Nothing is so firmly believed as that which least is known - or why changing your mind is evidence of learning
While I don’t doubt the finitude of many natural resources, and that the human population cannot grow indefinitely, I doubt that finite limits of resource inputs to the economy necessarily means that economic growth cannot continue indefinitely.
To be sure, I am certain that substantial unforeseen changes to the rate of extraction of some resources will lead to short-term disruption of established production chains, such as shocks to oil supply, but in the long run I see no reason that an economy with finite resource inputs cannot increase production through improved technology and efficiency.
I need to be clear that when I talk of economic growth I mean our ability to produce more goods and services that we value for a given input. Increasing the size of the economy by simply having more people, each producing the same quantity of goods, will be measured as growth in GDP, but provides no improvement in the material well being of society.
A better measure of growth is real GDP per capita. This adjusts for the disconnection between the supply of money and the production of goods, and adjusts for the increase in scale provided by the extra labour inputs. Even then, this may overestimate the rate of real growth occurring, as there has been a trend of formalising much of the informal economy, for example child care, which is now a measured part of GDP rather than existing as individual family arrangements.
On these adjusted measures economic growth is a very slow process. In a world where non-renewable resource inputs are fixed or declining, it is the rate of the decline and the speed of adjustment that will determine the overall outcome for our well being. If the rate of decline of non-renewable resource inputs is below the rate of real growth (our ability to produce more with less) and the rate at which we can substitute to renewable alternatives, we can avoid economic calamity in the face of natural limits.
Unfortunately there are other factors at play.
The rate of population growth will greatly determine the per capita wellbeing in a time of limited growth. While extra labour input will no doubt contribute to production inputs, my suggestion is that this input will be outweighed by a decline in complementary resource inputs. Remember, we care about real economic ‘wealth’ per capita, and with more people there is a smaller share of remaining resources each person can utilise in production, thus reducing wellbeing.
Further, we can begin to take productivity gains as leisure time instead of more work time, thus there is a possibility of maintaining a given level of production in the economy with fewer labour inputs over time.
There is also the reliance of our financial system on high levels of growth. Many economic growth critics cite the need for exponential growth of financial measures of the economy as being in conflict with any finite system. Yet the ‘system’ itself is a human construction and I seen no reason why a stable money supply cannot operate under various levels of growth (even prolonged negative growth) if used cautiously and with little leverage.
Often forgotten is that many resources are currently fixed and yet go unnoticed. There are always 24 hours in a day, but that doesn’t stop us producing more each day. If a shortage of hours was encountered, would a sudden change to 23hrs (a 4% decline) have a dramatic impact? Or would society easily adjust to this new environment of tighter time scarcity?
While a smooth transition to prosperity under much greater limits on resource inputs to the economy is theoretically possible, I don’t expect this to be our future reality. Self interested governments, businesses and the general public will react to short term shocks in unexpected ways, potentially promoting conflict, and taking the bumpy road. I have no doubt that there will extended periods of prosperity in the future, but also expect a rough ride to get to them.
Pool fences are only there to protect kids from parents who don't. There are no fences around all the lakes in Brisbane, Southbank's lagoons are not fenced, the Brisbane River is not fenced. Why? Because we are responsible enough to ensure our children don't get into danger in these areas.
My point is, people are taking the cuts as real water then multiplying impacts to flow on industries then getting bigger and bigger impacts that border on ridiculous. These complementary agricultural industries are clearly already adjusted to any proposed cutbacks.
WEIRD people: Western, Educated, Industrialised, Rich, Democratic... and unlike anyone else on the planet
How much would you offer? If it's close to half the loot, you're a typical North American. Studies show educated Americans will make an average offer of $48, whether in the interest of fairness or in the knowledge that too low an offer to their counterpart could be rejected as unfair. If you're on the other side of the table, you're likely to reject offers right up to $40.
It seems most of humanity would play the game differently. Joseph Henrich of the University of British Columbia took the Ultimatum Game into the Peruvian Amazon as part of his work on understanding human co-operation in the mid-1990s and found that the Machiguenga considered the idea of offering half your money downright weird — and rejecting an insultingly low offer even weirder.
"I was inclined to believe that rejection in the Ultimatum Game would be widespread. With the Machiguenga, they felt rejecting was absurd, which is really what economists think about rejection," Dr. Henrich says. "It's completely irrational to turn down free money. Why would you do that?" (here)
A recent paper by Dr Henrich and colleagues from the University of British Columbia investigates the psychological differences between WEIRD societies and other societies. In a deep examination of the literature, Henrich shows that while many basic similarities remain common to Homo sapiens, cultural factors play a large role in determining many psychological dispositions. Such differences occur when examining fairness, individualism and cooperation.
For me one standout finding was that the income maximising offer for the ultimatum game (discussed in the introductory quote) was a mere 10% of the total sum for most cultures in the review, while in typical WEIRD cultures a 50% offer was income maximising (see graph below).
So I took the time to examine situation for Australian families, and it is quite revealing.
This recent paper, for example, shows that the effective marginal tax rate (EMTR), which estimates the change in take home income after tax and after accounting for reduced welfare payments, actually declines at higher income levels for almost every family type (see table below). High income families receive a greater percentage of an extra dollar earned than low income families, with middle income families suffering very high EMTRs.
For example, an extra dollar earned by a parent in a family with two dependent children and an income in the middle tax bracket will leave them with an extra 28c in the pocket, while for a high income family, they keep 67c out of any extra dollar.
There are even situations in Australia where the EMTR is greater than 100%! Low income families with dependents on youth allowance have an EMTR of around 110% - for every extra dollar earned, they get 10c less in their pockets.
Unfortunately, I fall into the group with the highest EMTR – families with dependents – where 15% of the group have EMTRs above 70%.
...families with children are more likely to face an EMTR of 50 to 70 per cent than other types of households, due to the accumulation of withdrawal rates for family related payments on top of income support withdrawal and income tax. This is observed even without including the withdrawal of childcare subsidies. On average, the EMTR is highest for couples with dependent children. (here)
After a quick bit of research, it appears that if I earn another dollar we lose 20c from family tax benefits, about 18c in the dollar from child care benefits, and 30c in tax – a 68% EMTR. If my wife earns an extra dollar we lose 40c in Family tax benefits (Part A and B combined), 18c of child care subsidies, and 15c in tax – a 73% EMTR.
In light of this outrageous situation, cutting down to part-time work (4 days/week) provides an extra 48days of leisure per year at a minimal cost to the family.
Also, if we factor in the extra expenses incurred due to extra work hours and time pressure – takeaway meals, remaining child care costs, driving instead of cycling, and splurging on treats because you deserve a reward at the end of a busy day, you quickly see the rational for staying in the welfare trap.
All this makes me wonder just how many families are trapped in high EMTR bands – all earning different incomes, but taking home much the same income ‘in the hand’.
In a recent bulletin to members he criticised the Local Government Association of Queensland’s interpretation of a report they commissioned on factors affecting home prices in South East Queensland.
He questions the conclusion that the AEC report commissioned by LGAQ refutes ‘for all time the spurious arguments of a so-called under-supply of dwellings in the SEQ market’. If he had paid attention in statistics it would be clear to him that this is exactly what the report does.
Although the report is far from an exemplary analysis of key determinants of residential property prices, the authors did estimate six econometric models to seek the determinants of real median house, unit and land prices in SEQ - eighteen models in total. If we quickly browse the report we find just one model, for house prices, not unit or land prices, where any of their supply-side variables is significant in explain real prices.
To be sure, Stewart’s interpretation of the report was poor, and his bulletin misleading, but I still have reservations about the report itself.
Particularly I have concerns about the choice of, and construction of, variables, including location bias in calculating the median prices and using ratios to total stock rather than sales volumes (particularly in the treatment of the FHOG). It seems odd that with 69 data points and 32 variables at hand they had trouble finding significant relationships in the data – could it be their selection was stacked with the wrong variables to explain prices?
One example of the construction of variable is ‘SEQ housing stock per capita’, which is total stock for SEQ at the beginning of the period at the beginning of the analysis (1991) of 734,126, less an allowance for depreciation (about 0.3%), plus new stock completed IN QUEENSLAND in the period. This variable then accumulates over time to represent the stock of housing.
I first hope that the new stock only includes new stock in the SEQ region and that this is a typo. Second, I can’t see how depreciating a dwelling is good accounting. What should be considered is a factor for demolitions, and it would be easy enough to estimate the demolition to new dwelling ratio based on past census data.
These types of errors abound.
Most importantly I wonder how this controversial variable could be negatively correlated with prices. In the section on housing stock (p13) it shows that dwelling stock per 100 people grew from 38.1 to 41.1 from 1991 to 2006, while real prices grew from around $100,000 to $250,000 in this period (below). Either a) the three other significant variables, the All Ordinaries, unemployment and mortgage rates, explained the most of the change, or b) the variable used in the analysis is the CHANGE IN dwelling stock per person, which was positive but declining over the period.
What is further surprising is the conclusion that the SEQ property market somehow behaves differently to other parts of the country. Given that the analysis failed to explain the behaviour of the SEQ residential property market at all (their final land price model on page 29 had seven variables but just two were significant), one wonders how such conclusions are drawn. I am happy for someone to explain why it is different here (cringe) if they have the evidence to support the statement.
Anyone looking to elastify the supply side should note the report concludes by noting how responsive supply has in fact been to prices:
...the lot stock for SEQ rose from 25,000 during the early part of the decade to reach 50,000 by December 2005 and has stabilised around 54,000 since September 2007. This progression follows the growth in land prices very closely, indicating that supply of undeveloped residential lots has responded to price signals.