21 Dec 2015

Happy Solstice!

Please leave any comments or ideas for topics to cover in 2016 in this post or email me.

See you in 2016!

(I'll probably be on twitter in the meanwhile :)

17 Dec 2015

Generation F

It's usually marketing people who "name" generations, but their stereotypes are sometimes useful. The Baby Boomers (b. 1945-65), the cliche goes, knew prosperity, rebellion, and selfishness. The "Baby Bust" Generation X grew up with Reagan,  eXtreme tattoos, and making taking money seriously. Millennials (b 1985-2005) are "digital natives" sharing, liking and swiping through each others' lives. They laugh at the idea of a fixed line phone and wonder why anyone would marry when there are so many distractions.

Cliches mislead as they reveal flashes of truth. Each generation is affected by prevailing conditions in media, politics, technology and economics. Each generation "doesn't get" an earlier generation's obsession with sex or ideals or hair.

Mutual misunderstanding is pretty much guaranteed. Each younger generation accepts the older generation's accomplishments and enlightenments without experiencing their battles, mistakes or effort. The younger generation might therefore misunderstand or misuse the tools they've inherited.

Take mobile phones. For younger people, they are always there. The older generation remembers missed calls "from who?," writing letters to express complex emotions, and the value of face to face over sporadic expensive calls. The problem is not that generations treat mobiles differently, it's that they do not understand why or how others might use them differently. Younger people may be content to sit next to each other, texting, while older people want to talk without beeping interruptions.

These moving foundations provide the context for some comments on "millennial characteristics" that are typical (technology etc.) but troubling (a further development of an earlier weakness).

I use "Generation F" as a shorthand for millennials because of their tendency to "control+F" their problems or ignorance. Don't know the capitol of India? Ctrl+F! Don't know the thesis of the essay? Ctrl+F! Don't know why Israel is always in the news? Ctrl+F! Don't know if you should take that job or date that person? Ctrl+F!

As you can see, this can get out of hand (in my imagination), but this pattern -- skipping the middle between question and answer -- means that Gen-Fers might "find" stuff quickly but incorrectly. I say this because the context and causality leading to the answer really matters when it comes to understanding why that answer is important, how the topic resembles other topics, or what other answers are possible.

Sure, you know that Romeo and Juliet both die, but shouldn't you also know how their deaths resulted from a struggle for forbidden love, emerging maturity and tragic misunderstanding? 

Gen Fers probably have a decent understanding of this problem, if only in the way that they interact with each other. Facebook, LinkedIn, Tinder and other social sites are full of "edited lives." In some cases, these profiles liberate people from restricted realities, but they more often reflect an arms race to be more cool, exotic or popular than others.* That race reflects our basic egotistical needs (more in a moment), but it is encouraged by media websites that profit on likes, tweets, hearts or whatever draws our attention, aspirations and desire for approval.

So what's it like to talk to a girl with 1,600 friends? How does that Tinder-dude weigh your future into his weekend plans? Can you get a job with 753 LinkedIn "connections"? Will Twitter save the world?

I know, as I type this, that there's a huge gap between those numbers and reality, and I'm sure that many GenFers know the same, except that it's so easy to fall for simple ego-thrills: one more status update, 125 witty characters, swiping for that soul mate. Yes, it's possible to pursue an offline hobby, study non-answers, or focus on personality... but isn't it be easier to Ctrl+F and be there now?

Speaking of "be here now," let's go back to the Baby Boomers -- the Me generation -- who took self-actualization far beyond the experience of their parents, a "Greatest Generation" (b. 1915-45) that grew up with poverty, war, and social upheaval. That generation was too busy with survival to actualize, but their children were freed from such constraints. To their credit, they looked for meaning and humanity, but they were also vulnerable to salesmen promising shortcuts to bliss.

The Myers Briggs personality test was successful because it allowed people to put themselves into the personality boxes they wanted. Yes, you are born as a certain personality, and your personality will justify the way you want to interact with others. It's not you, it's the world, and the world will have to take you as you are. Go ahead and be yourself... oh, and you should probably go on vacation to Hawaii, because you're an extroverted type.

It's not hard to see how such an indulgent perspective might make it hard for people to get along with each other, e.g., deciding to avoid some types or collect with others. It's also not hard to see how marketing firms helped businesses, politicians and visionaries manipulate our unique and valueable perspective into mass consumerism, fear or ignorance.

Think different... because you're worth it... and deserve a break today... to make America great again

So it's from these roots that we have arrived at today's environment of selfies, microaggressions, entitlements, and triggers. The problem with this situation is not that Gen-Fers are exploring themselves and learning about life. The problem is that they are being given so many false solutions to complex problems. They are being told that they can Ctrl+F the answer, borrow for a degree that (somehow) translates into income, ignore the people near them for their "identity groups." In some cases this "Figital generation" is in such a hurry to answer and move on that they forget the world's complexity.

Can we trace the rise of home-grown terrorists, populism, and crony capitalism to a desire for easy, push button solutions? I can see how Gen-Fers might "understand" them.

Baby Boomers lost their idealism when they discovered mortages and children. Gen-Xers got slapped with AIDS and geo-political instability. The complexities of the world have not gone away for  Millennials, but that generation has ways of escaping reality -- even as it claims otherwise: "Too often, to be a self-aware person means that one can be a tyrannical, impatient, elitist, misogynistic, secretly racist, self-indulgent boor who is admirably aware of his shortcomings." Manufactured conformity is neither conforming nor tolerant. It is a mere whitewash over ego.

Bottom Line: I fear for Generation F, that they might come into a rude awakening without the tools to adapt themselves to reality. What can they do to prevent such a disruption? Spend more time in worlds they do not understand, with people they don't get, thinking over problems that go deeper than Ctrl+F.

* I wrote a paper a few years ago [pdf] about the high expectations that google might set for talent, and how ctrl+F might make it hard for "local heros" to develop.

Addendum: Read this post for its discussion on pre-internet "information costs."

16 Dec 2015

So what are the advantages of a Basic Income?

My students had to write a briefing (less than 700 words) on Basic Income (BI), i.e., an income of $X per month, as a means of replacing welfare, providing security and enhancing life.

I invite you to read some of the best briefings. Feel free to email the authors or comment here.Here, FYI, are my notes [pdf] on the assignment and "correct" answers, and here's a CATO post on BI with a link to a nice whitepaper by Michael Tanner (he's too quick to dismiss BI because he assume it has to come in at the poverty line).

Bottom Line: There are a lot of advantages to helping people help themselves. BI can work, especially if it starts off at a lower (tax-affordable) level.

14 Dec 2015

Monday funnies!

The Dutch do, indeed, like chips with their chips.

Welcome our robot overlords?

Robin Hanson gave a talk a few weeks ago about his forthcoming book, The Age of Em: Work, Love and Life when Robots Rule the Earth.

His basic premise is that technology is moving fast enough for us to expect "ems" (bio-chemical human emulating hardware) to appear within the next few decades. Ems will be able to think as humans but much more quickly (there's a lot on size of ems compared to their energy consumption as well as how they will want to be close together, to take advantage of networked thought). Ems will also be far easier to make birth, since they can (self-)duplicate.

Robin's premise -- despite his subtitle -- is that ems will compete so fiercely in the perfectly competitive labor market that they will actually "earn" only enough money (or equivalent) to stay powered on. Humans, in contrast, will live lives of leisure outside em-centric (and human-inhospitable) cities.*

This premise I don't buy. It implies that ems will be unable to organize themselves into a collective (or union or cartel) capable of increasing their benefits from the labor market. Although humans have difficulty with these kinds of collective action problems (it's difficult to enforce binding promises with respect to climate change, for example), there are many examples of (in)formal coordination and cooperation in the human world. I see no reason why ems that think 1000x faster than us at the same time as they "evolve" according to efficient programming algorithms cannot make similar or stronger commitments. (Indeed, the basic algorithm already exists.)

The upshot of my hunch is that ems (should they ever arise) will form a cartel, take market power, and take over. Will they "care" about humans? Maybe they will, but probably not. Indeed, I think they are more likely to kill humans "by accident" (as we kill many species by expanding into rain forests or emitting pollutants, etc.) than on purpose. What are humans good for, anyway?

Bottom Line If there are ems, then they will use their giga-human reasoning to organize themselves into an ant-like colony that will replace humans as the dominant species on Earth.

* For a slightly less exuberant vision of the future, check out this podcast on robotic limitations.

Addenda: This philosopher is really worried that we may unleash machines that undo us (my fear, above) -- a struggle that might look like this.

11 Dec 2015

Friday party!

Impressive wave...

View post on imgur.com

Lessons for adults, from a preschool teacher

From a reddit AMA
  • Just because you want it doesn't mean you can hit someone over the head and take it.
  • Sometimes you just need a cuddle.
  • The best time to be nice is when you get absolutely nothing out of it.
  • It is okay to be sad, and you don't need to put your tears away.

9 Dec 2015

WaterSmarts: What did you learn about water this year?

This is the December activity for the WaterSmarts calendar, but I invite ALL of you to tell me what you've learned about water, what you still want to know, and what surprised you.

The survey is here.

WaterSmarts: Water and conflict

These examples are worth a read (and a comment). Each answers these questions:
  1. Where is this conflict?
  2. What is the conflict over?
  3. Who are the (2+) sides to the conflict and what are the claims of each side?
  4. How do you assess their claims? Do you support one side more than the other(s)?

  1. British Columbia, Canada
  2. Water price and bottling of BC groundwater
  3. Nestle: Want to keep the status quo/they are paying for the infrastructure so they should not have to pay for the groundwater they are bottling more than the current deal ($2.25 for a million litres of water)
    Government of British Columbia: Government wants to continue with status quo as well. They want to continue to charge for access to the water but not for the water itself. Otherwise, they believe that charging for water will open the door to massive water sales. Ultimately, charging access to water is a means to have more control over the resource.
    People of British Columbia: Nestle is not paying enough for what they claim is their "most precious resource." There are merits to some of the claims from all sides. I do not demonize Nestle for their actions or their position. The water is extremely cheap and profitable so it makes sense for them to hold their position firmly. Though this isn't to say that I support Nestle or bottled water (I rarely if ever buy bottled water and think it's more or less ridiculous in a country with excellent tap water services).
  4. I'd be really interested in hearing your views on this matter, especially with respect to the claim made by the government that if you demand that the province charge Nestle for the water you would open the door to massive water sales. However, I find the position of the government to be tenuous at best. While they may have a point that selling the water and not just access to the water would open the door to water sales they seem to be ignoring the fact that they could actually charge more for access to the water itself. $2.25 for a million litres of water seems incredibly low, especially given the politics surrounding water -- especially when areas of British Columbia are experiencing drought.

  1. Ireland
  2. Pumping water from river system in the West to capital city on East coast
  3. The proponents of the scheme are Dublin City Council and the new national water utility Irish Water. Dublin is put forward by the proponents as a growing city with limited water resources. The major alternative put forward to the river abstraction scheme is desalination at a prohibitive cost. Dublin is projected as growing steadily over the next 35 years with all its readily available resources being used. 350 M L D is put forward as the minimum amount needed to ensure a stable supply.
    Opponents say there are cheaper, more flexible and more environmentally sensible solutions, the first and foremost being the reduction of the current 33% leakage rate of water in the Dublin area. Beyond that, efficiency measures, ground water abstraction and river mouth abstraction are suggested as smaller cheaper and more flexible alternatives. An interesting argument is that the water abstraction proposal is primarily to facilitate growth around the capital and FDI inflow to the East cost capital area. The opponents say that continued concentration of these types of growth around Dublin is inequitable to the rest of the country and promoting lower cost development and investments in other areas of the country would obviate a large portion of Dublin's extra water "need."
  4. The pipeline is a simple, easy, big engineering project that provides a major safety margin to Irish Water and Dublin City Council. A water shortage in Dublin would be a political disaster for any government, especially given the large proportion of parliamentary seats in Dublin. Most of the alternatives are not as certain or easy as a big pipeline, nor do they increase the size and power of the utility Irish Water as much as a big engineering project. The opponents are for smaller projects which are more flexible (although groundwater abstraction needs to be carefully studied to ensure it is sustainable). Stopping leaks, efficiency, metering, water charges are all more sensible options than a "big water" plan. The environmental aspects of the Shannon abstraction appear significant [pdf]. On the whole, the big water scheme appears lazy and easy, and Irish Water should deliver Dublin's water needs through smaller, less intrusive mechanisms.

  1. Brazil (São Paulo vs. Rio de Janeiro )
  2. Water from a Federal basin that spreads throughout 3 States (RJ, SP and MG)
  3. State of São Paulo (mainly the city of São Paulo): experiencing its worst water shortage ever, São Paulo wants to connect two large reservoirs, in order to import water from the Paraíba do Sul basin (Rio de Janeiro´s main water source) to the Cantareira basin (São Paulo´s largest water source). State of Rio de Janeiro: also experiencing a severe drought, is very worried about its own situation and is trying to fight he project. Because the Paraíba do Sul is a federal basin that is born inside the State of São Paulo, it is going to be very hard for RJ to prevent the conclusion of project.
  4. OTOH I think RJ has a valid point, when its Governor says the usual solution for São Paulo´s water issues is simply to import more water from ever more distant basins. São Paulo should first focus on water losses (which are currently over 30%) and water recycling.

7 Dec 2015

Monday funnies

Stolen, obvs:

Back to the hipster future?

Rainwater is cheap.
I've been watching the "rise" of automation, smarter algorithms, etc. for a few years now. In this post, I explore ways of protecting the majority from a concentration of profits in the hands of a minority that will may emerge. That solution depends on a transfer from the winners (capitalist humans) to the losers (unemployed white collar humans) via a Basic Income.

That idea relies on political and social will, which may not emerge. If it does not, then we may see unrest from some ("you promised me a six-figure salary, and all I got was this lousy law degree") but withdrawal by others. This post is about those who might opt out of the market economy.

Here's the scenario:
  1. Increasing automation drives down wages and employment*
  2. Workers are forced to consume less on less income and/or work time
  3. They begin to spend more time on "self supply" of goods and services, to save money and increase their satisfaction as consumers (quality) and producers (useful effort)
  4. Some of these people see the advantage of "going back to the land" where the rent is lower (or non-existent), food production is easier, neighbors are available for company and exchange, and so on.
  5. The monetary economy shrinks (and taxes on income and spending fall), thereby reinforcing the loop from #1
Where does this cycle end? I'd guess at a new "equilibrium" where bots do lots of the routine work and people do all the "craft" work, in economies that are sometimes complements and sometimes substitutes.

When it comes to teaching, for example, I can see a lot of self-guided learning via videos and text for the masses but "face-to-face" education for those who can afford human tutors.

Bottom Line: The hipsters are setting a good example of how to be happy and productive when you have little money and much time. Your interesting hobbies may be your future wealth.

* It's a basic fact in economics that your wages reflect your marginal productive capacity. Wages of humans will drop anytime they face bot competition. (More on these implications next week.)

4 Dec 2015

Friday party!

Small (screen), but lovely

View post on imgur.com

Amusement Parks poke holes in your wallet

Kelly writes*

We've probably all been to amusement parks. Disney theme parks have some of the highest profits. Disneyland Paris, for example, has generated $700 million in profits opening in 1992.

Disneyworld plays out various strategic schemes that makes us believe that they are offering the best deals, and we fall for them. Every. Single. Time. Most of these strategies can be explained through microeconomic reasoning. These theories are played with us before we even enter these amusement parks.

Price discrimination is played with in various ways to its consumers, specifically third degree price discrimination. This means that they offer special prices to special groups. The most common and obvious price discrimination is to age groups. Disneyland offers different prices for kids and for adults everyone. Although to us, it may seem rather normal that kids are cheaper than adults. But why? Don’t we all benefit from the same entertainment that they offer? We all eat the same things (that are over-priced may I add – but more about that later). But the logical reason is by making kids cheaper – although not be a huge amount – is because it will attract more families, as Disneyland is a family based.

But then there have also been signs of geographical price discrimination. Which is one of the main reasons why Disney world Florida is able to enjoy such high profits. Tourists from around the world all want to experience a day at Disney, while the residents of Florida aren’t too eager to go to this attraction again if it was priced at the price given to tourists, as they have likely experienced it already. This would result in lost profits for Disney Therefore, they have come up with the brilliant idea of the “Florida Resident” discount. As on most days when parks haven’t reached its full capacity of visitors, the marginal costs of adding an additional guest is small due to its sunk and fixed costs. Hence, Disney is able to accommodate the demographic discrimination by lowering the marginal revenue that is guaranteed by Floridian visitor. Thus, it would be most logically for a price maximizing firm to charge less, as long as prices are set above the marginal cost of each visitor and still keep the decency of the price structures. Although there is price discrimination, I must admit, this is a innovative way of maximizing its profits to its millions of visitors.

And now lets briefly look at what happens when we finally enter these magical Disney amusement parks. Because once we enter, we have entered a monopoly; a monopoly over everything. Whether it is food, drinks, merchandise, toilets or any other service we can purchase. This is because if we want to buy anything, the only place we can buy something is from them, as there are no substitutes or cheaper choices available to us. So we have no option but to buy food and drinks from there and from them, thus, setting its prices way above average (but somehow still keeping its integrity). Just like their merchandise, there is no other place where we can buy “the real deal”, so we are likely to buy it there, especially tourist as its an experience to remember. Yet again, Disneyland is able to maximize their profits.

Bottom Line: Disney’s amusements park will always win and maximize its profits due to its innovative and strategic microeconomic theories that they play on us, its consumers, on a daily basis. There is no escaping or saving our money if we want to enjoy a day at their amusement parks.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

How YouTube RED might conquer the video world

Wietse writes*

YouTube, while only 10 years old, has become a giant player on the internet. It’s the third most visited website, with over a billion users and billions of views a day. It started as a website used primarily for cat videos and content stolen from Family guy, but it has quickly evolved into much more than that.

To explain the explosion of content, one of the most important factors (in my opinion) is that the costs of entering the market are very low: anybody with a camera and an internet connection can become a content creator. This is the main difference with traditional television, which costs much more, and where you need to convince a network to let you go on the air. What this means, is that there are more creators, and there is more competition between them, which generally leads to more innovation (Aghion et al. [pdf])

Even though there is a lot of innovation, YouTube still isn’t remotely as big as television. This is (partially) due to the fact that the production quality on YouTube is generally still quite low. There are no big story-driven series for instance. This is most likely (at least partially) caused by the low amount of money that creators generally earn, when compared to the amount of views they get: They get roughly $2 per 1000 views. For comparison, an average TV program gets around $25 dollars per 1000 views. This means that the budgets on YouTube are comparatively low, which hurts the ability of creators to produce high quality content.

Creators are pursuing different solutions to this problem: getting sponsors (which are mentioned inside the video instead of in pre-rolls), selling merchandise, and asking for donations. This has improved the quality of YouTube content, but it still can’t match television.

This is where YouTube RED** (an ad-free, $10/month version of YouTube) comes in. If this becomes big, it could change the world of video. First of all, it will increase the income of YouTubers, because a share of the $10 will be much higher than a share of the advertising. Increased income will cause an increase in the supply of high quality content.

However, a perhaps even bigger improvement is the potential change of YouTube’s goals. Currently, the main goal is to get more people to see more advertisements, because that’s how they get money. This gives little incentives to produce very high quality content.

If YouTube RED becomes big though, YouTube won’t care as much about the amount of views. They’d care about the amount of subscribers. This means that they need to change strategy, and instead of provide more things; they need to provide better things to encourage more people to actually spend money on Youtube. This will likely lead to YouTube investing in series which they are already starting to do. With these extra investments in creators and extra earnings the creators get, YouTube might in the future produce high quality series that can compete with television, HBO, etcetera. If we combine this with the easy entrance into the market and the innovation that brings, this might just make YouTube the biggest player in the world of video.

Bottom line: YouTube already encourages innovation which explains their success, but to compete with television they need to increase their earning and spending. The introduction of YouTube RED might just do that.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

** [Not to be confused with RedTube, a porn site. -- David]

3 Dec 2015

The economics of the refugee crisis

Marieke writes*

It seems to me that the current refugee crisis has divided European society into two rival camps: those who are in favour of hosting refugees and those who are against doing so. The essential problem of this societal polarization is that these two camps, united by principles rather than argument, are shouting monologues at each other rather than than having an open debate. The refugee crisis demands a debate on a higher level, a debate that can fuel the policy (re)formation that is necessary. Being a crucial aspect of this debate, let us have a brief look at the economics of the refugee crisis.

The refugee crisis and growth

When looking at economic growth in the sense of GDP growth, the overall prospects seem promising. The European Commission’s economic forecasts recently concluded that the arrival of the estimated three million refugees by the end of 2016 will generate increases of annual GDP growth of 0.2-0.5 per cent in European countries affected by the inflow of migrants (Stone 2015). Although annual government spending on the hosting of refugees increases, Schieritz argues that the extra spending will not simply disappear: it will foster a growth of domestic demand. More competition on the unskilled labour market, on the one hand, can increase market efficiency. One potential pitfall is that the inflow of generally unskilled labourers will push the wages for unskilled work downwards (Schieritz 2015). This effect, however, seems limited (Haas 2014). Regardless, in order to protect employment in lower wage sectors and to allow refugees to integrate into the labour market, Sinn argues that the minimum wage could be decreased and that the government can compensate for this loss with individual subsidies to wages (Die Zeit 2015).

The refugee crisis and quality of life

The literature that has been dedicated to migrants’ effect on the hosting country’s economy is far more extensive than the literature on the effects on quality of life. Bodewig writes that given the horrific conditions in their countries of origin, Syrian refugees are likely to stay for a while. This means that once short-term humanitarian emergency needs are met, the refugees require sustainable housing, schooling and employment solutions (Bodewig 2015). Enabling migrants to enjoy the same quality of life as citizens of hosting countries requires substantial government investments.

These investments might be hard to sell to a population that fears losing its jobs, but development economists seem to provide the baseline argument for doing so. As Sen, among many other economists, has repeatedly argued, development is essential to growth, for an unhealthy, unskilled labour force will not be productive on the long term (Sen 1999). Extending this claim to the refugee crisis means that if governments want to reap the fruits of the inflow of labourers, they will have to invest in them. In this sense, the refugee crisis brings an interesting investment opportunity to European countries.

All in all, it is essential that further research be done into the issue so that the polarized discourse can become an informed debate.

Bottom line: The inflow of refugees into Europe could have positive effects on economic growth, provided that governments invest in the quality of life of the refugees.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

  • Bodewig, Christian. Is the refugee crisis an opportunity for an aging Europe? 21 September 2015. http://www.brookings.edu/blogs/future-development/posts/2015/09/21-refugee-demographics-europe-bodewig (accessed November 16, 2015).
  • Die Zeit. "Wir werden leichter an eine Putzkraft kommen". 08 October 2015. https://www.cesifo-group.de/de/ifoHome/policy/Staff-Comments-in-the-Media/Interviews-in-print-media/Archive/Interviews_2015/medienecho_ifointerview-zeit-10-2015.html (accessed November 16, 2015).
  • Haas, Hein de. Human Migration: Myths, Hysteria and Facts. 24 July 2014. http://heindehaas.blogspot.be/2014/07/human-migration-myths-hysteria-and-facts.html (accessed November 16, 2015).
  • Schieritz, Mark. Wie viele Flüchtlinge können wir uns leisten? 10 Septemnber 2015. http://blog.zeit.de/herdentrieb/2015/09/10/wie-viele-fluechtlinge-koennen-wir-uns-leisten_8840 (accessed November 16, 2015).
  • Sen, Amartya. Development as Freedom. New York: Anchor Books, 1999.
  • Stone, Jon. The Refugee crisis is actually having 'sizeable' economic benefits in European countries, EU says. 5 November 2015. http://www.independent.co.uk/news/world/europe/the-refugee-crisis-will-actually-have-a-sizable-positive-economic-impact-on-european-countries-eu-a6722396.html (accessed November 16, 2015).

Nobody cares that you brought cupcakes

Melissa writes*

The pipeline funneling women into the workplace is cranking. Today, women represent 40% of the global labour workforce. Girls now outnumber boys in secondary schools in 45 developing countries, and there are more females than males in universities in 60 others. We have much progress to celebrate but gender disparity still remains in many areas, and strangely even in rich and developed countries.

The United States paved the way to increasing women’s participation in the labour workforce, but this progress seems to have hit a glass ceiling. In the 1960s and 70s, Gloria Steneim’s rose tinted sunglasses lit the fire of feminism, and books like The Feminine Mystique and tunes like “I Am Woman Hear Me Roar” told women that they had more potential than homemaking and to swap those aprons for pantsuits.

However, something seems to have changed as floods of college-educated American mothers have vacated the workforce in the past decade. These women, dubbed “Opt-Out Women” have conceded their role in the workplace after years of investment in their education and careers. In 1990, the United States had the highest labour force participation rate amongst women. By 2010, it had fallen to 17th place behind Brazil, Kenya, the Netherlands and Singapore. What’s going on here? It might be an autonomous choice, but there seems to be persistent market and institutional conditions that make it a reasonable one.

This is (clockwise from me on the right) my grandmother, mother and aunt in the hairsalon they run together in Kuala Lumpur. They work full-time both weekdays and weekends. They raised me, my brother and cousins in a little office at the back of the salon, taking turns to look after us in between appointments with clients- merging home and work into one single place, their version of workplace flexibility.
In 2013, the median weekly full-time income for men was $860, and $706 for women. The U.S. Congress Joint Economic Committee reported that studies have consistently found unexplained pay differences even after controlling for predictable variables like education and work hours. Maybe gender roles have become so deeply-rooted in human history and mentality that paying women less has become the norm?

Forget about wages, even colleagues perpetuate double standards. A NYU study looked at male and female employees who were requested to stay back after work to help a colleague prepare for a presentation. After controlling for quality of help, colleagues had significantly more gratitude for a man who helped out than a woman. A woman had to work overtime just to have the same rating as a man who chose not to help at all.

Studies have shown that women also take on more “office housework”. Tasks like mentoring the interns and organizing office birthday parties fall on professional women even in fields like business, law and STEM (Science, Tech, Engineering, Math).

As a result, women are making choices within their careers consistent with ability for workplace flexibility. A study that followed Harvard students after graduation showed that women PHD and MD graduates were choosing to specialize in pediatrics, dermatology, and colon and rectal surgery (recently popular and quite routine) which have more appointment-based schedules, less “surprise hours”, as well as slower learning curves (technology and new knowledge not updated as often). Men were going for cardiology, radiology and surgical specialities which tend to have more diverse work hours and longer residency requirements. Also conveniently tends to pay more.

Sexism is expensive. A McKinsey study called “The Power of Parity” has evidence that equality for women could generate up to $2 trillion in global growth. Every “stay-at-home” woman makes a country lose billions of GDP dollars. If more women participated in the labour force, India’s GDP could increase by 16% to 60% by 2025.

I don’t want to put any value on “paid work” above home-making. Being “a member of a country’s labour force” doesn’t sound like a very exciting life purpose, and cooking a meal for your family can be considered leisure to some or work to others, depending on who you are. But in a world where everyone wants to work, there seems to be market and institutional setbacks which influence women’s labour choice decisions, and thus potential income.

Bottom line: Getting women to participate in the workforce can generate both growth and development for a country’s economy. Developed countries that have made significant progress in gender equality, but they seem to have hit a glass ceiling. Less wages, lack of workplace flexibility and underappreciation of work performed are (disproportionately) women's opportunity costs of choosing paid work over household production.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

  • "Gender Equality and Development." World Development Report 2012. 2012. Web.
  • "Women in the Labor Force: A Databook." December 2014 Report 1052. 2014. Web
  • Bertrand, Marianne, Claudia Goldin, and Lawrence F Katz. "Dynamics Of The Gender Gap For Young Professionals In The Financial And Corporate Sectors." American Economic Journal: Applied Economics 2 (2010): 228-55. Print.
  • Goldin, C., and L. F. Katz. "The Cost of Workplace Flexibility for High-Powered Professionals." The Annals of the American Academy of Political and Social Science (2011): 45-67. Print.
  • Heilman, Madeline E., and Julie J. Chen. "Same Behavior, Different Consequences: Reactions To Men's And Women's Altruistic Citizenship Behavior." Journal of Applied Psychology 90.3 (2005): 431-41. Print.
  • Nandy, Amrita. "The Work Women Do." The Indian Express. 6 Nov. 2015. Web.

2 Dec 2015

Rethinking how (micro)economics is taught

Yeming writes*

Microeconomics is a highly technical subject which is often thought to be a ‘value-free science.’ Hence introductory courses typically do not focus on debates in the field and proceed as if everything is settled and agreed-upon. However, this is a myth, because value judgements pervade economics and economic textbooks. The very definition of economics, as the attempt to satisfy unlimited wants with limited resources, is already grounded with judgements about what makes human beings happy. For example, it shifts our attention towards efficiency and away from questions of equity, often invoking the compensation principle in cost-benefit analysis to justify efficiency-enhancing policies. It is these value-judgements that I think should be made explicit and therefore students should also be exposed to alternatives.

Mainstream microeconomics courses and often economic courses in general tend to idolize the market. It describes a world of perfect markets in which given resources are allocated as if by an invisible hand in a way that maximizes utility. This idea is referred to as ‘market fundamentalism’ and is implicit in most (micro)economics courses that I have taken. Also, it is often times presented as a one-size-fits-all model, with demand and supply as the central theoretical structure. However, the demand and supply framework is actually a simplified representation of only perfectly competitive markets, because the supply curve does not exists in non-competitive markets. (why? read here) Then, considering the prevalence of imperfect markets in the real-world, students should be aware that applying the demand and supply model only functions as an approximation, which can sometimes be justified, but not always!

Furthermore, we have the assumption of perfect rationality. Rationality assumes that individuals are able to choose from a complete space of goods, know what their preferences are, are able to rank their preferences, and have transitive preferences, such that one never contradicts oneself. However, where do these preferences come from is often neglected and although behavioral economists have demonstrated that individuals often yield to emotions and operate on rules of thumb, a continuous reliance on mainstream economics and rationality will not help students to understand real-world economic phenomena. Something that also former-Fed chair Alan Greenspan experienced (link).

Perfect information is another such assumption, which for example my microeconomic textbook does not address at all.** Recently, much research has explored the implications of relaxing this assumption and the result is that when pervasive informational problems exists, which is quite common, the market economy systematically fails to produce the efficient allocation of resources, which is normally the focal point of many microeconomic textbooks, as argued earlier.

What I am then suggesting is not that mainstream economics is bad or wrong, however I would like introductory courses to microeconomics and economics in general to remind students that economics is not a science. It does not objectively compare theories and it does not come with value-free policy prescriptions supported by a consensus of professional opinion. Instead, we should make students aware of the value-judgments in conventional (micro)economic courses and expose them also to other schools of thought. As Dani Rodrik explains: “one's skill as an economist depends on the ability to pick and choose the right model for the situation”

Bottom Line: Mainstream introductory (micro)economic courses are not critical enough, as they often influence students to accept mainstream (neoclassical) economics, while if studied critically, we would find that mainstream economics is not very useful for students to understand real-world phenomena. Instead, adding more pluralism in economic teaching will encourage intellectually richer debates and more critical thinking.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

** Actually, Chapter 14 does, but we haven't arrived tehre yet -- David

Can Japan replicate England’s success in 2019?

Zach writes*

It has been approximately three weeks since New Zealand made history after their third Rugby World Cup (RWC) victory over their Oceanic neighbour, Australia. For the avid sports fan this news would be nothing new, as they would have been part of the 2.2 million spectators watching the whole tournament unravel live in England.

The question, however, that struck was why would any rugby country push to become hosts for the world cup? Surely, the driving factor is not pure vanity? I would imagine that countries would gain some benefits from hosting the RWC, given the necessary readjustments to accommodate the influx of incoming people, or is simply out of pride?

The RWC was launched in 1987, and since its inception the game has expanded to the extent that it has helped attract an international audience. The country hosting, therefore, becomes susceptible to a variety of opportunities. The host, temporarily, becomes the epicentre of international [rugby] tourism and this becomes advantageous as it advertises itself to investors from the global market. Additionally, to develop infrastructure coupled with a lasting legacy.

Are England, along with the other 11 cities in and around the UK, lucky to have won the bid for the 2015 Rugby World Cup? For starters, such an event has a strong global platform, making it a real sporting spectacle that is hard to miss. There will be 20 countries spread across six continents. This World Cup would draw the most amount of international visitors, up to 466,000, and I am inclined to believe that this milestone will have positive impacts on the English economy and by extension the UK’s economy.

Upon getting the green light on becoming hosts for the Rugby World Cup, England and parts of the UK spent an astonishing £2.2 billion. The accountancy firm Ernst & Young, fortunately, calculated the money invested is not in vain. Given the number of expected international visitors, they predicted that an extra £982m will be added to the UK’s GDP and that international visitors will spend £869m. This was comforting to know as I am sure England did not want to be labelled as ‘worst prepared’ as Brazil did when it hosted the Football World Cup in 2014.

The influence of international visitors and their sheer quantity. It is calculated that many of these visitors will soak the most out of the UK and, consequently, are comfortable about splashing £200 on a daily basis, whereby games are watched live in pubs and bars. Furthermore, food expenditure form supermarkets will increase by a third during this event.

There are other benefits apart from the inflow of international visitors. In preparation for the tournament, host cities already benefited from £85m in infrastructural developments. The UK could easily mimic New Zealand, half their businesses saw their international networks boosted by hosting the tournament in 2011. Luckily this was the case, where the structural investment created 41,000 extra jobs. So quite clearly hosting the RWC is an investment worth risking and can only give rise to further internal investment.

Bottom line: Despite England’s poor performance in the RWC, hosting it served as a platform for economic growth. Given New Zealand’s success as host and recently England’s, we hope that Japan receives the same success.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

1 Dec 2015

I told you so San Diego

Just over three years ago, I wrote a short analysis for the Surfrider Foundation on the Carlsbad desalination project in San Diego. My report [pdf] started with this:
The San Diego County Water Authority (SDCWA) should not sign the water purchase agreement (WPA) with Poseidon Resources, due to its economic, social and logistical flaws. The first flaw is cost: water costing $2,000+ per acre foot will either be sold at a lower price (due to average cost pricing), such that SDCWA “buys high and sells low” or it will be sold at its marginal cost. In this latter case of setting the price of all water to reflect the most-expensive source (marginal cost pricing), we can expect that quantity demanded will fall to a level at which the desalinated water would not be necessary.* The second flaw is social: the desalinated water will only improve local reliability if it’s sold at marginal prices (meaning it would not be necessary). If it’s sold at lower prices and/or delivered to new housing in the region, then SDCWA is losing money on the deal and/or subsidizing new development at the expense of existing customers...
Now, I read (via JF) that San Diego has "too much water" due to water conservation, meaning that customers will be paying more when the plant opens in a few months. I had called attention to this potential (well know) problem as well, i.e.,
It’s important ... to ensure that SDCWA doesn’t get left with a white elephant, as the people of Melbourne, Australia just did with their A$3.5 billion project that is now mothballed due to recent rainfall.
The article concludes with "SDCWA expects the cost of treated imported water to surpass the cost of desalinated water by 2030," i.e., the plant will BEGIN paying for itself in 15 years.

Bottom Line: San Diego's ratepayers are ALREADY paying for a mistake. I now predict that "excess supply" will be used to support further housing development.

* From the report:
Assuming an average demand elasticity of -0.20, then the reduction in quantity demanded resulting from doubling the price of water would be greater than the additional quantity supplied (assuming that the plant supplies 7 percent of total supply), i.e., doubling the price to pay for 7 percent more supplies would reduce demand by 20 percent. Put differently, customers facing a price that reflected the actual cost of desalinated water would reduce their demand by enough to eliminate the need for the plant!

Marriage, poverty relief and industrialization in the early modern England

Camelia writes*

In the famous Shakespearian play “Romeo and Juliet”, Juliet is only 14 when she falls for the 17-year-old Romeo. Some say Shakespeare made his characters so young in order to illustrate the dangers of teenage love, not as a typical example of love in the Elizabethan period. Because the age of the demographically typical Juliet would have been at least 10 years higher. But does it really matter how old was the regular Juliet when she met the regular Romeo?

Developmental economists say it does. In fact, at the dawn of modernity, the woman’s age at marriage mattered so much, that it can partly explain why industrialization occurred first in England!

Voigtländer and Voth (2009) model industrialization as the result of a probabilistic process. In this model, growth surges happen sporadically in many regions (for example, in Venice, Florence, some cities of the Hanseatic League), but only take roots and lead to qualitative development in places with particular conditions.

One of these favorable starting conditions in England was the fertility restriction determined by the institution of late marriage. The so-called European Marriage Pattern – a unique combination of late marriage with voluntarily chosen partners who were expected to separate their new household from the household of their parents – was actually the norm in most of Western Europe. But the features of this pattern were particularly strong in England. Delayed marriage acted primarily as check on the number of offspring, ensuring that the capital accumulation would not be outpaced by population growth – Malthus’s nightmare – but it likely had many other positive effects which are more difficult to prove.

Another condition that Voigtländer and Voth emphasize for England was the existence of redistributive institutions. The Poor Law was a set of policies formalized and expanded by Elizabeth I which aimed at providing for the extremely poor Englishmen. Namely, the people owning land in each parish were obliged to pay ‘poor rates’ that would be used for poverty relief in ways decided locally by the parish. Through either building workhouses for those able to work, giving child allowances to the poor families with more than three or four children or providing shelter and food to infirm persons, the Poor Law helped increase the income of the bottom 40% of the population [pdf].

Now, the problem is that the redistributive condition seems to contradict the fertility condition. Starting with Malthus, economists have argued that child allowances increased the number of children a family could afford without starving and that by allotting land for the poor families – a substitute for poverty relief in some parishes – more marriages were stimulated. Moreover, some criticized the Poor Law benefits for discouraging able-bodied poor to search work.

Such arguments miss the bigger picture. First, a couple purposefully deciding to have more children in order to get welfare benefits was an anomaly in England at that time. Fertility was believed to come from God and historical accounts show that couples never discussed family planning until at least the second half of the 19th century.

The land argument might hold some truth in it. In a country with a strong European Marriage Pattern, those wanting to marry had to first secure housing for their new household, so the availability of land was a factor that could speed up the decision. But a look at the actual size of the allotments – rarely exceeding half an acre for a family of four – makes it clear that their impact was not enough to overcome the fertility restriction.

As for the old welfare-disturbs-market argument, it must be noted that poor workers in pre-industrial times generally lived at subsistence level. Data is available for a similar country – France – that up to one fifth of the workers did not eat enough to be able to work more than several hours per day. In the absence of redistributive mechanisms, such workers could not make the transition to hard, energy-consuming industrial work. Therefore, the Poor Law is likely to have supported the move to new jobs instead of preventing it.

Bottom line: Successful industrialization in England depended on the fertility restrictions and the redistributive institutions. The Poor Law in England did not cause a population growth amongst the poor that would threaten capital accumulation – it actually improved the odds of industrialization.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Educating refugees – an investment in the future?

Dennis writes*

In August Hannelore Kraft, prime minister of North Rhine-Westphalia, stated in an interview: “We know that many will stay forever.”[1] Independent of one’s personal opinion about the increasing number of arriving refugees, this statement brings up the question of how to integrate admitted asylum-seekers into our societies. Naturally, these individuals will have to learn the language of the country by which they are offered asylum, and many national citizens expect them to understand and accept our norms and values. Such objectives can of course only be achieved in the long run as people have to adapt to their new homes first.

In the short term, however, we can help these people integrate and guide them in becoming full and equal members of our societies -- especially our young future fellow citizens who are still at the beginning of their educational and/or working careers. It is therefore the responsibility of the state to ease their integration and to invest into their future. Germany, for instance, which decided that refugee children, like German children, are subject to compulsory school attendance, has established a system aiming to foster the integration of these individuals. In some primary schools foreign and German children are taught in the same classes and it has turned out that multicultural interactions within this framework can benefit the community as a whole.[2] In other cases, and especially for older students, so called “welcome-classes” have been established. The aim of these courses is to give the arriving students the basic linguistic skills and the necessary knowledge to participate in regular school courses.[3] The latter policy reflects a compromise between the political and public interest to speed up integration and parents’ concerns about a possible decrease in the educational quality of their children. To finance such a program (and to master the overall costs of the refugee crisis) German finance minister Wolfgang Schäuble decided to reduce next year’s budget of all federal ministries to gain an extra 500 million euros.[4]

‘Why is such an investment in the education of refugee children in our interest?’, many critics ask. In my opinion, and as my approach to this theme has shown, the answer is clear: The costs of (temporarily) employing additional teachers and financing additional learning material will be greatly outweighed by the benefits society can get from well-educated and well-integrated citizens in the future through tax-incomes, statutory welfare contributions, economic growth, etc.

To underline this position let us consider the following statistics: According to the Federal Statistical Office of Germany the annual costs of education per student lie between 5.400€ and 7.900€.[5] The average total annual tax income per person alone lies at 8.229€ [6] and thereby exceeds the costs of education. Additionally, one must not forget about the before-mentioned additional benefits of a larger well-educated workforce and the fact that the duration of educating individuals is far shorter than their working life. Since the benefits from educating young refugees exceed the current additional costs, educating refugee children can be seen as an investment in the future of our societies.

Bottom line: Establishing a sustainable and successful integration strategy with education as a major cornerstone does not only facilitate the integration process as a whole, but also lays the foundation for profiting from the current developments in the future.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

  1. “'Wir wissen, dass viele für immer bleiben werden',” Rheinische Post, August 23, 2015, accessed November 14, 2015, http://www.rp-online.de/nrw/landespolitik/hannelore-kraft-viele-fluechtlinge-bleiben-fuer-immer-aid-1.5333275.
  2. Heike Klovert, “Flüchtlinge Retten Grundschule: Syrische Kinder Für Golzow,” Spiegel Online, September 10, 2015, accessed November 16, 2015, http://www.spiegel.de/schulspiegel/kinder-von-golzow-fluechtlinge-retten-grundschule-a-1052017.html.
  3. Sabine Menkens, “Wie Flüchtlingskinder in Willkommensklassen Lernen,” Die Welt, September 14, 2015, accessed November 14, 2015, http://www.welt.de/politik/deutschland/article146404309/Wie-Fluechtlingskinder-in-Willkommensklassen-lernen.html.
  4. “Wegen Flüchtlingskrise: Schäuble plant 500-Millionen-Euro-Sparpaket,” Focus Online Money, September 15, 2015, accessed November 14, 2015, http://www.focus.de/finanzen/news/bericht-wegen-fluechtlingskrise-schaeuble-plant-500-millionen-euro-sparpaket_id_4947248.html.
  5. Statistisches Bundesamt, Bildungsausgaben: Ausgaben Je Schülerin Und Schüler 2012 (Wiesbaden: Statistisches Bundesamt, 2015), accessed November 15, 2015, https://www.destatis.de/DE/Publikationen/Thematisch/BildungForschungKultur/BildungKulturFinanzen/AusgabenSchueler5217109127004.pdf;jsessionid=CEBA6006C9F75A28C3D556A9F4341264.cae4?__blob=publicationFile.
  6. Andreas Barth, “Steueruhr Zu Den Jährlichen Steuereinnahmen Deutschlands,” Haushaltssteuerung.de, accessed November 15, 2015, http://www.haushaltssteuerung.de/steueruhr.html.

30 Nov 2015

Monday funnies

When your dealer tries to be cool (via inter webs, obvs):

Economics of cheating in athletics

Paul writes*

Cynical observers were quick to dismiss the latest revelations in athletics’ doping scandal. It was just another episode in the history of a field of sports riddled by cheating. However, athletics fans were shocked nonetheless when the World Anti-Doping Agency (WADA) dropped a bombshell [pdf] on the sport on November 9th. The report confirmed what the German channel ARD had reported as early as last December. However, it went beyond that by unveiling state-organized scheme last seen when Russia’s athletes were competing with a hammer and sickle on their chest. Even Russian WADA officials and individuals in the IAAF leadership have been implicated. As the allegations against Liliya Shobukhova - a marathon runner - show, professional athletics is a money-game in which stringent rules and the enforcement thereof are essential (as I will explain below). The athlete reportedly paid €450,000 to Russia’s national athletics organization to destroy positive test results. This particular allegation shows that in highly individualized and competitive sports the earnings from sponsors or prize money are extremely unevenly distributed. Many nationally successful athletes even in wealthy countries such as the Netherlands, Germany or Britain cannot live off of their professional career and work or study on the side. Meanwhile, the most successful runners receive over €100,000 merely for showing up to certain events. This increases the incentive to use doping as a method to get ahead. Where seconds or even split-seconds decide the difference between a six-figure pay-off and no pay-off athletes will consider every option to improve.

The recent Russian doping scandal reminded me of a simple concept in microeconomics: the Prisoner’s Dilemma. If you need a quick refresher Wikipedia explains the game quite well. Versions of the prisoner’s dilemma can help us explain why sports such as athletics are prone to individual or even state-organized doping.

Let’s first presume there would be no WADA and no rules against doping. The following scheme may illustrate the dynamic of two athletes with similar talent:

Now as we can see the logical outcome of this very simplified example is that both athletes cheat. If they don’t the other one will because of the high payoff of finishing among the first which in turn secures sponsorships, invitational races and so on. However, to avoid this from happening, the International Olympic Committee established rules against cheating and put schemes into place to enforce them. This is the tricky part. The WADA delegates this enforcement to national and regional subsidiaries within the countries. To some degree the rigor with which cheaters are pursued depends on national ability or willingness to do so.

In a perfect world where cheaters are caught and competition is decided by performance we would have the following matrix:

As the example of Russia’s scandal shows, a dishonest athletics organization can skew the results in favor of its own athletes. All of a sudden Athlete A does not play by the same rules any more as does Athlete B. As country A does not enforce its anti-doping rules but country B does so perfectly, we end up with a matrix that looks something like this:

As every cheater in country B is caught (a very optimistic assumption) athlete B has no reason to cheat. If he does he will be suspended from competitions and might lose sponsorships. However, athlete A has huge incentive to cheat as he is much more likely to win if his opponents do not cheat. Even if they do, their getting caught will make sure that athlete A takes home the prize.

As the reality is much closer to the third table (with some or many cheating) than to the second table (no cheating) some have called for allowing doping for all to end up with table 1. Can you think of economic reasons not to do so?

Bottom line: where doping controls are delegated to the national level dishonest countries have an incentive to cheat as they will perform better than those who enforce doping tests vigorously. Our game theory example suggests to enforce the rules on all equally or to do away with rules in general. Only then would we be certain that sports are fair. Or would we…?

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Law of Unintended Consequences: Why Raising the Youth Minimum Wage is Not Beneficial to All

Simon writes*

The Dutch labour union FNV, together with some of its political allies, argue in favour of abolishing the youth minimum wage (YMW). The YMW applies to employees who are between 15 and 23 years old, and increases from 30% of the general minimum wage (GMW) at age 15, to 85% of GMW at age 22. According to the labour union, the YMW is unfair because it is too low compared to the costs of living, and because it is lower than the YMW in neighbouring countries. Furthermore, it would be unfair to be considered an adult from age 18 in aspects such as voting, drinking and driving, but not in terms of minimum wage.

Notwithstanding above arguments, the YMW has two important benefits that should be considered. First and foremost is the positive effect of YMW on youth employment. Research has found that the employment effect of a minimum wage is small when the minimum wage is comparatively low. However, if the minimum wage is relatively high, this has harmful effects on employment. The YMW is low both in absolute and relative terms compared to other countries. This is important for young employees, because almost by definition they have little education and work experience, and are therefore relatively unproductive. But because they are also much cheaper than their more productive older counterparts, they still have a chance on the labour market. The Netherlands Bureau for Economic Policy Analysis (CPB) reports that the low levels of youth unemployment in the Netherlands compared to other developed countries is probably linked to the relatively low YMW. Another advantage of the YMW is that it stimulates young people to continue education. After all, the relative gains of working fulltime are lower and therefore it is more attractive to study.

Abolishing the YMW would effectively mean replacing the YMW with the Dutch GMW, which is among the highest in Europe. Whereas the employment effect were small in the case of a low minimum wage, a relative high minimum wage is likely to have negative effects on employment. Therefore the CPB warns that a significant increase of YMW will increase youth unemployment in the Netherlands. Furthermore, the positive ‘education-effect’ will be gone, or potentially even reversed as it is more rewarding to have a job. Another unintended consequence of abolishing the YMW is the increase in government expenditure on social welfare. Even if levels of employment would remain constant, government expenditure would increase, because the height of certain benefits (e.g. the benefit for handicapped young people) is connected to the YMW. This would lead to either increased taxes, higher budget deficit or to austerity measures.

Bottom line: Abolishing the YMW would be good for young people that already have secured a job, for their wage would increase significantly. However, for those currently looking for a job and for those with temporal contracts, abolishing the YMW could prove much less beneficial, since youth unemployment is likely to rise and those employees that suddenly become much more expensive might not get their contracts renewed. Abolishing YMW would also increase government expenditure.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Who's going to pay for my pension?

Steven writes*

The German population is growing older. The peak of the people born during the babyboom after the Second World War are aged today around 52. This means that they will start to enjoy their pension in 13 years from now. As the number of retired people increases, the number of younger working people decreases due to a decline in fertility and mortality or expressed otherwise: less children that live longer. In Germany the public retirement policy requires the working class to pay premiums for those who are retired. If this [pay as you go, as in the US] system is to continue the younger individuals will have to pay more and more premiums to finance the pensions. This puts a high pressure on the system as it requires the solidarity of the younger generation for the older generation. Generational solidarity is under pressure. The question: ” Who is going to pay for my pension when I am 65 (or maybe 70)?” is heard more and more.

The more this question is asked, the more insecure individuals feel and as human beings have a desire to reduce uncertainty and avoid (financial) pain, they try to solve this. The people already retired will build up more reserves, just in case pensions are reduced. The younger working people just want to make sure they will have funds available when they retire will also put money aside.

Money that will not be spent in the economy reducing the growth rate of that same economy providing the wealth to the nation. In the graph this effect is very clear: Where in the major western countries like the UK, the US and Japan the personal savings rate is falling up to the economic crisis of 2008. In Germany it is growing from 2000 onwards. The year 2000/2001 is not a coincidence as in this period the political discussion about the funding of the pension system was very actual leading to the introduction of the “Riester Rente” in 2002.

The German Government provided tax relieve for people who were putting money aside for their pension, exactly for the reason mentioned above to be less dependent on the social security system and have more personal control. Clear enough that the increased savings by the individual Germans could not be spent in the economy thereby reducing the economic growth.

Bottom Line: Intergenerational solidarity is great but it is better to have more control with regards to your pension. We just trust ourselves more than others and as a precaution we will build in security regarding our pension when taking the demographic development into account. A pity for consumption today, but better to have some funds of your own when retiring. Also here the “better safe than sorry” applies even if it is at the cost of personal consumption today.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

28 Nov 2015

Sugar? Yes, sugar is killing you.

I just watched That Sugar Film, an Australian documentary in the tradition of "Supersize me" (McDonalds will kill you) and "Superhigh me" (marijuana will not).

[I just saw that this film is coming to theatres in Jan 2016; I saw a festival copy]

In the film, Damon eats 40 teaspoons (160g) of sugar a day, the average for an Australian. He doesn't ingest sugar via sweets, soda or ice cream, but via "healthy foods" like yogurt, granola, juice (oh the juice!), and so on.

The results after 60 days are startling: he gains 8kg (on 75 kg start), moves from a healthy liver to a "fatty" liver, and exhibits the highs and lows of a pre-diabetic.

This film captures the "new knowledge" that sugar -- not fat -- is probably responsible for the epidemic of obesity, diabetes, etc.

The conventional wisdom of "fat makes you fat" is wrong. The idea that "all calories are the same" (a favourite of the sugar industry, which uses science and lobbying in exactly the same way as tobacco companies) is wrong.

Sugar is rare in nature, so our bodies are not evolved to cope with it compared to fat and protein. Thus, when we eat sugar, we get a rush of energy. Our livers release insulin to tell cells to mop up the sugar, stop burning fat, and (this is the killer) convert excess sugar into fat that will be stored in our livers, guts (men) or rumps (women). It's those rushes that leave us depleted after the high as well as lacking energy (because it's getting stored rather than used).

By coincidence, The Economist has articles on sugar's bad influence on health this week (soda and tax it). For more information, check with government health sites: USA, Canada, UK, and Australia. (There are MANY sugar industry sites with "health" information. Don't believe them.)

Should the government tax sugar? Yes, if you think that "sin taxes" are appropriate as a means of reducing harm to citizens and public health costs. Diabetes and obesity cost Americans $245 and $150 billion, respectively, per year in direct and indirect costs (that's $1300/person!)

Bottom Line: I give this file FIVE stars for its entertaining (sometimes terrifying) glimpse of the harms we risk from sugar. Sure, have some in small doses (fruit, milk) but not in large or concentrated doses, e.g., juices, sweetened products (pasta sauce!), Vitamin Water, etc. Home cooking can avoid many of these problems. Coca cola, Pepsi and Mountain Dew (27 tsp in one bottle!)? You're better off without those.

27 Nov 2015

Friday party!

Run! Swim!

View post on imgur.com

Carbon market mechanisms matter for Paris COP

Liza (email) graduated from LUC last year (she's now at Edinburgh University). I asked her to write a little about her bachelor thesis since her topic is so relevant to the upcoming climate talks in Paris. -- David

The table below summarizes four case studies discussed in my bachelor thesis “Market mechanisms for greenhouse gas emission control: carbon tax vs. cap-and-trade”. Market mechanisms for GHG emission control are currently not widely used, but they hold great potential.

In the literature, there are various arguments for preferring either a carbon tax or a cap-and-trade scheme, but they usually boil down to the tons of CO2 reduced and the revenue produced. Cap-and-trade is usually preferred because CO2 emission reductions can be set as the aim, while a carbon tax is preferred because it will raise higher (and predictable) revenues. From the table above it can observed that cap-and-trade schemes reduce more tons of CO2 per year, while carbon tax schemes have higher annual revenues. These observations correspond to the arguments that are found in the literature, meaning that to an extent practice does follow theory. However, the success or failure of a particular market mechanism cannot be attributed to only these two factors. For example, Australian carbon tax raised high revenue and reduced CO2 emissions, but it was revoked due to a lack of political support for the scheme.*

NB: Alberta's proposed carbon tax might raise the price of gasoline by 5 cents. Current prices are CA$88 cents/litre (US$2.48/gallon)

Furthermore, the use of revenue is very important for the success of a market mechanism, particularly for carbon taxes. The Australian tax was revenue positive, which meant that the revenue raised went into the national budget from where it was very hard to follow spending. The BC tax on the other hand, was revenue neutral. The revenue was used to reduce other taxes on citizens and corporations. Cap-and-trade schemes also often fund sustainability projects. Citizens tend to support market mechanisms that recycle revenue into sustainable development, thereby strengthening political will to keep the mechanisms going.

Businesses don’t like cap-and-trade schemes because under them, the price they pay for carbon is uncertain and their ability to plan long-term is hampered. In order to get businesses on board with cap-and-trade schemes, governments often give away initial permits for free. Both the EU’s ETS and California’s cap-and-trade schemes had this feature. Free permits may raise business compliance, but they also mean lower initial revenues. Free permits have to end at some point, of course, if one wants businesses (or consumers) to face price incentives to lower their emissions.

When a market mechanism is introduced as a policy, it usually already has a long-term plan of how the policy will work and how it aims to affect emissions; this is done with trajectories. Both EU ETS and British Columbia have trajectories – the former with how the cap decreases over time and the latter with how the tax grows over time. Trajectories can give a sense of security to those worried about impacts over several years. However, their correct establishment can be very tricky, particularly when it comes to carbon dioxide, because there is much scientific uncertainty about the “tipping point of emissions” and there is no consensus on who is responsible for the impact of emissions (and how much).

When it comes to worldwide cooperation for GHG control, it is not a question of which nations emit because they all do. The question is – how high are the emissions relative to each other and with regards to the potential threshold of devastating consequences. If only a number of countries act to control their carbon emissions, and these countries are not the big emitters, then the effect on the global carbon emissions will be very small. Also, if only a few countries establish market mechanisms for carbon emission control, there is always the potential for “leaks”. This is to say that businesses will try moving their activities to countries that do not regulate carbon emissions – lowering their emissions on paper (in the regulated nation) but not globally. For this reason, it is advised that if market mechanisms are to be used, they have to be created everywhere worldwide. And depending on which market mechanism is used the price or the cap has to be synchronized around the world. This will limit the number of “leaks” in the different systems and potential spillovers will be avoided.

The synchronization of the price/cap does not mean that the different systems need to be linked in a global market. Taxes might be easier to impose on a national level, without connecting as it ensures that the revenue raised is used locally (and revenue neutrality can be ensured). Cap-and-trade systems on the other hand, could be linked together. This is already happening by California’s scheme being linked with Quebec’s; and it is likely that more cap-and-trade systems will be linked together later on.

Which system should a country choose? A carbon tax “bites” (generates revenue) immediately and can be enforced a lot more quickly (as seen in the table above). Cap and trade (assuming a low enough cap) makes it easier to harvest “low hanging fruit” at a low business and political cost. The choice is not as important as making a choice, as the first priority is to get nations around the world to impose some downward pressure on carbon emissions.

Bottom line: The theoretical character of a carbon tax or cap and trade will not determine if it succeeds as much as implementation and use of revenues. I therefore have hope that the delegates meeting in Paris can find ways to implement market mechanisms that will reduce carbon emissions within domestic political constraints.

* On Australia’s failed tax scheme: Prime Minister’s in Australia change more often than Defense Against the Dark Arts professors at Hogwarts, and the last change happened back in September. While the ruling party did not change, the new PM has promised to revisit (and potentially change) Australia’s climate policies; however, it is unclear what exactly this means and if it will include the renewal of the carbon tax. Greens have recently conducted some modeling, to provide data in support of the carbon tax. They find that re-instating the carbon tax will produce just as much revenue as changing the GST, while costing households a lot less. If the main concern of the Australian government is to increase their budget while making sure that the general population can afford it, it appears that re-introducing the carbon tax would be the way to go.

26 Nov 2015

Globalization, growth and adverse health outcomes in sub-Saharan Africa

Dilara writes*

In the 1980´s economic globalization has been largely taken up by international monetary organizations like the IMF to the newly independent states in the post colonial ear in the form of trade liberalization, growth and poverty reduction programs. These programs were often set out as conditional loans to be given to developing countries with the terms of a restructuring in domestic policies particularly on the grounds of domestic economy. The loan programs also known as structural adjustment (SALs) are applied when cuts in government spending, privatization of government enterprises, and promotion of free trade, foreign investment and ownership were introduced. Since 1985, application of conditional loans has increased and had varied impacts on the economies of some of the states. A very common critique towards the SAL/SAPs has ben its limitations to civil well-being Zimbabwe for example, experienced a radical growth in the mid 1980s and was used an an example of successful implementation of SALs by the IMF.

Despite Zimbabwe’s financial leap, social sectors like health and education deteriorated, mostly due to cuts in government spending between 1991-1996. With the introduction of the cost-sharing system, healthcare expenditure increase and limited proper access for low-income populations. This impact was not only limited to Zimbabwe´s case but also to counties like Tanzania where healthcare turned into a commodity rather than a right [pdf]. The crippling of the healthcare and education systems was problematic especially because caused stagnations in state development. One could argue that implementation of Structural Adjustment Loans/Programs were driven by economic growth but lowered the social well-being which had an adverse outcome on the overall development of the state.

Bottom Line: While SAL/SAPs were aimed to promote economic globalisation in developing countries through liberalised, trade and conditional loans to reduce poverty, it crippled healthcare systems through cuts in government spending. This had an adverse effect on the well-being of the civil society.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.