Trade-offs are more complicated than Okun’s leaky bucket

A popular story in macroeconomics and broad public economics is that of Okun’s leaky bucket (Okun 1975).  This essentially states that we can think of redistributing income like using a leaky bucket to move water – where the loss of income associated with the loss of efficiency is the water that falls out of the bucket on the trip.  This gives us our basic “equity-efficiency trade-off“.

Both the Spirit Level and a lot of the “new economics of income inequality” (namely the work on rent seeking) is trying to turn this on it’s head by saying that, not only does the efficiency vs equity/inequality trade-off not exist, but it is often the other way around.  When a mechanism is given, which can in turn be tested, I am fine with this (eg I am not discussing the types of studies Offsetting touches on here).

However, when it comes to directly determining policy about redistribution this use of the leaky bucket has stretched the metaphor too far.  Policy has more dimensions than a couple of synthetic aggregreates (GDP and inequality measures) which get confused for the much broader terms ‘efficiency’ and ‘equity’. Read more

A couple of recent NZ posts on inequality and poverty

I enjoyed these two posts by Bill Kaye-Blake – one on inequality, and one on poverty. [Also add this recent post]

I suggest you go give them a read if you haven’t already 😉

Note:  Looks like this accidentally turned into a link post …

Note this is good.  Real good.  The sheep analogy is one of the banes of my life … it gets whipped out whenever someone wants to make a social claim but not actually defend it 😉

Also, good post in a series on poverty here.

And Ryan Avert discussing the Piketty book.  Also assortative mating – I remember my high school economics teaching talking to me about this with regards to inequality!

And this post where a physicist discusses economics saying what “scientists” would look at with inequality.  That is fine, his description of what a scientist would do looks like an oversimplified view of what economists already do so that is all gravy 😉

Krugman makes a good point about negative labour supply effects.   Something that increases labour supply does not necessarily increase welfare/satisfaction etc etc, the fact the two often get mixed up has vexed me for a long time.  Krugman is also very right here when he discusses the return of “macroeconomic popularism” – the effect of policy is a harder question than many people give it credit for!

Marginal Revolution touches on income volatility for high income earners.

I heard that I was in this Radio NZ report.  Hopefully I didn’t say anything too inflammatory – I save that for when I’m blogging.

A defence of the calculation of the living wage

Over at The Standard I noticed this defence of the recent living wage calculations from the two critiques that had popped up (which I linked to here).  The key points seem to be:

  1. The living wage concept was being defined in a different way by critics – making the attacks a wee bit of a straw man.
  2. The living wage concept is not being sold as a policy, or as mandatory.  It is about articulating certain fairness principles with regards to need.
  3. A discussion of the costings, countering many of the specific claims.

That is cool, thinking about poverty requires discussions about many of these issues, and I think that this defence was clear and completely legitimate.

In this context, I agree with the authors.  However, there are a few points I would raise – points that I think are especially important when judging Treasury’s analysis, and points I touched on when initially blogging about this.

  1. The Treasury work was largely pointing out that, if the living wage was to bind, the number of people who fall into this “specific group” is quite small (especially relative to the full number of people who earn below the living wage).  As a result, any policy relevance is a bit murky.
  2. Although the authors say the policy is not mandatory, or a call to government, it is being used widely as a call to government to “do stuff”.  It is fine to say something such as “we are trying to ethically motivate firms”, but many people do not take the concept that way.  In this way, Treasury’s response was almost preemptive.
  3. We can have a reasonable debate about relative poverty.  In this way, having Brian and the living wage authors argue about these things is choice – as it makes the value judgments involved in discussing “need” more transparent!
  4. For me I get a bit confused about why we talk about need and poverty in terms of a wage, rather than in terms of minimum income.  If we are interested in poverty and opportunity, it makes more sense to articulate these in terms of bundles of goods and income – and think through that – rather than stating that those who are employed should reach that standard, while those that are not shouldn’t.  This is where I probably disagree with both NZ’s left and right – but not to worry!

The Reserve Bank of Air New Zealand

With Bitcoins and Argentinian hyperinflation in the news, it seems like an apt time to discuss what currency actually is.  In a novel way Benje Patterson discusses this with regards to Air New Zealand’s airponts program – and given this he tries to figure out how exactly this program should be valued (Infometrics link)!

Airpoints Dollars conform to the standard definition of a currency – they are a medium of exchange for goods and services, they can be used to store value through time, and they are a quotable unit of account.  Air New Zealand operates a fixed exchange rate policy for its currency, where one Airpoints Dollar can be redeemed for one New Zealand dollar worth of flights.

Furthermore, in addition to being a currency, the Airpoints Dollar loyalty scheme also adds to Air New Zealand’s bottom line.  Air New Zealand is the sole institution with the ultimate authority to issue the Airpoints Dollar currency and back-of-the-envelope calculations show that the value of the airline’s loyalty scheme could be around $400 million.