Alex Tabarrok of George Mason University talks to EconTalk host Russ Roberts about a recent paper Tabarrok co-authored with Shruti Rajagopalan on Gurgaon, a city in India that until recently had little or no municipal government. The two discuss the su…
EconTalk this wek Feb 01
Yes, the Motu report on the costs of Auckland’s urban planning regulations does not include a measure of the benefits. In some cases this will not matter much; in others, it might.Andrew Geddis focuses on building height limits which impose about $18-3…
If councils are determined to commit absurdities, they’re going to do it regardless of fixes to the RMA. After whatever legislative tweaks are enacted, and new Environment Court rulings come through, it will take councils a little while to figure out how to restart the micromanagement that pushes up costs and helps make New Zealand the seventh least affordable place to live in the world.
Councils don’t care about the effects of their planning rules on the macroeconomy, what it does to Reserve Bank policy, or whether it utterly ruins the economy. For them, that’s all under a great big Somebody Else’s Problem shield of invisibility. Councils’ problem is making sure that councillors get re-elected. That means not hiking property taxes too much (and so loading costs onto new developments) and making sure that the short term interests of current voters, and of the loudest voters, are prioritised over the interests of those who might be in town after the next election, if development were allowed. Dumb rules that hike costs could be the desired outcome, not an unintended consequence.
This basic calculus will not change much until councils’ incentives are fixed.
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Matt O’Brien makes a simple but important point when he writes,
It [Venezuela] should be rich. But it isn’t, and it’s getting even poorer now, because of economic mismanagement on a world-historical scale. The problem is simple: Venezuela’s government thinks it can have an economy by just pretending it does. That it can print as much money as it wants without stoking inflation by just saying it won’t. And that it can end shortages just by kicking people out of line. It’s a triumph of magical thinking that’s not much of one when it turns grocery-shopping into a days-long ordeal that may or may not actually turn up things like food or toilet paper.
Venezuela, you see, has the most oil reserves [in the world], but not the most oil production. That’s, in part, because the Bolivarian regime, first under Chavez and now Maduro, has scared off foreign investment and bungled its state-owned oil company so much that production has fallen 25 percent since it took power in 1999. Even worse, oil exports have fallen by half. Why? Well, a lot of Venezuela’s crude stays home, where it’s subsidized to the you-can’t-afford-not-to-fill-up price of 1.5 U.S. cents per gallon. (Yes, really). Some of it gets sent to friendly governments, like Cuba’s, in return for medical care. And another chunk goes to China as payment in kind for the $45 billion it’s borrowed from them.
That doesn’t leave enough oil money to pay bills. Again, the Bolivarian regime is to blame. The trouble is that while it has tried to help the poor, which is commendable, it has also spent much more than it can afford, which is not. Indeed, Venezuela’s government is running a 14 percent of gross domestic product deficit right now, a fiscal hole so big that there’s only one way to fill it: the printing press. But that just traded one economic problem — too little money — for the opposite one. After all, paying people with newly printed money only makes that money lose value, and prices go parabolic. It’s no wonder then that Venezuela’s inflation rate is officially 64 percent, is really something like 179 percent, and could get up to 1,000 percent, according to Bank of America, if Venezuela doesn’t change its byzantine currency controls.
So what is the government up to?
The Maduro regime wants to throttle the private sector but spend money like it hasn’t. Then it wants to print what it needs, but keep prices the same like it hasn’t. And finally, it wants to keep its stores stocked, but, going back to step one, keep the private sector in check like it hasn’t. This is where its currency system comes in. The government, you see, has set up a three-tiered exchange rate to try to control everything — prices, profits, and production — in the economy. The idea, if you want to call it that, is that it can keep prices low by pretending its currency is really stronger than it is. And then it can decide who gets to make money, and how much, by doling out dollars to importers at this artificially low rate, provided they charge what the government says.
This might sound complicated, but it really isn’t. Venezuela’s government wants to wish away the inflation it’s created, so it tells stores what prices they’re allowed to sell at. These bureaucrat-approved prices, however, are too low to be profitable, which is why the government has to give companies subsidies to make them worthwhile. Now when these price controls work, the result is shortages, and when they don’t, it’s even worse ones. Think about it like this: Companies that don’t get cheap dollars at the official exchange rate would lose money selling at the official prices, so they leave their stores empty. But the ones that are lucky, or connected, enough to get cheap dollars might prefer to sell them for a quick, and maybe bigger profit, in the black currency market than to use them for what they’re supposed to. So, as I’ve put it before, it’s not profitable for the unsubsidized companies to stock their shelves, and not profitable enough for the subsidized ones to do so, either.
A big issue for Venezuela is its reliance on oil.
Not when 95 percent of its exports come from oil, and its price has fallen by half. (It’s actually a little worse than that, since Venezuela’s crude is so heavy that it sells at a $5 a barrel discount to the rest of the world’s). Without as many petrodollars, Venezuela has had to cut back on imports so much that its shortages, which had already hit 30 percent of all goods before the central bank stopped keeping track last year, have gone from being a fact of life to the fact of life. Things are so bad that there isn’t a bank run — who wants to save their worthless currency? — but rather, as Jonathan Wheatley puts it, a supermarket run. People have lined up for days to try to buy whatever they can, which isn’t much, from grocery stores that are even more empty than usual. The government has been forced to send the military in to these supermarkets to maintain some semblance of order, before it came up with an innovative new strategy for shortening the lines: kicking people out of them. Now they’re rationing spots in line, based on the last digit of people’s national ID cards.
This is a story which simply can’t end well. If the government keeps on doing what its doing things will only get worse and if starts to deal with the problems it has created the short term results will see a lowering of the already low standard of living for all citizens, but especially the poor, of Venezuela.
EconTalk for two weeks Jan 24
Greg Page, former CEO of Cargill, the largest privately-held company in America, talks to EconTalk host Russ Roberts about the global food supply and the challenges of running a company with employees and activity all over the world. Page talks about t…
Needs a diff-in-diff Jan 24
I’d love to see somebody else head into the Stats Datalab and do a bit more digging into recent declines in teenage fertility rates.Teen fertility rates are down but we aren’t entirely sure why. The new report commissioned by the Social Policy Evaluati…
CEO pay and inequality Jan 23
We should start by looking at whether there actually has been any great increase in earnings in the top 1% relative to others, just so we have the data right.
I created this chart from the World Incomes Database. You can check my numbers at http://topincomes.g-mond.parisschoolofeconomics.eu/#database. The only difference between those figures and mine is that I averaged incomes between 1999 and 2000 for everybody, because the change to the 39% top marginal tax rate had a pile of people bring forward income to 1999 from 2000, making 1999 look super rich and 2000 super bad. Best is then just to average the two. I set everyone’s income in 1953 to be equal to 100 to get an index score, then looked at growth from then onwards relative to the 1953 baseline. That makes it really easy to compare income growth in different cohorts. Note that these are real inflation-adjusted figures.
As you can see, there is zero evidence of any blow-out in top 1% earnings in New Zealand. Since 1953, real earnings in the top 1% are up by 50%. But real earnings for the bottom 90% doubled.
This is further confirmed by the Ministry of Social Development’s recent report. You can check it at the link; I’ve pasted the relevant table below.
“Overall, there is no evidence of any sustained rise or fall in inequality in the last two decades. The level of household disposable income inequality in New Zealand is a little above the OECD median. The share of total income received by the top 1% of individuals is at the low end of the OECD rankings.
Income inequality in New Zealand, 1984 to 2013 HES
1984 1994 2004 2009 2012 & 2013 for HES, 2010 & 2011 for tax records Household disposable income, adjusted for household size … data from sample surveys (HES) Gini x 100 (trend-line) 26.6 32.5 32.9 32.9 32.9 Share ratio, D10 to D1 6.1 8.2 9.1 8.6 8.3 Share ratio, Q5 to Q1 4.1 5.1 5.5 5.4 5.3 Share ratio, D10 to D1-4 (Palma) 0.92 1.21 1.31 1.29 1.27 Percentile ratio, P90 to P10 3.5 4.1 4.2 4.4 4.2 Percentile ratio, P80 to P20 2.4 2.7 2.9 2.9 2.7 Individual market income … data from tax returns – avg of year noted and the one either side Top 1% share 5.6 8.9 9.0 7.8 7.8 Top 10% share 28 33 33 30 30 Top 10% – 1% share (ie P90 to P99) 23 24 24 22 22
Income inequality in New Zealand compared with other OECD countries, c 2011-2012
(%) NZ OECD-34 median DNK NOR FIN FRA AUS CAN UK US Gini x 100 (trend-line) 32.9 30.5 25.3 25.0 26.1 30.9 32.4 31.6 34.4 38.9 Share ratio, D10 to D1 8.2 7.6 5.3 6.1 5.5 7.4 8.5 8.5 9.6 16.5 Share ratio, Q5 to Q1 5.2 4.8 3.6 3.7 3.7 4.7 5.4 5.2 5.6 8.2 Share ratio, D10 to D1-4 (Palma) 1.27 1.18 0.87 0.85 0.93 1.18 1.27 1.19 1.40 1.74 Percentile ratio, P90 to P10 4.2 3.8 2.9 2.9 3.2 3.6 4.5 4.1 4.1 6.1 Top 1% share – tax records 8 The latest available from 2009 to 2012 6 8 8 8 9 12 13 19 Top 5% share – tax records 21 17 19 21 21 21 27 28 36
Note: See the main report for details about the sources for the figures in the above tables.
Eric here again now.
So, top 1% earnings here are hardly high by either a historical comparison within New Zealand, nor by any international standard. And inequality in New Zealand is middling by OECD standards.
The MSD report also points out that while wealth inequality is higher than income inequality (and data on it less reliable), what we do know about it is that the top decile’s wealth share here is about on par with France and Canada, and lower than Norway and the US. Further, when we account for that much of the country’s wealth is held in the form of mortgage-free houses by the elderly who have low incomes, the joint distribution of wealth and income is far more equal than if we look at wealth alone: a lot of people with high wealth have little income.
In my view, inequality has taken on a lot of salience in New Zealand for two main reasons. First, inequality in the US has risen substantially – though not here. New Zealand is way too quick to assume that whatever’s happening everywhere else is also happening here. Please look at the data above and help people to at least base their opinions on what the data actually says about things here. Second, the ridiculous run-up in housing prices, due mostly to Council restrictions preventing new building, has made housing really really unaffordable for a lot of even middle- to higher income New Zealanders. They then blame richer people for bidding up the price of housing – and they’re especially prone to blaming rich foreigners. It’s right to be concerned about housing costs, and especially about that housing costs eat up way too much of household incomes for lower to middle income families. But that’s not a problem with inequality – it’s a “not building enough houses” problem.
With that established, let’s look at some of the evidence on CEO compensation.
Edward Glaeser finds that executive compensation in the US is strongly related to firm performance. See the first paper in this set.
Adams et al find that Swedes with higher cognitive andnon-cognitive abilities get put in charge of larger companies. Better CEOs sort to the bigger firms where their skills are more needed; CEO pay then reflects both their abilities, and the size of the firms they have to manage.
Kaplan and Rauh find that top CEOs have been gettingbigger pay packets largely because the market has gotten a lot bigger and morecomplicated: the CEO job has gotten harder at large firms, and so the gains from having the best people have gone up too.
Again, this is consistent with the view that shareholders generally do well in keeping an eye on their boards, that boards pay what’s necessary to attract top talent, and that the importance of having strongly performing CEOs has increased.
Another way of testing? What happens to a firm’s value when the CEO dies unexpectedly. Here’s Nguyen and Nielsen. In short, there are sharp drops in firm valuation (share price) on the death of a CEO. They argue that for every extra dollar of wealth that a CEO creates for the company *over and above what someone else in the job would have created*, that CEO keeps about $0.75 and shareholders get $0.25. Other papers using different measures find that CEOs keep a much smaller fraction of the wealth they create for shareholders; the high estimate here may reflect some drop in value due just to the uncertainty about who the successor will be.
If there are problems in CEO compensation, they will be specific to individual firms. If a CEO has managed to pack the Board with friendly supporters, that CEO could be getting paid far more than he or she deserves. That makes the case not for any kind of blanket rules on CEO pay but rather for making sure that corporate governance is strong: that shareholders maintain control of the firms they own, that Boards are active in monitoring performance, and that shareholders sack Boards and CEOs if they can get a better deal elsewhere.
I hope this helps.
It’s always interesting to keep track of what bits get used and which bits don’t.
Update: for the benefit of those who, like Keith Ng, seem to want to assume I did something dodgy in choosing 1953 as a baseline year, go and check the original source data. The basic reporting unit changed from 1952 to 1953 so the data isn’t consistent; they have ‘em as different data series. I chose 1953 because it was the earliest consistent year in that dataset; I chose that dataset because it’s the longest term data I’ve yet seen on income distribution in New Zealand. Maybe Keith would be happier with a 1984 base year because then he could be all mad about income increases for the top 1% in the late 80s; maybe somebody else would like a 1999 base year so they could be all mad about income declines for the top 1% since then. The nice thing about choosing the longest possible data series is that anybody can then truncate it to later points if they want to think about alternative base years. I’m hardly hiding the increase in top 1% incomes in the late 80s; I’m just failing to hide the prior long term decline in earnings among the top 1%.
Update2: Keith’s only unhappy that I took 1953 as base year, not that I included the full data series. People can use whatever base year they want. In absence of some big reason for picking one over another, I go with the earliest; you can easily run ocular re-basing to whatever base-year’s desired.
There is a very interesting report out from the Social Market Foundation that investigates the characteristics parents value in a school. The core result is that less-wealthy families do not choose schools on the basis of academic achievement: This leads the SMF to express concern that school choice may not lift educational achievement because some parents […]
Here’s Will Wilkinson at The Economist on Cassandra C’s forced chemotherapy. She’s 17 and refused chemotherapy, with her mother’s support. She is likely to die as consequence.
It’s simply maddening. Let’s recap. Cassandra’s mother does not force her to submit to an unwanted treatment, so she is an unfit mother. Cassandra is therefore held hostage by the state and allowed to return home only if she pays a ransom: submission to the unwanted treatment. Held against her will, and very afraid, so she agrees under duress. But she hasn’t really changed her mind about the treatment, so she reneges. This is then used as evidence that she was insufficiently mature to be allowed to make her own decisions about the treatment in the first place. Dizzy yet? It seems that the only thing that would have counted as dispositive evidence of Cassandra’s maturity, of her capacity to withhold consent, was a willingness to grant it.
I suspect Cassandra has some dotty ideas about chemotherapy. Perhaps she inherited them from her mom. It may be that if she were allowed to act on her dotty ideas, she would die, while chemotherapy may save her (Hodgkin Lymphoma is one of the more treatable cancers). But liberty is a completely empty ideal if we are free to act only when our conception of our interests coincides with those of experts, medical and otherwise. If we are entitled to choose on our own behalf—or on our children’s behalf—only when we are deemed rational, and rationality is defined to mean a consensus with the authorities, then autonomy is a bad joke. Cassandra’s case illustrates the technocratic tendency of American culture and politics to nibble away at the edges of our autonomy, to deprive us of the right to make anything but the medically correct choice.
Every time I make this point on rationality, the public health brigade here insists that I’m arguing in favour of some blackboard model of perfect rationality. Rather, deviation from what public health doctors think is best, where those doctors don’t seem to give a whit about the patient’s experience other than QALYs, sure ain’t evidence of irrationality.
In December last year The Work Foundation released a comprehensive review of performance-related pay in the public sector: PRP schemes can be effective in improving outcomes across the three public services for which evidence is available (health, education and the civil service), although the central conclusion is that the outcomes from PRP are mixed, which […]