necessary to take inflation into account in the calculation. Inflation tends to deplete the purchasing power of the amount deposited, so some part of the after-tax interest has to be saved in order to prevent the real value of the nest egg from being depleted. Retirees who do not take inflation into account in their calculations are suffering from money illusion - an affliction that enables them to spend their children’s inheritances without feeling any guilt until they realize how much the real value of those sums have depleted.

So, if a retiree is intent on preserving the real value of her capital, the amount of interest income available to be spent is real after-tax interest. You might well ask why a retiree would want to preserve the real value of her capital. That is a very good question. If she has saved the funds to spend during retirement, it does not make any sense for her to be obsessed with the idea of living on interest and preserving capital. The important point is that awareness of the real after-tax interest rate might help her to avoid depleting the real value of her savings more rapidly than she intended.

The chart below shows trends in Australian interest rates on one year bank term deposits, after-tax interest rates on those deposits assuming a marginal tax rate of 30%, and real after-tax interest rates (deducting the CPI inflation rate for the previous 12 months). The data used in the chart is sourced from the Reserve Bank of Australia.

From the chart it looks to me as though it is about 15 years since retirees have been able to spend any of their interest income from term deposits without depleting the real value of their savings. 

It is easy enough to understand that some elderly people might suffer from money illusion and consider it to be sinful to deviate from time-honoured prudential rules about living off nominal interest. One would hope that professionals in the investment advice industry would encourage such people to modify their views somewhat to take account of tax and inflation.

However, some senior people in the investment advice industry have been encouraging the view that low interest rates have reduced the real spending power of retirees. For example, Jeremy Cooper, chairman of retirement income at Challenger Ltd, and the man who chaired the 2010 review of the superannuation system, has been reported in The Australian as saying:

 “Back when bank deposit rates were around 6 and 7 per cent there was no great problem with self-funded retirees relying on bank interest”.

In the same article, Jeff Rogers, chief investment officer of IPAC funds at AMP Capital, made a similar point. He is reported as saying bank deposit rates “will now adjust to just below 3 per cent, so with core inflation at around 2.4 per cent your real spending power is very small” in a self-funded retirement and warns that even if interest rates do start moving up again, “they won’t be going back up any time soon to the level that provided bank interest of 6 to 7 per cent’’. (Article by Andrew Main, ‘Risk rules for retirees reliant on bank interest’, May 6, 2015.)

It looks to me as though the after-tax real rate was close to zero when bank deposit rates were around 6 or 7 per cent, just as it is now.

Why are old Americans more satisfied with their lives than are old Europeans?

The latest WorldHappiness Report (2015) contains an interesting chapter examining how happiness varies around the world by gender and age. The chapter was written by Nicole Fortin, John Helliwell and Shun Wang.

What would you expect those comparisons to show? I guess many people would expect that, on average, women would be less happy than men because in most of the world the opportunities available to females are still less favourable than those available to males.

The data doesn’t actually show that. When people are asked to rate their lives relative to the best possible and worst possible life (i.e. using the so called Cantril ladder) the world averages show that until they are about 50, women tend to rate their lives more highly than men. Perhaps women are more inclined to look on the bright side of life.

In any event, differences between the happiness of women and men are much less marked than differences between young and old people. On average, happiness tends to decline to about age 40 - a few years later for men than women - and then to stay relatively flat.

That finding was a surprise to me. I was given the impression from research I had read about that happiness was U-shaped over the life cycle. When I looked for more recent literature, just now, I found an article by Paul Frijters and TonyBeatton, published in 2012, based on panel data for Germany, Britain and Australia, which suggests the dominant age-effect is a strong happiness increase around the age of 60, followed by a major decline after 75. So I should have had an open mind about what to expect.

The data in the World Happiness Report shows a great deal of variation in the relationship between age and happiness in different parts of the world. Happiness does not vary much with age in South-East Asia, South Asia and Sub-Saharan Africa. Happiness declines sharply with age in CEE&CIS region (former Soviet Union, Eastern Europe and Central Europe) and less sharply with age in Latin America, Middle East and North Africa and Western Europe. The only regions with the U-shape are East Asia and NA&ANZ (North America, Australia and New Zealand).

It does not surprise me that there is a different relationship between happiness and age in high and low income countries, but I did not expect to see the different patterns in Western Europe and NA&ANZ which are shown below (based on Figure 3.2 of the World Happiness Report 2015).The NA&ANZ data are dominated by America (regional averages are calculated using population weights) so I am seeking an explanation of why old Americans are relatively more satisfied with their lives than old Europeans.

The different pattern between America and Europe also showed up in survey respondents’ reports of some positive emotions experienced the preceding day: smiling and laughing a lot; enjoyment; and learning or doing something interesting. The survey data also shows that older women in Western Europe report experiencing greater sadness, physical pain and depression than do men of comparable age in that part of the world, or people of either gender in America.

A hint about the possible causes of the difference in patterns between America and Europe is given by looking at the determinants of life satisfaction, as indicated in the regression analyses undertaken for the report. Those determinants are income, health, generosity, corruption, freedom of choice and social report.

An inspection of the graphs showing how those variables differ according to the age of respondent suggests that the main area of difference is in respect of perceptions of social support. What this means is that, on average, older people in Western Europe perceive that they are less able to count on relatives and friends for support when they need it than are older people in North America.

It is interesting to speculate about the reasons why old people in Western Europe are less likely to feel that they can count on relatives and friends in times of need. The thought that passes my mind is that the reasons might have something to do with the nature of the welfare states of Western Europe, but that might just reflect my prejudices. 

Should scientists be seeking to persuade or inform?

When I hear scientists engaged in policy advocacy I often cheer them on. At other times I make cynical comments questioning whether their conjectures have any substance. I notice that other people seem to have similar reactions, but some jeer when I cheer and vice versa.

In thinking about my own reactions I am able to rule out some possible reasons for negativity without much difficulty.

Expertise: My reactions are not always closely related to my own expertise. I can react positively or negatively to scientific advocacy in relation to areas of public policy in which I have no expertise as well as in aspects of economic policy where I can claim some expertise.

Conservatism: My reactions do not seem to be consistently conservative in the sense of being cautious about change. Sometimes I feel that scientists are setting out to make me worry unduly about the implications of our current lifestyles, but I am less inclined to feel that they are trying to make me feel more complacent than I should be about potential adverse effects of various innovations e.g. GM food or health effects of living close to power lines or wind farms.

Research funding: My reactions are not necessarily related to the question of how the scientists fund their research. In some instances I might suspect that they are advocating in the interests of the people who have provided funding, or slanting their presentations to further their interests in obtaining more funding, but such factors are not always relevant.

Indoctrination: My reactions are unlikely to be the result of indoctrination by particular branches of the news media. I am exposed to a range of media organisations with a range of different biases.

I had to think more carefully about whether my reactions could be related to the presentation skills of the scientists. I know I have a strong allergic reaction to being preached at or manipulated. So, I took a look at Jason Nazar’s 21 principles of persuasion and some other web sites discussing the art of persuasion. In the end I realized that I don’t have too much difficulty these days in being able to appreciate the persuasive skills of speakers while disagreeing with the messages they are presenting. I can also support the message being presented by speakers while thinking they could do with some help to improve their presentation skills.  Membership of Toastmasters encourages people to think about such matters.

It was not until I stumbled on an article by Dan Kahan on the science of science communication that I realized that the reactions that people have to advocacy by scientists might be related to Bryan Caplan’s concept of rational irrationality and Jonathan Haidt’s moral foundations theory (which have previously been discussed on this blog). Caplan suggests that people can have an almost religious attachment to irrational beliefs about economics, while Haidt suggests that identification with groups tends to blind people to the wisdom of people outside those groups.

Cutting to the chase, Kahan tests the performance of two hypotheses to explain why there is so much public dispute over science-based conjectures about the risks that humans are facing. The first thesis, the public irrationality thesis (PIT), predicts that the gap between public and expert assessments of risk narrows as members of the public become more literate about science. On that basis, people who scored highest on science comprehension could be expected to be more concerned about climate change than those with lower scores. However, this doesn’t happen - at least it doesn’t happen in studies cited by the author.

The second thesis, the cultural cognition thesis (CCT) posits that certain types of group affinities are integral to the mental processes ordinary members of the public use to assess risk. Kahan cites various studies that have tested CCT, but the results of one which tests CCT head to head against PIT are particularly interesting. The results show that on issues that have become politicized – such as global warming and fracking – the average divergence between risk assessments of people who identify as liberal democrats and conservative republicans is greater among those who have high levels science comprehension than among those who have low levels of science comprehension. (See chart below.) The results suggest that individuals who are most adept at scientific reasoning search out evidence to support their cultural dispositions.

 

Source: Dan Kahan, 'What is the science of science communication', Journal of Science Communication, 2015 

The study suggests that there is little difference between risk assessment of liberals and conservatives on issues that have not become politicized e.g. artificial food colourings, exposure to radio waves from cell phones, GM food, exposure to magnetic field of high voltage power lines, use of artificial sweeteners and nanotechnology. The PIT thesis does apply to such issues. I guess the results might differ in countries where some of these issues, e.g. the risks associated with GM food, have become politicized.

So, in the light of the above, how should I react to the Earth Statement recently published by a group of eminent scientists which suggests that “2015 is a critical year for humanity” and predicts dire consequences if international forums to be held this year decide to postpone substantial reductions in greenhouse gas emissions? Let me quote a paragraph:

“We can still avert dangerous climate change. However, we are currently on a warming trajectory that will leave our world irrevocably changed, far exceeding the 2°C mark. This gamble could propel us into completely uncharted waters, with unmanageable sea-­level rise and a vastly different climate, including devastating heat waves, persistent droughts and unprecedented floods. The foundations of our societies, including food security, infrastructure, ecosystem integrity and human health, would be in jeopardy, impacting most immediately the poor and vulnerable.”

My immediate reaction was along the lines that they would say that wouldn’t they. Those who preach about the end of the world can always be expected to tell us to repent now for the end of the world is nigh. Would you expect them to say that it is now too late to do avoid catastrophe, or that there is no need to worry much for the next 20 years or so?

I claim no expertise in climate modelling, but the little I know suggests to me that current models are not reliable enough to tell us that it is critical that further action be initiated in 2015. Such claims seem to me to be more like hysteria than science.

That leaves those of us who accept the physics of the greenhouse effect with great difficulty in assessing the urgency of the threat to humanity that it may involve.  It is easy enough to find 22 ways to think about the climate debate, but it isn’t easy to find a dispassionate expert overview of the relevant science. Nearly all leading scientists seem to have become preachers.

When scientists seek to persuade people to adopt particular positions on contentious policy issues it is inevitable that they will be seen to be preaching rather than presenting information on the current state of knowledge. If scientists want to be listened to by people other than their political cheer squads of “true believers” they should distance themselves from policy debate and display some modesty about the quality of their conjectures. 

Did Christianity invent the individual?

Inventing the Individual by Larry Siedentop, makes an important contribution to available literature on the origins of the individualism and secularism which characterize Western Civilization.

Before I read the book I was aware from reviews that the author claims that, in some sense, Christianity “invented” the individual. How could that be so?

Siedentop summarizes his argument: “in its basic assumptions, liberal thought is the offspring of Christianity” (p 332). What he means by “inventing the individual” is recognition that individuals have natural rights, including the rights to liberty, to equality before the law and to election of representatives. As early as the 13^th and 14^th centuries, recognition of the important roles of conscience and individual choice even led some philosophers associated with the church to recognize that enforcing moral conduct is a contradiction in terms. The essence of Siedentop’s argument, is that liberal thought became established as a way of thinking “as the moral intuitions generated by Christianity were turned against an authoritarian model of the church” (p 332).

The words, “moral intuitions generated by Christianity”, raise another problem that I might as well consider before moving on to provide some positive comments. The moral intuitions that Siedentop is referring to are intuitions about moral equality and reciprocity – including the ideal of loving others as oneself and the golden rule of doing unto others are you would have them do unto you. My problem is that something like the golden rule is common to the major religions and is expressed in remarkably similar terms in Judaism, Buddhism, Taoism, Confucianism, Hinduism and Brahmanism. More fundamentally, the idea of moral intuitions being generated by religion seems to rule out of consideration the possibility that such intuitions are innate. Perhaps Siedentop means to argue that Christianity has been more successful than other religions in cultivating moral intuitions, but his book contains few references to other religions.

One reviewer, Samuel Moyne, writing in Boston Review, has suggested that there is a major difficulty for anyone who tells a Christian story of liberalism’s origins:

“They must explain how, against its original purposes, the Gospel’s message was brought down to earth, applied right now to radically new aims and institutions that Jesus and Paul would not have accepted. The reversal is stark: from a refusal of the relevance of Christian moral beliefs’ to politics to a revolution in this-worldly assumptions about the subordination of individuals to hierarchy. You need an argument to show how this happened. Siedentop doesn’t really have one. He just knows the reversal occurred”.

Siedentop has probably attracted such criticism because he has been over-ambitious in stating the aim of his book. He has set out to answer a very big question:

“Is it a mere coincidence that liberal secularism developed in the Christian West?”

In my view his book should be viewed as answering a more modest question:

Did Christianity contribute to the advent of liberal secularism in Europe? That is a fairly provocative question in view of the common belief that liberal secularism stems solely from the Renaissance in Italy and the rediscovery of ancient humanism.

This book shows that liberal secularism has some strong moral roots in Christianity. The author also acknowledges that the development of market towns and cities played an important role in the growth of freedom (as have other authors including Adam Smith in Wealth of Nations). 

I found the author’s discussion of St Paul’s contribution to be a powerful reminder that his message was about, among other things, the idea that all humans are children of God and the potential of that idea to liberate individuals from constraining perceptions of their personal identities as defined by social roles - such as father, daughter, official, priest or slave. Siedentop puts it his way:

“Paul overturns the assumption of natural inequality by creating an inner link between the divine will and human agency. He conceives that the two can, at least potentially, be fused within each person, thereby justifying the assumption of the moral equality of humans.  … That fusion marks the birth of a ‘truly’ individual will through the creation of conscience” (p 61).

The book is largely about the development of the concept of ‘moral equality’ within the Christian establishment as well as among heretics. Siedentop points out that the concept of moral equality was evident in the early years of Christianity, and led to recognition of the claims of conscience by some influential Christians. For example, he quotes Tertullian as recognizing that “it is a basic human right that everyone should be free to worship according to his own convictions” (p 78).

It was, of course, many centuries before the implications of moral equality came to be tolerated by Christian churches - the full implications have arguably yet to be accepted by most church leaders. The author takes us through the history, providing a fairly persuasive case that the roots of Western liberalism were firmly established in the arguments of canon lawyers and philosophers by the 14^th and early 15^th centuries.

One of the most interesting parts of the book is the discussion of the views of John Duns Scotus and William of Ockham. At the end of the 13^th century Duns Scotus identified freedom as a necessary condition of moral conduct and argued that “an act is neither praiseworthy nor blameworthy unless it proceeds from the free will” (p 294). In the 14^th century Ockham probed the concept of dominium (or lordship) which had hitherto rested on the assumption of natural inequality and involved both a right to govern and a right to own. Thus, the role of the paterfamilias in the ancient family meant that the father not only governed but in a sense owned his family. Ockham insisted that the existence of a right implied moral authority – rightful power – rather than just exercise of de facto power. Discussion of rights brings to bear the concept of moral equality, and with that, recognition of freedom of the will and individual moral agency.

William of Ockham

My mind is unable to comprehend the book’s discussion of the contest between doctrines associated with Aquinas and Ockham on the question of whether references to eternal ideas in the mind of God implies a restriction on God’s freedom. In terms of the book's objectives, however, the important point concerns the role of the individual’s will. Siedentop notes that Ockham associated reason with individual experience and choice, and saw ‘right reason’ as obligated by principles of equality and reciprocity (p 309). 

Incidentally, the discussion of the different approaches of Aquinas and Ockham left me with the impression that the author is claiming that Ockham rejected Aristotle’s teleological reasoning.  However, the entry on Ockham in the Stanford Encyclopedia of Philosophy suggests otherwise. According to that source, Ockham accepted Aristotle’s view that humans have a natural orientation toward pursuit of their own ultimate good (happiness).  The point that Ockham adds is that this inbuilt orientation does not restrict individual choice - individuals are free to choose whether or not to will their ultimate good.

It seems to me that the author has provided people in the West with a timely reminder of the links between liberal secularism and the concepts of moral equality and freedom of conscience. The book reminds us that secularism is not devoid of values. As Larry Siedentop puts it, “secularism identifies the conditions in which authentic beliefs should be formed and defended”.

What tax and spending reforms might be feasible in Australia?

The government’s recent tax discussion paper contemplates a similar tax reform agenda to that recommended by the Henry tax review in 2010. The general thrust of the proposals is a move away from taxes which hamper efficient allocation of resources (e.g. stamp duties on property transfers) and taxes which impose disincentives on investment (taxes on capital income) or productive effort (high taxes on labour income).

Some commentators, for example Peter Martin in the SMH, have suggested that the discussion paper “has set out the case for an increase in Australia's rate of goods and services tax”.  Perhaps the report hints in that direction, but the Treasury research findings noted in the report do not seem consistent with the view that there are large gains to be had from substituting increases in GST for the taxes that have highest economic costs. The marginal excess burden (MEB) on GST is estimated to be in the medium range (around 20%) along with taxes on labour income, compared with an MEB of around 50% for company tax. As discussed in my recent post on the intergenerational report, the MEB of a tax rises exponentially with increases in the rate of the tax. If the relevant elasticities are such that the MEB on GST is currently around 20% (rather than around 10% as I previously thought) a doubling of the rate would cause the MEB on GST to 50% - as shown below.

It seems that the only way to get large economic gains by substituting one tax for another would be by relying more heavily on land taxes (and municipal rates) which, according to Treasury research, have a slightly negative MEB. The use of land tax to replace stamp duties on property transfers would make a great deal of sense from an economic perspective and should not pose huge political feasibility problems. People who cannot afford up-front payment of the land tax (e.g. old people who often income-poor despite being asset-rich) could be given the option of having payment deferred until after death, with appropriate interest being charged.

However, I find it difficult to imagine that increased revenue from land taxes could do much more than to replace some of the most highly distorting taxes used by state governments. Perhaps I could fire up my imagination by reading what Henry George had to say many years ago about the desirability of funding government by a single tax on land. However, I doubt whether any politician could persuade the electorate to accept substantial losses on the wealth invested in their homes in the hope that they might enjoy the benefits of lower taxes on capital income. Most Australian politicians are not even game to contemplate the merits of subjecting home owners to the same capital gains tax regime as is applied to owners of other assets.

One way in which it might be feasible to obtain benefits from lower taxes on capital income would be to reduce the tax concessions applying to superannuation. It might also be possible to reduce government spending by tightening up the assets means test on aged pensions. The potential for a bi-partisan agreement emerging in these policy directions has recently emerged with the Labor party offering to end superannuation concessions for the wealthy and the Australian Council of Social Services (ACOSS) suggesting that the assets test on aged pension eligibility should be tightened to better target the pension to those who need it.

At first sight these indications of a willingness among some politicians to contemplate a reduction of concessions to the elderly might appear to be attempting to swim against the tide of grey power – the growing proportion of old voters in the electorate. Paradoxically, however, the ability of any group to benefit from redistributions extracted from the rest of the community tends to diminish as it comes to represent a higher proportion of the population.

A big question which groups representing old people need to face is whether they stand to gain more by using their political muscle to increase their share of the economic cake or by using their political muscle to increase the size of the economic cake. As the elderly come to represent a higher proportion of the population, their attempts to obtain a larger slice are eventually likely to reduce the size of the cake by leading to higher tax rates and thus dampening economic incentives. A larger slice of a smaller cake could end up to be very little indeed. The elderly can possibly defer the time of reckoning by encouraging governments to adopt a complacent attitude toward growing government debt, but that strategy runs the risk of great hardship if the welfare system becomes unsustainable and has to be sacrificed to repay debt. 

Perhaps we are now beginning to see the political limits of grey power in Australia. The way ACOSS is using its influence seems likely to produce outcomes along the lines of those I predicted a few years ago when I considered the question of whether the elderly poor tend to fare better under a pensions means test than under universal pension benefits:

“As the increase in proportion of elderly people in the population in Australia reduces the per voter political power of this group, I would expect the per voter political power of the elderly poor to diminish to a smaller extent than that of the much larger group who hope to benefit from the private superannuation tax and pension means test rorts. I expect incentives for early retirement implicit in the superannuation arrangements will be an early casualty as attempts are made to contain government spending on retirees. If a choice has to be made at some time in the future between, say, maintaining the current level of the aged pension in real terms and maintaining superannuation tax concessions, I expect that maintaining the aged pension levels would be likely to win the political debate. Similarly, given a decline in grey power on a per voter basis I doubt whether superannuation tax concession would win the political debate if a choice has to be made at some time in the future between maintaining these tax concessions and an overall lowering in income tax rates to promote economic growth.”

After reading that again, I hope that the government doesn’t forget to obtain a substantial reduction in tax on capital incomes as a quid pro quo for a reduction in superannuation tax concessions.

The conclusion of my last post that young people have good reason to be concerned about their futures is also relevant in considering what tax and spending reforms might be feasible. As young people become more aware of the range of factors that affect their future well-being, more of them can be expected to show interest in the way economic policies are impacting on their own incentives to acquire skills, and on the incentive for investors to take the risks that will need to be taken to ensure the growth of remunerative employment opportunities. Perhaps young people will come to recognize that, as a group, their interests are likely to be best served by lower government spending and lower tax rates.

When a government throws all the pieces of tax and spending policy in the air there is no guarantee that what we will end up with will look any better than the mess we had before. On this occasion, however, there are some grounds for optimism. The political winds seem to be blowing in the right direction .

Postscript
I have just noticed that Treasury estimates of marginal excess burden of GST in their working paper, Understanding the Economy-wide Efficiency and Incidence of Major Australian Taxes (2015–01) imply a much smaller increase at higher tax rates than shown above. See Chart 20, page 36. The Treasury estimates are more likely to be correct, but it would be nice to be able to understand the reasons for the difference.

Should young Australians be more concerned about their futures?

Young Australians do not seem to be particularly concerned about their futures. The data discussed in a recent post suggests that measures of optimism and pessimism depend a great deal on the specific question that is asked and the context in which it is asked. Nevertheless, it is reasonably clear that young Australians are less pessimistic than young people in many other high-income countries.

Perhaps young Australians should be more concerned about their futures. In considering this question I will rely largely on two reports: 

• Renewing Australia’sPromise: Will young Australians be better off than their parents? (authorship anonymous) published by the Foundation for Young Australians (FYA) in November 2014; and
• The Wealth of Generations, by John Daley and Danielle Wood, published by the Grattan Institute in December 2014.

The FYA report attempts to compare the lives of young people today and their future prospects with the lives and prospects of their parents when they were at a similar age. Young people are defined in various ways e.g. between 15-24 years of age, 20-24 and 25-34. The comparisons are largely between relevant data for the present and thirty years ago (1985). The aspects covered by the comparisons are: work and incomes, education, housing, government services, health and environment.

The focus of the Grattan report is somewhat narrower than that of the FYA report. It looks in some depth at change in household wealth, incomes, and government taxes and transfers of people in different age groups.

The environment: 

The FYA report argues that Australia is likely to become a hotter place and to be more at risk of fire and drought as today’s young grow older. Some precautionary measures are desirable even if the FYA report is too pessimistic. From an international relations perspective it is important for Australia’s efforts to control GHG emissions to be defensible in international forums. (Interestingly, the FYA report does not include a discussion of international relations; perhaps the region in which we live is now so peaceful that the potential for international conflict no longer comes readily to mind as an important factor affecting the wellbeing of future generations of Australians.)

If the climate change pessimists are correct, nothing Australian governments can do will make much difference, except for policies supporting adaptation. Technological advances will probably help future generations to cope with any increased risk of fire and drought if appropriate investments are made in research.

Health: 

The FYA report suggests that young people will live longer and healthier lives than their parents as a result of advances in medical technology and adoption of healthier lifestyles. Between 1985 and 2015 life expectancy of 25 year olds increased by 6.2 years for males (from 74.5 to 84.7) and by 4.5 years for females (from 80.3 to 84.8).

Education: 

Over the last 30 years there has been a massive increase in the amount of time people spend being educated but the quality of education does not seem to have kept pace with that in other OECD countries.  Data presented by FYA shows Year 12 completion rates have risen from 44% to 77% (20-24 age group) and the percentage of people with university degrees has risen from 26% to 35% (25-34 age group). PISA scores indicate that basic skills in maths and reading have slipped substantially relative to the OECD average.

Housing: 

The Grattan report notes that home ownership is declining, especially among the young. The percentage of 25-34 year olds owning their own home slipped from more than 60% in 1981 to 48% in 2011. FYA notes that the ratio of house price to income rose from 3.2 in 1985 to 6.5 in 2015, while the ratio of housing loan interest to income rose from 3.9 to 7.1. However, the Reserve Bank’s estimates suggest that repayments on new housing loans as a percentage of household disposable income were much the same in recent years as in the mid 1980s.  The relevant percentages are higher than in the early 1980s, but lower than in the late 1980s.

It is also relevant to consider how the price of housing and rents compare with movements in the CPI over the past 30 years. Over the period from December 1984 to December 2014 the CPI All Groups index rose on average by 3.6% per annum, the housing component of the index rose by 4.1% per annum. Over this period, the annual rate of increase in the rental sub-group was 4.9% in Sydney, 4.0% in Melbourne and 3.3% in Hobart. This data is not consistent with a general decline in affordability of rental accommodation over the last 30 years.  The fact that it is costing more to live in Sydney suggests that many people find Sydney to be an attractive place to live.

Government Services and Taxation: 

The FYA report makes the widely-known point that over the next 40 years an increase in the proportion of old people in the population is likely to result in an increase in government spending on programs which benefit older people, while young people are likely to be required to contribute more in taxation and to receive less services in return. Young people are already contributing more than their parents’ generation; this is evident in the increase in average student (HECS) debt on graduation from zero in 1985 to about $24,000 in 2011.

The Grattan report provides a more detailed examination of intergenerational transfers. It notes that since 2003-04 there has been a substantial increase in net transfers per household of $9,400 to the 65+ group - mainly in the form of health spending and cash benefits - which has been funded by increases in government debt.

The Government’s latest intergenerational report has projected that under current legislation net debt per person will rise from $10,400 in 2014-15 to $65,000 mid-century, measured in today’s dollars. It is probably not reasonable to expect old people, children and others on relatively low incomes to make much contribution to servicing that debt, so a middle income earner could be looking at having to service an additional debt approaching $100,000 on top of their home mortgage.

We can expect the open season for crazy tax ideas to continue in Australia until we manage to get government spending under control.

This cartoon by Nicholson was published in “The Australian” newspaper in 2010.

Work, incomes and wealth: 

Data presented in the FYA report indicate that the unemployment rate of 13% for 15-24 year olds is similar to that in 1985. However, there are many young people engaged in casual and part-time employment who would prefer to work more. Over the past three decades the percentage of young people who are not able to get as much work as they would like has more than trebled (rising from 4.7% to 16.6%). 

As to the future, a decline in the proportion of young people in the population will not necessarily bring about a return to the situation where young people will be able to find secure employment more readily. Technological change can be expected to continue to result in displacement of a growing number of occupations and labour market regulation may continue to favour people who have secure employment relative to job-seekers. Technological change will also provide new opportunities, but the FYA report makes the important point that ability to take advantage of such opportunities will depend on skill development to ensure that “technology augments young workers rather than displacing them”. That might be easier said than done in the context of current opposition to labour market deregulation and education reform.

The FYA report notes that there has been a modest increase of 6.8% in median weekly earnings of 15-24 year olds over the last 30 years. That represents a rate of increase five times slower than experienced by people aged 45-54.

The Grattan report shows that older Australians have also captured most of the growth in Australia’s wealth over the past decade. Households in the 65-74 age bracket are on average $200,000 wealthier than households of that age eight years ago, while the wealth of households in the 25-34 age bracket have gone backwards. The main driver of the growth in wealth of older Australians has been an increase in house prices. Young people have missed out on this as a result of their lower home ownership rates.

As an old person it would be easy for me to be complacent about growing intergenerational disparities of wealth. After all, it is reasonable to expect that older people will ultimately pass on much of their accumulated wealth, isn’t it? Data in the Grattan report suggests, however, that inheritances are typically received later in life and primarily benefit people who are already wealthy. Gifts to younger generations are typically small and also primarily of benefit to well-off households.

Concluding comments

In the past I have often tried to dismiss the fears that young people have expressed to me about their future lives with some comforting words about the benefits of ongoing economic growth. I still think the problems discussed above will be manageable if Australia can maintain rates of economic growth comparable to those experienced during the last 30 years. 

   

However, it will be difficult to maintain economic growth comparable to the past, given projected changes in the age structure of the population. We may not have much economic growth at all if an increasing tax burden is placed on investors and medium to high income earners. Investors can easily find attractive opportunities elsewhere in the world and medium to high income earners are likely to be increasingly attracted by the pleasures of early retirement, particularly if they can look forward to a government-funded pension after their savings are sufficiently depleted.

In my view young Australians have good reasons to be concerned about their futures.