What a cow wants, what the economy needs

It seems that some fine researchers in Waikato are trying to discover sets of preferences among cows. Good. I’m sure that individual cows do have a set of preferences over outcomes. However, the researchers better be careful that they don’t try to compare the value of different cows preferences, or take one cows (or a small subset of cows) set of preferences and assume that it holds over all cattle. These are mistakes that economists have made throughout time.

Economists are experts at positive judgements. Distilling the ‘facts’ and providing a framework with which to place issues of scarcity. If you want a normative judgement, such as what is the welfare function for cows, or how do we weight the importance of different cows feelings, then you have to find an expert in the field. In the case of cows, I think the appropriate expert would be a farmer. After all, who knows the nuances of a set of cows better than the farmer who raises them!

If only finding the appropriate experts was as obvious for questions about the national economy. Economists often settle for policy analysts or even themselves to provide the normative judgements around policy decisions. However, do economists and policy analysts get up at 4am most mornings to go visit the national economy? Do they spend precious time alone with the national economy, so they can really get to know it? Can policy analysts and economists identify the subtle nuisances that exist between the different individuals in the national economy?

Ultimately, if an economist wants to add apply normative judgements after setting up a given issue in the frame of scarcity, they must make sure they go out into the open air, and discover how their precious economic agents (people) are feeling. Only then can they attempt to claim that they know what the economy needs.

Climate change policy

Bjorn Lomborg seems to be causing a stir again with his new book, ‘Cool It’. I haven’t read the book but the essence of it seems to be that the dangers of climate change are over-rated. Lomborg also proposes that trying to cut emissions might be part of a good policy response to climate change, but it shouldn’t be the entire response. He says in an interview with Bill Maher,

Right now, we talk a lot, and we say, let’s do the Kyoto Protocol, which costs a lot of money; we actually don’t implement [it], and then even if we did, [it] would do very little good… Instead, we should focus on cutting the cost of cutting emissions. That is, invest in research and development on non-carbon-emitting energy technologies.

Whether Lomborg’s right about the numbers or not, it raises an interesting point: in our haste to talk about ways of cutting emissions have we lost sight of the basic economics principles which should guide us? Lomborg points out that good things can come from global warming too, such as the opening of the Northern Passage. If we can no longer prevent it happening, wouldn’t it be worthwhile to invest in making it productive? Essentially, his point is that many of the responses to climate change have a higher marginal cost than marginal benefit and a re-allocation of resources would be beneficial to everyone.

On a broader lever, does there come a point where we have to acknowledge that, given the lack of action so far, many of the predicted consequences are unavoidable? At that point, would it be more beneficial to invest in technology that will take advantage of a different global climate than continue to aim for an unachievable first-best outcome of preventing climate change? I don’t pretend to know much about the issue but books such as Lomborg’s that address such questions in a reasonable fashion are vital to the construction of effective policy. Climate change is simply too important to let a knee-jerk reaction dictate the future of our planet.

Check out comments by people who’ve read the book at MR.

Over US$0.76

Oww yea, we crossed US$0.76 temporarily.

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I said we would cross 76, however I said we would do it by the start of September, so I guess I was sort of wrong 😉

Where to from here?  I don’t know, all this volatility scares me!

Subsidies for driving

On this blog we’ve talked a lot about how driving is undertaxed and overused. An aspect of this that we haven’t addressed yet is the funding mechanism for roads in New Zealand. At present, government spending on roading exceeds the revenue gained from road taxes. Essentially this means that road use is subsidised by all taxpayers. As a consequence, road use is inefficiently cheap for all road users even when congestion and carbon emissions are disregarded. Megan McArdle’s right when she says

We clearly need to institute comprehensive road tolls combined with a congestion pricing scheme. Plus, of course, a carbon tax to compensate for the negative externalities drivers are imposing on those of us who use primarily mass transit.

The road tolls she speaks of could be in the form of higher fuel prices, higher licensing costs for vehicles or toll booths on roads. If the government is serious about reducing congestion and decreasing our carbon emissions then ending the subsidy on road use might be a good place to start.

Lifting the cap on GP rates

People are making a big deal about the fact that National wants to lift the cap on GP (general practitioner) rates. Now I know pretty much nothing about health policy, especially not New Zealand health policy, but I can see some of the merit in getting rid of the cap.

Now before you kill me let me make my case. I agree that in the short run the lift of rates will be painful in areas that do not have competition for GPs. GPs aren’t all going to rush into Otorohanga (small but beautiful country town 😉 ) just because they hear that they can make some extra money there. Furthermore, there is a shortage of GPs, which means if we let them set prices they will have market power and they will set them above the market optimum. Beyond this people are also scared that if prices go up, poor people will not be able to afford health care, and in a society like NZ that is just not right. I agree that these points are highly relevant, but they are not the be all and end all of the argument.

We have a shortage of GPs. You increase the supply of GPs by increasing the return for people for getting trained and moving into that line of work. If we allow GPs to increase rates, then in the long run the supply of GPs will rise, and this is a good thing. Furthermore, if society is worried that poor people will not be able to afford doctors visits, why don’t we give them some sort of subsidy. If we subsidise the price for poor people, then poor people will be able to afford to see a GP, and GPs will still get their market rates.

Price controls are never a good policy. By keeping the price of visits to GPs artifically low we reduce the supply of GPs, by lowering the incentive of students to study and move into this type of work. By allowing market prices we can ensure efficiency. From there, subsidies and targeted assistance are the best ways to achieve our equity goals, not ad hoc price controls.

Orchardists and Labour productivity

NZPA released a story about an Orchardist that tried to get out of paying some seasonal workers for a public holiday.  All well and good, the contractual obligations of an employer is a topic that is out of my league.  However, the final line of the article got my interest.

“When employers treat their workers well by paying their entitlements, their workforce is likely to be much more productive”.  This is the claim of the Department of Labour.  Now I think by itself this is a fair claim.  In the apple picking industry it can be difficult to quantify the amount of effort a worker is putting into picking.  The output of the worker depends on both the effort they put in, and the density of the fruit in the area they are picking (I did a little blueberry picking back in the day 😉 ).  It is also impractical to constantly supervise workers (as they tend to work over a largish area).  As a result of these factors, efficiency wages can increase effort and thereby increase the workers productivity.

However,  the context that DOL made this statement in wasn’t purely descriptive.  They were trying to tell employers that they should be more generous with their wages, as they should want higher productivity.  In this sense I disagree with them.  The employer realises that the productivity of their workers depends on the way they treat their workers.  If they choose to pay their employees at a low rate, it is because the expected benefit from paying them more is less than the cost of paying them more.  Now in the case of the apple orchard this was illegal.  However, the employer obviously felt that the probability of getting caught was sufficiently low that the cost of paying his employees (which includes the productivity enhancement, and the loss from getting caught times the probability of being caught) was less than the benefit from paying.

If this is DOLs line on productivity, they are treating employers like they are stupid.  They believe that they understand the relationship between employers and employees better than the employers and employees themselves.  While I do not have a problem with the idea that higher wages leads to greater productivity, I do have a problem with the idea that firms are not doing what is in their own best interest.  If this is how the DOL feels, they need to realise that employers goal is not to maximise the productivity of their workforce, it is to maximise the profitability of their business.

Some people may feel that is would be a good idea to intervene and force firms to pay higher wages and increase labour productivity.  If we did this output could rise or fall (depending on the relative effect on productivity), the amount of labour hired would fall (as you would need less labour to produce the same quantity of output), and the effect on prices would depend on the change in output (as we are moving along the demand curve).  Ultimately, we assumed that the firm would not want to do this unless the benefit was greater than the cost, if this is the case output from each firm would fall and prices would rise.  In the apple industry we face a world price, and for the consumer, the loss of output would be made up by imported apples.  However, the leftward shift in the domestic supply curve implies that producer surplus would fall.  As consumer surplus hasn’t changed, total surplus from the industry would fall.

So by forcing firms to set higher wages, to force a higher level of productivity than they would have chosen in equilibrium, we get greater unemployment and lower profit in our apple industry.  Not an outcome that people on either side of the political spectrum would be particularly happy with.

Note:  I am only talking about setting higher wages to receive higher productivity and how that influences efficiency.  I am not talking about the equity reasons for higher wages, and I’m certainly not talking about the minimum wage.  You can talk about that stuff if you have a point you want to raise, but if anyone gets all ideological and angry about it I’m going to be very mean to you!