## Sunday, June 22, 2014

### Is Chang's economic development really complexity?

I am reading Ha-Joon Chang’s new book Economics: The User’s Guide. About half way through he makes a big effort to explain that GDP is quite an arbitrary construct and should not be interpreted as a measure of welfare or economic development.

In making the point that economic development is much broader than GDP he uses the example of Equatorial Guinea as a country that saw rapidly increasing GDP after discovering oil in the mid 1990s, yet it is usual to overlook the extremely high measured GDP growth in judging the level of development.

Chang defines economic development as
… a process of economic growth that is based on the increase in an economy’s productive capabilities: its capabilities to organise - and, more importantly, transform - its production activities.
This broad definition reminds of the complexity economics approach some researchers have adopted to understand economic development outside of traditional measures such as GDP.

MIT and Harvard researchers have developed complexity indexes for countries based on the diversity of their productive activities, and more importantly, the uniqueness of those products that are produced. The logic behind this measure is that a country able to produce goods that cannot be widely produced elsewhere has some inherently greater level of internal specialisation and productive knowledge.

Japan leads the way on the complexity index, followed by closely by the usual suspects of Germany, the US, Switzerland, UK, Austria, Sweden, and China a little further down, but no doubt gaining in the rankings.

Australia ranks 73rd, behind Cuba, Oman and Qatar.

Which does make me wonder whether interpreting our own level of development by GDP should be moderated by the heavy influence of our narrow export base, which today is over 50% coal and iron ore.

In any case, I wanted to take a moment to compare the diversity of exports, a key input into complexity measures, for a few countries (data from 2010).

Here are Germany's exports

What about Australia? Note that in the past four years the share to coal and iron ore has grown considerably.

Or maybe Austria

For resource rich countries maintaining diverse productive capacity is not a natural market outcome. Both Canada and Australia have seen their complexity rankings fall during the naughties resource boom.

Chang’s point that economic development is a much broader concept than GDP alone is important. As I’ve said before (as has Steve Keen) diversity is an important measure of both the robustness and overall level of development of a national economy. Australia’s narrowing production base opens the question of whether we should, and how we could, direct policies towards encouraging diversity of domestic productive capacities.

## Tuesday, June 17, 2014

### Age of entitlement - my SBS Insight notes

With my upcoming debate on entitlement in Australia I though I'd better watch Insight on SBS to see what punters think.

If you missed it, here are my notes.
_________________________________________

Major moral decision - should we support people till they can get a job they might like.

Carrying a job while trying to get one in a different industry?

Says the guy that had no problem getting a job in his industry that he would get a job cleaning toilets full time after his degree.

What should they be prepared to do?

Amanda Vanstone (on the Commission of Audit) -

“In my day I walked up hill both ways to school…barefoot”
“We’ll never have a health or welfare system like the US” mmm… she might regret that
“We are richer than others, so we shouldn’t focus on equality or social issues”

Ignores politician's retirement entitlement that she lives on.

Guy who has no idea what is happening elsewhere in the world compares us with elsewhere in the world.

My family is rich and support me so should yours.

Beggers can’t be choosers

Are people entitled to a job they might actually like? Yeah, we covered that. No one knows.

Some people not very good at finding work. Really? Such an informative program.

Frank Stilwell -
Points out that poor people are not the only ones who think they are entitled.
Says job-snobs is actually rare.

Tourism Association wants people to wash dishes on the cheap, according to their well-paid consultant, who has been lobbying to open up immigration.
Says there are 30,000 jobs in tourism. seek.com.au says there are 7,000 currently advertised nationally.

Old lady worked since she was 15 - in the post-office, then bus conductor. Public servant for life. Worked hard, thinks she’s entitled to her pension.

Some dude wants to say privilege instead of entitlement.

Guy states the obvious -
“you contribute when you can, and when you can’t others will contribute to look after you”

People shrug it off and start bitching again.

As expected woman with 5 kids shows up with about $20,000 in various benefits. Oh god, now ageing population comes in. Woman does her bit for society. Says hypocritical of government encouraging children but decreasing family support. Really thinks that ageing is solved by more people. I have no problem giving her a bigger chunk of the pie. Who really cares! Again, let’s all not talk about the moral judgements we are making. Single Mum, good earner, gets$160 a fortnight in various benefits. Has a whinge about her life being tough and ‘deserving’ hand out. She has a mortgage. Really?

Why does everyone just justify their position by some appeal to deserts?

Taiwan guy - in Taiwan, in the 1980s, you were expected to look after yourself. Actually scrap that, your family. Why don’t we use the family unit as the social welfare system?

Oh I wish someone had thought of that. Is welfare really stopping that? What if your family can’t support themselves, who supports them… mmm…

Another single Mum says she’s being pragmatic and helping her parents and children.

The guy without a job reminds everyone that we are a rich country. Says it’s very inefficient to have highly educated people pouring coffee and doing dishes.

ANU guy (Andrew Whiteford) -
“Lowest ratio of welfare payments to wages in the developed world”

Audience gasps. Facts are hurting brains and their beliefs.

“We spend less than everyone except Chile and Mexico. South Korea is catching up”.
“We can just spend more by raising more taxes, easy”

Guy who once advised Tony Abbott -
“We need to get in early before we send ourselves broke - a crisis”

Amanda Vanstone -
"If we do nothing now, where will we be in ten years”

Ummm… probably perfectly fine. Anyone want to challenge them to define a crisis? Which metric would cross which threshold?

Old lady (ex-pubic servant again), wants the simple retirement - asks Vanstone what should she do to adjust to reduced pensions?

Amanda Vanstone ignores that. Has a bitch about paid parental leave scheme.

New guy -
Works in a restaurant. Ask Vanstone whether welfare is about raising people to upper classes.

Sure mate. We’ll just all be upper class. See how that works? Get used to things being relative, not absolute.

People clap because Vanstone hired someone who had a job.

Farmer (National party member) can only get backpackers to pick fruit. Locals are difficult, with all the paperwork and stuff. Backpackers need the money to get on with their travels. Better to employ the more desperate people.

Oh oh. Coming up - old lady says her home is not an asset. Ask her kids about that when she dies.

Zara, age 92, full pension, $800/fn. She’s frugal. Has bills. Gardens a lot. Lived in her house in some expensive suburb - Mosman. Neighbours house sold for$2million. But doesn’t know what to do with $1million. Needs her garden apparently. Here we go. Vanstone - “should someone with$2million in asset get same benefits as someone with \$0 in assets”

Young guy perks up, wants to stick up for the old ladies.

What about a reverse mortgage to fund retirement.

Other dude - my grandparents sold their farm to fund their retirement and move to the city. It is possible to use assets to support yourself.

Smart guy says - “hey why don’t we have inheritance taxes (or similar) which would fund pensions for those with assets?”

Oldies really like death duties, but think the rich will not let it happen. Woman with no assets doesn’t want an inheritance tax - doesn’t seem to understand how percentages work.

Woman with 5 kids likes GP co-payment, for some reason.

Other woman says people will delay visits and may miss out on early treatment.

Dude who advised Abbott - who recommended GP co-payment while working in a think tank (golly gosh, what a surprise) - says system needs to be sustainable. Doesn’t seem to want to explain what his view of sustainable means. Doesn’t want to consider the health system as a whole.

Guy without a job makes a statement that proves he won’t get one in a hurry.

## Friday, June 6, 2014

### NSW hands builders and developers rents, again

NSW is preparing to streamline laws to enable redevelopment of strata-title lots. These new laws give more power to developers attempting to amalgamate lots, which will enable them to force sales from owners if 90% of owners agree. Developers are pushing for that threshold to be brought down to 75%, since this would further increase their bargaining power and ability to extract economic rent.

As I said earlier
While I would need more facts to judge the appropriateness of the law, it is worth noting that this is a complete shift in bargaining power towards developers and away from the existing strata unit owners as a collective.
For example, a developer only needs to buy 50% of lots to get the process started, and then only get agreement from 50% of remaining lot owners. They are effectively able to squeeze the final hold-out owners – transferring rent from those owners to themselves in the process.
Now NSW is going a step further in their quest to transfer rents to the development industry. The recently passed Home Building Amendment Bill 2014 will not only reduce the liability of builders and developers for building defects, but will be enacted retrospectively to apply to building contracts entered from 1 February 2012.

If you bought a new apartment build since February 2012, you have now lost many of your previous rights of recourse to the builder or developer in the case of defective construction.

One of Sydney’s leading strata lawyers, David Bannerman, sent me a short summary of the changes under the heading NSW Government Hands Developers a Windfall
Now that the Home Building Amendment Bill 2014 has passed the Upper House (28 May 2014), the NSW Government will be able to introduce changes that will massively reduce the liability of builders and developers for building defects so that in many cases owners will have to bear the burden of repairs themselves.
Amongst many changes designed to have that effect, most defects will now only have a two year warranty period from the date of completion. This change will apply retrospectively to contracts entered into after 1 February 2012, unless a claim has already been made either with the court or the home warranty insurer by the time of assent.
This change merely hands over liability from builders and developers to owners who had paid for services over the past two years. Mere transfer of obligations away from builders and developers.

There’s two wins for the development and construction industry, and two losses for owners of strata title lots. Incremental legal changes such as this reveal a lot about government priorities.

## Monday, June 2, 2014

### Retirement confusion: Savings are not investment

I’m constantly surprised at how fundamental concepts in economics are so easily confused as soon as they are applied to real-life policy.

Take the issue of fully-funded versus pay-go pension systems. In a pay-go system, pensions are paid to qualifying individuals each year by the government out of general revenues. In the fully-funded system, individuals are forced to save in their working years to fund their retirement in later years.

Australia and many other countries have transitioned towards fully funded systems in the past couple of decades. This change can partly be attributed to a fear that pay-go systems are unsustainable, and partly because economic theory suggests that fully funded systems can increase the growth path of the economy through their effect on increasing savings, and therefore increased investment.

But the fear of unsustainable pay-go pensions, and the growth effects of fully funded systems, are both unfounded.

This is a very confusing area for many people, which is why it was so important to clarify the difference between saving and investment in my earlier post. When an individual or group within society spends less of their income, this does not automatically imply increased investment in new capital goods in proportion to that saving.

When my fully-funded pension account buys BHP shares, it buys them from existing owners, who may very well be retirees selling down their assets to fund their retirement.

Using this basic example we can see that a fully funded pension system involves the young buying assets from the old, which is a transfer to the old in exchange for an asset.

But this is exactly what a pay-go system is as well. It is a transfer from the young to the old via the tax system rather than via other financial vehicles. Or we could think of it as an exchange of the asset of a guaranteed retirement income instead of a BHP share. The diagram below summarises this point.

Regarding the investment effects, some have argued that when pension accounts buy shares they force prices up, thereby generating more investment. But to believe this you then need to explain some mechanism by which the share price was a binding constraint on new investment.

Does the BHP share price determine investment decisions in new mining ventures? Or is it the expected price path of the minerals, the ability to secure contracts for future output, and the costs of the facility?

Sure, there may be some small cases where equity value is binding, but that doesn’t mean that an investment opportunity will not instead be undertaken by a separate entity that doesn’t have that constraint.

Others have suggested that the share of savings that does go to direct investment funding, such as the example here, is sufficient to make the point. To me, this is the rare exception that proves the general rule and moreover makes the point that under normal circumstances debt, in the form of bank lending, is the almost universal investment funding tool.

To wrap up this point, here is the breakdown of assets in Australian superannuation (retirement savings) accounts from APRA. Only a very small share of these assets could be interpreted as being new investment. Most shares would be purchases of existing assets, with a rare exception of capital raising for new ventures. Cash and property are obviously not related to new investment, leaving fixed interest assets that may also involve a component of new investment.

The other important point here is that anything that makes a pay-go system unsustainable also makes a fully-funded system unsustainable, though I think neither system is. Each is merely a transfer from one group to another in society, with the same level of output to be shared at each point in time.

Let’s be clear about this. In the pay-go system, wealth is transferred between taxpayers and the retirees each year. The retirees share of the economic pie is whatever is determined by demographics and government policy on retirement pensions.

In the fully-funded system, we have the bizarre situation of working age people buying assets from retired people who had accumulated them in the past, so that they can then sell them when they retire. There is a lot of asset churn in this system to generate what is a transfer from working age to the retired at all points in time. In essence, it is a pay-go system with the added cost of private funds management.

I have made this point in more detail in the past.

My point here is that this is yet another example of economists inappropriately equating savings, which are transfers, with investment, which is the production of new capital equipment.