Alan Bollard Doesn’t Understand Economics

Alan Bollard repeats the common claim that the difference in economic performance between Australia and New Zealand is due to Australia’s abundance of natural resources:

Speaking on TVNZ’s Q+A programme yesterday, Alan Bollard said Australia had been “blessed by God sprinkling minerals” and had handled its economy well. He said New Zealand would do better to make the most of the “crumbs that come off the Australian table”.

He said it was up to the Government what its own goals were, but he did not believe catching up with Australia was possible.

I haven’t watched the show, but I’m assuming Bollard is arguing that changes in commodity prices favourable to Australia explains the fact that living standards across the ditch are around a third higher. This is just not true. The 2025 Taskforce (led by Don Brash, who does understand economics) does a good job of summarizing the evidence.

While movements in terms of trade have made Australians richer in recent years, most of its improved performance came well before any significant and sustained changes in commodity prices. Further, New Zealand has fallen in income relative to other OECD countries which should have been hurt by changing commodity prices.

Bollard seems to be stuck in a materialist mindset when it comes to economic performance. While resource endowments do matter, assuming that New Zealand’s relative lack of minerals destines those living here to a permanently lower level of income than Australians is absurd. As the Taksforce points out, many high performing countries such as Taiwan and Ireland are extremely resource-poor. Many extremely poor African countries are also very rich in minerals. People become richer when the institutional environment allows them to cooperate for mutual advantage, not when there are lots of shiny things to take out of the ground.

New Zealand’s economic stagnation has nothing to do with resource endowments or commodity prices and everything to do with poor institutions. Australia’s economic reforms since the 1980s have been much more constant and thoroughgoing than ours, and have not produced the same destructive regime uncertainty.

The Empirical Evidence Against Big Government

A nice, even-handed overview from Dan Mitchell for the Center for Freedom and Prosperity:

Rising Fertility in Highly-Developed Countries

I’ve always suspected that the link between economic development and fertility is more complicated than the standard story of inverse relationship. Increased economic opportunities increase the opportunity costs of having children, and this decrease fertility. Counterbalancing this, though, is the possibility that kids are a normal good in the sense that demand increases with income: as we get richer, we are more willing to give up income to have kids. Additionally, advances in IT seem to be pushing down the opportunity cost of children by making flexible work arrangements (particularly telecommuting) more feasible. It’s possible that at some point the pro-natal factors could come to dominate the anti-natal.

According to some new research published in Nature, there does seem to be a development threshold above which the standard relationship is reversed [WaPo story, gated nature article, annoying ungated version]. The results indicate that the standard story remains true for most countries, but once countries reach a very high level of development – around 0.85-0.9 on the Human Development Index – fertility begins to increase.

If this trend is real and continues to higher levels of development, the long-term relationship between development and fertility should be U-shaped (or maybe even J-shaped!). As someone who likes people and would like to see as many of them as possible, I think this is great news. The Simonian future of a trillion humans might not be quite so far off, after all.

Hat tip: Contexts Crawler

Holcombe on the Foundations of Welfare Economics

I haven’t yet read it, but this paper by Randall Holcombe in the latest Review of Austrian Economics, “A reformulation of the foundations of welfare economics“ looks like a very important contribution. The abstract:

Neoclassical welfare economics takes an outcome-oriented approach that uses Pareto optimality as its benchmark for welfare maximization. When one looks at the remarkable improvements in economic welfare that have characterized market economies, most of those improvements in welfare have been due to economic progress that has introduced new and improved goods and services into the economy, and innovations in production methods that have brought costs down, leading to higher real incomes. Pareto optimality is only peripherally related to actual economic welfare, and no economist would argue that people are materially better off today than a century ago because the economy is closer to Pareto optimality. After analyzing the actual factors that lead to improvements in welfare, this paper suggests a reformulation of the foundations of welfare economics to replace the almost irrelevant outcome-oriented concept of Pareto optimality as the benchmark for evaluating welfare with a process-oriented benchmark based on factors that generate economic progress. The paper then explores some implications of this reformulation.

The future is already here, and it’s reasonably evenly distributed

This video from 1981 (hat tip: Jerry Brito) shows the remarkable progress of information technology in recent years.

That which which seemed amazing yesterday is taken for granted today. Hyperland (1990) from Douglas Adams is even more remarkable in how exciting it made hypertext seem.

If we think back even further, someone 300 years ago would find the way we live today – or even the way we did in 1981 – absolutely unimaginable. Talking to someone on the other side of the world through some strange contraption? Witchcraft! This is why we shouldn’t discount future technological innovations – indefinite lifespans, bioengineered superintelligence, desktop nanotech – based on their pure strangeness and unfamiliarity. We are in the midst of self-reinforcing and accelerating economic growth. Decent institutional arrangements have allowed markets and other means of technological innovation to produce new knowledge at an unprecedented rate. Knowledge begets more knowledge, as we use past innovations to more effectively produce new ones.

This sort of growth is not the norm if we consider human history as a whole, and it’s possible that an exogenous shock could force us out of our positive feedback loop. I wouldn’t bet on that happening, and think those in the near future will have levels of wealth and capabilities only the most imaginative of us can dream of today. We tend not to notice change as it’s happening, but its cumulative effect is enormous. The Singularity will come, but nobody will notice it.

Real, No-Fooling Socialism [updated]

The Alliance Party says the Government should take ownership of the Lane Walker Rudkin (LWR) Factory in Christchurch to prevent a disastrous loss of hundreds of jobs.

Alliance Economic Development Spokesperson Quentin Findlay says it is vital that jobs and incomes are preserved to prevent mass unemployment in New Zealand.

He says the Government should take control of failing enterprises and investigate options such as public ownership, employee shareholdings and worker ownership.

“The cost of positive action is far less than the human misery, financial burden and economic stagnation of mass unemployment.”

Mr Findlay says the cause of the LWR factory’s closure was both National and Labour led Governments supporting free trade deals and free market policies.

Ugh.

It’s hard to believe these morons won 13 seats in the New Zealand’s parliament in the 1996 election. I understand calls to compensate those who lose out from economic change (I know some very smart and reasonable lefties), but it is just beyond me how anyone could be so short-sighted as to think that businesses which do not produce anything of value should be kept afloat. Whenever someone proposes this sort of thing I generally ask them whether they would think it a good thing if ninety percent of people still worked in agriculture and had pre-industrial levels of wealth. I’ve never heard to reasonable argument for the idea that past, but not future, economic growth was worth the short-term costs of dislocation. There are some primitivists, of course, but they’re certainly a minority of anti-current progress types. I suspect a big part of it is the status quo bias.

Update: Paul Walker offers a very thorough and wide-ranging takedown of Alliance’s stupidity.