Too much nudging, not enough shoving

The case against behavioural economics being used in public policy ironically has been made by two prominent figures from within the field. I am referring to George Lowenstein and Peter Ubel who have argued in the New York Times against the tendency of taking the politically convenient route of applying nudges which are based on informational cues to improve decision-making to problems which are best solved by traditional tools from traditional microeconomics which use price signals such as taxes and subsidies.

Within the context of the debate over climate change in Australia, the two leading parties, Labor and the Liberals, have opted for "direct action" and balked at imposing a price on carbon immediately contrary to both their platforms in 2007. This is a prime example for how one set of policy tools have been substituted for another due to the inherent unpopularity of the latter with voters. One of the main discoveries made by behavioural economics is that in making lifelong decisions such as whether to make tiny sacrifices today in exchange for a large payout tomorrow, people tend to put a greater weight on the short-term pain.

If left to their own devices, people tend to procrastinate up until the last minute to deal with such questions. That is why savings has been less than adequate from a social standpoint in most advanced economies and why action on climate change has not been forthcoming from governments who are expected to heed the will of the people (who are fickle and irrational according to the theory). Nudge theory is conceived of as being paternalistic libertarian in the sense that it tries to account for human frailties in designing policy interventions without restricting individual choice or socialising the cost of such interventions. The question is whether or not nudging people is adequate in response to existential threats such as climate change or whether a shove is better at least initially to affect the calculations made by individuals over decisions that have long-term consequences.

The end of "Cheap Labour" from China?

Just as the New York times ran a story on the "end of cheap labour" in China with large companies sourcing cheaper labour elsewhere; and as The Economist by Invitation began a conversation on the possibility that it had reached a Lewisian turning point, in South Australia, it was revealed a Chinese contractor was being investigated for allegedly paying its workers as little as $1.90 an hour to dismantle heavy machinery at the former Mitsubishi plant. The current Federal minimum wage is $14.31 an hour.

As Stephen Roach, one of the contributors in The Economist by Invitation made clear

even if Chinese manufacturing wages increased at an average annual rate of 25% over the 2007-10 period—highly unlikely for reasons noted below—the hourly compensation rate would be just $1.98 in 2010. That would boost Chinese compensation to only about 4% of US pay rates—barely making a dent in narrowing the arbitrage with major industrial economies. A similar, albeit unsurprisingly less dramatic, comparison would be evident with the developing world. At $1.98 per hour in 2010, Chinese hourly compensation in manufacturing would still be less than 15% of that elsewhere in East Asia (ex Japan) and only about half the pay rate in Mexico

It is important to stress that this 25% hypothetical wage-inflation scenario is well beyond the outer bound of any conceivable outcome for China. (emphasis added)

It appears that the Chinese contractor at Tonsley overpaid its Chinese workers by China's standards. By Australian standards of course the 24 temporary migrant workers were allegedly underpaid by its employer more than $130,000 over an eight month period. This should put the labor cost arbitrage question into perspective.

Debating Industrial Policy

The Economist has sponsored a debate on industrial policy in which its proposition is that "industrial policy always fails".

In defense of the motion is Josh Lerner of the Harvard Business School, while opposing it is Dani Rodrik of the Kennedy School of Government. So far, opponents of the motion seem to be winning by about a 75 to 25 margin.

This "debate" where the proponents "pretend to disagree" is one that should help illuminate rather than divide audiences about the merits of industrial policy.

From Garbage Can to Dumping Ground

The many disciples of John Kingdon would point to Australia's handling of the asylum seeker/ people smuggling issue as a validation of their espoused "garbage can" theory. According to them, the rational-legal process known as the public policy cycle is a myth, and most government policies are recycled out of the dust bin and given new life via the "policy primeval soup" consisting of problems, policy proposals and political events.

In this case, border protection is the problem (or "the product", depending on how you view things), the "worrying" increase of boat people arrivals and the registered concern within marginal electorates the event, and the discarded Pacific solution of the previous government the policy that has been revived through the collusion of policy entrepreneurs and clever politicians. Mix these ingredients together, and voila! You get a newly minted policy prescription consisting of a regional centre based in the nearby developing nation of Timor-Leste (or Indonesia) to process asylum seekers under the UNHCR's supervision.

The problem is getting one of these nations to accept the responsibility given the image of being branded a "dumping ground" as an unwanted part of the package. Everyone in the region seems to be crying "NIMBY!" (not in my back yard) including New Zealand, which does not really have an incentive to get involved with the issue. This means that whatever solution finally gets hammered out will be a very costly one given that the only consensus of being humane but tough taken by both the ruling Labor party and the opposing Coalition led by the Liberals is a reflection of the community.

If the irrationality at the core of Kingdon's philosophy is the basis for these types of decisions on the part of policy actors (in the garbage can model), it could perhaps spring from some deep seeded evolutionary response to the need for survival. This would explain a lot about the way policy takes shape under these circumstances.

Of Boats and Votes

After the announcement by PM Julia Gillard of her intention to forge a regional solution to the arrival of boat people into Australian shores, Peter Browne asks the question, could the belief that boat people influence the way people vote be one of the great myths of Australian politics? He goes on to provide some anecdotal and historical evidence from the 2001, 2004 and 2007 elections in this Inside Story article.

Keynes vs. Alesina. Alesina Who? - BusinessWeek

A lovely debate over what excites the market's "animal spirits" more, whether spending or spending cuts, is taking place.

The US seems to remain in favor of increased spending in order to prop up its economy and strengthen job growth. Europe and other G20 nations are persuaded that austerity is more fitting. The policy makers on either side have their own set of economists arguing in favour of their approach. On the pro-stimulus side, are the new Keynesians. On the anti-stimulus end are those who support the work of Harvard economist Alesina.

The proponents and their key arguments are summarised in this BusinessWeek article, entitled Keynes vs. Alesina. Alesina Who?.

Economists Behaving Irrationally

Check out this entry by Emmanuel Santos on The Cusp that talks about evidence supporting the view that individuals behave irrationally most of the time, which holds true even among economists the so-called "rationality hawks" of academia. Wild!

Global Ramifications of Aussie Mining Tax Debate

Beyond BRICs in in this entry highlights the global impact of an Aussie mining super profits tax and the important design features in the proposal that do not receive media attention.