Sunday, July 30, 2017

Long live food waste

One issue that occupies the minds of environmentalists from across the political spectrum is food waste. Around one-third of all food produced for human consumption is never eaten. To environmentalists, this is astonishing and terrible.

But, unfortunately, they are completely wrong. And I say that as a fervent environmentalist.

It is actually a world with zero food waste that is a terrible place to be. We absolutely do not want to be that world.

The reason is this.

Food waste is, in practice, a tremendously important global food insurance policy. In a world of zero food waste, if a natural disaster, such as a flood or drought, hits some of the most productive agricultural regions, both food production and food consumption will fall dramatically. There is no buffer. If production falls, food consumption falls by an equal amount.

If a flood, for example, wiped out a quarter of world food production one year, in a world with zero food waste the per person food intake must also fall on average by 25%. It would be an absolute humanitarian tragedy by any measure.

However, in a world where one-third of the food produced is wasted, either on the farm, during distribution, or in processing and cooking, that flood would have the same effect on food production, but a much smaller impact on overall food consumption. Reducing waste at each point in the food production chain could regain most of that 25% of food that was lost to flood.

The below table show this basic comparison. Country A is the idealised zero food waste utopia, producing 100 units of food, and consuming it all, in the Before scenario. Country B is the current world, consuming only two-thirds of the food produced, and ‘wasting’ the rest. Notice that in the situation before the natural disaster, Country B produces far more food, and this production requires vast swathes of land to be brought into production, something with considerable environmental cost.

But look at both countries in the After scenario, where an unforeseen disaster wipes out a quarter of food production, it is Country B that comes out on top. Country B is able to consume more than Country A, perhaps as much as before, by using the food waste as a type of insurance, able to be drawn on when needed.

This is important. As a world we can’t use traditional insurance for such situations. Being paid out financially by an insurance policy is useless if there is no food to buy. You still starve.

This is also why most countries heavily subsidise and incentivise agricultural production. Letting markets alone decide what to produce each year will not create the genuine over-supply needed to act as a buffer against bad times.

Indeed, countries with the most food waste are generally the most economically efficient. Europe and North America waste almost 300kg of food per person per year. In sub-Saharan Africa and southern Asia, food waste is around half of that. Yet it is Europe and North America that are overall the most economically efficient in terms of converting resource inputs to outputs.

The above scenario also abstracts away from the many distributional issues at play in our food system as well. But reducing food waste overall won’t solve these either. If the problem is distribution, focus on distribution.

Indeed, if land degradation from agriculture is the underlying concern that makes reducing food waste an attractive idea, we should focus directly on the problem by making rules that control land uses to ensure better environmental outcomes. Indirect approaches should be a last resort.

Reducing food waste, like many pro-environment ideas, seems plausible and obvious on the surface but ignores crucial systemic issues.

Tuesday, July 25, 2017

Population debate now mainstream

After years of being an 'off-limits' topic, a debate has finally emerged in the mainstream media about an appropriate level of immigration to Australia.

As a background, immigration levels have been rising steadily since the late 1990s, with record inflows after the financial crisis of 2008, as the below ABS chart shows. The break in the data series is a change in the measurement, now applying a "12/16 month rule" of residency that captures immigrants who travel to their home country periodically, but reside in Australia for 12 out of the past 16 months. This brings the data in line with many other countries, like Canada.

The latest mainstream media attention has been at The Guardian, in an article by Tom Westlake, responding to ongoing discussions at MacroBusiness, which has led to some back and forth (here, here, and now here).

No doubt the media will prefer to avoid the main issue, instead attracting clicks with racist rants and name-calling, all the while presenting the debate as a choice between two extremes (open borders vs zero immigration). The debate is not about immigrants being bad people for coming to Australia. After all, they almost always jump the hoops and follow the rules our politicians made. The debate is about setting up an immigration system that delivers a lower overall rate while delivering better humanitarian and social outcomes.

Below is what I hope is a sensible contribution, which I originally posted at Medium in response to Tom Westlake.

~~~***~~~
I’m pretty sure the arguments boil down to you each having two different points of view, then both sides finding evidence to support it (which is totally normal, by the way). As you said:
I am not going to try to address the implied moral logic of van Onselen: that the criterion upon which we ought to judge immigration policy is the welfare of incumbent residents. As it happens, I think this is a deeply unethical social welfare function.
This is the crux. I know enough economics now to know that you can get just about any answer from technical assessments of marginal welfare effects. So let’s leave that to the side. Let’s stop pretending technical assessments will provide an answer or change minds.

I personally think this ideological different is strange, and am curious as to your ethical viewpoint. For example, if you think nations are a useful organisational institution, and democracy is a useful way to offer some checks on power structures in a nation, surely you imply support for judging national policy based on the welfare of residents, as that is the underlying rationale of the democratic nation-state.

If you don’t, then you open up some puzzles. For example, if you are instead a global welfare maximiser, start sending ships to collect the neediest people from Bangladesh, or the drought-affected regions of Somalia, South Sudan, Tanzania, Mozambique etc., and bring them over. It’s the easiest way to do it. Or just send them free food and equipment. Our policy settings, and most individual choices, are completely unlike the choices of a global welfare maximiser.

In any case, any policy position apart from complete open borders is a de facto population policy. The question is whether the benefits outweigh the costs (to whoever, based on your ethical view) at an immigration rate of 200,000+ per year, or whether the net benefits are higher with a rate less than 100,000 per year. Judging by the comments and my experience talking to people from all across the country, the common view is that the benefits are more apparent with lower rates.

If we take some counterfactuals for a moment, consider if this debate was happening in the early 2000s when the immigration rate was about half what it is now. I assume you would argue that higher is better. I have no idea what Leith would argue, since I don’t think he thought it was an issue back then.

Then immigration doubles. You, I assume, would still be happier with a higher rate. Leith now sees it as a problem.

Let’s double the rate again (to half a million a year). Would your position change? I suspect not. I suspect, again, that this argument is really about conflicting underlying moral and philosophical viewpoints.

Anyway, my feeling is many of the policy failures you discuss are also much easier to remedy with lower rates of immigration.

Lastly, if you genuinely want higher immigration you should be ignoring this debate and not fuelling the fire, since there is massive popular support for lowering immigration back to pre-2006 levels, and the more it is in the media, the more politicians will have to respond to this groundswell.

Saturday, July 15, 2017

Billionaire Industrial Policy

Elon Musk has lost billions of dollars for nearly a decade trying to make electric vehicles at Tesla in a way that has never been done before.

In the new tech-billionaire space-race, where Musk has also been active with his Space X company, his competitor Blue Origin, run by Amazon CEO Jeff Bezos, has been running at an enormous financial loss, requiring Bezos to sell over a billion dollars of Amazon stock a year to fund his space venture.

In both of these sectors, electric vehicles and space transport, there is no guarantee of any long term profit – there are threats from multiple new entrants as well as incumbents in both sectors. Yet billions of dollars are being poured into these experimental investments.

When governments fund similar decades-long loss-making ventures that expand the economy’s production capabilities, we call it industrial policy. When a billionaire does it, we say it is markets at work.

But there is nothing “market like” about long-term, long-shot, gambles like these. This behaviour falls outside any core economic theory about the efficiency of markets in allocating resources. After all, most billionaires don’t spend their fortunes on privately-funded industrial policy with only a fleeting chance of any future payoff.

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Saturday, July 8, 2017

Game Of Mates: Nepotism Is Costing The Economy Billions

It is no secret that increasingly, workers are no longer enjoying the fruits of their labour as a smaller and smaller group of people and companies come to share the returns of (slowing) economic growth across developed nations such as the US, the UK and Australia.

The ‘jobs for the boys’ model is having a tangible and outsized impact on inequality and it is killing the economy.

It is so tangible you can measure it. And measure we did.

In our book, Game of Mates, I and my colleague, Professor Paul Frijters explore insights from the science of human cooperation and raw metrics of economic costs and benefits, melding this information together to paint a picture of how a nation’s wealth can become siphoned off by a well-connected network of powerful individuals.

Drawing on our own research and that of others, we find that those outside the game are being bled dry, with hundreds of billions of dollars a year of hidden theft taking place.

The book helps to frame a discussion on ‘grey corruption’ – the type of unethical political favouritism that is economically costly to the unfavoured, but that is not necessarily illegal – that is brutally honest about human nature. We look at how the Game of grey corruption in played, how much it costs, and what to do about it.

What is a grey gift and when do I know I am getting one?
A grey gift is a way to pick a winner and loser without great, (or any) personal cost. Often the cost is instead passed on to another person or group. This phenomenon exists at many levels in almost all organisations, including government bureaucracies.

When a city council decides a plot of land can be now used for urban development instead of farming, it adds millions in value to the land which goes into the pockets of landowners.

In our study of just six rezoned areas in Queensland, Australia, we found that $410 million worth of property rights were given to a small group of well-connected landowners. Or when the government insures bank deposits to secure the financial system, the free insurance is a gift to bank owners that should have instead been sold, costing the public billions in forgone revenue. In Australia, this gift of insurance is worth about$4 billion per year, which goes straight into the pockets of bank shareholders.

And when the transport department closes road lanes to funnel cars onto a private toll road it provides a gift to the toll road owner that costs motorists, but not themselves. If just 1,000 vehicles per day are forced onto a $4 toll road, that is an$18 million grey gift from a small routine bureaucratic decision.

It is important to make clear that a network of people trading favours is not inherently a bad thing and is an innately natural way to cooperate. The problem is when gifting occurs at an enormous cost of the financial, social, legal, or physical, security of other people.