Africa in 1880 vs. 1913 – brilliantmaps.com/africa-1914/ http://t.co/mLSSZfG0Co—
Brilliant Maps (@BrilliantMaps) May 31, 2015
The scramble for Africa 1880 – 1913
05 Jun 2015 Leave a comment
in comparative institutional analysis, economic history, Public Choice, rentseeking Tags: Africa, British empire, colonialism
A Quick Question for All Advocates of Minimum Wages
31 May 2015 Leave a comment
in applied price theory, comparative institutional analysis, constitutional political economy, labour economics, minimum wage Tags: expressive voting, rational irrationality
Does Inequality Reduce Economic Growth: A Sceptical View
30 May 2015 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis, development economics, economic history, entrepreneurship, growth disasters, growth miracles, income redistribution, politics - Australia, politics - New Zealand, politics - USA, Public Choice, public economics, rentseeking Tags: entrepreneurial alertness, Leftover Left, taxes and the labour supply, The inequality and growth, Thomas Piketty, top 1%, Twitter left
Tim Taylor, the editor of the Journal of Economic Perspectives, has written a superb blog post on why we should be sceptical about a strong relationship between inequality and economic growth. Taylor was writing in response to the OECD’s recent report "In It Together: Why Less Inequality Benefits All,".
Taylor’s basic point is economists have enough trouble working out what causes economic growth so trawling within that subset of causes to quantify the effects of rising or falling inequality inequality seems to be torturing the data to confess. The empirical literature is simply inconclusive as Taylor says:
A variety of studies have undertaken to prove a connection from inequality to slower growth, but a full reading of the available evidence is that the evidence on this connection is inconclusive.
Most discussions of the link between inequality and growth are notoriously poor of theories connecting two. There are three credible theories in all listed in the OECD’s report:
The report first points out (pp. 60-61 that as a matter of theory, one can think up arguments why greater inequality might be associated with less growth, or might be associated with more growth. For example, inequality could result less growth if:
1) People become upset about rising inequality and react by demanding regulations and redistributions that slow down the ability of an economy to produce growth;
2) A high degree of persistent inequality will limit the ability and incentives of those in the lower part of the income distribution to obtain more education and job experience; or
3) It may be that development and widespread adoption of new technologies requires demand from a broad middle class, and greater inequality could limit the extent of the middle class.
About the best theoretical link between inequality and economic growth is what Taylor calls the "frustrated people killing the goose that lays the golden eggs." Excessive inequality within a society results in predatory government reactions at the behest of left-wing or right-wing populists.

Taylor refers to killing the goose that laid the golden egg as dysfunctional societal and government responses to inequality. He is right but that is not how responses to inequality based on higher taxes and more regulation are sold. Thomas Piketty is quite open about he wants a top tax rate of 83% and a global wealth tax to put an end to high incomes:
When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much).
It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive…
The left-wing parties don’t say let’s put up taxes and redistribute so that is not something worse and more destructive down the road. Their argument is redistribution will increase growth or at least not harm it. That assumes the Left is addressing this issue of not killing the goose that lays the golden egg at all.

Once you discuss the relationship between inequality and growth in any sensible way you must remember your John Rawls. Incentives encourage people to work, save and invest and channels them into the occupations where they make the most of their talents. Taylor explains:
In the other side, inequality could in theory be associated with faster economic growth if: 1) Higher inequality provides greater incentives for people to get educated, work harder, and take risks, which could lead to innovations that boost growth; 2) Those with high incomes tend to save more, and so an unequal distribution of income will tend to have more high savers, which in turn spurs capital accumulation in the economy.
Taylor also points out that the OECD’s report is seriously incomplete by any standards because it fails to mention that inequality initially increases in any poor country undergoing economic development:
The report doesn’t mention a third hypothesis that seems relevant in a number of developing economies, which is that fast growth may first emerge in certain regions or industries, leading to greater inequality for a time, before the gains from that growth diffuse more widely across the economy.
At a point in its report, the OECD owns up to the inconclusive connection between economic growth and rising inequality as Taylor notes:
The large empirical literature attempting to summarize the direction in which inequality affects growth is summarised in the literature review in Cingano (2014, Annex II).
That survey highlights that there is no consensus on the sign and strength of the relationship; furthermore, few works seek to identify which of the possible theoretical effects is at work. This is partly tradeable to the multiple empirical challenges facing this literature.
The OECD’s report responds to this inclusiveness by setting out an inventory of tools with which you can torture the data to confess to what you want as Taylor notes:
There’s an old saying that "absence of evidence is not evidence of absence," in other words, the fact that the existing evidence doesn’t firmly show a connection from greater inequality to slower growth is not proof that such a connection doesn’t exist.
But anyone who has looked at economic studies on the determinants of economic growth knows that the problem of finding out what influences growth is very difficult, and the solutions aren’t always obvious.
The chosen theory of the OECD about the connection between inequality and economic growth is inequality leads to less investment in human capital at the bottom part of the income distribution.
[Inequality] tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole
I found this choice of explanation curious. So did Taylor as the problem already seems to have been solved:
There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages.
All high-income economies are relatively open to foreign trade. In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.
In New Zealand, interest free student loans are available to invest in higher education as well as living allowances for those with parents on a low income. There are countries in Europe with low levels of investment in higher education but that’s because of high income taxes not because of inequality.
The OECD’s report is fundamentally flawed which is disappointing because most research from the OECD is to a good standard.
via CONVERSABLE ECONOMIST: Does Inequality Reduce Economic Growth: A Skeptical View.
Mises on the Great Fact
29 May 2015 Leave a comment
in Austrian economics, comparative institutional analysis, economic history, Ludwig von Mises Tags: capitalism and freedom, The Great Enrichment, The Great Escape, The Great Fact
The first citizen initiated binding referenda will be on…
29 May 2015 Leave a comment
in comparative institutional analysis, constitutional political economy, politics - New Zealand, Public Choice Tags: citizen initiated referendums, Colin Craig, Conservative Party, Edmund Burke, expressive voting, Joseph Schumpeter, parliamentary sovereignty, rational ignorance, rational irrationality
The Conservative Party of New Zealand in the 2014 general election was very much formed around the notion of introducing citizen initiated binding referendums in a country with the Parliament is sovereign. The first referendum is likely to be on one of the following:
· decriminalising marijuana,
· banning smoking,
· voluntary euthanasia,
· a living wage,
· life means life in prison,
· same-sex marriages,
· marriage is between a man and a woman,
· entrenching the Treaty of Waitangi,
· abolishing the Maori seats,
· entrenching the Maori seats,
· stop school closures, and
· capital punishment; and
· future referendums not be binding
Binding referenda are unworkable. Parliament can’t amend them later as we learn from the implementation of the law and unintended consequences arise. Every new law is riddled with unintended consequences and blow-backs.
Do you really want to have to have another referendum to undo a binding referendum that turned out to be a bit of a mistake? One of the few redeeming features of the Parliament that is sovereign – a parliament for can make or unmake any law whatsoever – is it can repeal its mistakes quickly.
The first citizens initiated referendum was held on 2 December 1995. The question was
Should the number of professional fire-fighters employed full-time in the New Zealand Fire Service be reduced below the number employed in 1 January 1995?
Turnout was low as the referendum was not held in conjunction with a general election, and the measure was voted down easily, with just over 12% voting “Yes” and almost 88% voting “No”.
The key to constitutional design is not empowering you and yours – it is how to restrain those crazies to the Left or the Right of you, as the case may be, when they get their hands on the levers of power, as they surely will in three, six or nine years’ time.
The one inevitability of democracy is power rotates – unbridled power and binding referenda lose their shine when you must share that power with the opposing side of politics who put up their own referendum question.
Constitutions are brakes, not accelerators. Much of constitutional design is about checks and balances and the division of power to slow the impassioned majority down.
Constitutional constraints are basically messages from the past to the present that you must think really hard, and go through extra hurdles before you do certain things.
The 18th and 19th century classical liberals were highly sceptical about the capability and willingness of politics and politicians to further the interests of the ordinary citizen, and were of the view that the political direction of resource allocation retards rather than facilitates economic progress.
Governments were considered to be institutions to be protected from but made necessary by the elementary fact that all persons are not angels. Constitutions were to constrain collective authority.
The problem of constitutional design was ensuring that government powers would be effectively limited. The constitutions were designed and put in place by the classical liberals to check or constrain the power of the state over individuals.
The motivating force of the classical liberals was never one of making government work better or even of insuring that all interests were more fully represented. Built in conflict and institutional tensions were to act as constraints on the power and the size of government.
Representative democracy is a division of labour in the face of information overload. John Stuart Mill had sympathy for parliaments as best suited to be places of public debate on the various opinions held by the population and as a watchdog of the professionals who create and administer laws and policy:
Their part is to indicate wants, to be an organ for popular demands, and a place of adverse discussion for all opinions relating to public matters, both great and small; and, along with this, to check by criticism, and eventually by withdrawing their support, those high public officers who really conduct the public business, or who appoint those by whom it is conducted.
Representative democracy has the advantage of allowing the community to rely in its decision-making on the contributions of individuals with special qualifications of intelligence or character. Representative democracy makes a more effective use of resources within the citizenry to advance the common good.
Members of parliament are trustees who follow their own understanding of the best action to pursue in another view. As Edmund Burke wrote:
Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices ought to guide, but the general good, resulting from the general reason of the whole.
You choose a member indeed; but when you have chosen him, he is not a member of Bristol, but he is a member of parliament. … Our representative owes you, not his industry only, but his judgment; and he betrays instead of serving you if he sacrifices it to your opinion.
Modern democracy is government subject to electoral checks. Citizens do have sufficient knowledge and sophistication to vote out leaders who are performing poorly or contrary to their wishes. Modern democracy is the power to replace governments at periodic elections.
The power of the electorate to turn elected officials out of office at the next election gives elected officials an incentive to adopt policies that do not outrage public opinion and administer the policies with some minimum honesty and competence.
Richard Posner argued that a representative democracy enables the adult population, at very little cost in time, money or distraction from private pursuits commercial or otherwise:
- to punish at least the flagrant mistakes and misfeasance of officialdom,
-
to assure an orderly succession of at least minimally competent officials,
-
to generate feedback to the officials concerning the consequences of their policies,
-
to prevent officials from (or punish them for) entirely ignoring the interests of the governed, and
-
to prevent serious misalignments between government action and public opinion.
Enough of politics and elections, I have a life to lead. Don’t you? Too many want to remake democracy with the faculty workshop as their model.
Such deliberation has demanding requirements for popular participation in the democratic process, including a high level of knowledge and analytical sophistication and an absence, or at least severe curtailment, of self-interested motive. The same goes for citizen initiated binding referendums.
Bill Easterly on the other people are stupid fallacy
20 May 2015 Leave a comment
in applied price theory, behavioural economics, comparative institutional analysis Tags: Bill Easterly, Nudging, Other people are stupid fallacy
Housing affordability breakthrough! The capital gains tax has been given its chance to fail
20 May 2015 Leave a comment
in comparative institutional analysis, politics - New Zealand, Public Choice Tags: capital gains tax, evidence-based policy, land supply, RMA, zoning
This week, the New Zealand government announced a special capital gains tax for investments in housing. Specifically, if a buyer sells the house within two years of buying it, and this house is not their home, the investor will be liable to income tax on any profit.

This solution also has been put forward by the left-wing political parties in New Zealand as their solution to the problem of restricted land supply in Auckland and other cities in New Zealand.
The introduction of a capital gains tax is a breakthrough for housing affordability. This solution of using a capital gains tax to dampen demand has been given its chance and it will fail.

Once a capital gains tax fails to make housing more affordable, political parties on the left and on the right can no longer put off confronting real solutions such as major reforms to the Resource Management Act (RMA) to loosen restrictions on the supply of land in the big cities in New Zealand and in particular in Auckland.
The Ten Pillars of Economic Wisdom
10 May 2015 Leave a comment
in applied price theory, applied welfare economics, Austrian economics, comparative institutional analysis, constitutional political economy, development economics, economic history, economics of education, economics of information, economics of media and culture, economics of regulation, energy economics, entrepreneurship, financial economics, health economics, history of economic thought, industrial organisation, survivor principle Tags: David Anderson, evidence-based policy, offsetting behaviour, pretence to knowledge, The fatal conceit, unintended consequences
via The Ten Pillars of Economic Wisdom, David Henderson | EconLog | Library of Economics and Liberty.
FA Hayek on piecemeal analysis such as cost benefit analysis and evidence-based policy
09 May 2015 Leave a comment
in applied price theory, applied welfare economics, Austrian economics, comparative institutional analysis, constitutional political economy, economics of regulation, F.A. Hayek Tags: Constitution of Liberty, cost benefit analysis, evidence-based policy, offsetting behaviour, The fatal conceit, The pretence to knowledge, unintended consequences
Happy Birthday, F.A. Hayek!
(8 May 1899 – 23 March 1992) http://t.co/K431Kj9nok—
Screwed by State (@ScrewedbyState) May 09, 2015
Milton Friedman on evidence-based policy
27 Apr 2015 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis, Milton Friedman Tags: evidence-based policy, offsetting behaviour, The fatal conceit, The pretence to knowledge, unintended consequences
Murphy’s Law of Economic Policy
26 Apr 2015 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis, constitutional political economy, economic history, economics of bureaucracy, Public Choice, rentseeking Tags: Alan Blinder, evidence-based policy, expressive politics, free trade, protectionism, rational ignorance, rational irrationality, rent seeking
Greg Mankiw on one of the few things economists agree on: free trade. That's the problem. nyti.ms/1GrLisQ http://t.co/WrLuP3oBSW—
The Upshot (@UpshotNYT) April 25, 2015
Maybe the European Union membership isn’t that bad after all, especially if you’re a former Eastern Bloc country
24 Apr 2015 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis, constitutional political economy, development economics, growth disasters, growth miracles Tags: European Union, transitional economies


For these reasons regarding strong passionate minority opposition and weak majority support, the Labour Party’s new leader pressured a member of his caucus to withdraw a private member’s bill on end of life choice.




Recent Comments