Monthly Archive for May, 2007

Paul Wolfowitz and the World Bank

I think that Wolfowitz was a tainted choice to head the World Bank from the get-go; an architect of the Iraq war was never going to be a popular choice among Europeans. To some extent, I see a parallel between the US choosing Paul Wolfowitz to lead the World Bank and John Howard choosing Peter Hollingworth to be Governor-General of Australia. Both were seen as placing an ideological choice into a role that is, in theory, meant to be above ideology. In both cases, ideological opponents complained loudly, but could do nothing until a moral slight could be held against the appointee.

Libertarianism, inequality and cultural homogeneity

Andrew Norton doesn’t think much of this article by Christine Wallace in the Griffith Review, in which she argues that the Coalition under Howard has instigated libertarian policies by stealth. He calls it “a dozen or so pages of ignorance and silliness,” citing this paragraph from page 8 in particular:

The libertarian logic is that, since personal freedom and the existence of free markets are inextricably entwined, and since – as Bork puts it – “vigorous” economies are vulnerable to being “enfeebled” by particular cultural practices, then the champions of personal freedom have a licence to police cultural practices – in the interests of freedom and economic vigour. Thus libertarians can reason that difference (for example, multiculturalism, homosexuality) must be eliminated so that the economy can function better – reasoning that is absurd, to say the least.

A commenter on Andrew’s blog also highlighted this bit on the previous page:

The central difference between the Howard Government and the Hawke/Keating Governments is that the Labor governments saw a crucial role for the public sector … especially in relation to issues of economic inequality; about which libertarians are unconcerned.

First a confession: I’ve not read more than two or three pages of Christine’s article. Still, if the blogosphere isn’t a place for partially informed comment, I don’t know what is. In the interests of fairness, though, I will disagree (slightly) once with Andrew and once with Christine …

In the paragraph that drew Andrew’s ire, Christine argues that the libertarian pursuit of free markets justifies cultural homogeneity. Andrew’s implicit criticism certainly seems to make sense: why should free markets and cultural heterogeneity be mutually exclusive? But it is worth noting that Christine may – at least to some extent – have an unpleasant point. For a market to operate efficiently requires trust between its participants. A market can certainly operate without trust if institutions are sufficiently advanced and corruption-free, but the enforcement costs they impose are a classic form of market failure, along with moral hazard and adverse selection. Even with good institutions, market efficiency is optimised by increasing trust. However, as Andrew Leigh has observed for Australia [here and here] and Robert Putnam has found for the USA [here], ethno-linguistic diversity breeds mistrust. In so far as they proxy for culture, Chrstine’s point at least partially stands.

Now back to Christine. She reckons that libertarians are unconcerned about inequality. It’s obviously a generalisation, but even in general, it’s misleading. While I’m sure that libertarians are not concerned about inequality per se, I’m equally sure that they are concerned with unwarranted inequality. Classic theory of the firm suggests that in perfectly competitive markets, a person’s wage will equal the value of their marginal product. Presuming (safely enough) that different occupations have different marginal products (so an engineer will contribute more to a firm’s profits than a cleaner), if people at the top of the pile are being paid more than their marginal product and people at the bottom are being paid less than theirs, a libertarian would oppose the excess inequality that resulted.

The man whose name is anathema

Peter Martin, currently the economics editor of The Canberra Times, has got a nice little piece on labour productivity in Australia over here.

It’s fascinating for two reasons. The first is that growth in labour productivity in Australia has stalled – it may even be as low as 0% for the current financial year – and this slow-down coincides neatly with the Coalition’s Work Choices program. I’m not convinced that one necessarily caused the other. At the very least, I would have expected some sort of lag between Work Choices coming into effect and any change in productivity growth. Nevertheless, it looks ugly for the Howard government and they’re clearly doing their darndest to avoid drawing attention to it.

The second fascinating thing is that, even though this raises the question of whether Keating’s enterprise bargaining system was better in terms of promoting productivity growth, nobody – on either side of Australian politics – will dare mention this possibility. For the coalition, this makes perfect sense. They don’t want to acknowledge anything about the previous Labor government that was “better” than under them. For the Labor party, though, it’s far sadder. They’re clearly working under the assumption that invoking the name of Keating will tar them with the 1991 recession. It’s sad, because they’re just as clearly throwing away the best piece of evidence they have for Labor’s economic-management credentials.

In case anyone is interested, here is a graph from ABS data that Peter included in his piece, showing clearly that the quarterly change in labour productivity has turned negative for the last two quarters:

Quarterly change in Australian labour productivity

Recognising the probable noise in quarterly data, Peter also includes this graph of a four-year rolling average courtesy of Saul Eslake at ANZ:

Four-year rolling average of changes in Australian and American labour productivity

Paul Keating, speaking to the ABC’s Eleanor Hall in the week leading up to the recent budget, justified enterprise bargaining over individual contracts thus:

On this floor at the ABC here, there must be 150 people. If you went out there and said to them, look we’re going to make an agreement for the next three years or four with the ABC and we want 3 per cent productivity a year out of it, or 2 per cent productivity, together you could all do something.

But if they just take Eleanor Hall by herself and say, you will give us an increase in productivity, how can you, individually? How can you? What are you going to do, talk louder? Talk more? Be at work earlier?

For reference, the latest Australian federal budget can be found here. The section relevant to Peter Martin’s commentary is Budget Paper 1, statement 4.

Update – 14 May 2007 – In response to Andrew Norton:

Andrew is absolutely right that a firm is concerned principally with profit, but there are always two ways to get more of the stuff. You can do the same at a lower cost (as he speaks of), or you can do more, with the value of the extra done being more than the extra cost it requires.

Assuming that the amount of labour employed remains the same in both cases, the first possibility does not increase worker productivity; it only shifts a greater proportion of the output away from labour and into firm profits. The second possibility increases worker productivity, with an ambiguous effect on the labour/capital shares of output.

US Trade policy

It seems that the White House has managed to agree with some key Congressional Democrats (presumably the speaker and the Ways and Means committee) on a trade policy framework, allowing them to move forward on a number of deals. See reporting from:

It seems to include items on labour standards, environmental protection (or possibly just require the enforcement of already-agreed-to environmental standards), allowing developing countries slightly easier access to some generic medications, a guarantee that US ports will continue to be owned and operated by US companies, and increased funding for training US workers affected adversely by trade.

I’m not sure how I feel about these things. I would need to see some more specific details than the tantalising hints that the journalists drop throughout their pieces. At a rough guess without seeing the details, and reserving the right to change my opinion, I support the environmental protections, partially support the labour support requirements (I’d support the right of workers to unionise, for example, but not US-imposed minimum wages or working conditions [*]), support easing access to generic drugs and absolutely oppose restricting the operation of US ports to US companies.

[*] I do generally support minimum work condition requirements and – absent a proper tax system that can provide appropriate subsidies to the poor – a minimum wage, but I do not support the US imposing any particular work conditions or minimum wages on other countries. It should be up to the people of those countries to make up their own minds.

Why I like Andrew Leigh

The man just talks sense. He argues that:

we can save a lot of Australians the bother of filling out an annual tax return. In August, the ATO would simply send you a statement saying what they think you owe. If you agree with it, if you have no complex income, and if you don’t want to claim any deductions, you do nothing. Of course, if you want to claim your deductions, you’re welcome to do so.

Simplifying tax-filing should appeal to politicians of all political stripes. Whether you think tax rates should be lower or higher, you should support lowering the compliance burden.

His primary article is here.