The scramble for Africa 1880 – 1913

Should economic reform have been slower in the transitional economies?

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via Normal Countries: The East 25 Years After Communism | Andrei Shleifer.

A Quick Question for All Advocates of Minimum Wages

via A Quick Question for All Advocates of Minimum Wages.

Does Inequality Reduce Economic Growth: A Sceptical View

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,".

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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

The first citizen initiated binding referenda will be on…

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.

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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.

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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:

  1. to punish at least the flagrant mistakes and misfeasance of officialdom,

  2. to assure an orderly succession of at least minimally competent officials,

  3. to generate feedback to the officials concerning the consequences of their policies,

  4. to prevent officials from (or punish them for) entirely ignoring the interests of the governed, and

  5. 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.

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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

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via William EasterlyNYU Development Research Institute | NYU Development Research Institute.

Housing affordability breakthrough! The capital gains tax has been given its chance to fail

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

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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

Milton Friedman on evidence-based policy

Murphy’s Law of Economic Policy

The role of the courts in end of life choices for the terminally ill

Lindsay Mitchell has a nice summary of the latest developments on an application to the High Court of New Zealand by a terminally ill patient for a declaration that her assisted suicide would not be unlawful and subject to the criminal law. This application currently before the court is specific to that individual and is crafted to claim that it will set no general precedent.

I’m with Justice Scalia when he argues that fundamental issues such as these should be decided by parliaments. As he says regarding general social change:

The virtue of a democratic system [with a constitutionally guaranteed right to free speech] is that it readily enables the people, over time, to be persuaded that what they took for granted is not so and to change their laws accordingly.

The amount of social change in the mid to late 20th century has been stunning. Yes, assisted dying years a passionate issue and some people are impatient, but again I believe Justice Scalia is right when he said:

We might have let the People decide. But that the majority will not do. Some will rejoice in today’s decision, and some will despair at it; that is the nature of a controversy that matters so much to so many. But the Court has cheated both sides, robbing the winners of an honest victory, and the losers of the peace that comes from a fair defeat. We owed both of them better. I dissent.

That importance of a fair defeat at the ballot box and in Parliament is important both to when and if a bill on end of life choice is passed, and to how quickly support opposition to that bill will be mobilised before such a bill even is put into the Parliamentary ballot of private member’s bills.

Nothing stirs up the impassioned (and most other people as well) more than depriving them of their right to support or oppose what is important to them through political campaigns and at an election. The losing side, we all end up on the losing side at one time or another, are much more likely to accept an outcome if they had their say and simply lost the vote at the election or in Parliament.

A decision by the High Court authorising assisted dying in some way does not offer the peace of a fair defeat where the votes are added up where your vote counted as much as mine and one side or the other lost as must always be in a democracy. That’s how majority rule works.

The last bill before the New Zealand Parliament to allow a death with dignity through an assisted suicide for the terminally ill was in 2003 and it failed by three votes: 60 votes to 57 votes.

It is not the role of the courts to hurry up the marshalling of those extra few votes to change the law to judicial action and dispensation. Again, when Scalia dissented on a parental rights case:

I have no reason to believe that federal judges will be better at this than state legislatures; and state legislatures have the great advantages of doing harm in a more circumscribed area, of being able to correct their mistakes in a flash, and of being removable by the people

As Justice Scalia explains, the purpose of the law is to slow the impassioned majority down, not speeding it up:

Judges are sometimes called upon to be courageous, because they must sometimes stand up to what is generally supreme in a democracy: the popular will.

Their most significant roles, in our system, are to protect the individual criminal defendant against the occasional excesses of that popular will, and to preserve the checks and balances within our constitutional system that are precisely designed to inhibit swift and complete accomplishment of that popular will.

Those are tasks which, properly performed, may earn widespread respect and admiration in the long run, but — almost by definition — never in the particular case.

The intervention in a court to grant that right before Parliament is willing to act will only mobilise opposition to any future private member’s bill because they have been denied the right to oppose it through normal democratic means. What are those normal democratic means? Scalia explains when discussing the right to an abortion:

The States may, if they wish, permit abortion on demand, but the Constitution does not require them to do so. The permissibility of abortion, and the limitations upon it, are to be resolved like most important questions in our democracy: by citizens trying to persuade one another and then voting.

Assisted suicide has had popular support for many decades in New Zealand. The reason political parties do not act is those who are against assisted suicide are passionately against it and will change their vote because of such a bill. Those who are for assisted suicide are unlikely to change their vote if a bill is not passed by Parliament.

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.

Similarly, the Green Party showed equal political cowardice in this matter. They don’t regard a death with dignity to be a priority for them, despite their alleged social liberalism and a willingness to champion the right to abortion in the most recent general election in 2014, which is a socially contentious issue.

The reason is a private member’s bill on abortion in New Zealand won’t get anywhere because the current compromise works – a point to which I shall return. A private member’s bill on end of life choice sponsored by a Green MP would attract too much political flak for the Green Party to handle.

The law has long acted to prevent, by force if necessary, suicide – including suicide by refusing to take appropriate measures necessary to preserve one’s life after the point at which life become unbearable. Justice Scalia argued that:

I believe in liberal democracy, which is a democracy that worries about the tyranny of the majority, but it is the majority itself that must draw the lines.

Whether the patient’s wishes to be honoured in this area is left to elected representatives to legislate. Justice Scalia asks

Are there, then, no reasonable and humane limits that ought not to be exceeded in requiring an individual to preserve his own life? There obviously are, but they are not set forth in the Due Process Clause.

What assures us that those limits will not be exceeded is the same constitutional guarantee that is the source of most of our protection – what protects us, for example, from being assessed a tax of 100% of our income above the subsistence level, from being forbidden to drive cars, or from being required to send our children to school for 10 hours a day, none of which horribles is categorically prohibited by the Constitution.

Our salvation is the Equal Protection Clause, which requires the democratic majority to accept for themselves and their loved ones what they impose on you and me.

The biggest threat to an End of Life Choice bill passing the New Zealand Parliament is judicial intervention in this charged social issue that will only mobilises the opponents of the very right the applicants to the court seek. Scalia again this time on the risks of the courts moving in advance of the popular will, and thereby poisoning the democratic process:

Leaving this matter to the political process is not only legally correct, it is pragmatically so. That alone… can produce compromises satisfying a sufficient mass of the electorate that this deeply felt issue will cease distorting the remainder of our democratic process.

As an example of the importance of democratic compromises in securing the votes in Parliament, there is a voluntary euthanasia bill currently before the Scottish Parliament. It has been stuck in committee for two years because it not only promises end of life choice, it also grants a right of euthanasia to those with progressive degenerative diseases.

By overreaching to progressive degenerative diseases, this Bill in the Scottish Parliament is bogged down because euthanasia as distinct from a death with dignity is a step too far from many members of Parliament willing to support end of life choice for the terminally ill such as provided for in the House of Lords Private Member’s Bill on end of life choice.

Any private member’s bill that does pass the New Zealand Parliament on end of life choice will be riddled with compromises and will have a genuine concern to prevent abuse and guard against questionable decisions made when judgements of the terminally ill is clouded in some way. No court in a single judgement can provide all those details and compromises.

The law attracts more than its share of reformers wanting to use the courts and judge-made law for political purposes. If you want to reform the world, do what we ordinary people have to do: change your vote, write to an MP, protest, donate to or even join a political party, or run for parliament.

The great strength of democracy is a small group of concerned and thoughtful citizens can band together and change things by mounting single issue campaigns or joining a political party and running for office and winning elections or influencing who wins.

Indeed, it is that very strength of democracy – small groups of concerned citizens banding together  – is what is holding up legislating on an end of life choice. It is not that minorities are powerless and individuals are voiceless. Exactly the opposite.

Many people have passionate opinions for and against an End of Life Choice Bill. These opinions are taken into account by members of Parliament in fine detail depending on how voters will vote at the next election.

What can be undemocratic about members of Parliament paying attention to how a wide range of ordinary members of the community might vote if they disappoint them.

The key safeguard of minorities against the majority is their ability to block vote. Yes, those in the majority will be annoyed at the power of the minority to slow down the passage of a End of Life Choices Bill.

Yet on some other matter passionate to them those currently in the majority will one day or another end up in a minority. The rotation of power is common in democracies, and the worst rise to the top.

It is wise to design constitutional safeguards to minimise the damage done when those crazies to the right or left of you get their chance in office, as they will sooner or later rather than focus on the powers you and those that currently agree with you should have in your few days in which you fleetingly have a majority.

Too many policies and ideas of the one political party or another assume that they are the face of the future, rather than just another political party that will hold power as often as not and always for an uncertain time.

New Zealand Parliamentary elections are always close because of proportional representation. This makes reality of ending up in the minority again very quickly in a few years very real.

Yesterday’s majority of the vote sooner or later and often sooner than they expect will break off into different minorities on the next big issue of the day.

These newly formed minorities will use that same ability to band together as a minority to block vote to protect what they think is important and advance agendas they think are to be wider benefit despite the opinion of the current majority to the contrary. All reforms start as a minority viewpoint.

You can’t complain about democracy not working because it’s working precisely as it should: parliamentarians paying attention to a great number of people from all walks of life vote in light of how they as members of Parliament voted on specific issues that are important to them.

Maybe the European Union membership isn’t that bad after all, especially if you’re a former Eastern Bloc country

60 years ago North Korea was richer than the South

https://twitter.com/MaxCRoser/status/581244277080092674

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